In one sentence: A listener's question about Under Armour becomes a live run through Munger's four filters: it's a comprehensible brand with only an okay moat, a Sticker Price far under the share price and negative free cash flow, so the answer is "not on sale; find a better company".
Key ideas
- Treat each company as one of 20 punches. Buffett's punch-card idea is a reminder to take each pick as seriously as if it were your only one. [06:00–08:00]
- Filter 1: can you understand it? Athletic apparel is familiar. The part to research is the licensing deals with sports teams. Phil's rule is to look for "too hard" or "no" before going deeper. [08:00–09:30]
- Stay on one company. Following Nike, Adidas or Gildan means wandering. Finish the first one to a watch list, a buy or a no. Competitors are fine for context. [09:30–11:30]
- The five-second answer. "Because in 10 years it'll be worth more than today." Danielle thinks it's obvious. Phil says it points at the core of Rule #1, and the real question is why. Pabrai's "free lottery ticket" and Buffett's "equity bond" (John Deere example) are the same idea: dividends, a return of your money and upside. [11:30–17:00]
- Two pieces. Is it a wonderful business, and can you buy a $10 bill for $5 (a private-company price)? [17:00–18:30]
- Price moves aren't value. Listener said the stock fell 75%. Split-adjusted it fell from about $49 to about $20, roughly 60%. A recent change into voting (A, class B owned by the founder) and non-voting (C, symbol UA) shares confuses the quotes. Short-term managers set prices. [18:30–22:30]
- Moat check. Of the five moats it has mostly brand, from being first, and it's only okay. No strong secret, switching or price moat. Exclusive team deals (MLB uniforms) are marketing, not a toll bridge: a toll bridge is where customers have no other way across (Phil's Golden Gate example, a power utility). [22:30–26:00]
- Quick-and-dirty valuation. Phil takes the CEO's 12% growth, trailing EPS of $0.44, a future P/E of 24 (double the growth rate) and runs it on the Rule One tool: Sticker Price about $8 against a price near $20. Danielle's point: check that the starting EPS is typical. A skim of Seeking Alpha helped: the company dropped an $8B sales target for 2018 and growth slowed from about 25% to about 12%. [26:00–29:30]
- Free cash flow is negative. Capex exceeded operating earnings over the last decade, especially last year, so Payback Time is effectively infinite. [29:00–30:30]
- Conclusion. Likely to be worth more in 10 years, but not on sale today. Not a buy. Look for better companies. [30:00–31:30]
- Side note. Charlie Munger's love of learning: Phil and Danielle met him at the Daily Journal meeting and told him they were writing a book. [03:00–04:30]
How it maps to RuleOne
- This is the screen's flow in miniature: Big Five, then Sticker Price and MOS, then Payback Time. The stock page's growth rate and EPS inputs are the ones Phil changes by hand here.
- The negative free cash flow check is a screen filter. A big gap between price and Sticker Price puts a name on the watch list at best.
- Seeking Alpha-style skim for context mirrors the research funnel in 001.
Buffett, Munger and Graham links
- Buffett's "equity bond" idea appears in his 1977 Fortune article and later letters. Phil's use of it here is loose.
- Buffett's punch card: Berkshire's talk to MBA students (frequently cited, Columbia/Florida sessions); the idea is Buffett's, the wording is Phil's.
- Pabrai, The Dhandho Investor, on low-risk, high-uncertainty bets. See 098.
Words to know
- Sticker Price: Phil's estimate of what a business is worth today from growth rate, EPS and future P/E.
- Class A / B / C shares: different voting rights over the same business.
- Payback Time: years of free cash flow needed to earn back the price.
- Equity bond: an equity whose cash flows behave like a bond (Buffett).
Try this
Choose a consumer brand you know. On its /stock/TICKER/ page, set a growth rate no higher than management's own guidance and read the Sticker Price. Write the one moat it really has and whether it's a brand, a toll bridge or neither.
Check yourself
- Why aren't exclusive sports deals a toll-bridge moat?
Answer
A toll bridge is a route customers can't avoid. The deals only market the brand and don't block shoppers from other makers. - Why did Phil reject Under Armour at about $20?
Answer
His quick Sticker Price was about $8, it had negative free cash flow, and so it wasn't a $10 bill for $5. - What should you do before starting on a competitor?
Answer
Finish the first company: land on watch list, buy or no/too hard.
Short quotes
"Because in 10 years it'll be worth more than it is today." (Phil, Buffett's five-second answer, ~12:00, auto-transcribed)