In one sentence: Updating the 2017 Tesla episode (128), Phil and Danielle argue that loving a company's mission is not a reason to pay any price, comparing Tesla's market value and operating cash flow with Ford, GM and Fiat Chrysler and pointing to a flood of competitors.
Key ideas
- Diversify or do the work. If you won't learn businesses, massive diversification is the honest answer; Phil's analogy is buying a thousand houses at random and doing "OK". Doing better means doing the work. [01:00–05:00]
- Danielle's quibble: make the work joyful. Most people aren't unwilling, they don't know how, and it feels like digging a ditch. Her claim is that people who aren't naturally numbers people bring useful qualitative skills and have lived every step consciously, which helps when things get hard. This is her view, offered as encouragement. [05:00–10:00]
- Values, but with your brain. Voting your values with money is fine, but buying a stock because you like it, or accepting lower returns "because it's good for the world", is the trap. Both hosts admire Musk's mission. [11:00–15:00]
- Danielle's test drive. Pros: beautiful interior, a navigation screen that plans charging stops, quick chargers (about 20 minutes to top up, as the salesman said). Cons: a very high price (about 150,000 Swiss francs for a Model X), range anxiety, and a strong regenerative braking feel that made her carsick until the salesman switched modes. Anecdote, not data. [16:00–35:00]
- Competition arrives. Phil says about 200 electric models are expected by 2022, and that the Audi e-tron's sales in North America and Europe were already adding up to Tesla's (his claim; verify). The first mover may not be the winner, as with Steve Jobs's NeXT computer, which Phil invested in and lost money on. [30:00–32:30, 35:00–39:00]
- Price check against car makers. The stock had fallen from about $380 (late 2016) to about $185 (end of May 2019), then $231, for a market value of about $41 billion. Phil says Ford for about $40 billion had about $15 billion of operating cash flow, GM at $54 billion also about $15 billion, Fiat Chrysler at $28 billion about $10 billion, against about $2 billion for Tesla. Figures are as said on air. [36:00–39:00]
- Operating cash isn't owner cash. Operating cash flow is before capital expenditure, so what reaches owners is smaller (taken up in 222). [see 222, 04:30–05:30]
- The lesson. "You have to vote your values, but you have to use your brain." Combine an emotional connection to a company with a price discipline that says "not at this price". [39:00–40:00]
How it maps to RuleOne
- The stock page shows market cap next to cash flow history, so the Ford-versus-Tesla comparison is something you can repeat for any pair of companies.
- The Love step of RULERS is where values enter; the Understand and price steps are where they must not override the numbers.
- A speculative favourite can be kept as a small, capped position on /holdings/, separate from core holdings (see 128).
Buffett, Munger and Graham links
- Buffett on diversification being for those who don't know what they are doing: see 016 (1993 letter idea).
- Graham's line between investment and speculation (The Intelligent Investor, ch. 1) is the one Phil draws between price-disciplined buying and loving a story.
- Phil's NeXT example is a personal story, not a Buffett or Munger one.
Words to know
- First-mover disadvantage: the pioneer proves the market and then loses it to better-funded followers.
- Operating cash flow: cash from running the business before capital spending.
Try this
Pick two listed companies you know in one industry. On /stocks/ or their /stock/TICKER/ pages, compare market cap with operating cash flow and note which is cheaper per dollar of cash flow, and what story would justify the difference.
Check yourself
- What is wrong with accepting lower returns because a company supports your values?
Answer
It mixes two decisions. You can hold your values and still demand a price with a margin of safety; paying any price just because you like the company is speculation. - Why does Phil compare Tesla's cash flow with Ford's and GM's?
Answer
The whole company is priced at a similar level but produced far less cash, which shows how much future success is already in the price. - What did the NeXT story teach him?
Answer
A brilliant product from a brilliant founder can still fail on price and competitors; being first isn't a moat.
Short quotes
"You have to vote your values, but you have to use your brain while you're doing it." (Phil, ~39:30, auto-transcribed)