December First Half
"Life was made by people that are no smarter than you.."
Welcome back. In a busy world we can be distracted with the trivial many things or we can focus on The Vital Few.
Something that I am thinking about
One thing on which I am constantly judging a company is how they allocate their excess operating cash flow. If they don’t have any excess operating cash flow, that is an entirely different situation. But, once you have EXCESS/positive operating cash flow, what do they do with it? Think about it. You are the CFO and CEO, and 10% of your $5B in revenue turns into net income and in this case, positive operating cash flow. What do you do with all that cash? $500MM per year, $125MM per quarter. Quarter after quarter. It can be more difficult than people think. Below is the mental model that I use to think about Capital Allocation of excess operating cash flow.
I don’t need to waste your time explaining each step. But I want to provide a few comments.
I mostly view it as a downward waterfall starting with #1, and only after that is exhausted does it move down to #2, etc. Now, in reality that is not mechanistic.
A company should know what its internal ROIC is so that it can evaluate the options it has and if/how much a potential action will be accretive.
Some of these options have high corporate control (OPEX, Incremental CAPEX, Debt Pay down). Some have significant risk (A large business acquisition and integration.) So perhaps the return required for a more risky action is higher.
A great company is faced with this real problem. What to do with all this excess cash? Recall that if the cash can not be put to good use than quarter after quarter the ROIC will decrease for the shareholders.
Bonus Homework Question- What does the CFO/CEO do when they have multiple GOOD options across the capital allocation range? (Share your thoughts in the comments below.)
At the beginning I stated that I am constantly judging a company's ability to allocate capital. Why? The better the management team performs this function, the more stable and growing my future ROI as a shareholder. Do all managers get this right, perform this allocation function well? In short, no. It is grueling to find both 1. a great company that also 2. allocates capital well. Often excess capital is wasted. Imagine throwing beautiful cash💵 into a bonfire.
A few company leaders that think in the terms that I have described and that you might be interested in learning more from include: Ruth Porat CFO GOOG 0.00%↑, Rich Templeton CEO TXN 0.00%↑ , Michael Scarpelli CFO SNOW 0.00%↑ , Amy Hood CFO MSFT 0.00%↑ , Jamie Dimon CEO JPM 0.00%↑ , Richard Galanti CFO COST 0.00%↑ , and the Berkshire Hathaway Team. There are others for sure, but this is a good place to continue learning. Listen to them on this past year’s earnings calls. They are looking for SHREWD/high ROI capital deployment.
Investing, Companies, Market Past/Future
(I invest in Companies, not in stocks. And, Peter Lynch frequently reminds me that if I have spent 15 minutes on market macro, I have wasted 13 minutes. With that self caution, let us press onward.)
Interesting companies that hosted earnings results or information session since my last edition that I reviewed-
Technology- MDB 0.00%↑ S 0.00%↑ AVGO 0.00%↑ ORCL 0.00%↑ Snowflake BUILD Summit SNOW 0.00%↑
Housing & Banking - TOL 0.00%↑
Others- COST 0.00%↑
Macro US Economy- Chart below with a summary of key economic data and future projections. The presentation of multiyear and the use of contrasting color made it a good visual for me.💫
Videos
Steve Jobs AAPL 0.00%↑ on Life [1.30 minutes]
Everything around you that you call life was made up by people that are no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use...Books since my last edition
(I am usually reading 2 at a time, and if I get bored of a book I quit and move on.)
Gentleman of Moscow by Amor Towles is a transporting fictional novel about a man who is ordered to spend the rest of his life inside a luxury hotel. The main character is so magnetic🧲, humorous and interesting that I have read it 2 times in about 4 years. From the Bill Gates reading list several years ago.
“The principle here is that a new generation owes a measure of thanks to every member of the previous generation. Our elders planted fields and fought in wars; they advanced the arts and sciences, and generally made sacrifices on our behalf. So by their efforts, however humble, they have earned a measure of our gratitude and respect.”
Distant Force by George A. Roberts is a year by year diary of Teledyne and its masterful founder Henry Singleton. I would recommend The Outsiders by William Thorndike as it has a great one chapter overview of Singleton.
Mastery by Robert Green
All The Light We Cannot See by Anthony Doerr is historic fiction set in WWII.
Here is a link to many of the books I have read and my 1-5 star rating- Goodreads Books Read
Wild Card🃏
Good Night Oppy- [Free on Prime AMZN 0.00%↑ ] 1hr 45min
The documentary film follows Opportunity, the Mars Exploration Rover affectionately dubbed Oppy by her creators and scientists at NASA. Oppy was originally expected to live for only 90 days but she ultimately explored Mars for ….🤫.
-Can we appreciate the complexity of how difficult it is to launch & operate a rover on Mars? NO! The amount of thinking, problem solving, planning, sequencing, double & triple redundancy, science & engineering… I find it difficult to wrap my head around it. The details just to plan a week long family trip of 1K miles… is Ugg. Now, send a robot🤖 to Mars🚀🌌 52M miles away while 7B humans are watching.🤯
-The gritty determination and joy of problem solving displayed by the engineers is contagious.✨ It stirs and inspires the problem solver in me, maybe in you too!🙏
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Disclaimer: All of my posts are for informational purposes only. I might own some of the companies discussed in these posts. This is NOT a recommendation to buy or sell securities discussed. Please do your own work before investing your money.