Leverage buyouts taught me that the real risk isn't paying too much — it's being wrong about the durability of the cash flow. A business that earns steadily through recessions is worth almost any price; one that merely looks cheap in a boom is a trap dressed as an opportunity.
Forgetting that your returns depend on the returns of the businesses you own—not on what you paid for them—is the source of more investment error than almost any other mistake I can think of. You must always ask: what will this business earn over time? Everything else is noise.
The ability to destroy value is not confined to bad businesses. A great business bought at too high a price, or managed by people who can't resist the temptation to allocate capital to adjacencies, will also destroy value. The label 'great business' is not a perpetual warranty.
The chain of logical steps from 'this is a good company' to 'this is a good investment at any price' is one of the most dangerous in finance. Quality is not the same as value, and confusing the two has ruined more intelligent people than stupidity ever has.
SpaceX must be a safe investment because, if the company ever needs more money, it only has to ask. Future capital issuance is sustained by perpetual motion. The stock represents nothing other than itself.
The stock promoter sells sizzle, but the great investor buys the business nobody is talking about yet. Most of the time the exciting story and the good investment are mutually exclusive — the more compelling the narrative, the more the price has already discounted the future.
The stock market is filled with individuals who know the price of everything, but the value of nothing. A great company is not a great investment if you pay too much for it — and a mediocre company can be a fine investment if you buy it cheaply enough.
In 103 years of operation, Valeo sold nothing other than auto parts. Now, suddenly, it's a concept stock. It's exciting when old-economy companies can add a billion euros by value on a hypothesis, but it rarely works out well for everyone.
Wall Street loved Google's earnings, and hated Meta's, even though the latter's core business was more impressive.
The investor of today does not profit from yesterday's growth. It is the always-uncertain future growth upon which the investor must capitalize, and it is those who will profit who must pay the delicate task of correctly appraising such uncertain future.
The best thing a public company can do with excess cash is repurchase stock when it trades below intrinsic value, but the worst thing is to repurchase stock when it trades above intrinsic value. Most companies do the latter.
The best thing a public company can do is repurchase stock when it's trading below intrinsic value—but the worst thing is to repurchase stock when it's trading above it, which happens far too often because of executive compensation incentives.
The best thing a public company can do with cash is buy back stock when it trades below intrinsic value. Everything else is just noise.
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