Thanks James, great addition! Management's integrity and ownership of the business he/she runs is incredibly important, however, I also want to make sure I own businesses that are well-positioned in the environment that they operate.
I fully agree, but the same company in the same environment will see an entirely different outcome based on who steers the ship. Three great examples:
1. John Sculley nearly crashed Apple having only 90 days of cash remaining before it would have declared bankruptcy in 1997, Steve Jobs took over and made it one of the magnificent seven trillion dollar companies.
2. Thomas Watson and his son built IBM to be a power house over 80 years. It was once the largest market cap company in the world. Lou Gerstner came along and in 9 short years he asset stripped it, failed to invest in innovation and left it a shadow of its former self.
3. Intel was once the leader in semi conductors lead by the incredible talented trio of Gordon Moore, Andy Grove and Bob Noyce. However, a shift in management strategy led to a significant decline in its competitive edge. This downturn can largely be attributed to former CEO Brian Krzanich who took charge in 2013. He prioritized short-term financial metrics over long-term growth. By 2024, Intel’s market capitalization had dropped to $84 billion, down from $108 billion when Krzanich first took over, marking a disastrous period for the company. Under new CEO, Pat Gelsinger, Intel has refocusing on the long-term strategy, but whether the company can fully recover remains uncertain.
The motto of the story is that as an investor you are not looking for the next Apple, IBM or Intel. You are looking for the next Steve Jobs, Thomas Watson, Bob Noyce, Andy Grove and Gordon Moore.
Brilliant examples, thank you for sharing! I'd like to think I have got a few great founders and CEO for my sleep well portfolio: Richard White of Wisetech, Michael P. Kehoe of Kinsale and Forest Li of Sea Limited.
Pieter van der Does at Adyen, of course Warren Buffett at Berkshire, Mark Leonard at Constellation, I used to like Jeff Bezos at Amazon but I still have great faith in Andy Jassy his successor. There is also someone else who has recently come on to my radar. Morgan Tilbrook at Alpha Group International. Read his communications to shareholders and you will see that he possesses the rare golden threads that run through all these great leaders. Alpha Group has a bright future.
I looked at Wisetech for the first time today. The numbers look impressive, but the valuation looks ridiculous (156x earnings and 31x sales). It is priced beyond perfection - I wondered what your view was here. If you are long, surely you must be tempted to cash out at these valuations - you are being paid for at least a decade of earnings that are yet to be earned!
On the subject of great CEOs, Richard White doesn't meet with one of my key criteria, namely that the CEO must seek to align interests of insiders with external investors. Buffett is the best examplar here, buying equity with his own capital and refusing to entertain SBC or any other form of transferring wealth from shareholders to insiders. By contrast, despite being a hugely cash generative company capable of paying its staff in cash, White is imposing a huge tax on shareholders in the form of SBC which was over 20% of net earnings in 2022 and 14% in 2024 (when taken at grant value, but likely to be far higher when vesting occurs if the value of the company increases further). He is then utilizing shareholder capital to repurchase shares purely to offset dilution so that they don't notice that they are having their pockets picked.
SBC, particularly in the tech sector, is one of the most abused aspects of corporate finance today. The regulators are asleep at the wheel.
First of all, I don't know if I can answer your question.
WiseTech looks expensive on an absolute level. Given I didn't buy when it was 60x FCF and now over 100x FCF, and missing out 70% gain, makes me look like a fool for sure. So I don't know what is the right valuation.
What I can say is it depends on how you view the quality of the firm. For me its the function of ROIC, runway, and competition. WiseTech scores well in all three. It has done 45% CAGR in FCF per share since IPO. If you believe it can continue to do so for 10 years, it's cheap, if you think it's 2 years, it's expensive. The truth is I don't know, but I continue to monitor how it execute and draw a line. I am not buying today as I do think a few others in my investable universe have better R/R, but I could start a position and buy in slowly whenever there is a dip, provided the company performs.
Regarding SBC, it's absolutely a must for high tech company to attract the best talent. It also gives a lot more skin in the game for employee. So, as long as it is not out of line and that FCF per share still trending up, I am ok with it. No company is perfect but Wisetech to me has a sticky and productive product that no one does in the market and is in a unique position to to expand organically and inorganically.
1. “Investors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesn’t count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.”
— Warren Buffett
2. “The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.”
— Warren Buffett
3. “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
— Charlie Munger
4. The P/E ratio of any company that's fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
5. “Over the longest period of time .. your return approximates the business return to capital invested in the business itself over the long term. The two tend to really converge pretty closely.”
— Li Lu
6. “In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”
— Joel Greenblatt
7. “It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens.”
I fully agree with all 5 lessons. Easy to say, more difficult to do.
If you want to add a number 6, it is that the person running the business is often more important than the business itself. To understand this better, see: https://rockandturner.substack.com/p/phil-carret-learn-from-the-best
Thanks James, great addition! Management's integrity and ownership of the business he/she runs is incredibly important, however, I also want to make sure I own businesses that are well-positioned in the environment that they operate.
I fully agree, but the same company in the same environment will see an entirely different outcome based on who steers the ship. Three great examples:
1. John Sculley nearly crashed Apple having only 90 days of cash remaining before it would have declared bankruptcy in 1997, Steve Jobs took over and made it one of the magnificent seven trillion dollar companies.
2. Thomas Watson and his son built IBM to be a power house over 80 years. It was once the largest market cap company in the world. Lou Gerstner came along and in 9 short years he asset stripped it, failed to invest in innovation and left it a shadow of its former self.
3. Intel was once the leader in semi conductors lead by the incredible talented trio of Gordon Moore, Andy Grove and Bob Noyce. However, a shift in management strategy led to a significant decline in its competitive edge. This downturn can largely be attributed to former CEO Brian Krzanich who took charge in 2013. He prioritized short-term financial metrics over long-term growth. By 2024, Intel’s market capitalization had dropped to $84 billion, down from $108 billion when Krzanich first took over, marking a disastrous period for the company. Under new CEO, Pat Gelsinger, Intel has refocusing on the long-term strategy, but whether the company can fully recover remains uncertain.
The motto of the story is that as an investor you are not looking for the next Apple, IBM or Intel. You are looking for the next Steve Jobs, Thomas Watson, Bob Noyce, Andy Grove and Gordon Moore.
People are everything.
There's more in the article (link above)
Brilliant examples, thank you for sharing! I'd like to think I have got a few great founders and CEO for my sleep well portfolio: Richard White of Wisetech, Michael P. Kehoe of Kinsale and Forest Li of Sea Limited.
Who are your great CEOs at the moment?
Pieter van der Does at Adyen, of course Warren Buffett at Berkshire, Mark Leonard at Constellation, I used to like Jeff Bezos at Amazon but I still have great faith in Andy Jassy his successor. There is also someone else who has recently come on to my radar. Morgan Tilbrook at Alpha Group International. Read his communications to shareholders and you will see that he possesses the rare golden threads that run through all these great leaders. Alpha Group has a bright future.
I have recently published a book which focuses on these golden threads and helps investors identify the best leaders by enabling them to spot the methodologies and personality traits that they all seem to have in common. Take a look: https://www.amazon.com/Fabric-Success-Threads-Tapestry-Business/dp/B0D5W7B9W1/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=&ccs_id=84125da7-10bb-49cc-928b-54edd5a976ef
FYI, this post is about Alpha Group. Be sure to also read the comments section: https://rockandturner.substack.com/p/for-fxs-sake-currency-volatility
Thank you, I have heard about others but not Morgan Tilbrook of Alpha Group International. I'll check him out.
And congrats on publishing your book!
I looked at Wisetech for the first time today. The numbers look impressive, but the valuation looks ridiculous (156x earnings and 31x sales). It is priced beyond perfection - I wondered what your view was here. If you are long, surely you must be tempted to cash out at these valuations - you are being paid for at least a decade of earnings that are yet to be earned!
On the subject of great CEOs, Richard White doesn't meet with one of my key criteria, namely that the CEO must seek to align interests of insiders with external investors. Buffett is the best examplar here, buying equity with his own capital and refusing to entertain SBC or any other form of transferring wealth from shareholders to insiders. By contrast, despite being a hugely cash generative company capable of paying its staff in cash, White is imposing a huge tax on shareholders in the form of SBC which was over 20% of net earnings in 2022 and 14% in 2024 (when taken at grant value, but likely to be far higher when vesting occurs if the value of the company increases further). He is then utilizing shareholder capital to repurchase shares purely to offset dilution so that they don't notice that they are having their pockets picked.
SBC, particularly in the tech sector, is one of the most abused aspects of corporate finance today. The regulators are asleep at the wheel.
What are your thoughts on this topic?
First of all, I don't know if I can answer your question.
WiseTech looks expensive on an absolute level. Given I didn't buy when it was 60x FCF and now over 100x FCF, and missing out 70% gain, makes me look like a fool for sure. So I don't know what is the right valuation.
What I can say is it depends on how you view the quality of the firm. For me its the function of ROIC, runway, and competition. WiseTech scores well in all three. It has done 45% CAGR in FCF per share since IPO. If you believe it can continue to do so for 10 years, it's cheap, if you think it's 2 years, it's expensive. The truth is I don't know, but I continue to monitor how it execute and draw a line. I am not buying today as I do think a few others in my investable universe have better R/R, but I could start a position and buy in slowly whenever there is a dip, provided the company performs.
Regarding SBC, it's absolutely a must for high tech company to attract the best talent. It also gives a lot more skin in the game for employee. So, as long as it is not out of line and that FCF per share still trending up, I am ok with it. No company is perfect but Wisetech to me has a sticky and productive product that no one does in the market and is in a unique position to to expand organically and inorganically.
The most useful mental models:
Mental Models
1. “Investors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesn’t count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.”
— Warren Buffett
2. “The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.”
— Warren Buffett
3. “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
— Charlie Munger
4. The P/E ratio of any company that's fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
5. “Over the longest period of time .. your return approximates the business return to capital invested in the business itself over the long term. The two tend to really converge pretty closely.”
— Li Lu
6. “In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”
— Joel Greenblatt
7. “It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens.”
— Warren Buffett
Thanks Totalcompound. Good reminder, what's hard is to find the enduring drivers to businesses with high ROIC.