Sanjay Bakshi is the latest to do a Talk at Google (link to the video). Bakshi, an MBA professor, teaches about behavioral financial and valuation.
In the talk, Bakshi discusses five areas where the market misprices a moated business because it’s given the wrong label:
- High P/E multiple – P/E doesn’t determine whether a stock is cheap or expensive, performance does (return on capital). Many great companies are focused on growth – spending more today, for greater gain tomorrow – which understates earnings and forces a higher P/E (see Amazon). The E in P/E is exploitable. Using ratios to filter out so-called expensive companies can just as easily filter out great companies.
- Hidden Champions – Are companies that stay below the radar of most consumers, and thus most investors. The companies provide machinery, parts, or services that drive growth for other businesses. Because the champions are further down the production chain, they go unnoticed by the average person. But they control a large share of the market because the business is hard to copy. Most are B2B companies. Many are hugely profitable businesses specializing inside some commodity industry.
- Learning Machines – The market consistently discounts business leaders who make mistakes as though they will continue to make the same mistakes in the future – what’s happening today is the new normal and the old normal will never return (even though it will). Some owners/CEOs actually “learn” from their mistakes and recover. Before they do there’s an opportunity. The market eventually forgives past mistakes and corrects it with higher prices.
- Serial Acquirers – Most acquisitions don’t improve the value of a business. But not all acquisitions. It’s easy for the market to label every acquisition as “bad”. The successful serial acquirer’s have better capital managers like Henry Singleton and Buffett. The opportunity is finding where the market is mislabeling an acquisition. You might find a better capital manager too.
- Freaks and Misfits – Great business leaders are misjudged early and often because they don’t conform to typical “business” procedures. They see the world differently or attack problems differently than what the market is used to, so the market discounts it. The market judges the company on the characteristics of the leader and not performance. In other words, opinion gets in the way of facts. (How often does that happens? Politics, sports, I’m looking at you).
- The Long Road of Proving Yourself as an Investor – M. Housel
- Would Seth Klarman Buy His Own Book? – CIO
- The Two Types of Knowledge – Farnam Street
- How Idea Adoption Works: The Idea Progression – S. Godin
- How America Lost Track of Ben Franklin’s Definition of Success – The Atlantic
- It’s Not Easy (PDF) – H. Marks
- Total Addressable Market: Methods to Estimate a Company’s Potential Sales (PDF) – M. Mauboussin
- Ask-Me-Anything Session with Guy Spier (Podcast) – BeyondProxy