In one sentence: "Growth" and "value" are labels Wall Street uses, but what matters is the value of the business and how certain its cash flow is. When a growth-priced stock is told it will grow slower, its P/E collapses, and Phil argues for using the ten-cap when you can't predict growth.
Key ideas
- A "maybe not great" is a no. Phil and Danielle place Ulta between "too hard" and "worth more digging", using the Weather Matrix. Passion for a business helps you dig. [01:00–04:00]
- Revenue could fall further than expected. Phil's worry: if prices and use rose on loose money, a spending pullback would cut revenues sharply and the stock with them. [04:00–07:00]
- Volatility signals doubt. Ulta's big moves on each quarter show investors don't know its future. [07:00–08:00]
- Why P/E collapses. Ulta grew in the high teens to low 20s, so the market gave it a high P/E. When the CEO guided to about 7% growth, roughly 3% real, the stock became a "value" stock and its P/E shrank. [08:00–10:00]
- Growth versus value: ignore the labels. What matters is the value of the business, whether it can be bought at a big discount, and how certain its future is. A company growing very consistently at a high rate is ideal, but the label is useless. [10:00–12:30]
- Buy the same, hold differently. Phil's example: buy a 3% grower and a 15% grower each at half price, and each doubles when the market corrects. After that, the 15% one keeps compounding and is far better to hold. [12:30–15:00]
- Phil's recurring error. He sold compounders when they had doubled, to chase his 26% target, and then missed the market paying 60 times earnings or more. He now leans toward holding. Yahoo at an enormous P/E in 1999 is his example of how far prices can go. [15:00–21:00]
- A new hypothesis. Danielle suggests that, with more people able to buy, and ETFs forced to buy whatever rises in an index (Phil says about 30% of the market), great companies may trade far above value for longer. Phil calls it plausible but notes markets have cycled over 140 years. [21:00–26:00]
- Sell or hold in a crash? Phil can't predict timing. If you've got a lot already, hold great franchises. Cash to buy comes from saving income, like Berkshire's businesses feeding cash to Buffett (the Payback Time analogy). [29:00–33:30]
- The ten-cap. For Ulta, Phil says to use the ten-cap because it needs only "it will be bigger", not a growth rate. He says the result would be roughly half the price at that time. (Not checked.) [33:30–35:00]
How it maps to RuleOne
- The valuation panel on /stock/ULTA/ and other stock pages shows value and margin of safety. For a business you can't forecast, the ten-cap view is the simple one to use.
- The screen doesn't label stocks "growth" or "value". It ranks by discount to value, in keeping with Phil's point.
- /holdings/ is where to check your own habit of selling winners at roughly intrinsic value.
Buffett, Munger and Graham links
- Buffett's 1992 letter says growth and value are joined at the hip, which is the same point (the letter wording should be checked before quoting).
- Graham's Mr. Market: price swings reflect mood, not value (The Intelligent Investor, ch. 8).
- Buffett's move from "sell at value" to "hold great businesses" is the Munger shift covered in 464.
Words to know
- Ten-cap: Phil's quick valuation, owner earnings divided by 10%, with no growth rate.
- P/E expansion and compression: the price paid per dollar of earnings rising or falling.
- Too-hard pile: companies you can't understand or forecast and so skip.
Try this
On /stock/ULTA/, find the current owner earnings and divide by 0.10. Compare this with the price. Then ask: which would you rather hold for ten years, a certain 3% grower or a probable 15% grower, both bought at half price?
Check yourself
- Why did Ulta's price fall more than its growth cut implies?
Answer
The market had paid a high P/E for high growth. Cutting expected growth cuts both earnings and the multiple. - What is Phil's difference between buying and holding?
Answer
He'd buy a steady 3% grower at a deep discount, but he'd rather hold a 15% grower for the long run. - Why use a ten-cap on Ulta?
Answer
It needs no growth forecast, only the view that the business will be bigger.
Short quotes
"We don't think in terms of growth or value. We think in terms of certainty of the future." (Phil, ~10:30, auto-transcribed)