In one sentence: Phil walks through the nine checklist items for the discounted-cash-flow "sticker price" (an optimistic view of the value), and the hosts compare their mistakes in selling Chipotle too early because they used a 15% minimum rate in a market pricing far lower.
Key ideas
- Three views of price, one of value. The 10-cap and payback time say what is a good price to pay today. The DCF (sticker price) values the business ten years out, optimistically. Phil now runs the 10-cap first, even though the book lists the DCF first. [02:00–05:00]
- Sticker price. Like a car's window sticker, you bargain down from it (though the hosts note that with the 2021 chip shortage buyers were bargaining up). [04:00–06:00]
- Use ranges. Danielle tries a decent growth rate, one below and one above, to get a range. Phil says that is fine because the future growth rate is always a guess (the "windage"). [06:00–08:00]
- Velocity matters. A stock bought at half price can snap back to sticker in a year, and then the remaining years may earn only the business's growth (about 7% to 9%) rather than 26%. Buffett's early partnerships sold and rotated; at Berkshire's size he can't. Phil cites the late-1990s Coca-Cola comments. [08:00–12:00]
- The common mistake: selling too soon. Both hosts say it is their most frequent error. Phil sold Chipotle around $500 on a conservative value, and it ran far higher. He says that if you must err, this is the better error, since selling at or near a big gain isn't a loss. [11:00–16:00]
- Why the model undershot. Phil says the cause was his 15% minimum acceptable rate of return (MARR) while the market was pricing nearer 6%. He now thinks a lower MARR belongs in the optimistic case. Danielle says her mistake was underestimating the growth, not the discount rate. These are opinions about one stock, not advice. [16:00–24:30]
- The nine checks. (1) Long-term growth rate of earnings and cash flow is pinned down, and a bit optimistic. (2) The projection stays well below the industry's ceiling. (3) The future PE multiplier is reasonable (about twice the growth rate, capped by analysts and history). (4) The starting earnings are not an unusual year. (5) The MARR is reasonable. (6) Cyclicality is smoothed, using mid-to-upper cycle. (7) Capital expenditure is in the cash flow (Phil's example is a fertiliser maker that must build a new plant). (8) The price is about 50% below the value. (9) You're confident enough to put about 20% of your net worth in at that price. [17:00–30:00]
- The 20% test. Phil says the 20% idea comes from sizing option bets: only a bet with great odds earns a big share. It isn't a rule to hold 20%; you'd also build the position in tranches. [28:00–31:30]
- Next topic. Love the business and "put your money where your values are". [31:00]
How it maps to RuleOne
- /stock/TICKER/ pages show a sticker price and a margin-of-safety price. Use the checklist items to test the inputs (growth rate, PE, starting EPS) before trusting the output.
- Check item 2 against revenue: if the projected ten-year earnings need a share of the industry that no firm has ever had, the growth input is too high.
- The sell side (reallocating at or above sticker) is still manual; see the /holdings/ page.
Buffett, Munger and Graham links
- Margin of safety: Graham, The Intelligent Investor ch. 20.
- Size as an anchor on returns: Buffett's remarks in the late 1990s on Coca-Cola, as described in the episode; check the original wording before quoting.
- Munger's "load up the truck" fits the 20% test.
Words to know
- MARR (minimum acceptable rate of return): the discount rate. Phil's default is 15%.
- Windage: Phil's name for the guessed growth input; adjust and see the range.
- Cyclicality: swings in earnings with the economic cycle.
Try this
Open /stock/TICKER/ for a company you follow. Change the growth rate by two points up and down, and note how the sticker price moves. Then ask checks 2 and 4: does the ten-year projection stay well below the industry's size, and is the starting EPS typical?
Check yourself
- Why can buying at 50% off still give you less than 26% a year?
Answer
If the price returns to sticker quickly, the remaining years earn only the business's growth rate. - What does Phil say caused his Chipotle sale to be too early?
Answer
A 15% MARR (discount rate) in a market pricing much lower returns, which made the value too conservative. - What is check 4?
Answer
The starting earnings are a historically reasonable base, not an unusually good or bad year.
Short quotes
"If you're going to make a mistake, this is the one to make." (Phil, on selling too early, ~13:30, auto-transcribed)