ScottHall

You guys really need to think about what advertising is and the unique value it has on digital platforms. You're talking about ROIC as if advertising is about turning a profit, as a whole. In some regards, digital advertising is much better suited for analyzing this than conventional advertising is. For brand advertisers, that's pretty much a secondary concern and ad spend can't accurately be valued anyway. At least in my opinion.

I do have a model for it, which if I shared could be argued as violating an agreement I signed with my current employer. So I won't share it or its conclusions, but I will say that the valuation is entirely ridiculous. Even a small change in sales growth rate or margin can move the valuation by over 20%. So in my view, it's pretty much a waste of time to value, at least in a conventional manner. Personally, I use more of a mosaic approach, and find it far more valuable than my DCF. Amazon is the clear leader in e-retail, at least in the U.S., and that's a massive advantage. As Amazon grows, its scale should allow it greater and greater bargaining power vs. suppliers over time. My view is that this is a sort of self-reinforcing moat, in that it gives Amazon margin that it can either give back to customers, that it can reinvest in future growth, or that it can use to fund new ventures. We see this happen all the time; take a look at Amazon's employee count. In my eyes, it's pretty clear that they're investing ahead of the growth curve to make sure they can maintain a satisfactory service. So long as the ecommerce business continues to grow, I want the company to keep doing that even though it makes profitability and FCF suck. And with ecommerce still in the mid-single digits as a percentage of total retail sales, it can probably grow at a healthy rate for another few decades. It's true that Amazon's GAAP profits and even FCF aren't that impressive, but that's why I like it. One of the things that really reinforced my thoughts here was this blog post by a former employee, indicating that many of Amazon's businesses are already profitable, and the company is reinvesting the cash internally. http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-model-narrative I suspect Amazon will be the largest retailer in the world some day, and when that happens, giving the company any credit for decent margins (compared to other large retailers), and I think the stock looks pretty attractive even now. But you have to believe in the business model to get there. I do. This is a company that requires essentially no capital to scale its ecommerce business; its net negative working capital allows the company to grow to as large as its infrastructure can handle without putting up any more cash. That's an amazing business, and because the business becomes stronger the larger it becomes, these cycles feed on each other. So, that's basically it. There's no magic valuation bullet here; it requires that you believe in the advantages of the business model and that they'll take the business far. Given the track record to date, I think they will. If they do, the stock will look very cheap in hindsight. If they don't, it will prove expensive. I've been to ShopHouse several times and love it. I suspect it could be large. As large as the Chipotle franchise? Maybe not, but still big. No thoughts on the pizza place.

Russo is an influence. Thanks for reading. Haha, thanks. I don't recall your FCF question, but you're welcome. For most companies, I just eyeball the valuation. Building elaborate spreadsheets isn't really my thing. I've done it in the past to sanity check myself for some of the companies with more troublesome valuations, but otherwise, everything is back of the napkin. It has consistently been a huge mistake not to own both of them. For CMG, I wasn't entirely confident on how many units they could scale to. For Netflix, my big concern was that content providers would end up taking all of the economics for themselves. So far I've been dead wrong on both stocks. I'll probably take a closer look again in the near future. Maybe I'll finally pull the trigger. <3 Plan

This statement may apply to me. Guilty as charged, if I understand you correctly! But do I understand you correctly? Would you be saying the same if you hadn't evolved into a more GARPish style? In terms of value investing gurus, would you say you're less Ben Graham (of whom I am more of) and now more Phil Fisher/Peter Lynch? Anyway, thanks, Scott, for this unique and most refreshing thread. No, I wouldn't be. My statement there comes down to efficient allocation of capital. What does having free cash flow mean? That cash is piling up in the bank, essentially. That cash can be used for a number of different things - dividends, share repurchases, acquisitions, debt repayment, and so on. That sounds unambiguously like a good thing, and generally it is. The trouble comes when you have very high quality businesses that can invest at high rates internally. For example, Chipotle Mexican Grill has amazing unit economics. Their restaurants have something like 27% operating margins on about $2.5 million of sales each. It costs Chipotle something like $843k to open a new restaurant, so, the returns there are pretty damn amazing. Somewhere in the mid-to-high double digits That's a crazy amount of money, and each store provides Chipotle with a lot of cash flow. That's great. What isn't so great is letting that sort of money pile up when CMG can reliably earn returns stock investors can only dream of by putting it to work opening new stores. Ideally, Chipotle would have no free cash flow because it would be able to continually reinvest with those economics. Unfortunately, we don't live in Candyland, and there are major bottlenecks towards opening new stores. They have to scout locations, train employees to ensure the quality is what consumers expect, and so on. So they can only allocate a portion of their cash flow to new locations each year. But if they could get away with it, they'd be nuts not to spend as much as possible on new locations so long as they can continue scaling. And here's the thing. That would make the company's financials look ugly. There'd be no cash flow. Sure, they'd be generating profits, but none of it would make its way to the bank. And that'd turn a lot of investors off. But really, if that were to happen, they should be salivating over the returns their capital is earning. For an even better example, look at Netflix. I haven't looked at it in a while, but they were acquiring customers for somewhere between $30 and $40 just a few years ago. And those folks stay with them for a long time, delivering, generally, multiples of that value back to the company over the life of their subscriptions. And those subscriptions? They can last for years. All of the hundreds of millions they're throwing at acquiring customers? It's expensed on day one, as advertising typically is. There are narrow exceptions to this granted, but as a rule of thumb, advertising is expensed. It's not amortized. Think about that for a moment. They're buying members, many of who stick around for years. But the ad spend shows up as an expense entirely in the first year. What are the implications of that for Netflix as a business? It means that, so long as the company keeps growing, its income statement will lag the true economics the company is generating. That's true of all subscription businesses, and is why looking at profitability and free cash flow alone for them is absurd. They're buying a stream of cash flows. A stream. More money for years. And that ad spend makes each year they grow look like shit, but what do they care? They're creating a lot of lifetime value for their business by doing it. Put it more simply... if I gave you the opportunity to shell out $100 for income streams that would pay you $50 per year indefinitely, would you snap at it? Think of how that translates to GAAP, though. If you had to expense that like Netflix does its advertising, you'd show a loss. And if you doubled the amount of income streams you bought each year, you'd keep showing losses. Even though you'd be creating a ton of wealth for yourself, you'd be showing losses and negative cash flow. In other words, your financial statements would be completely divorced from economic reality. This happens in business more often than most people think. It can be in land acquired long ago, or it can be in things like Netflix, SaaS companies, or any other growing business that is creating long term customer relationships that require money upfront to create. And these can be enormously profitable for shareholders over time, regardless of what the financial statements say. This is why, for many businesses, I'd rather they not generate cash flow. Because if they earn great economics and can scale their concept nearly infinitely (Amazon) they'd be insane to do so. Not only will they take a tax hit on earning profits, they'll be letting good money sit idle and lose out on some amazing compounding magic. That's basically what I meant. No opinion on any of the stocks mentioned, except Amazon, which I own. As for Ben Graham vs. Phil Fisher: maybe? My style is my own, and adapts concepts from Warren Buffett, Peter Lynch, John Malone, Jeff Bezos, and my employers (the Gardner brothers), among others. Most of my insights come more from great business creators than great investors, to be honest. Happy you find the thread interesting.

Sure. To answer your question: I've used it for about two years. So far, it has worked out favorably: investments in Amazon, Markel and Valeant have thumped the market, while Facebook has performed roughly in-line and Google is too new of a position to really say yet, but has outperformed so far. Kraft and Lions Gate are two very recent (and small) positions, and have yet to prove themselves. I also have Optimal Payments, which has murdered the market, but I can't tell you by exactly how much as my account has yet to receive proceeds from a rights offering I was not allowed to participate in as a foreign investor. But substantial outperformance, regardless. All other holdings either predate my move to quality - Pardee Resources stock (which I would actually count as quality), which has underperformed, and Wells Fargo warrants and BAC stock, which have outperformed - or were 1 share work-related purchases and are immaterial (SODA, PRLB, MIDD, and CTSH). Note that many of my high quality names are also some of the companies with higher volatility, so it's no shock they've done well so far. The real test will be over a full cycle, including how well they hold up on the way down. Despite early success, the jury is definitely still out. W/R/T investing generally: one thing that I see way too often with value investors is that they focus far too much on a company's financial statements without giving real thought to underlying business economics. For many companies, I'd rather they generate no free cash flow, not an abundance of it. seems like Softbank might fit in with your strategy? any strong feelings on it? I must say that I haven't looked closely at it as of yet, but have read some posts on it on this board. It wouldn't surprise me if I loved it. I've read enough. Thanks for inspiring me to do so; will purchase some shares next week. Very quick turnaround time on my ideas these days... I've learned most aspects of businesses are completely irrelevant. If I get the main couple of things right, it'll probably work out favorably.

Sure. To answer your question: I've used it for about two years. So far, it has worked out favorably: investments in Amazon, Markel and Valeant have thumped the market, while Facebook has performed roughly in-line and Google is too new of a position to really say yet, but has outperformed so far. Kraft and Lions Gate are two very recent (and small) positions, and have yet to prove themselves. I also have Optimal Payments, which has murdered the market, but I can't tell you by exactly how much as my account has yet to receive proceeds from a rights offering I was not allowed to participate in as a foreign investor. But substantial outperformance, regardless. All other holdings either predate my move to quality - Pardee Resources stock (which I would actually count as quality), which has underperformed, and Wells Fargo warrants and BAC stock, which have outperformed - or were 1 share work-related purchases and are immaterial (SODA, PRLB, MIDD, and CTSH). Note that many of my high quality names are also some of the companies with higher volatility, so it's no shock they've done well so far. The real test will be over a full cycle, including how well they hold up on the way down. Despite early success, the jury is definitely still out. W/R/T investing generally: one thing that I see way too often with value investors is that they focus far too much on a company's financial statements without giving real thought to underlying business economics. For many companies, I'd rather they generate no free cash flow, not an abundance of it. How much would you say this move to quality was influenced by your peers and environment at the Motley Fool, which is best known for its quality/moat/compounder approach (obviously it is a big tent and has other types of analysis as well)? Not saying that's a good or bad thing, just interesting to think about. Quite a bit. I was into deep value investing when I first showed up, and have gradually moved from that to primarily buying quality businesses that can grow for many years, and save on the taxes. Another component is just lifestyle. I don't want to spend my life going over thousands of annual reports anymore, when previously, that's exactly what I wanted to do. My net worth is substantial relative to my age, and I'd rather spend the time enjoying life than trying to be the absolute best investor possible. So long as the world keeps improving, I'll do very well regardless, so the difference between having something like $50 million at normal retirement age vs. several hundreds of millions is quite frankly immaterial to me.

Sure. To answer your question: I've used it for about two years. So far, it has worked out favorably: investments in Amazon, Markel and Valeant have thumped the market, while Facebook has performed roughly in-line and Google is too new of a position to really say yet, but has outperformed so far. Kraft and Lions Gate are two very recent (and small) positions, and have yet to prove themselves. I also have Optimal Payments, which has murdered the market, but I can't tell you by exactly how much as my account has yet to receive proceeds from a rights offering I was not allowed to participate in as a foreign investor. But substantial outperformance, regardless. All other holdings either predate my move to quality - Pardee Resources stock (which I would actually count as quality), which has underperformed, and Wells Fargo warrants and BAC stock, which have outperformed - or were 1 share work-related purchases and are immaterial (SODA, PRLB, MIDD, and CTSH). Note that many of my high quality names are also some of the companies with higher volatility, so it's no shock they've done well so far. The real test will be over a full cycle, including how well they hold up on the way down. Despite early success, the jury is definitely still out. W/R/T investing generally: one thing that I see way too often with value investors is that they focus far too much on a company's financial statements without giving real thought to underlying business economics. For many companies, I'd rather they generate no free cash flow, not an abundance of it. seems like Softbank might fit in with your strategy? any strong feelings on it? I must say that I haven't looked closely at it as of yet, but have read some posts on it on this board. It wouldn't surprise me if I loved it.

Sure. To answer your question: I've used it for about two years. So far, it has worked out favorably: investments in Amazon, Markel and Valeant have thumped the market, while Facebook has performed roughly in-line and Google is too new of a position to really say yet, but has outperformed so far. Kraft and Lions Gate are two very recent (and small) positions, and have yet to prove themselves. I also have Optimal Payments, which has murdered the market, but I can't tell you by exactly how much as my account has yet to receive proceeds from a rights offering I was not allowed to participate in as a foreign investor. But substantial outperformance, regardless. All other holdings either predate my move to quality - Pardee Resources stock (which I would actually count as quality), which has underperformed, and Wells Fargo warrants and BAC stock, which have outperformed - or were 1 share work-related purchases and are immaterial (SODA, PRLB, MIDD, and CTSH). Note that many of my high quality names are also some of the companies with higher volatility, so it's no shock they've done well so far. The real test will be over a full cycle, including how well they hold up on the way down. Despite early success, the jury is definitely still out. W/R/T investing generally: one thing that I see way too often with value investors is that they focus far too much on a company's financial statements without giving real thought to underlying business economics. For many companies, I'd rather they generate no free cash flow, not an abundance of it.

Sure. Generally, if someone tells me to do something, it's probably not going to happen. I don't appreciate people acting as though they have any say in how my life works. If they ask me, I may do it to be helpful, but it depends on my own priorities as well. A big part of this is standing up for yourself. At a previous job I once got in trouble over a perceived HR violation and was sent to lunch with an HR employee, who was aiming to get me to apologize. I explained my situation to him and told him that if I was asked to apologize, I'd just quit. He actually ended up agreeing with me, and I never had an HR issue again. A lot of times you just have to throw off the notion that people have power over you. Because no one really does, so long as you're willing to adjust your expectations in life based on any potential consequences.

Huh? It's like I always say; you can't go wrong with free clothes. Sometimes folks overthink things in the context of the HERE and the NOW, instead of focusing on the underlying truths of the world.

Insurers suck b/c they can't earn anything on their float in this environment. Insurers suck b/c they're gonna take mark-to-market losses on their portfolios as interest rates rise. I don't even know man. Does anyone seriously care about any of this? Some insurers are baller and most are mediocre or suck. Is it really that complicated if you're holding for 10+ years?

You all think too much.

I actually haven't. Is it good? Don't want to spend 30 mins without at least a hunch.

Happy to share. Toronto is right, by the way. You don't really give up much that matters. I've always loved video games, and I still play them. Minimalism to me is more about centralizing things. Like Toronto's books; I love to read, but instead of getting the physical copy, I get the Kindle edition whenever possible. It just makes life a lot easier to deal with. My brother brought a blow-up mattress over when he came to visit, and left it behind. I slept on it since it was here, but when the air got low, I couldn't open it to put the pump in. So I just put a knife through it, started sleeping on the floor again, and now use its folded up remnants as a place to sit.

No, actually I am not joking. You presume that anyone who'd do it would look like a creep. I disagree. It's possible to buy that house and get to know Buffett nicely. (Yes, running across the street on a move-in day to share your stock pick is possibly not the way to go ;) ) Yes, I presume you'd look like a creep. Because you would be a creep. And it'd be really obvious the motivation if some hedge fund manager bought the place and was like, "oh, what, the Warren Buffet lives next door? I had no idea. What are the odds?" Social intelligence is a real thing. You can ignore it if you're rich and most people will pretty much give you a pass, but otherwise, doing so is really not in your best interest.

That's why I suggested for Buffett to Zuckerberg it. ;) If I was aspiring money manager, I'd grab it without thinking. OMG what opportunities. Better than a lunch for $1M. Seriously. The guys here who want to go to the top should really consider this. 8) I know you're joking, but I don't think that'd work. It'd make you look like a stalker and a creep if a HF manager just so happened to buy it and started "bumping" into Buffett all the time. It may not seem like it, but Buffett is a human just like the rest of us and deserves to be treated like one. I hope it's bought legitimately and folks leave the guy alone to enjoy his twilight years as best he can. Just my two cents.

Would you guys accept a fight for $100 mil if there was a good chance you were going to suffer permanent brain damage from it? 100% chance? 50% chance? 20%? At what level would it be an acceptable risk? For me, 0%. This is just a hypothetical... not criticizing the sport. But I think athletes in aggressive sports are going to have to ask themselves a lot of questions over the next few decades as we keep learning more about the danger of concussions. Football, too.

I ended up betting half a bitcoin on Mayweather because we share a moniker. Won like $60. Yay.

I like Mayweather, even though I probably won't watch this. So I hope he wins, I guess.

These questions are a little bit odd. I have enough to retire, but with my definition of retirement, that doesn't necessarily mean what most people would infer from it. I could quit my job and live in a car at public rest areas digging food out of the bins at Safeway. I'd be retired, but most people wouldn't consider that a desirable outcome. The most important thing is to have enough to sustainably live your target lifestyle. For me, that isn't much. For others, maybe it's a whole lot. In general I support getting by with less than more for a lot of reasons, only one of which is sustainability, but I know I'm an outlier on that. That's why personal finance advice online really bugs me; folks act as though there's one acceptable way to do this thing, and you have to have a certain amount of money by a certain date or you're screwed. This is pretty much hogwash. Tons of people live on Social Security and not much more, which is fine. You just have to have your expectations set to the reality you've created for yourself. And, by the way, I'm not sure accruing a massive amount of money is particularly useful. If you want to have $100 million or whatever, go ahead, but keep in mind there is also an opportunity cost to doing that in that you can have less experiences along the way with your friends and family. Maybe some folks don't value that, but to me, that's an important consideration when considering what to do with your money. Money is much easier to get more of, past a certain threshold, than time is to get back. Which is, as far as I know, impossible. You're also probably going to die, so, uh, congrats on the billions. Uncle Sam thanks you for your patriotism.

Intelligent Investor once. Don't bother with Security Analysis - half of it is on the selection of railroad bonds and other antiquated securities. Margin of Safety once, maybe, if you're not paying a ridiculous price. I don't really use any of the valuation concepts from these books regularly. I mostly eyeball it, for better or worse.

Well, that's up to you. How much of a premium is management worth? Are they lowballing us? Will they continue to do more value-adding deals in the future? Some things aren't so easy to model. Your thoughts on these are pretty important to whether or not you should keep holding, or at least should be. IMO.

I bought a small position in this the day the deal was announced, up about 8% so far. My suspicion is that Buffett & 3G aren't near done, and this is a platform for them to do more deals in the future. May be wrong, but I'll bet this beats the market quite handily over five years.

For what it's worth, I find Sykes' method to make a lot more sense than most daytraders. I would not be shocked if it is +EV.