During their latest episode of the VALUE: After Hours Podcast, Trainer, Taylor, and Carlisle discussed Mauboussin’s Valuation Approach: A Way to Avoid Overvalued Stocks. Here’s an excerpt from the episode:
David: Like, with Nvidia, give them a margin that is 15 basis points, I’m sorry, 15 percentage points higher than what they’ve ever done, and grow revenue at 25 plus percent compounded annually for 25 years, 30 years, so the return on capital gets to anyway, that’s what it takes. That’s what a lot of our clients love about our system. I don’t know, Tobias, if you use that part of the tool or not, but that kind of scenario analysis where you can back into and understand the math behind the valuation, I love that part as much as I love the economic earnings part.
Tobias: I always go and look at the assumptions that the market is implying for the stock to try to understand. The stuff that I’m looking at though it tends to be just the way that I use the stuff. For the cheap stuff, I tend not to go in and look, because I’m not long-short anymore. When I was long-short, I used to use the short. I used to like to make sure they were expensive and deteriorating and so on. I don’t look so much at that. Now, I just look to make sure the assumptions are very, very modest for all the stuff that I buy. I always joke if they get up in the morning tomorrow, then thesis plays out.
As long as they survive for one more year, thesis works. So, that’s what I like to see virtually less than one-year growth appreciation period. Very, very modest assumptions for survival. And then if any of them materialize, then they should do fairly well. From that perspective. I really like that Mauboussin approach and your approach that you’ve adopted. I like that expectations implied. I think that’s a much better way of than trying to guess what is an appropriate thing. It’s much easier just to look at what is implied and say that’s possible, that’s impossible. That’s the way I’d rather think about it.
David: Yeah. Would you rather be a fortune teller or critic of a fortune teller?
David: It’s a no brainer when you see how crazy the fortune teller is on, both the short and the long side. We see a lot of great stocks on our focus list long that just incredibly cheap. Incredibly cheap. I think that’s the crazy expensive stuff sucking capital away from the better stuff. And ultimately, that’s not good for society either. That lowers growth potential.
Tobias: I think part of it has been too that there’s been this long period where capital has been so available that the ability to survive or self-fund has been not at all important, because you can just go and raise another round of VC or whatever the case, just tap public markets, whatever the case may be. That might not be the case from here on or from the last 12 months onwards as the cost of capital approaches a real cost of capital and VC pulls back the ability to self-fund and survive is a much more important. That’s just my bias as an old value investor is that you want to make sure that the thing can survive on its own 2ft without requiring additional financing. But I don’t know. To what extent do you think that’s important? Is it too conservative? Is it that financing really is available all the time? There’s so much VC and public markets are so frothy.
Jake: There’s a lot of kindness of strangers.
Tobias: Yeah. I don’t like relying on it. Sorry.
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