Life is Crazy or Ask Scott About Life

[Liberty]

Here is my summary version.  Scott had an unconventional childhood.  He dropped out of school in 4th grade to play video games. [...]

As an aside and because it ties in with the theme of unconventionality, today there are many people who play and live stream video games for a living. The most popular site (I think) for watching these streams is Twitch.tv. Some of the most popular streamers draw tens of thousands of viewers every day. The streamers make money from people who subscribe to their channel, from donations and from ads. Some of them make a very good living. The most popular ones probably also get paid by game studios looking for a channel to promote their newly launched games. Twitch takes a cut of subscription revenues and also makes money of the ads. Amazon bought Twitch last year for about $1 billion.

 

To me it is amazing how a site like this pops out of the ground and becomes an alternative to television for many (young) people looking for entertainment. It has allowed some entertaining gamers to make a career out of their hobby.

 

In South-Korea, pro-gamers can be stars. The Starcraft scene, for example, has many teams with coaches who all live together and train all day long, with matches being shown on TV and streamed online.

 

This type of thing will only keep getting more popular over time.

 

Starcraft is so 2000's. LoL/Dota2 are where it's at.

 

They are more popular than SC/SC2 for sure, though I never saw the appeal myself. I was into the korean SC2 scene for a while, but I stopped following it a little while ago.

[CorpRaider]

Weird story bro. 

[no_thanks]

http://blue.bikeshed.org/

 

seems relevant....

[Dustin T]

 

The reason for this is what I was taught was mostly useless, and we were required to go at the pace of slowest folks in class.

 

 

This rings a little too true. Every other field has been revolutionized by the computer age but education is still stuck in the 19th century. We do a very poor job of getting the best out of our very brightest students.

[innerscorecard]

The highest praise I have (and I'm not being facetious) for the US education system is that it allows you to opt out, through taking the GED and/or home-schooling.

 

Many countries don't let you do that.

[moustachio]

Hi Innerscorecard,

 

I am still at the Motley Fool. I was pretty tired when I wrote that (was on the Benadryl as a sleep aid), so going back, I noticed there were a lot of typos. It was more a stream-of-consciousness rant than a post with any real rhyme or reason to it.

 

I used to work as an analyst at the company, was promoted to senior analyst and am now working in the marketing department.

 

Scott, could you tell us more about this job and how you got it? I've always been interested in the newsletter industry.

[matjone]

Scott, let me steer the discussion to investing.  Can you talk about your philosophy or technique, how it came about and how it evolved, how you have performed, and any other points you'd like to discuss regarding investing?

[ScottHall]

Scott, could you tell us more about this job and how you got it? I've always been interested in the newsletter industry.

 

To an extent, yes. I am under a pretty standard NDA so I won't breach that, but I'll tell you about how I got started.

 

The short version is that TMF has a stock picking game called CAPS. You pick whether you think a stock will outperform or underperform, and based on how right you are and your accuracy, you get assigned a ranking.

 

I ended up getting in the top 0.6% of the game or so when I played it regularly (your score will generally deteriorate the less you play), and noticed the top ranked guy in the game had recently been hired by the company.

 

I started a conversation about stocks with him and convinced him to buy a micro-cap E&P that doubled in two months. We stayed in contact and he recommended me for a job the next time there was an opening. I guess I did well enough in the interview not to tank myself, so I got hired.

 

Funny story is that the E&P later crashed over 90% from its peak because its shale assets turned out to be pretty worthless, but we both got out with multibagger returns. You can always get lucky in the stock market.

 

Scott, let me steer the discussion to investing.  Can you talk about your philosophy or technique, how it came about and how it evolved, how you have performed, and any other points you'd like to discuss regarding investing?

 

Sure. So, originally I was a highly concentrated investor, and would invest most of my money in just two or three companies that I thought had multiples of upside even if they also had high risk. There were some big winners in there (GGP, SSN) and I did very well with my winners.

 

But there were also losers that crashed >50% (DBLE, for instance). That wouldn't really hurt much in a diversified portfolio, but giving back literally years of gains is pretty brutal when you concentrate heavily and it goes against you.

 

This strategy ended up making me a decent amount of money on average - enough to beat the market, even with the losers - but I'm not sure it was actually +EV or if I just got really lucky. I do know that it was tax inefficient and took a lot of effort, so I gradually switched from this concentrated deep value approach to more of a GARPish approach.

 

Now I place a lot more emphasis on quality of management and quality of business, and am happy to sit back and let my winners compound for me for long periods of time. Saves on taxes, and more importantly, it saves on time.

 

I now allocate the time I spent diving into 10-Ks into hanging out with friends, playing games, and reading books. I enjoy my life more this way. I still beat the market overall, but I'm willing to settle for just a few points of outperformance instead of gunning for dozens.

 

Not saying my way is the right way for everyone, but I realized that I already had enough money to quit working if I really felt like it, so why turn myself into a slave of my portfolio if I didn't really enjoy it.

 

I find investing much more fun when research is only something I do when I feel like it, as opposed to feeling like I have to find a certain number of new companies to replace the ones that I churn off. Much more relaxing when I have a stable of winners that I can let run for many years.

[ValueHippie]

Hey Scott, your lifestyle resonates well with me (even though I still love my bed).

I was wondering how you avoid doing things you don't want to do. For example if my parents (or somebody else I am close to) tell me to do something, I will do it, no matter what. Simply saying no doesn't work well neither, because then they seem disappointed and I can't handle that. It's like in the military, except that I have a choice.

Any thoughts?

 

Steve

[Liberty]

Hey Scott, your lifestyle resonates well with me (even though I still love my bed).

I was wondering how you avoid doing things you don't want to do. For example if my parents (or somebody else I am close to) tell me to do something, I will do it, no matter what. Simply saying no doesn't work well neither, because then they seem disappointed and I can't handle that. It's like in the military, except that I have a choice.

Any thoughts?

 

Steve

 

I'm not Scott, but here are a few tips: if you're having trouble with something like this, I would recommend training up to it; start with something small, and build up your confidence with small successes. Say 'no' to a small thing first, or reclaim some easier part of your life, then move on to what really gives you trouble. Also, make sure you explain some of your reasoning to people, they can be understanding when things don't seem to come out of nowhere. Also, just for your general well being, learn to stop caring too much about what other people think ( http://waitbutwhy.com/2014/06/taming-mammoth-let-peoples-opinions-run-life.html ). Hope that helps :)

[TwoCitiesCapital]

Hey Scott, your lifestyle resonates well with me (even though I still love my bed).

I was wondering how you avoid doing things you don't want to do. For example if my parents (or somebody else I am close to) tell me to do something, I will do it, no matter what. Simply saying no doesn't work well neither, because then they seem disappointed and I can't handle that. It's like in the military, except that I have a choice.

Any thoughts?

 

Steve

 

I'm not Scott, but here are a few tips: if you're having trouble with something like this, I would recommend training up to it; start with something small, and build up your confidence with small successes. Say 'no' to a small thing first, or reclaim some easier part of your life, then move on to what really gives you trouble. Also, make sure you explain some of your reasoning to people, they can be understanding when things don't seem to come out of nowhere. Also, just for your general well being, learn to stop caring too much about what other people think ( http://waitbutwhy.com/2014/06/taming-mammoth-let-peoples-opinions-run-life.html ). Hope that helps :)

 

If I might make a suggestion, I'd suggest a good start might be leaving your cell phone on silent 24/7 as a small step towards the unconventional/freedom/independence.

 

I started doing this a year ago and it's been great! Far less distractions when I'm trying to get something done, far less stress when I'm in the middle of something and it is constantly ringing/vibrating, I don't wake up at 2 AM anymore due to annoying facebook/text notifications, I spend time with those around me and occasionally check my phone instead of being on my phone with others around me, etc. etc. etc.

 

I'm free to check it when I want, I'm free to be available when I want, and ultimately I control how often I interact with my phone and not anyone else. I only turn it on vibrate when I'm expecting an imminent phone call. It's incredibly freeing to not have to feel like you have to respond to that text message or answer that call immediately just because someone decided to send/call at that moment in time. Just be prompt with your responses when you do have time and it doesn't seem like people get too annoyed.

 

[ScottHall]

Hey Scott, your lifestyle resonates well with me (even though I still love my bed).

I was wondering how you avoid doing things you don't want to do. For example if my parents (or somebody else I am close to) tell me to do something, I will do it, no matter what. Simply saying no doesn't work well neither, because then they seem disappointed and I can't handle that. It's like in the military, except that I have a choice.

Any thoughts?

 

Steve

 

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.

[nodnub]

Hey Scott, your lifestyle resonates well with me (even though I still love my bed).

I was wondering how you avoid doing things you don't want to do. For example if my parents (or somebody else I am close to) tell me to do something, I will do it, no matter what. Simply saying no doesn't work well neither, because then they seem disappointed and I can't handle that. It's like in the military, except that I have a choice.

Any thoughts?

 

Steve

 

The fact that you are aware of the problem is the first step to successfully dealing with it.  I used to be like that and then I realized you can't keep everyone happy all the time (someone will always be disappointed by you at some point). Keeping everyone else happy is futile and doesn't lead to your own happiness.  We need to decide what we want for ourself and our own immediate family and take steps to make that happen.  It's okay to have boundaries around what you are willing to do for others. It's also okay not to be liked by every single person you meet.  It sounds dumb, but for a long time, deep down, that is what I was aiming for.

 

The link in Liberty's post is a good one. I would also spend some time reading the first chapter or so of Robert Glover's book "No More Mr Nice Guy".  (disclaimer: That's all I've read).  Terrible title because it's not about no longer being "Nice", but about figuring out what you want and pursuing it, rather than pursuing what other people want for you. The Nice Guy thing can be really phony and superficial and there is not much benefit to it, unless the only thing you care about it being known as the Nicest guy in your community.  Take a look at it on amazon.com and look at the first few pages of the book.

 

--edit:  I think the lessons in that book would be well suited to a lot of women that have the same issue.

[rkbabang]

Hey Scott, your lifestyle resonates well with me (even though I still love my bed).

I was wondering how you avoid doing things you don't want to do. For example if my parents (or somebody else I am close to) tell me to do something, I will do it, no matter what. Simply saying no doesn't work well neither, because then they seem disappointed and I can't handle that. It's like in the military, except that I have a choice.

Any thoughts?

Steve

 

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 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.

 

One thing I'll add to your excellent answer is that in the case of family.  Once you are an adult, no one in your family has a claim on you.  The saying "blood is thicker than water" is bullshit.  Ask yourself "if this person wasn't related to me, would I choose to spend my time with him/her? Would I choose to be friends with this person?"  And really think about the answer.  Someone who takes advantage of a "family" relationship to get something out of you or force you to do things you do not want to do is not treating you very well, thus you should not feel any guilt about telling them to go to hell (in so many words) or just simply start saying no.

 

[matjone]

Scott, I just realized I intended to harass you with more questions last time I posted here and for whatever reason didn't get to it.

 

I am intrigued by your new quality approach and would like to learn more about it if you wouldn't mind delving into it.  First of all, how long have you used this strategy and how have you fared with it, both absolutely and relative to the market?  Secondly, would you mind providing some examples of past investments or maybe even current holdings?  I imagine these are mostly large caps so you wouldn't have to worry too much about moving the market mentioning them here (I know you mentioned google on twitter).

 

And if there is anything else you'd like to discuss with regards to investing investing, I'd like to hear about it. TIA

[ScottHall]

Scott, I just realized I intended to harass you with more questions last time I posted here and for whatever reason didn't get to it.

 

I am intrigued by your new quality approach and would like to learn more about it if you wouldn't mind delving into it.  First of all, how long have you used this strategy and how have you fared with it, both absolutely and relative to the market?  Secondly, would you mind providing some examples of past investments or maybe even current holdings?  I imagine these are mostly large caps so you wouldn't have to worry too much about moving the market mentioning them here (I know you mentioned google on twitter).

 

And if there is anything else you'd like to discuss with regards to investing investing, I'd like to hear about it. TIA

 

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.

[no_thanks]

Scott, I just realized I intended to harass you with more questions last time I posted here and for whatever reason didn't get to it.

 

I am intrigued by your new quality approach and would like to learn more about it if you wouldn't mind delving into it.  First of all, how long have you used this strategy and how have you fared with it, both absolutely and relative to the market?  Secondly, would you mind providing some examples of past investments or maybe even current holdings?  I imagine these are mostly large caps so you wouldn't have to worry too much about moving the market mentioning them here (I know you mentioned google on twitter).

 

And if there is anything else you'd like to discuss with regards to investing investing, I'd like to hear about it. TIA

 

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?

[ScottHall]

Scott, I just realized I intended to harass you with more questions last time I posted here and for whatever reason didn't get to it.

 

I am intrigued by your new quality approach and would like to learn more about it if you wouldn't mind delving into it.  First of all, how long have you used this strategy and how have you fared with it, both absolutely and relative to the market?  Secondly, would you mind providing some examples of past investments or maybe even current holdings?  I imagine these are mostly large caps so you wouldn't have to worry too much about moving the market mentioning them here (I know you mentioned google on twitter).

 

And if there is anything else you'd like to discuss with regards to investing investing, I'd like to hear about it. TIA

 

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.

[innerscorecard]

Scott, I just realized I intended to harass you with more questions last time I posted here and for whatever reason didn't get to it.

 

I am intrigued by your new quality approach and would like to learn more about it if you wouldn't mind delving into it.  First of all, how long have you used this strategy and how have you fared with it, both absolutely and relative to the market?  Secondly, would you mind providing some examples of past investments or maybe even current holdings?  I imagine these are mostly large caps so you wouldn't have to worry too much about moving the market mentioning them here (I know you mentioned google on twitter).

 

And if there is anything else you'd like to discuss with regards to investing investing, I'd like to hear about it. TIA

 

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.

[ScottHall]

Scott, I just realized I intended to harass you with more questions last time I posted here and for whatever reason didn't get to it.

 

I am intrigued by your new quality approach and would like to learn more about it if you wouldn't mind delving into it.  First of all, how long have you used this strategy and how have you fared with it, both absolutely and relative to the market?  Secondly, would you mind providing some examples of past investments or maybe even current holdings?  I imagine these are mostly large caps so you wouldn't have to worry too much about moving the market mentioning them here (I know you mentioned google on twitter).

 

And if there is anything else you'd like to discuss with regards to investing investing, I'd like to hear about it. TIA

 

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.

[ScottHall]

Scott, I just realized I intended to harass you with more questions last time I posted here and for whatever reason didn't get to it.

 

I am intrigued by your new quality approach and would like to learn more about it if you wouldn't mind delving into it.  First of all, how long have you used this strategy and how have you fared with it, both absolutely and relative to the market?  Secondly, would you mind providing some examples of past investments or maybe even current holdings?  I imagine these are mostly large caps so you wouldn't have to worry too much about moving the market mentioning them here (I know you mentioned google on twitter).

 

And if there is anything else you'd like to discuss with regards to investing investing, I'd like to hear about it. TIA

 

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.

[oddballstocks]

 

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.

 

This is the crux of my style as well.  Identify the main fulcrum points, get those right and everything else works out.

[cobafdek]

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.

 

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.

[ScottHall]

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.

 

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.

[cubsfan]

Very nice insights Scott. You sound like a page out of Tom Russo and his "Capacity to Suffer" thesis on great businesses.