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Holly LaFon
Holly LaFon
Articles (9304)  | Author's Website |

Brian Yacktman's Talk Notes: High Confidence Mental Models

Discussion at GuruFocus Value Conference 2018

May 04, 2018 | About:

Business analysis is more important than valuation analysis.

Are safe industries changing?

His father Don Yacktman has loved consumer defensive stocks.

Dollar Shave Club: Spent very little to disrupt the shaving market.

Alexa: His family buys a lot of diapers. It gives them good deals.

Branded chocolate industry: Difficult to ship chocolate.

Media Industry: Increased supply is putting pricing pressure on content. More content produced by Netflix than by Time Warner.

Health Industry: Inefficient markets, pressure to break collusion.

Shorter Company Lifespans

Study: average lifespan of S&P 500 companies went from 67 years to 15 years. It could get shorter.

“I would rather invest in predictability, rather than try to figure out what is going to be the next Microsoft, or Facebook.”

There will be abundant wealth creation as seen around the globe. With that will come deflationary pricing.

To fight deflationary trend: Single most important decision in evaluating a business is pricing power – Warren Buffett (Trades, Portfolio)

Where do you find it?

Wealth creation leads to experiences, opportunities, human connection, which decreases time.

Long-term value will be found in filters.

Scarcity of time plus universal desire for status & resources accumulation will lead to demand for reliable people filters and reliable information filters.

People filters are for loyalty or status within a tribe, like wearing Nikes or buying Richemont. Derive pricing power by definition because if easily attainable, it’s no longer a good filter.

Example companies: Disney, Coca-Cola, L’Oreal, Estee Lauder, Hershey and others.

Increasing Information

Examples: Alphabet, Booking, Verisk, MSCI, Moody’s, CBRE Group.

Filters for safety, reliability, efficiency and others.

Derive pricing power from cost of searching for or creating cheaper substitute being far higher than price.

Moody’s is one of the strongest examples because it’s a global language used to rate debt that everyone understands.

Outputs of High Quality

  1. High return on tangible assets (ROTA), high returns on incremental invested capital (ROIIC), i.e., low capital intensity
  2. 2) Low cyclicality (non-durable/short repurchase cycle, essential/mission critical, non-fad/long-product cycle)

When you combine the two, you want high degrees of both. The danger areas are where it’s low and low

Amazon – Doesn’t know what will happen, but just because you’re growing your profits doesn’t mean you’re going to capture a lot of profits over time. The genius thing about Amazon is taking labor and brick and mortar, an inflationary cost structure, and laid it off into a deflationary cost structure, technology.

  1. Wide and stable gross profit and operating margins
  2. High market share
  3. Conservative use of leverage

Valuation: return + shareholder yield + terminal growth

Helps recognize whether you’re getting growth from value or growth side.

Portfolio Weighting

You want higher superior risk-adjusted return, not inferior risk-adjusted return, with high quality.

But isn’t the market expensive?

Shiller CAPE for S&P 500 – it’s clearly expensive relative to the past, but is it overvalued? He doesn’t know. Overvalued compared to what? A hundred years out, you’re probably looking at something like 7%, or 30 years out will be 7%.

Median price/revenue ratio is the highest it’s ever been. Everything is broad-based more expensive than it’s ever been.

Investors can’t guess the macroeconomic cycle or company specific operational cycle that will tell them when to trade in and out.

Should we time individual stocks?

American Express/AmeriCredit during financial crisis in 2009. In this case, they had $16 of book value and stock traded at $3. Credit card company with collateral so they can recapture 50% of that. You needed two-thirds to 80% of defaults for it to wipe out the equity. He assumed people may leave their keys in the house, but they’re not going to walk away from their cars. But point is: Even if the business never survived, you were looking at returns of 30-50% annualized. Because of people’s fear, it provided an incredible opportunity.

Alphabet or Wells Fargo now in 2018? Have concerns with culture at Wells Fargo, very difficult to change a culture.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

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