You have been generous in answering lots of my questions on growth already.. one more... What about cases where the eventual size of the opportunity is not very large, to begin with, or it is more or less fully exploited. Do you directly or indirectly think about the size of the opportunity and its penetration....[ Eg. Coca cola is great business but its sales grew only at 3% CAGR between 1997-2018 and profit at 2% CAGR]
I understood the part of not chasing growth. One question to fully understand what exactly you are trying to say. Under your process do you ask yourself whether this company can grow its EPS at the rate of 12-15% CAGR for next 10 years or not or do you only focus only extremely strong and stable business at an attractive price even if it's in the highly matured industry whether it can grow only at low single-digit growth
I dont know anyone who can reliably predict future growth of a company. I know many who thought they could, leading to unhappy endings. Beyond a general sense that future prospects are sound, especially around the company maintaining its competitive position, I dont put a number or a forecast. So, I pay based on risk, quality, return on capital etc. It's worked well on average, and I suspect better than for those who projected forward & discounted back.
Thanks a lot for your reply and Apologies for pushing this point again. Actually my entire investment process is designed around finding companies which can grow at 15% CAGR for next 10 years and available at reasonable valuation. Chasing high growth is wrong, no doubt about it…. But completely ignoring growth is going to another extreme. Major difference between our thinking is that I believe in concept of growth traps, by which I mean a company which satisfy all the criteria you listed under fifth ingredient but because of the size of the opportunity itself cannot expect to grow even at nominal GDP growth rate over next 10 years. I think for 10-20 companies we can reasonably know in foresight that there is there is POSSIBILITY OF GROWTH AT HIGHER THAN 12-15% CAGR over next 10 years.
Some quotes “Equity is all about growth. When the growth goes way, equity becomes a bond and bond is clearly not equity.” “When the eventual size of the opportunity is not very large, to begin with, or it is more or less fully exploited, then it has a very cathartic influence on the extent of value creation or its continuation. Such businesses become cigar butts (RATHER THAN FULL CIGARS). They produce an interesting conundrum. Good profitability, decent capital efficiency, even reasonable (current growth) rate and yet increasingly crimped value creation. Similarly, Value creation dies when future growth stops.” “You don’t want to buy a dollar bill that’s sitting for 50 cents, and it demand positive capital, and it’s going to be dollar bill ten years from now. You want a dollar bill that’s going to compound at 12% for a long time”
Hello Anand! Can a compounder compound without growth?
It certainly makes sense that growth in an outcome and hence should not be an input in an investment process. Should scope-for-growth (in fuzzy terms) not be an input either?
Sir, Thanks for the article. I wanted to understand if you have any minimum growth criteria for companies, acknowledging the benefits of reinvestment of earnings in core of the business to grow.
And also, how do you differentiate in valuation of companies which have grown in the past differently - say a slight differential on either side of 10%
You have been generous in answering lots of my questions on growth already.. one more... What about cases where the eventual size of the opportunity is not very large, to begin with, or it is more or less fully exploited. Do you directly or indirectly think about the size of the opportunity and its penetration....[ Eg. Coca cola is great business but its sales grew only at 3% CAGR between 1997-2018 and profit at 2% CAGR]
I understood the part of not chasing growth. One question to fully understand what exactly you are trying to say. Under your process do you ask yourself whether this company can grow its EPS at the rate of 12-15% CAGR for next 10 years or not or do you only focus only extremely strong and stable business at an attractive price even if it's in the highly matured industry whether it can grow only at low single-digit growth
I dont know anyone who can reliably predict future growth of a company. I know many who thought they could, leading to unhappy endings. Beyond a general sense that future prospects are sound, especially around the company maintaining its competitive position, I dont put a number or a forecast. So, I pay based on risk, quality, return on capital etc. It's worked well on average, and I suspect better than for those who projected forward & discounted back.
Thanks a lot for your reply and Apologies for pushing this point again. Actually my entire investment process is designed around finding companies which can grow at 15% CAGR for next 10 years and available at reasonable valuation. Chasing high growth is wrong, no doubt about it…. But completely ignoring growth is going to another extreme. Major difference between our thinking is that I believe in concept of growth traps, by which I mean a company which satisfy all the criteria you listed under fifth ingredient but because of the size of the opportunity itself cannot expect to grow even at nominal GDP growth rate over next 10 years. I think for 10-20 companies we can reasonably know in foresight that there is there is POSSIBILITY OF GROWTH AT HIGHER THAN 12-15% CAGR over next 10 years.
Some quotes “Equity is all about growth. When the growth goes way, equity becomes a bond and bond is clearly not equity.” “When the eventual size of the opportunity is not very large, to begin with, or it is more or less fully exploited, then it has a very cathartic influence on the extent of value creation or its continuation. Such businesses become cigar butts (RATHER THAN FULL CIGARS). They produce an interesting conundrum. Good profitability, decent capital efficiency, even reasonable (current growth) rate and yet increasingly crimped value creation. Similarly, Value creation dies when future growth stops.” “You don’t want to buy a dollar bill that’s sitting for 50 cents, and it demand positive capital, and it’s going to be dollar bill ten years from now. You want a dollar bill that’s going to compound at 12% for a long time”
So basically trying to find out what I am missing or getting it wrong...
No right or wrong in messy world. So long as method objectively works over a long period, it's right for that practitioner
Hello Anand! Can a compounder compound without growth?
It certainly makes sense that growth in an outcome and hence should not be an input in an investment process. Should scope-for-growth (in fuzzy terms) not be an input either?
Sir, Thanks for the article. I wanted to understand if you have any minimum growth criteria for companies, acknowledging the benefits of reinvestment of earnings in core of the business to grow.
And also, how do you differentiate in valuation of companies which have grown in the past differently - say a slight differential on either side of 10%