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John Huber

lines on the record: 51
first: 2024-05-31
most recent: 2024-05-31
sittings or episodes: 1
sources: podcast

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“Yeah, well, thanks for having me on, Clay. It's always fun to chat with you. You mentioned my blog is called Base Hit Investing. That's sort of my thoughts on investing. My firm is called Saber Capital. And you can find it. We have a website, obviously. And, you know, I'm on Twitter. You can find me on Twitter as well. But yeah, that's, I would say, the blog is the best place to kind of check out my thinking on investing. But yeah, it was a fun discussion. Thanks for having me on.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Specific company. And so I have like all the companies I follow on my watch list have different, you can think of like folders, but different tags of articles underneath it. And like I say, I have a write-up for each one that I buy. And then I also have a string of ongoing notes and thoughts as the businesses develop and change over time. So that is my system. And I do think it's very valuable to write. You don't have to be good at it. It's a forcing mechanism. It clarifies your thinking. It sort of forces you to look at things that are not well understood yet in your own mind. And then it gives you the ability to go and address those things that you're not sure about yet or not you don't fully understand. And so it really is a helpful tool as an investor to sort of improve your understanding of whatever you're working on.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Don't need a lot of the minutiae. That's more for you than it is for whoever's reading it. You want to capture the essence of the investment and the key drivers, the key variables that will impact that investment. And to me, that doesn't need 10 or 20 pages, although I don't begrudge anyone for doing that. I mean, different schools of thought on that. And I'm not saying you shouldn't write 20 pages, but to me, that's, you know, I don't do that. That would be overkill for me. keep a journal, I write daily. I write a lot. I use a piece of software called base rate. It's more than a piece of software. And it's more than a journaling tool. It's an incredible thing. In fact, my friend Jake Taylor, who I think you know Jake, started this company called Base Ray. It used to be called Journalitic, and they changed the name to BaseRate. But it's more of a decision engine where you can, as an investor, it's great because you can log your journal entries and your thesis and you can look back on all the other.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“I don't write a 10 or 20 page write-up. No, but I do write mine tend to be quite simple. So I do a large amount of research and there might be 10 or 20 pages of what I would call like scratch notes, you know, digital scratch notes where I'm collecting all sorts of data from the 10Ks and I'm clipping different sections and linking to different things and sort of building almost like a journalist trying to build a story, right? You're collecting information from all over notes on phone calls you made, all that stuff does add up to a lot. But in terms of the final write-up, I do a write-up, yes. I try to make it very simple. Like, you know, one page, two pages. Sometimes they're longer. I've tried to actually get better at writing more succinctly. And I joked in one of my last letters. I only have time to write a long letter, like the Mark Twain quote. I didn't have time for a short letter, so I wrote a long one instead. It's always a challenge to do that. But I think if you can boil down your investment thesis into one page or a thousand words or less, you really”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“You know, what your returns as a shareholder will be. And, you know, if the stocks have 10 times earnings, you don't need to be overly worried about what those returns are going to be. But if the stock's at 30 PE, then you need to have a little bit more precision. And so it's another way of saying your margin of safety is lower. And so, yeah, like Microsoft's going to spend $50 or $55 billion on CapEx and their depreciation is $15 billion, one five. And so even if the CapEx plateaus eventually the depreciation is going to catch up to that capital expenditure amount and perhaps the sales growth and the earnings, you know, potential the business will grow and absorb that. And that's really the question that you have to answer.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Investments they're making now in, let's say, a data center or a server flows through the cash flow statement today, but it takes five years to flow through the income statement because it's depreciated over five or I think these servers are now six years, let's say. But the expenses amortized over that period. And so only a fifth of that expense, you can look at the cash flow statement and see, wow, they're going to spend $50 billion this year. They spent $40 billion last year. You can look and see what it was. Only a portion of that flows through the income statement. And so there's a risk that the earnings are actually elevated right now versus what their true earning power is because the depreciation is lagging the CapEx. And that's natural for any business that's growing and investing in their business. So that's not anything to be concerned about. That's normal. But in this case, it's so significant and so extreme that you have to have a view on what those returns will be on those investments to properly determine.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“It's moving from Microsoft's customers on premise to Microsoft's premise, right? Data centers that Microsoft has invested in. And these are like billion dollar data centers, very high capital requirements to build these things. But it's been a great business. So that's worthwhile return on capital they've earned from that. What's interesting now is now we're getting into AI and AI is very capital intensive because it takes a huge amount of computing power to run these LLMs and these things that are required beyond my pay grade to try to explain it, but it's a lot of capital and it's a lot of energy and it's, you know, these companies have a lot of advantages, but they're spending a lot of capital to build out these businesses, these AI revenues. And so, you know, what worries me as a, if I own stock in these companies, I would be concerned about what are the returns on capital for these huge investments that they're making. And what's interesting is that, you know, the nature of accounting is”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, these businesses are getting more capital intensive. And so I wrote a post about this where they're different businesses than they were. And this is kind of, it sort of dovetails into what we were just talking about. And this isn't necessarily something to worry about if you're a shareholder of these companies. I've owned a couple of these companies for many years. I think they're great companies. I do think they're changing, though. the makeup of the business and potentially the returns on capital are changing because of the fact they're getting so much more capital intensive so Microsoft, I think, is a decade ago it had around $5 billion of CapEx and they're guiding towards somewhere north of 55 billion this year so like an 11x increase in a decade and a large portion of that increase has come just in the last few years really in the last four or five years and so you know things like data centers and the last decade has been all about the cloud right moving computing power from on-premise to the cloud and the cloud is basically”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“And so I don't think there is such a thing as like a set it and forget it investment. Buffett invested in Fannie Mae. And I mentioned Peter Lynch. She did, you know, Fannie Mae was a great investment for both those guys, Peter Lynch and Warren Buffett. And throughout the 1990s, it was a compounder. It was a stock that went up many, many fold over that decade. And it had a lock on that portion of the market, the securitization market. It generally had like, it's a duopoly, basically, but it had a strong position. And you can see why those guys liked it. But Buffett sold it in 2001 because he noticed that I think it was actually Freddie Mac in particular in that case. They were doing certain things with their capital that were outside of their core competence without getting too much into the weeds. They were starting to make bets on the direct”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's a great question, Clay. I think it's hard to know precise answer because I feel like every case is so different. I think one of the things you want to be as an investor is you want to be humble. You want to be willing to change your mind and be willing to admit when you're wrong, right? This game is not about being right and wrong. It's about trying to compound your capital. I think Peter Lynch said, like, if you bat 600, you'll be in the investing hall of fame. That means getting four out of 10 wrong. So you're going to be wrong a lot. To me, I've always tried to very quickly change my mind when I determine I'm wrong. And so it could mean, I mean, you could buy a stock and a year later you could determine that the business is not what you thought it was or you made a mistake in analysis or perhaps the business has changed. You want to be very quick to change your mind when you realize you're wrong. It could be a year. It could be three or four or five years. Businesses are not static. They're dynamic living organisms that change and evolve over time.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think so. I mean, interest rates are rising or they're higher than they were. And so there's, you know, if you think about like, if you own a stock at 30 times earnings, the simplest way, like for most of your listeners or, you know, for people thinking about this just at a very high level oversimplified, if you have one percent interest rates and you have a 3% earnings yield and rates go to two, that ate up half of your, you know, you could think of it like a margin of safety, you know, the gap between your 3% earnings yield and let's say a 1% risk free rate. But if you have a 12% free cash flow yielding, you can think of it like a bond, like an equity bond, like, you know, these are stocks we're talking about. But if you have a 12% yield and rates go from one to two, the impact on valuation is much less to the 12% than it would be to the 3% bond. And so obviously that's simple math there and that's way over simplifies it. But in a nutshell, that's what we're trying to do as investors is protect ourselves against these various risks. Interest rate risk is one of the things.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Also giving you the chance to outperform, you know, if you're right on balance. And so that generally tends to be how I think about my portfolio. We do have that third category I mentioned of bargains. Those tend to be smaller positions and they tend to be more numbers based. So you could almost think of those as a basket. And they sometimes work out in a fashion that's uncorrelated to the general market, which is nice. We do have a few more investments recently in that category. But for the most part, yeah, we own a concentrated group of companies.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“How long these reserves last, and it's many decades. And so there's a lot of things that give me comfort that this business has a margin of safety and has very low likelihood of permanent capital loss. And then when you couple that with the valuation, in this case, the valuation is really compelling. Very high dividend yield. I think there's very low likelihood of losing money on it in a nutshell. And so those are my biggest positions. And so it's a comfort level. Those don't come around very often, but from time to time, you know, I find a business where in a stock where I think everything lines up and I like the management team. I like the business. I like the durability, the competitive advantage it has, and the prospect for attractive future returns. And so those tend to be my biggest positions. But yeah, I think it makes sense to have some diversification. I don't think you want to have all your eggs in one basket, but I think like having eight to ten stocks represent 70 or 80% of your portfolio is adequate diversification.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, the biggest investments for me are the ones where I feel extremely confident in the downside or lack thereof. Like I'm looking for companies where my biggest investments are the ones where I think I have the lowest likelihood of losing money permanently. And obviously that's not meaning the stock price, any stock price can go down. But in terms of losing money permanently. And so I'm thinking about things like what does the balance sheet look like? How much cash do they have? What's the liquidity? What's the margin profile? This particular company They own mineral rights and they are it's a bit of a special situation, but they're very soon to be debt-free and they will have no liabilities whatsoever and they have a essentially they're because their mineral rights they take a royalty and they have virtually no operating expenses so it's like literally it's a 90% profit margin business and so there's very little business risk they have reserves in the ground which you can measure and and have an idea of”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“And in terms of its returns and its longevity, and he very rarely, from what I understand, talk to management teams, he would make bets, make investments based on the numbers solely and sort of a classic Ben Graham numbers-based approach. He achieved his expected return. He achieved the values that he was expecting, the expected values, the returns he generated were done through the law of large numbers. He had a group of stocks that collectively would result in that 20%. And so that's how he diversified away that risk of not knowing. But for me, I try to absent like a basket better or something, which I've considered, but I'm always more comfortable like if I can understand what the business does, understand the dynamics, the returns on capital, how the management thinks about allocating that capital. Those are things I want to answer. And it's harder for me to do that in overseas companies. So I tend to stick with the US for the most part.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I have looked outside the US. I've made a couple investments outside of the US at times. Really, I have one investment in Canada, which I would consider, you know, very similar. North American markets are similar. So technically outside the US, but I view that as the same more or less Western Europe. I don't have any investments in Western Europe, but I would consider that similar in terms of the culture and the jurisdictions and the rule of law and things like that. But there are a lot of markets around the world that I think are probably cheaper than the US. So yeah, I have a copy of the Japan company handbook and I've been leafing through that. And for me, it's all about circle of competence. It takes a lot for me to, especially with smaller companies, I want to get to know the business very well. I want to get to hopefully talk to the management team. Unless you're making like a numbers or a basket bet.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Realistic to try to have everything lined up perfectly because there's always trade-offs. You know, if you think about employees, there's different constituents every company has. There's employees, there's customers, there's shareholders, there's management, there's vendors, right? Costco prioritizes its customers. I think it does a great job with its vendors, but there's always a little bit of give and take there. You know, Google might historically at least was very good to their employees, perhaps at the expense of shareholders in some way, although it was hard to argue with Google's results there as well. But, you know, every company kind of has different cultures and different sort of personalities, really. And so there's give and take between those different constituents, but nothing's perfect. But yeah, there are opportunities in the small cap space and the mid-cap space that I think are perhaps not conventionally viewed as high quality or not well understood, but very high quality.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Of course. But, you know, so you do find opportunities. They're not widely acknowledged usually. You have to kind of dig into it a little bit and learn a little bit, perhaps even meet the management team or talk to people that know the management team if you're not able to meet the management. But I try to do some on the ground research there to try to get to know to the extent that I can with some of these smaller companies, you can do this where you can get to know the leaders at the business and how they think about capital allocation is a big thing for me. But yeah, there are a lot of overcapitalized balance sheets. There are founder-led businesses. There are businesses that treat their shareholders well, that care about their minority shareholders that are very good stewards of capital. And that to me is at the end of the day as a shareholder, that's what I want. You want to have all of the constituents in that, you want to have your customers happy. You try to have all of those in place. I've learned that there are trade-offs. There's no perfect company, no perfect investment, no perfect valuation. I don't think it's...”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“I would say that the opportunities are, I think, just as prevalent. It's just that you're going to, not on a percentage basis. So you're going to find opportunities. It's just you have to sift through a lot more opportunities just by the very nature. You could look at the Russell 2000 and there's roughly 2,000 companies there. And the vast majority of those are not attractive to me as a business. I don't want to own those stocks. The list of attributes you just rattled off, they don't have any of those or very few of them. But there are some and there are enough, which is interesting to me. And the more you look, the more you find. There are numerous family-owned operations. I own stock in one of them right now that I can think of that is a third generation family-run business for the last 80 years. And it's extremely high quality by almost any measure that I prioritize and care about. It's a very high quality company and it's very cheap in my view.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Out there and not a lot of them at 20% yields, but there are some, believe it or not. And you can find many with double-digit free cash flow yields that I think are very durable businesses, very high quality, good returns on capital, and probably have some modest growth potential and some potential for multiple appreciation. And so those are where I think if you're looking for like mid-teen returns or even double-digit returns, that's where I am looking.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“There are a lot of stocks and people ascribe reasons for why this has happened, but there is a dichotomy in my view between the largest stocks in the market and just even medium sized to small caps, like below the medians, let's say. And with 10,000 stocks, there's a lot of opportunity. So I do think there's some real bargains. And it could be just the fact that I think what a lot of people think is all this money that's gone into passive investing have sort of pushed up prices for the largest stocks in the market. And the stocks that are not in that index have not benefited from those flows. But that's to your advantage as an investor. And David Einhorn talks about like, I think he said like the market is broken. And to me, the market's not broken. It's not a negative thing. It's just the reality is if you buy a stock at five times earnings and it's cash earnings and you're getting a 20% return, you don't need to worry about what the multiple does. So there are opportunities like that.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“You get 7% growth and you get a 20% decline in the multiple, you're looking at like 5% annual returns, something like that. And so I think that's where I see the market right now is it's not overly attractive at the highest end. But what's interesting to me is when I first started my fund, I had some small caps. But I also noticed like really high quality large cap companies like Apple at 10 times earnings. Microsoft, believe it or not, traded at 10 times earnings. It's just hard to believe because those days just seem gone. But really high quality companies that would be defined as growth companies, but just very high quality businesses with high returns on capital trading at 10 times earnings. Those are now, for the largely, those are trading at 30 times earnings. And where I'm seeing opportunity now is sort of in the smaller end of the market, not necessarily small caps per se, but small caps, mid caps, and just companies that are sort of outside the S&P.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“On the high side, it's not anything to be worried about if you're an index investor or anything like that. If you're a long-term investor, you know, you just want to hold stocks for the long run. For the first time in my career, I am not overly enthused about the S&P 500 as an index. I've always recommended it to friends and family. You have a small amount of money and you're trying to start your savings and you're starting your career and you're putting some money aside. Index is always a good place to be. And it probably is, I still think it is over the very long term. I do think the reality is over the next decade. It's probably going to be a much lower return than we've had over the previous decade. It's probabilities. We don't know that you have to assess probabilities here. But if the multiple goes from 25 to 20 or to even 16 where it historically has been that that would be say a 20% to a 35% decline in the multiple. And your growth engine will overcome that to a certain extent.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think we could look at the three engines of the stock market in the same way that we would look at a stock. So the S&P 500 when I started my fund was trading around 12 times earnings 11 years ago or so. And not at the bottom of the financial crisis, but sort of coming out of the financial crisis, 2011, 2012, 2013, you were paying a 12 times multiple in the last decade earnings have grown, let's say, around 7% per year and the multiple has gone from 12 to 25 roughly. And so the combination of those two factors is around a 15% return or so. Growth might have been a little bit less. It depends on how you define the multiple, but roughly that's approximately what happened. And so the point is you had a nice fundamental result from earnings growth and you had a really nice tailwind. The tailwind now has turned into, in my view, probably a modest headwind, that 25 PE is probably”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“to do that as a professional because you have clients and you have, you know, I've tried to structure my firm where I don't worry about that. I have my own money invested. And so I don't worry about that. And I've tried to purposely structure it because that is a real risk is people have to make money this year. And so you're as an individual investor. You don't have that same requirement or that constraint and that institutional imperative. So you can look past that and give yourself a real advantage. And that's really the time arbitrage, which I think is the biggest edge in markets today. It's not information. It's not analytical. It's more this behavioral mindset that anyone with the proper behavior and proper mindset can achieve.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Right. And it's always going to look, I mean, not always, but most times it will look bleak. You know, there will be something that people are worried about. And so, but you don't need to, you know, like Buffett says, there's no called strikes. So you don't need to swing at everything, but you will find if you pay attention enough opportunities in that second category, the unpopular large caps, there will be something that happens where you can look at it and say, I disagree with this. Or, you know, I think this is a short-term thing. And maybe the iPhone cycle won't be good this time, but it'll be good next time. Or, you know, maybe the movie business looks bad right now, but it'll be fine next year because there'll be more movies coming out. There are certain consumer behaviors that you might be able to predict longer term, even if you don't really know exactly what it will look like next quarter or next year. And those are sort of the, that's like the time arbitrage. You want to be able to look past where most people are focused.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“A 10% free cash flow yield that I think is durable, so you get to 10% return right there. Plus, whatever growth you get. And I knew growth was going to be modest at that point, just like now Apple's a more or less a mature business and it wasn't growing fast. But if you could grow at 5%, that's a 15% return, the free cash flow of 10%, the free cash flow yield plus the 5% growth. And then on top of that,”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Revenue that should have a higher stream of income. It's like Starbucks or Nike. Like people that like Nike will go buy another pair of shoes. It's not technically recurring revenue, but it has a brand. It should be valued more like a brand, like a consumer brand and not like a hardware electronics business. And so, you know, from time to time, you find opportunities like that where you have maybe a different view than the market does. And Apple also was at the time there were worries about competition from Samsung and there was also worries about competition from two specific Chinese manufacturers that were growing very fast in 2015 and 2016. And China is obviously a third big part of Apple's revenue. So all of those things sort of had a confluence, came together and had this impact on the valuation, which traded at 10 times earnings. And so the simple math is you had a business trading at 10 times earnings and those are three cash flow earnings. So you had a 10% free cash flow yield. And my thinking at the time was you're getting”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“I mean, very simply, like Apple in 2016, it was viewed as a consumer hardware business or a hardware manufacturer, electronics company that, you know, almost like Dell or like a computer manufacturer that didn't have a moat, believe it or not. I mean, it's hard to imagine. But eight years ago, there were numerous worries on Apple. I think people viewed it as certainly better than Dell. But it was trading at 10 times earnings. And so it was trading. And people said it deserved that because, again, it's a hardware manufacturer. Hardware is more or less a commodity is how that company was viewed. And there was really no value ascribed to the ecosystem that it had built. And even more than the ecosystem to me, I would look at the long lines and I would say, well, the hardware is to me recurring revenue. It's not like Dell or these other phone companies, even like Samsung. It's people will line up to get another iPhone. And I view that as recurring.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“And they're just undervalued. And so at various times, any one of those three categories might, you might find more opportunities in one or the other, but I like to have those three as sort of arrows in the quiver.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Companies in the world. The intrinsic value isn't fluctuating that much, but the stock price does. And so at times there's an opportunity there. And you could look at extreme examples like Facebook going from $100 to $500 a share in the course of 18 months, like things like that. That's an extreme example. But there are a lot of examples where stocks fluctuate a lot more than business values do. And so I keep an eye out for large caps because those are, if you can find the really high quality ones, I think those are really low risk investments. And then the third category would be what I call bargains for lack of a better word. I refer to them as bargains. And they could be stocks trading below liquidation value. They could be some special situations. I have a group of stocks that I refer to as like my Ben Graham basket. But these are very safe. I don't even think of them as cigar butts. They're not melting ice cubes. They're very safe companies with good balance sheet, cash flow productive businesses.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“The buyback or the dividend. That is going to compound capital. And so it's really businesses that are very high quality and durable that I think I can own for a decade. The second category would be what Ben Graham called unpopular large caps. And I've written a lot about this where it's interesting, but even the largest stocks in the market can be very mispriced at times. And it usually doesn't happen. It often happens when the market is down or there's some sort of market-wide fear. But I've noticed that the degree with which even the most well-followed companies in the market can get undervalued or mispriced in one direction or another is pretty significant. And you can look at, I've done some posts on where I show this chart of the top 10 largest stocks in the market. And the gap between the 52 Akai and the 52 Eklow is almost always on average 50% or more. And my point is basically the intrinsic value of those businesses. These are the biggest.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“That fit within your own circle of competence and that you can understand and you think have a high probability for success. And so for me, companies and stocks come in different categories. This oversimplifies it, but I have three categories that I tend to, my investments tend to fall in one of these three categories. And it's compounders, again, a term that I think has been overused as of late. And I can tell you my definition of that. But compounders would be high quality companies that are very well managed with capital allocation that I understand. And so that does not necessarily mean fast growth. It's high quality, good returns on capital. It could be fast growth or it could be moderate growth. It could even be low growth. But the goal is compounding your capital that you invest in it. So it could be a stock at five times free cash flow that's very durable, that perhaps is underappreciated, that's giving you a 20% return via the capital return.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“I mean, I modeled my fund after the Buffett partnerships of the 50s in terms of the fee structure. And I also, in some ways, kind of modeled the portfolio approach, obviously adapted it to my own circle of competence and my own skill sets and that sort of thing. But I liked how we had different categories of investments. And he was very flexible. I mean, he owned American Express and he owned Disney. And he also owned like workout situations and cigar butts and things like that. For me, I think it's important to think in first principles again just to reiterate the goal as an investor is to not, you're not trying to pigeonhole yourself into investing in a certain type of company. Your goal is to compound your capital, right? It's to grow your capital. It's not to invest in growth stocks. It's to grow your capital. You could do that by investing in growth stocks at a certain price. You could also do that in value stocks, right? But I don't think people should think of themselves as I'm a value investor or I'm a growth investor. You should look for opportunities that make sense to you.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Saying that there's not a lot of upside if everything goes right and if they do stumble, there is a huge amount of downside because if the business grows at 7% and the PE is at 20%, you can do the math on that and you're at negative returns in that standpoint. When you buy a stock, you're looking for low risk and potentially skewed upside potential. And you don't what you don't want is limited potential and skewed downside in a situation that you might not expect, even if it's low probability. And so that's just something to be mindful for. But again, I want to be clear. I'm not predicting anything bad happening at Costco fundamentally. It's purely the reason I think it's Coke in 1998 is Coke continued to degrade as a business. It's just shareholders didn't do well because the valuation. And that's the main thing to be concerned with there, I think.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, another way you could look at it is what do you need Costco to do fundamentally to achieve a 10% return? For me, I'm looking for a significantly better return than that when I buy a stock. But even to get 10% returns, it's challenging. You would need, like I said, the same fundamental growth as you got last decade. And you would need the PE multiple to be closer to 40 in a decade. And it's possible that you could do that, but that's to get a 10% return. So think about those three engines. How much are you going to get from the dividend and buyback at a 50 PE, you're not getting much. You're getting a 2% earnings yield. You're getting around a 1.5% free cash flow yield. And then, you know, you think about the nature of retail is not, it's not easy. So it's not a cinch to me that Costco 10, 20, 30 years from now will necessarily be as dominant as it is now. Again, I'm not predicting anything bad happening to Costco, but I'm just.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“And it continued to produce great fundamental results for a decade. And I think the stock returned, I think it went nowhere for a decade. And over the next 20 years, it maybe returned like mid single digits. Microsoft is another example, a famous example in the late 90s where the business continued to do quite well. Earnings continue to grow. The fundamental result was superb, but the stock went nowhere for a decade. And so that at a certain price, even for the best companies in the world, you can wind up with a mediocre or even a port investment result over a long period of time if you pay too much. And that's the risk that potentially could exist with Costco, I think.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“And so that's the risk is even if the business does achieve what most people think Costco will do. I don't have any reason to believe they won't do it. I'm just saying even if you assume they're as good next decade as they were the last decade, I think shareholders are looking at like a low-to-mid single digit return. You might get an extra percent or so from the dividend, but that's about the returns you can get if they achieve what I think would be an incredible fundamental result, which is continuing to do what they've done. If growth rate slows just a bit, if it's like 8 or 9%, now you're talking about the sort of the lost decade, you know, or even though the fundamental result's great, the stock might not go anywhere. And so that's the risk. And I just want to point that out. Like that, it's not me being anti-Costco. It's not me thinking the stocks a disaster or anything like that. There is a great company. It's one of the best companies in the world. But Coke was one of the best companies in the world in 1998.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Investors are willing to pay for Costco a decade from now. And my hunch is it won't be 50 times earnings. If it's 25 times earnings, which would not be necessarily a cheap price, but probably a more reasonable price for a great company like Costco, that multiple gets cut in half. So you have a 3x on the earnings growth and a 0.5x on the multiple, and now you're down to 1.5x. And that is about a 4% compounded rate of return.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“I do see a resemblance there, and I just want And you're three times larger in terms of earning power than you were a decade ago, it's naturally going to be harder for you to grow at the same rate over the next decade. Most retailers at any point in their life cycle will grow slower next decade than they did the previous decade. And that's simply because if they're a successful retailer, they're bigger now than they were a decade ago, and it's going to be harder to sustain that rate of growth. But let's say that Costco can do that. They can defy the odds. despite being three times larger, let's say they can grow at the same rate and they've grown earnings at operating earnings of around 12% or so their sales growth was around eight and a half over the last decade. If you assume that all the great things about Costco will remain and they'll be able to actually continue to grow at that rate, 12% over a decade is about a 3x. So earnings will be 3x greater, three times larger a decade from now. That would be a 12% return, but you have to make an assessment on what”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“up. You don't necessarily have to rely on the PE multiple going up, but I think people underappreciate how significant that can be, even over a period as long as a decade, right? If you buy a stock at 10 PE and it goes to 15, that's a 4% per year tailwind over a decade, right? And if it happens in five years, that's like an 8% or 9% per year tailwind. So that's really important to consider. And you can earn great returns. You can have high rates of compounding on a fairly modest rate of growth if you don't pay too much. And that's basically the lesson there.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“And so you want to look at the interplay of all three of those, not just growth, because a business that's growing at 20% a year is phenomenal. There's two things to worry about there, though, is one is it's very difficult to grow at that rate for a long period of time. But even if you could sustain that rate of growth, and that would be, let's say, roughly a six or seven X or a decade or something, if you pay too much for that stock and the multiple shrinks by half or even more, that eats into a lot of that return. And I think that's the risk of some of these growth engines. And so you just want to be very careful with paying too much. And that's, you know, or I mentioned in a post recently about how Buffett rarely pays over 15 times earnings for a stock. And that's, I think that's a big reason why is he understands that you don't want to have that headwind on that second engine, right? You want to pay a price that's fair or preferably below fair, right? So you get a tailwind on the PE going.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“That earnings of that company is going to double over the next decade. So 7% per year over a decade is roughly at 2x. If you paid 10 times earnings for that stock and it goes to 20 times earnings, that is another 7% growth on the PE multiple expansion. And so it's very important to not pay too much because it's nice to have that tailwind if you have the opposite, right? If you pay 25 times earnings and you end up, you know, at 12 or something like that, that's a, you know, your multiple gets cut in half. And so you can achieve great returns in stocks by buying something that's undervalued and seeing a tailwind to all three of those engines. 7% earnings growth, 7% on the multiple, that gets you to, let's say, roughly 14. And then, you know, perhaps if some of that is returned to you in the form of a dividend or a buyback, you can achieve a further return from that third end.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, absolutely. And I think in recent years, part of the reason I wrote that article, The Three Engines is because it's such an obvious thing, I think, when you think about it. But a lot of people naturally gravitate towards the growth engine. And so the term compounder has been, in my view, I've been using that term for 10 years and I kind of feel like it's been hijacked. There's so many businesses now that are referred to as compounders. What you really want to do is you want to compound your capital, right? It's not about finding the best. It's like Charlie Munger said. It's not about finding the best business, right? It's about finding the best investment, the highest quality investment. And a great business oftentimes can be a great investment, but it occasionally can be a very poor investment or even a risky investment at a certain price. And the simple math on that is if you use an example of a stock that grows at, or let's say 7% per year, that stock is going to double.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“As you said, there's lots of factors that go into this, but at the end of the day, there's three things that matter. There's three things that determine the stock price. It's earnings growth. It's the change in the PE multiple, so up or down. And it's the amount of cash that you receive from the company via buybacks or dividends. So capital returns. So growth, the change in the multiple and the capital return are the three engines. And the stock price is going to be governed by those three factors. The stock price appreciation. And of course, you could use sales growth. It's really growth in the multiple. You could use sales growth and price-to-sales ratio, the change in that, or you could use free cash flow growth and price to free cash flow as long as the growth metric is the same as the denominator in the valuation multiple. But those are the three things that determine your stock price. So I think it's helpful to keep those in mind when you're thinking about stocks and you're thinking about those three drivers.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Know a baseball fan, sports fan, as you said. I love baseball. Baseball is my first love in terms of sports. So it's a baseball metaphor, obviously. And from an investing standpoint, it's about, you know, getting on base, hitting line drives. I've always been an investor who prioritizes low risk investments. I'm not necessarily trying to swing for the fences, so to speak. I'm looking for, as Buffett said, the one foot hurdles to use a different sports metaphor. Base hit investing is about that. To me, it's more broad than just the investing size. It's almost like a life philosophy where I'm trying to make incremental progress every day. I'm trying to get better at what I'm doing. And the way you do that is to come in every day and follow a methodical process and put in the work. And over the long haul, those base hits can compile into a lot of production, so to speak. And so that to me is what base hit investing is.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely, is and it's not, you know, it's not a completely unselfish endeavor. I mean, I get a lot of, like I mentioned, fulfillment when you serve or when you volunteer, for example, or you coach your kids' baseball team, you know, you might have some work to do and you might like not be looking forward to that practice on any given particular night or whatever it might be. But I've often found that afterward you come home and you feel a sense of satisfaction on what you just did. So there is an element of It's a lot of fun to do. And you know, when I started investing, I like a lot of investors. I reached out to a lot of other investors and people that came before me and those people were very generous with their time. And so, yeah, doing these kind of things, they're a lot of fun. And to the small extent that I might be able to help someone, then that's all the better.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“What is not excess or not infinite, which is your time. And so spending time with your kids and spending time with your family members and perhaps volunteering, donating your time. What's interesting is, you know, people in general want to be happy. I think you pursue your career, you pursue your goals in an attempt to, at a very high level, you're trying to achieve fulfillment. And one of the ways you can get fulfillment is through serving, serving others and giving your time. And so I think that's to me what the quote means, just sharing what you've been given with others”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, this is a terrific quote. Yeah, I think to me if you're blessed in life with certain resources and certain assets and these aren't necessarily financial assets, they could be financial assets, of course. But I think making sure others around you are lucky is the quote says to me that sharing what you've been given with those around you in an attempt to try to benefit their life. And so for me, it's looking inward at my family and those people around me, extended family members, obviously your immediate family members, your spouse, your kids. One of the things we all have is sort of that we're all governed by is the finite resource, the ultimate finite resource, which is your time. And so, of course, you can give your financial resources. And if you're in the investment business and you're successful over time, you'll probably have excess financial resources to give away. But honestly, that to me is easier than giving away.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT
“Is and I did a lot of this, but I think I read a lot of investing books. And so like one piece of advice I'd have for new investors is you don't really need to read the next investing book. You should focus more on studying individual case studies or even just reading 10Ks. You know, I think the sooner you get into studying company annual reports and learning about a business and looking at its past numbers, it's like looking at baseball card statistics. The more numbers you soak in, the more you start to understand the margin profile of different businesses and the returns on capital and how much capital certain businesses require and all that sort of stuff. So I would do a lot of case studies. I would study all the buffet letters and I would listen to all his annual meetings, which are also great. Those have been posted in recent years on CMPC's websites and go through all those. And then the final thing I would say is just read books on business. So not necessarily investing books, but read bios of some of the business greats.”
2024-05-31 · We Study Billionaires · TIP634: Value Investing Fundamentals w/ John Huber · IDENTIFIED FROM THE TRANSCRIPT