I learn about what makes a good investor by how they spend their time. This is one of the best bits of advice that I learned from the Oracle of Omaha, Warren Buffett.
Instead of telling me who you are or what you do, tell me how you spend your time. Not how you think you spend your time, but actually look at how you spend your time. If you say I am an investor, but you spend most of your time watching YouTube, maybe you’re not an investor. If I tell my clients I’m an investor, but I spend most of my time marketing the company, then I’m really not an investor.
This is why I spend two hours in the morning writing. Then when I come to the office, I have this office, which I call the cave, because it’s basically an empty room with a chair. It’s very cold in there, so I usually have an extra blanket there. a big iPad which has no internet but has no email, it has no slack, and for three or four hours a day, all I do is just sit in the chair and read.
Now in addition to that, I go to my main office where I have a computer where I also work on models. My actions show that I spend most of my time investing. Now let’s talk about recessions for a second. If you say, I don’t care about recessions, but you spend most of your time worrying about recessions, maybe you do care about recessions.
And as I just discussed previously, you are basically wasting your energy. Because just like you should not worry what the weather’s going to be tomorrow, because you spend a lot of energy on something that has a very short shelf life. As an investor, what you should be doing actually, and that’s what you do, you should worry macro, invest micro. And what I mean by, when I say macro, I don’t mean next recession.
I mean identifying significant events, kind of climate changing events that will impact economy, that will have a long lasting impact on the cash flows of the company as a whole. That’s what I worry about, not the next recession. So let’s talk about what constitutes a good company?
Warren Buffett has this great definition of what constitutes a quality company. And he only poses one question. Would you want to own this company if the stock market was closed for 10 years? See when you invest in stocks because you can sell the stock at any point in time, your lifetime you end up owning junk because you feel like you can sell it tomorrow. That company is not a quality company. Quality company, we approach quality from three different sides. Business quality, we can spend hours talking about this, but this is basically a company that would have significant competitive advantage, therefore, which protects its future cash flows. It would have high return capital, so that, like I said, just to keep that simple, that would be quality business. It would have strong balance sheets and even if it has debt, it has the ability, for us this is a very important point, we have companies that have debt. But, and that’s okay, some companies should have debt.
But every single company we own has enough cash flows, cash flows to pay off any maturity, debt maturity in any kind of year. This way, if the bond market freezes, then these companies will not go out of business because they can’t refinance that payment. And the final piece of the puzzle is management. When you analyze management, what we do, we look from two different perspectives.
We look from how well they allocate capital and how well they run the business. Having management teams that are good at both is very difficult. A lot of management is good running the company, but then they make acquisitions that destroy value. And I would argue that most acquisitions, especially large acquisitions, when you have a fund that comes to mind, it’s an AT&T buying 10 more, that cost shareholders tens and tens of billions of dollars. So AT&T destroyed more value just by signing on the deadline of acquisition. Most acquisitions destroy value. So what is the right capital allocation? When management takes company’s capital and puts it to better use, to the best available use. It could be paying down debt, it could be paying a dividend, it could be buying stock, could be making an acquisition. If that acquisition will create shareholder value.
But for us, it’s extremely important that we have management who is good at doing this. that we have management who is good at doing this.
For us, it’s extremely important that you have management who is good at doing this.
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