Tren Griffin+ Your Authors @trengriffin I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. I am on the board of directors of Kymeta. Nov. 09, 2019 3 min read + Your Authors

1/ "Competitive strategy and valuation should be joined at the hip. The litmus test of a good strategy is that it creates value. You can’t really do a valuation without understanding the economics of a business and the industry."

Quotes 1/-6/ are all from Michael Mauboussin.

2/ "Sustainable value creation has two dimensions: the magnitude of the spread between a company’s return on invested capital and the cost of capital and how long it can maintain a positive spread." Mauboussin  [ ]

3/ "Strategy is about deliberately being different than competitors and requires making tough choices about what activities to do and not do. Operational effectiveness relates to the activities that all businesses need to do and hence does not entail choice."

Michael Mauboussin

4/ "Great investors can appreciate what differentiates a company that allows it to build an economic moat around its franchise that protects the business from competitors. The size and longevity of the moat are significant inputs into any thoughtful valuation." Michael Mauboussin

5/ "Sustainable value creation as the result solely of managerial skill is rare. Competitive forces and endogenous variance drive returns toward the cost of capital. Investors should be careful about how much they pay for future value creation."

Michael Mauboussin

6/ "It isn't unusual for 75% or more of a company’s value to be attributable to terminal value. A DCF model incorporating CAP usually has a longer forecast horizon, all growth assumptions are explicitly stated, and terminal value is usually a modest contributor to overall value."

7/ The strategy taxonomy and framework I use is Porter/Buffett/Mauboussin.

There are many books on strategy (below is Maubousin's bookshelf just on the topic of strategy), but my favorite book in this area is Competitive Strategy by Michael Porter. 

8/ The strategy of a business is the non-operational choices it makes to create and maintain a positive spread between return on invested capital and cost of capital. Without that spread lasting for years there is no moat. CAP is a time period over which that can happen.

9/ The test of whether a moat exists is quantitative, even though the factors that create moats are qualitative. No formulas exist that govern the creation and sustainability of moats, but there is enough commonality that you can get better at understanding how they are created.

10/ Buffett: "The key to investing isn't assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the *durability* of that advantage."

Time is fundamental with moats

11/ Charlie Munger: "Frequently, you see a business having fabulous results. The question is, ‘How long can this continue?’ There's only one way I know to answer that: think about why the results are occurring now – and then figure out what could cause those results to stop.”

12/ Theme of all my tweets but one today was strategy. This thread has a taxonomy and the framework I borrowed from Porter/Buffett/Mauboussin. The examples used in other linked tweets included Costco, antenna technology and early Microsoft. Strategy is what you decide not to do.

13/ Michael Mauboussin: "Investor's make short-term bets on long-term outcomes. The way to convince yourself of this is to build a spreadsheet and see for yourself. It isn't uncommon for it to take 10 or more years of value-creating cash flows to justify a company’s stock price."

14/ "Investors who rely on multiples aren't avoiding the problem of forecasting cash flows and discount rates, they are burying it. It's better to make assumptions transparent and distinct than to jumble them inside a multiple under the guise of accuracy." 

15/ 25iQuiz: Buffett said in 1996: "We generally will be charging [operating companies approximately] 15% for capital. 15% pretax, depending on state income taxes, is only 9 to 9 1/2% after-tax. We find that 15% gets their attention." What's Buffett trying to avoid by doing this?

16/ "Projects that don't earn the costs of capital may drive earnings per share growth, but will destroy value." 

You can follow @trengriffin.


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