In one sentence: Owner earnings would have flagged Sears years before its apparent bankruptcy, and Phil and Danielle then set up Fiat Chrysler as a complicated example and a "too hard" case.
Key ideas
- Why a 10% yield. The 10 cap asks for 10% a year in your pocket before tax, like a rental house, and it builds in a large discount to real value. [03:00–05:00]
- Quick comparison tool. Phil used owner earnings to compare Amazon (his rough figure about $20B, so a 10 cap near $200B against a trillion price) with Japanese peers. It is a fast sanity check across a sector, not a full valuation. [04:30–06:30]
- It is hard work, and that is normal. Danielle admits she needed several false starts for Fiat's numbers; it gets faster with practice. [07:00–09:00]
- GAAP can flatter. Reported earnings can be shaped by accounting rules and by management with something to hide. [09:00–10:00]
- Sears as a case. Phil's rough figures for 2017: a loss of about $2B, with depreciation, working capital and low capex leaving owner earnings near minus $2.3B, funded by about $2.1B of new borrowing. In 2018 about minus $400M, again funded by borrowing. Negative owner earnings back to at least 2009. [10:00–15:30]
- Reading holders' reactions. The articles from long-time shareholders showed willful ignorance and trust in a famous CEO; the cash numbers told the real story. [10:30–16:00]
- Know your game. Turnarounds and speculation are different sports from long-term Rule #1 investing; look at others' incentives before comparing views. [16:30–18:00]
- Be a contrarian by method. The crowd being wrong, or right, tells you nothing; get confidence from understanding plus a big margin of safety. [18:00–20:30]
- Twenty companies in a life. Buffett's point as relayed: expect to find about twenty, four or five of which carry the results. [20:00–21:00]
- Fiat Chrysler set-up. Mohnish Pabrai bought near $4; at about $16 the market value was about $26B, even though Ferrari alone was spun off at about $24B. Brands include Jeep, Ram, Maserati and Alfa Romeo, plus parts businesses. A conglomerate, so valuing it is hard. [21:00–28:00]
- Too hard is a good answer. Danielle puts it in her "too hard" box (Buffett's physical box on his desk); Phil adds that late in a ten-year bull market almost nothing is on sale, so beginners should build cash. [22:00–25:00]
How it maps to RuleOne
- A negative owner-earnings line on a stock page is a stop sign no matter what the headline earnings say.
- The "too hard" decision is a legitimate output of the research flow on /stock/TICKER/: note it and move on.
- Cash as patience maps to the cash line on /holdings/.
Buffett, Munger and Graham links
- Buffett's "too hard" pile: a recurring Berkshire meeting theme; see 001.
- Companies that need constant funding: Buffett's 1980s letters on businesses that "gobble cash".
- Margin of safety against error: Graham, The Intelligent Investor, chapter 20; see 150.
- Spin-offs and sums-of-the-parts: see 164.
Words to know
- Negative owner earnings: the owner must put cash in to keep the business going.
- Conglomerate: a company made of many separate businesses.
- Spin-off: a division distributed to shareholders as its own stock.
Try this
Find a company with a big headline story you suspect is weak. Compute owner earnings for the last three years and check the financing section of the cash flow statement for whether borrowing covered the gap.
Check yourself
- What did Sears's owner earnings show?
Answer
Large negative figures for years, funded by borrowing. - Why did Danielle shelve Fiat Chrysler?
Answer
A conglomerate with complex statements is outside her circle of competence, so it goes in the "too hard" box. - What should a beginner do when nothing is on sale?
Answer
Build cash and keep practising.
Short quotes
"Just because the crowd says you're wrong doesn't mean you're wrong." (Phil Town, ~19:00, auto-transcribed)