220: Management Quality vs Tangible/Intangible Assets, Growth vs ROIC, Nvidia BlueField-2, Snowflake vs AWS, F-14 Birthday, and Economic Value of Aging
220: Management Quality vs Tangible/Intangible Assets, Growth vs ROIC, Nvidia BlueField-2, Snowflake vs AWS, F-14 Birthday, and Economic Value of Aging
did you read "Boyd: The Fighter Pilot Who Changed the Art of War". That book (and Boyd) absolutely skewers the F-14 Tomcat as too heavy, "lumbering & poor-performing". "The variable sweep wing design [like the one on the F-14] was one of the major aviation engineering blunders of the century" Fixed wing is better, lighter is better - like the Boyd-designed F-15 (which the Air Force still "gold-plated" with added weight and other elements that degraded dog-fighting capability.
I'm sure you read that book - if not, I highly recommend it. John Boyd was a very interesting person with a great life history.
main problem of roic for me is that some expenses too are also actually investments (r&d, s&m). not too much for established businesses maybe but i believe you can not really analyze a company that is in the fast growing phase with roic
Like a lot in investing, I think there's the clean principle, which is very useful to understand, but then you have to be careful to apply it correctly to the very messy world of business.
So in the case of a business that is early in its growth phase, of course all the growth investments probably mask things, and you have to try to figure out unit economics and make some educated guesses about what a mature state may look like for the business, etc.
Definitely not easy, but closer to the target than those who'll just say "it loses money so it's a terrible business", right?
exactly. so with it we can also rule out the earnings multiples. I agree 100% that unit economics is much better than ROIC. But as you said, in a mature state, some companies might still need to do these s&m and r&d spendings just to keep up. So I can not really do dcf either. that's why most of the time I can not value businesses and just stick to index funds. I generally have a good understanding of unit economics but I just can't value the companies and always have this feeling that I'm paying too much.
I doubt anyone can value most companies (if it they think they can, they aren't really, they just have some simplistic heuristic without much understanding of the actual business). But you only need a few in a portfolio, so I don't mind too much that I can't value most things.
RE: Growth vs. ROIC - I feel like this is the type of things Mr. Leonard over at Constellation Software has struggled with when making capital allocation decisions. CSU's more recent pivot to lower their hurdle rate I think speaks to his acknowledgment of the focus to fuel growth over higher or sustaining super-high ROIC.
I think that's a balance that is hard to hit, yea. He wrote about the "magnetic hurdle rates" which made him very afraid to do anything to that discipline, but he also wrote about modelling the value of the business and how much a few points more in organic growth would add to the value..
Growth vs ROIC- This is a concept discussed in a number of business and investing books, BUT the graph you provided was really good. I think it feels more exact and quantitative when I see it in a graph, vs the opinion of an individual person or investor.
It reminds me a little of Billy Beane and the concept that "opinions are great, but what does the data say."
Yeah, I think if you develop intuition/pattern-matching based on a lot of data, you can probably get pretty good at it.
But if your intuition is based on a few anecdotes, stuff you've heard (ie. blinding cut & pasting other people's intuition), etc, then you may have some pretty big blind spot.
Re: F-14 :
did you read "Boyd: The Fighter Pilot Who Changed the Art of War". That book (and Boyd) absolutely skewers the F-14 Tomcat as too heavy, "lumbering & poor-performing". "The variable sweep wing design [like the one on the F-14] was one of the major aviation engineering blunders of the century" Fixed wing is better, lighter is better - like the Boyd-designed F-15 (which the Air Force still "gold-plated" with added weight and other elements that degraded dog-fighting capability.
I'm sure you read that book - if not, I highly recommend it. John Boyd was a very interesting person with a great life history.
wabuffo
I've read it, and it made me see all these classic planes in a new light (F-14, 15, 16, 18).
My comment was more about the aesthetics of it, but certainly there are better planes even from the same era (and many also aged well).
main problem of roic for me is that some expenses too are also actually investments (r&d, s&m). not too much for established businesses maybe but i believe you can not really analyze a company that is in the fast growing phase with roic
Like a lot in investing, I think there's the clean principle, which is very useful to understand, but then you have to be careful to apply it correctly to the very messy world of business.
So in the case of a business that is early in its growth phase, of course all the growth investments probably mask things, and you have to try to figure out unit economics and make some educated guesses about what a mature state may look like for the business, etc.
Definitely not easy, but closer to the target than those who'll just say "it loses money so it's a terrible business", right?
exactly. so with it we can also rule out the earnings multiples. I agree 100% that unit economics is much better than ROIC. But as you said, in a mature state, some companies might still need to do these s&m and r&d spendings just to keep up. So I can not really do dcf either. that's why most of the time I can not value businesses and just stick to index funds. I generally have a good understanding of unit economics but I just can't value the companies and always have this feeling that I'm paying too much.
I doubt anyone can value most companies (if it they think they can, they aren't really, they just have some simplistic heuristic without much understanding of the actual business). But you only need a few in a portfolio, so I don't mind too much that I can't value most things.
RE: Growth vs. ROIC - I feel like this is the type of things Mr. Leonard over at Constellation Software has struggled with when making capital allocation decisions. CSU's more recent pivot to lower their hurdle rate I think speaks to his acknowledgment of the focus to fuel growth over higher or sustaining super-high ROIC.
I think that's a balance that is hard to hit, yea. He wrote about the "magnetic hurdle rates" which made him very afraid to do anything to that discipline, but he also wrote about modelling the value of the business and how much a few points more in organic growth would add to the value..
Growth vs ROIC- This is a concept discussed in a number of business and investing books, BUT the graph you provided was really good. I think it feels more exact and quantitative when I see it in a graph, vs the opinion of an individual person or investor.
It reminds me a little of Billy Beane and the concept that "opinions are great, but what does the data say."
Yeah, I think if you develop intuition/pattern-matching based on a lot of data, you can probably get pretty good at it.
But if your intuition is based on a few anecdotes, stuff you've heard (ie. blinding cut & pasting other people's intuition), etc, then you may have some pretty big blind spot.
I enjoyed reading this article! Happy Christmas, buddy.
Thank you Fernando, have a good one too! 💚 🥃
Happy Holidays, Liberty!
Thanks Sergey, same to you and your loved ones! 💚 🥃