In one sentence: Phil and Danielle walk Lululemon through Munger's four filters, using Patagonia and Under Armour as comparisons. A quick "ten times free cash flow" check puts a fair price at about $2.5 billion against a $7 billion market cap, so the answer for now is to wait for a crash.
Key ideas
- Start with the foundation question. Will this business be worth more in 10 years than today? With a company you haven't studied the honest answer is "I don't know", and that is where the work begins. [08:00–10:00]
- Hills versus cliffs. Buffett's "six-inch bars" become a metaphor: a hill needs no bravery, a cliff needs expert skill. Danielle's test is that if you feel you must be brave to pull the trigger, don't. [06:00–09:00]
- Being a customer is a start, not the finish. Danielle can describe Lululemon (yoga roots, own fabric, men's and women's lines, rivals Gap's Athleta, Under Armour, Nike, Patagonia) from using it. That gives filter one, "capable of understanding", but she doesn't know how a garment gets to the shelf. [10:00–18:00]
- Apparel is a hard industry. Every season has to hit again, and J. Crew and Ralph Lauren show how fast a brand can slide. Phil's first move is to ask which of the five moats an apparel company could build. [18:00–20:00]
- Under Armour has little moat. It has no secret, no toll bridge and no price edge, and switching is easy. Sports-team deals are marketing, not a moat. [20:00–22:00]
- Patagonia is the benchmark. It began as a secret (pile fleece made for climbers and river guides), built a brand on real use by experts, backed it with a lifetime repair promise and stayed private to avoid quarterly pressure. [22:00–31:00, 36:00–37:00]
- Lululemon's moat is thinner. It started with a secret (its own fabric) and has a strong culture, but its appeal is "cute", not "durable". A competitor could pop up the way it did, and shoppers show little loyalty. [31:00–35:00, 37:00–38:00]
- Management doubts. The founder's remarks about sizing hurt the brand and he left. The new CEO said all was well and six months later the stock fell 21% in minutes on a miss and a reset outlook. [13:00–15:00, 38:00–41:00]
- A quick price check with a "ten cap". About $250M of free cash flow × 10 ≈ $2.5B, which would give a 10% cash yield. The market cap (shares × price) was about $7.14B, nearly three times that. Phil is explicit that this is a rough valuation on free cash flow, not the full margin-of-safety analysis. [40:00–47:00]
- The verdict: wait. Even after a 21% drop the stock didn't look to have gone on sale. They'd need a market-wide crash, which Phil says will come "with great certainty", though not when. [47:00–50:00]
- Side notes. Danielle flags dual-class shares (Under Armour) for a coming episode. They end with the thought that the broad market is nervous (see 106). [50:00–53:00]
How it maps to RuleOne
- The
/stock/TICKER/pages show free cash flow, market cap and the Big Five numbers, so the ten-cap check takes a minute. Keep it separate from the Sticker Price and MOS price, which are the proper valuation. - A thin, fashion-driven moat is what the screen cannot see. The moat judgement stays with you, which is why Phil ranks moat durability above current profits.
- The "wait for a crash" conclusion is the watchlist-and-events routine: keep Lululemon on the list and act when the price falls.
Buffett, Munger and Graham links
- Munger's four filters, as quoted in the BBC interview (2012) and covered in 001, structure the whole analysis.
- Buffett's six-inch-bar versus six-foot-bar idea (too-hard pile) matches his "invest in what you can easily understand" approach; Phil connects it to Pabrai's "too hard" box.
- The ten-cap (a 10% owner-earnings yield) echoes Buffett's habit of valuing a business like a farm or building by its cash yield, which Phil mentions in the show.
Words to know
- Secret (moat): something you do that others can't copy, such as a patented or proprietary fabric.
- Market cap: share price × shares outstanding, the price tag for the whole company.
- Free cash flow: cash the business produces after the spending needed to maintain and grow it.
- Ten cap: price = 10 × annual owner cash flow, a 10% yield, borrowed from real estate "cap rates".
Try this
Pick a consumer brand you use and run the four filters. Open its /stock/TICKER/ page, note free cash flow and market cap, multiply free cash flow by 10 and compare it with the market cap. Write one sentence on whether a rival could copy the moat in 5 years.
Check yourself
- Why does Phil rank Patagonia's moat above Lululemon's?
Answer
Patagonia's brand rests on expert users, durable gear and a lifetime repair promise, so it is lasting. Lululemon's rests on being flattering and fashionable, which a competitor could take. - Free cash flow is $250M and the market cap is $7.14B. What does the ten-cap say?
Answer
10 × $250M = $2.5B, so the market cap is nearly three times the quick price. It isn't on sale yet. - Why isn't the ten-cap calculation the margin of safety analysis?
Answer
It prices only current free cash flow, assuming durability. The real analysis looks at growth, the multiple and a discount to the estimated value.
Short quotes
"If you're feeling like you have to be brave to pull the trigger, don't pull the trigger." (Danielle, ~06:30, auto-transcribed)