In one sentence: Phil argues you should let your values veto a purchase (without paying extra for virtue), then starts valuing Chipotle with four inputs, beginning with trailing EPS and an earnings growth rate that he stress-tests against store counts.
Key ideas
- Four stages of mastery. Unconscious incompetence → conscious incompetence → conscious competence → unconscious competence. Valuation takes experience to move up, like driving or snowboarding, and good teachers often struggled to learn it. [12:00–15:00]
- Why value is hard to teach. Munger "dances right over" the fair price step. Phil says nobody systematically teaches it. [08:00–10:30]
- Automation has limits. The internet helps, but robo-advisors would fail when clients are down 40%. [15:00–16:00]
- Latest Chipotle news. Same-store sales fell about 35%, the stock was near $440, and one firm upgraded it. Phil says that implies either a valuation near $700–1000 or belief that prices equal value. [16:00–18:00]
- Value = cash that reaches your pocket over time. Separate from it are your values. [18:00–20:30]
- Values as a gate, not a premium. Don't add to intrinsic value because you like a company, but if you think it's bad you won't buy at any price. Phil contrasts Cramer (keep morals out) with Ackman's Herbalife short. [20:00–22:30]
- Phil's own example. He cut refined sugar, so owning Coca-Cola would be hypocritical for him. Buffett disagrees (Coke makes him happy). Phil's point is to vote your values, not to adopt his. Danielle notes the privilege in it, such as paying more for antibiotic-free chicken. [22:00–34:30]
- Why it matters. Most of the money in public companies is ordinary retirement money, and consumer choices have already moved grocers toward organic. Index and fund holders own whatever the fund holds. [27:00–32:00]
- Segue on regulation, federalism and gerrymandering. Off-topic, skip. [34:30–38:00]
- Number 1: EPS (TTM). Trailing-twelve-month EPS, at least the last four quarters. Chipotle was $15.37 on his site and $15.09 on YCharts. Cross-check sources. Smoothed EPS adjusts one-off jumps, but judgment is needed. [38:30–44:00]
- Number 2: EPS growth rate. Look at 10-, 7-, 5- and 3-year rates. Chipotle's ten-year average is skewed by a tiny base (about 50%), but recent years run roughly 20–35% (three-year 27%, five-year 29%, one-year 35.6%). Ten years of data usually costs about $10–$40 a month. [44:00–50:00]
- The back-window problem. Don't value on historical growth. Test it: 27% means doubling every ~3 years, so 2,000 stores becomes 64,000 in 15 years, versus McDonald's at about 45,000. Some growth can come from price and same-store sales, and Chipotle bought Pizzeria Locale, but being optimistic isn't the strategy. [50:00–55:00]
- Next steps. Compare sales, book value and operating cash flow growth with EPS. Earnings can't outgrow sales for long, equity shows whether owners get paid, and cash flow slows first when something is wrong. Phil is cutting the pick to a conservative one after all four. [55:00–60:00]
How it maps to RuleOne
- The stock page's Sticker Price needs exactly these inputs: TTM EPS, a growth estimate and a P/E. The four growth rows (EPS, sales, equity, cash) should sit together to show whether they agree.
- A store-count or unit-growth sanity check is a good analyst-agent task: translate a growth rate into the size the company must reach.
- Values screening: a "no-go" flag per holding or sector in /holdings/ that blocks without changing the valuation.
Buffett, Munger and Graham links
- Buffett's view on Coca-Cola is from the annual meeting, as Phil recounts, and his 1993–1999 letters discuss it as a favorite holding.
- Munger's "four steps of mastery" isn't Munger. It's the common competence model.
- Philip Fisher's scuttlebutt method fits the real-world checking (customers, news) in this episode, and Graham's focus on earnings power is in The Intelligent Investor, ch. 11.
Words to know
- TTM EPS: earnings per share for the trailing twelve months.
- Smooth EPS: EPS adjusted for one-off swings.
- Same-store sales: sales growth from stores open at least a year.
- Base effect: a high growth rate caused by a tiny starting number.
Try this
For one company, write TTM EPS from two different sites, and the 10-, 5- and 3-year EPS growth. Then convert your preferred growth to "doubles every N years" and check what that implies about size (stores, customers or market share). Does it pass?
Check yourself
- How do Phil's values enter his investing?
Answer
As a veto on what he'll own, not as a premium added to intrinsic value. - Why did the ten-year EPS growth rate of ~50% mislead?
Answer
It started from $0.24 a share, so the early percentages were huge; recent years show about 20–35%. - Why compare EPS growth to sales and cash growth?
Answer
Earnings can't outgrow sales for long, equity shows whether owners benefit, and cash tends to reveal problems first.
Short quotes
"I'm going to vote my money for what I want to see in the world." (Phil, ~20:30, auto-transcribed)