In a recent interview on the Invest Like The Best Podcast, Gavin Baker discusses why he’s addicted to the 52-Week Low List. Here’s an excerpt from the interview:
Gavin: So it is very, very simple. And I’ve written about this. The best thinking about this comes from Buffett, and it is first principles thinking. So Buffett and Charlie Munger, if you listen to what they say, a lot of it is basically a long term return of an equity should approximate its return on equity. Which makes sense for a lot of reasons, mostly having to do with reinvestment, simple DuPont equation. And so then you could think of, today we would say ROIC, not ROE.
And Warren Buffett wrote this amazing article in the 1970s that is by far the best thinking I’ve ever read on why inflation is bad for the stock market. And the reason it is bad for the stock market, and you kind of go back to the DuPont formula, is that inflation, let’s just say everybody just takes price increases in line with whatever their input costs are. So their margins stay the same, but inflation ultimately inflates your asset base, and so that depresses your ROE or your ROIC.
So thereby you expect your return goes down. And it’s even worse because at some level, what you really care about as an equity investor is the gap between the ROE or the ROIC of your portfolio, your equity portfolio, relative to the yield on government bonds. So that obviously gets way worse in an inflationary environment. That actually gives me a great deal of comfort about secular growth and technology, and I think it’s probably one reason I am right now as bullish… And I’m sure I’m early, always early.
I’m addicted to the 52 week low list, okay? I cannot stop myself from buying weakness. I almost always have a negative exposure to momentum. I’m wired differently in some ways than a lot of other growth investors.
I always buy early, I always sell early, and I wish I weren’t that way, but I am. 100% I’m early. But I do think if you think about that from first principles, everyone does this analysis.
They look back to the 1970s and tech was one of the worst performing sectors in the seventies. Well, tech companies in the seventies had nothing to do with tech companies today. They were asset heavy companies, they made stuff, they had relatively low gross profit dollars per employee.
And I do think that is a metric to really focus on, revenue and gross profit dollar and free cash per employee. And so of course they did badly in this Buffett framework. Today tech companies, they’re super asset light, they have the highest ROICs, they have massive pricing power, got probably broadly speaking as a sector, the lowest of employees per dollar gross profit or free cashflow.
You can listen to the entire interview here:
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