In one sentence: After a discussion of how your environment shapes your investing (groupthink pulls you toward the crowd just when you should buy), Phil and Danielle finish the 11-item checklist, covering MARR, TTM numbers, the "two of three" rule, guru buying and the fear-creating event.
Key ideas
- Environment matters. Guy Spier's The Education of a Value Investor describes moving his Bloomberg terminal to a side room and relocating from New York to Zurich to avoid short-term energy. Phil lists Buffett (Omaha), Pabrai (Irvine) and himself as investors who live away from financial centres. [00:00–05:00]
- Why groupthink hurts. You wait in cash for long periods, then buy when everyone is frightened. Phil says Munger holds about three companies, and that if you can't "load up the truck" on a great, cheap business, this style isn't for you. [04:00–07:00]
- Court-auction houses. Neighbours buy houses at auction for $60–75k, knowing $8,000 owner cash flow justifies up to $80,000 at a 10% cap rate. It's "not rocket science". [07:00–09:00]
- Recap of 1–3. Past growth (back window), predictable future growth (moat question), and a historical, bull-market P/E at year 10. [09:00–11:00]
- Item 4, MARR 15%. It's on the list as an adjustable lever, not a task. Phil uses 15% because he's risk-averse. Fund managers using 8–10% will rationally pay more for the same business. [11:00–14:30]
- Items 5–7: TTM EPS, FCF and owner cash flow. Google gives the stated numbers, but you must know why they are what they are (an acquisition, a one-off sale?). Compare the rent figure a seller quotes with local rents. Phil also says sources calculate FCF differently (an earlier listener found Netflix's FCF varied widely), so make sure the capex treatment matches. [14:00–20:00]
- Trailing 12 months, with a lag. Use the latest quarter and sum four quarters rather than relying on last year's report. Reports run about 45 days late, so you're always a few weeks behind. [19:00–24:30]
- Item 8: three valuations. Sticker price/margin of safety (MARR and TTM EPS), payback time (FCF replaces EPS, no MAR), and cap rate (a 10 cap on owner cash flow). [24:00–25:00]
- The zombie method is left off. Selling below tangible book is false security because managements won't liquidate. It might return for banks. [25:00–27:00]
- Item 9: two of three. Phil prefers all three but a 10 cap is hard. Requiring two means you always look at cash flow, since earnings are manipulable. [27:00–29:00]
- Item 10: a trusted guru buying. If no guru is buying, ask why you are. The exception is companies under roughly $500 million, too small for big funds, but those are less liquid and riskier. He names Dataroma (free, about 70 gurus) and GuruFocus. [29:00–32:30]
- Item 11: the event. Something has knocked the price down 30–70% and will resolve in 1–3 years without killing the company (his example is Volkswagen's diesel scandal, in 2016). If the price is at an all-time high, you need much more expertise. [32:30–35:00]
How it maps to RuleOne
- Items 4 to 9 are the numbers the stock page already computes: sticker/margin-of-safety price, payback time and cap rate. Whether two of three show "on sale" can be a screen filter.
- Item 10 is guru/13F data, and item 11 is the event watch (drawdown plus news).
- A lag warning is worth displaying: figures are as of the latest filing, and 13Fs are up to 45 days old.
Buffett, Munger and Graham links
- The tangible-book approach is Graham's "net-net" family (discussed in The Intelligent Investor and Security Analysis). Phil drops it as unsafe without other value.
- Munger's "load up the truck" idea appears in his talks and in Phil's paraphrase here. Treat the wording as Phil's.
- Buffett's 1993 and 1996 letters make the case for concentration (see 011).
Words to know
- Groupthink: the crowd's mood overriding your own analysis.
- TTM: trailing twelve months.
- Guru: an investor with a record you trust, whose buys you follow as a tip.
- Zombie valuation: valuing a company at tangible book, which Phil now avoids.
Try this
Choose a company you're watching on /stocks/ and write down items 5–7 from its page. Then on Dataroma or GuruFocus, check whether any investor you trust has bought it recently. Record your answers on items 10 and 11.
Check yourself
- Why is MARR on the checklist if it never changes?
Answer
It's an adjustable lever that reminds you which return you're using. Lower MARRs let others pay more. - Why require two of three valuations rather than one?
Answer
It forces you to include a cash-flow measure, since earnings are easier to manipulate. - When might no guru be buying even though the stock is a bargain?
Answer
When the company is too small for big funds, though such stocks are riskier and less liquid.
Short quotes
"If no guru is buying this business, what am I doing buying this business?" (Phil, ~29:30, auto-transcribed, paraphrased)