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Tim Koller

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first: 2025-05-30
most recent: 2025-05-30
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“Can go to mckinzie.com and click on valuation and you'll see more about the book and you can see more about our strategy and corporate finance practice. And then my email is tim underscore kohler at mcKinsey.com. And the book is officially available on May 20th, according to the publisher. And that's when Amazon says that they'll have it. But it is available for pre-order. But if you want to learn about the practice, go to McKinsey, look for valuation or look for strategy in corporate finance, and you'll find plenty of information there. We write a lot of articles on various topics. You can see them all there. There's also publication called McKinsey on Finance, which is also there, which comes out quarterly and has a lot of articles that would be relevant to investors and others.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“That said, if we look at a set of companies and they all have the same asset profile and they all are operating in the same geography and have roughly the same tax profile, then we'll use enterprise value over EBITDA just for simplicity, right? So it's only when there are differences that cause distortions that we would use these other measures typically.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Depreciation on his books. A company that outsources the depreciation doesn't show up as depreciation. It shows up as purchases, right? And yet they're really using the same amount of equipment and factories. It's under someone else's name. So if you ignore depreciation when there are companies that have different, let's say, asset intensities by choice, you'll miss some reasons for that. And then the other thing that we do is we want to take into consideration taxes because if you have companies, let's say, in different countries or with different mix of country businesses, they may have different tax rates. So that's why we go down to enterprise value over Not as the preferred measure because it takes into consideration differences in taxes and differences in depreciation profiles.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“To try to understand the share price, we're usually using an enterprise multiple. And then the question is, what's the right denominator? Most people now have focused on enterprise value divided by EBITDA, earnings before interest depreciation, taxes, and amortization. The reason for that, it's a pretty clean measure, right? EBITDA is a sort of a almost akin to cash flow. The reason that we want to take it a little bit further though is that we don't ignore the depreciation part. We don't want to add back the depreciation. The reason for that is that when you're comparing two companies, they may have different asset profiles. Let's say you have two companies, one company outsources its manufacturing and the other does it in-house. So the company that does the manufacturing in-house is going to have a lot of”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“So we tend to focus on enterprise value divided by NOPAT, net operating profits after taxes. Let me start with the traditional PE ratio. The traditional PE ratio is just so many things going on, so many non-operating items in there, one-time items, other things like that. We don't see too many sophisticated investors or bankers using the simple PE ratios. And when you talk to some of the analysts who publish, they say they published and talk about PE ratios because they think their audience can't understand something more sophisticated than that. Okay, which I think is underestimating the audience, right? But for the most part, when you look at M&A transactions and when companies are trying to understand their share price and they hire a banker or a”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“There are probably vices to avoid because the market hasn't taken enough into consideration. But that's what you want to think about is sort of what's the company going to look like five years down the road.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Because of the uncertainty, or are they being very thoughtful about how that uncertainty affects their specific business? Every business is affected differently by different types of macro uncertainty. And not all parts of their business are the same. Like if you take the grocery retailing where I live in Colorado, there are neighborhoods that are springing up all over the place, tremendous amount of growth. They need grocery stores regardless of what's happening to the economy. So there are still investment opportunities here for grocery stores. So you really have to think about that uncertainty at how it affects a specific company and whether it's going to affect the long-term economics of the business. That said, in terms of today's valuations, it's really hard to say what there are probably opportunities out there for companies where the market has gotten too conservative.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Uncertainty does make valuation much more difficult, which is why I think you have to sort of focus on the longer term, right? What are the long-term fundamentals likely to be for a company or for an industry? Because what's happening today, we just don't know. And so, for example, I was talking to a grocery retailer in the US. It takes them two or three years to build a new store. Typical recession doesn't last that long. You know, so if you say, how long is this uncertainty going to last? You might say, okay, the typical investment cycle is longer than the uncertainty. So I shouldn't still want companies to invest, right? And also, I think one of the things that you want as an investor to be looking at is the company freezing?”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Find that there is a big overlap. It's just that the US one has shifted over, okay, compared to the European one. So it's not an indictment, if you will, of all European companies, right? It's just that the laggards bring down the averages. So in a way, I would say that Europe has a lot more laggards than the US.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Equalize anywhere in the next 10 or 15 years. Maybe it happens after that, but it's a big opportunity. Lots of people in Europe trying to figure out how to make it happen. That said, there are companies in Europe that are leaders in their fields that have higher returns on capital. We're talking about averages or medians here, right? If you look at a particular industry, you will find that oftentimes even if the median return of a European company is lower, you'll find that the better European companies are much better than the median US company in a particular industry. So we don't want to overstate and sort of make it seem like every European company faces this issue, right? It's just the averages are brought down. But if you look at a distribution of returns, you'll”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“That I don't see changing in the near future. In addition to that, there is just a little bit of a different mindset there that hasn't changed that doesn't put as much emphasis on earning a high return on capital. As a result of that, I don't see sort of a”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Ton of smaller technology companies. We have a lot of life science. The U.S. is still the leader in innovation. And one of my co-authors is based in Amsterdam. And I spend time in Europe as well, five years. And there isn't sort of that entrepreneurial ecosystem that generates entrepreneurship, that generates the kind of new companies, new growth that we have in the US. So that's one of the things I don't see changing. I know European companies, countries have talked for years about how do we do this. You know, they set up incubators. They set up all kinds of things to encourage innovation. It hasn't made that much of a dent yet in terms of new companies, new industries being really the leaders in big chunks of the economy.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“I used to be, you know, when I was young and out of school, I used to be a strong believer in reversion to the mean. Competition would sort of cause that to happen. And I've discovered that doesn't always happen. Just that's why consumer packaged goods with great brand names consistently earn high returns on capital. It's very difficult to break into or to convince people to buy different laundry detergent than they've been buying, right? So they become these can charge a lot of very high premium, very high return on capital. So reversion to the mean doesn't necessarily happen, whether we're talking US versus Europe or within the US headset, et cetera. In terms of the US versus Europe, though, one is, first of all, a large part of it is just a different industry mix, right? As you pointed out, we have all the leading technology companies.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“A company's valuation multiple PE or Enterprise Value D, but as a function of growth, right? It's clearly a function of both growth and return on capital. And you can see it in the banking world, for example. Most of the companies are growing relatively modestly. And the differences in valuation all come down to differences in return on capital because it affects their cash flows. So whenever we look at companies and we look at hundreds of companies a year and look at them relative to their peers, growth, not just growth, but return on capital is a major effect on the way they are valued by investors. And it makes sense because of the math that return on capital determines how much of your profits gets turned into cash flow.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“If you have a higher return on capital, the way the math works is that at any level of growth, more of your profits will become cash flows that you can distribute to your shareholders, right? So if you have two fast-growing companies and both of them, let's say they're growing at the same rate, but one of them has a higher return on capital, it won't have to invest as much in order to achieve that revenue growth and that profit growth. And as a result, it'll generate more cash flows and it should be worth a lot more. And that is why you see, for example, some slow-growing companies like consumer packaged goods companies that have fairly high valuations if you look at sort of enterprise value to EBITDAs or PEs or whatever. Not because they're growing fast, but because they have high returns on capital. And I think there's a big misconception that”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“So, in industries where that is the case, that is the right thing to do is to return cash to the shareholders rather than investing it. However, it's also worth pointing out that sometimes if the measured return on capital is low, right, and you have a lot of assets that you can't do anything else with, it doesn't mean you should go out of business right away. It just means you should be very cautious about putting new capital into the business. Sometimes people use the word you should milk the business kind of thing. That's good for some businesses that are going to go away kind of thing. But really the more important thing is just being very cautious and selective about where you put new capital when you have a low return on capital.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“The audio industry is a tricky one for right now because you've got this transition going on, right? So sometimes it's hard to interpret or to draw conclusions from the current return on capital, right? But there are industries which are where the return on capital, even in normal times that the auto industry has a relatively modest return on capital. And you have seen as a result shrinkage of the market shares of say US-based companies over time. First we had the Japanese coming in with lower cost cars and initially lower quality, but their quality quickly caught up than we had the Koreans come up coming in and creating competition. So if you're in that kind of a situation, you do have to rethink and decide whether or not you should be returning cash to the shareholders.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Capital structure, so that's not going to have much of an effect. We do not advocate levering up a company in order to reduce the cost of capital. The benefits of levering up are far outweighed by the additional risks that you take and the fact that you may not have the ability to make investments when you want to. So that's why also we de-emphasize, if you will, trying to do anything about the cost of capital because there's not that much you can do about it.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“On equity, what's the typical growth rate of profits? That translates into cash flows. We can then solve for the cost of equity. And we do that, and we've done this consistently for the last 25 years. We find that the real cost of equity when we reverse engineer share prices has been about 7% pretty, very consistently going back 60 or going back to the 1960s. And so if you add a 2% inflation or so to that, you end up with a nominal cost of capital and cost of equity of about $9, 9.5%, which is what we were just talking about. So different ways we get to the same number. So the fact is, for the most part, most companies, the cost of equity is somewhere in the 9, 9.5% range, maybe a little bit lower, maybe a little bit higher. Not that much in the capital structure will affect that a little bit. Most companies have fairly conservative.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“The risk free rate because it wasn't market determined, it was artificially driven down by the central banks. And so our approach has been to look at what the long-term return on government bonds has been, real return, that's two or two and a half percent, add to conflation. And so we've typically been using a risk-free rate of four, four and a half percent, which is pretty stable and a market risk premium of about 5%. So we end up with 9, 9.5% cost of equity for the typical company. And we've also validated that by reverse engineering, if you will, the market. So what we do is we look at, take the market as a whole or the median company in the market. We got to throw out some of the outliers from time to time, right? Like the mega seven. We take the way companies are valued and then we create a little economy and say, okay, what is the typical return?”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Premium, right? That's where there's been more debate over the last 15 years or so. And what we observed was that when interest rates went down, when central banks pushed interest rates down artificially since the financial crisis until recently, investors, equity investors did not reduce the cost of capital. You didn't see PE ratios going up, but you would have seen if the cost of capital had gone down substantially. And also We and investment banks that we've seen their analyses couldn't come up with reasonable valuations using very low costs of equity that you might have, you know, if you would sort of done a knee-jerk reaction and just reduced your cost of equity as interest rates went down. So basically what our research suggests, and I think a lot of economists would agree that the government bond rate no longer really reflected”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, the first thing we do is we tell companies that you can't really do much about your cost of capital, right? Your cost of capital is for the most part determined by the industry that you're in. And it is what it is. And don't waste too much time worrying about that. And for most companies, large companies, you know, your cost of capital is somewhere between 7.5% and 9.5%. And yet your return on capital varies over a much broader range. So don't get hung up on getting it to the nearest decimal plane point or changing it a lot, right? I think that's the main thing we want to point out to investors or tech companies, for example. In terms of how to calculate the cost of capital, we do use the capital pricing model, but what really matters is what's the average or the median cost of capital for a big company, the sum of the risk-free rate and the market risk.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“I often think that boards actually don't spend enough time really of doing a good job evaluating the performance of the CEO because they tend to rely on sort of short-term numbers as opposed to really understanding what investments did they make how are they paying off are they doing a good job of allocating resources did they move resources away from older businesses to growing businesses and how long is that going to take and rewarding people for more qualitative actions to improve the performance of the business longer term that doesn't happen very much and so I think a lot of it is on the board a lot of it is on the CEOs themselves though to listen to the right investors and to have the courage like a Warren Buffett to just ignore the conventional wisdom right and do what's right for the longer term”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Job of understanding because the board set the incentives. And we've also come out with a system partly encouraged by the SEC where the SEC wants more quantitative sort of evaluations of executives, which by nature are short term, right? So a big chunk of compensation, while you think of it as being in stock options, which are longer term, the reality is the amount of options you get, the bonuses tend to be much more short-term oriented. So there's a lot of pressure from the board, a lot of pressure from your compensation system, et cetera, for short.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“I think the key reasons are one is listening to the wrong investors, right? They listen a lot to the sell side analysts whose clients are short-term hedge funds usually. If you listen to the typical quarterly call, it's mostly fairly narrow short-term questions, right? But those questions are all being asked by sell-site analysts. They're not being asked by long-term investors. When they talk to long-term investors, they hear different things. But they're sort of struggling to balance these two, right? That's one thing. Another thing that the boards of directors oftentimes aren't close enough to the businesses to judge whether or not the recurrent results are a function of poor performance or we made some investments. And I think there's an opportunity for boards to get more granular, to do a better job.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“More long term oriented as an independent pure play company, for example. So there's unfortunately a lot of companies out there that are still short-term oriented, right? That aren't innovative. Fortunately, we have as an economy, we have a great ecosystem that generates new businesses, entrepreneurs, et cetera, and not just in the tech world, but even in consumer products. So even if the bigger companies aren't being long-term oriented, there's a lot of smaller companies that are coming up with innovations that eventually get adopted by the big companies because they have to be. So we do have a very dynamic economy, which creates a lot of value. Unfortunately, it's not always the large companies that are capturing that value because some of them have become too short-term oriented.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Unfortunately, I don't come across as many managers, executive as I would like, who have that long-term view. A lot of companies now have adopted return on capital in my career. So there is a focus on return on capital, which is a good thing and the importance of having a high return on capital. That part's good. I do come across more companies than I would be comfortable with. Maybe that's why we're consulting to them. I don't know that are a bit too short-term oriented, to be honest. I think one of the reasons why you see a lot of companies being split up right now is it's because it's difficult for them sometimes to focus on growth when they are part of more conglomerates or more diverse businesses, right? And I think what we have seen, for example, when companies gets fun out of larger companies, that's often an opportunity to become”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“If we've got the right talent and if we're going to be willing to invest enough to actually win in that market, those are the kind of investments that investors would like to see you do.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“So, if you put a little bit of money into it, you're not going to win. You shouldn't be spending that money, right? Secondly, do you have the right people and the right people model for those new risky investments? If you're competing with a bunch of startup companies, that creates a challenge for large companies because oftentimes companies have very rigid pay scales, right? And so if you can't compete and you can't attract the best talent, maybe you shouldn't be making that bet. And then another element about making those bets is do you bring some sort of competitive advantage? Once again, if you're not going to bring a competitive advantage, you're going to be an also ran. Then you probably shouldn't be doing it. So if you take companies that or investments where you meet all those three criteria, right, we have a competitive advantage or no one is in that market yet, so we can create a competitive advantage.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“I think investors, and we've surveyed them, these sophisticated investors do, companies are in the business of taking risk, right? And making investments and not all of them are going to pay off. And if you're a large company and you're making 50 bets maybe at a time of different sizes, of different risk, you ought to think about it as a portfolio, just like as you were an investor thinking about your portfolio of stocks. Some of them aren't going to pay off. Doesn't mean you shouldn't invest in those, right? So you do want to be making some what I'll call risky bets. I think the important thing is, though, not whether or not you should do it, but you should only be undertaking those risky bets. One, if you are in it to win, right? So are you going to invest enough to be a winner in, say, some new product area? Or are you going to be a dabbler? Because dabblers never win.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Lines with growth opportunities are fully funded and that those businesses which are stagnating, their markets are not growing anymore, that they maybe don't try to grow and that they try to focus on improving the return on capital. That's what we mean by granularity. It's not day-to-day decision making, it is getting the strategic direction of each unit, each product line, each geography correct and getting alignment about what they should be trying to accomplish.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Accomplish based on the economics of that unit, right? And if you can't do that, you're likely to suboptimize, right? So if I have a company with 60 business units divided into three divisions, if I'm only looking at the three divisions, I don't understand how the division heads are making decisions. And the division heads may have a different timeframe, different objectives than I do as the CEO. They're focused more on their short-term bonus probably. So they may be in a situation where they're going to underinvest in certain units to meet their short-term numbers, which as a CEO, I wouldn't want them to do. So I need to understand that. And it doesn't mean, you know, making the day-to-day decisions for the division heads or the business unit heads. It's really more about transparency and guiding them and making sure that they have the right priorities, that the businesses, the products,”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“First of all, I would distinguish between complexity and size. You can have a big company that's not very complex, and you could have a medium-sized company that is very complex. But what we have found is that companies where the CEO and CFO don't manage at a granular level, at the level of, let's say, 30 to 50, maybe even more units. What they tend to do is they tend to use a one-size-fits-all approach to management, right? Okay, this year we're all going to cut costs. And yet, you know, you may have some young business units that are growing very fast that should be focused on revenue growth, right? And you may have some other units that should be focused on cutting costs and improving the return on capital. So that's why granularity is so important so you can tailor the strategy and what you want each business unit to.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“What are they doing? And as you grow and/or as your growth slows, for example, more of your stores will be older and your return on capital will go up. So investors can see a lot by looking at that. Now, that's a pretty simple example, but there are things I think investors can do or companies can do to educate investors about the timeframes on which things will play out and those investments will pay off.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“I mean, we have to be realistic that it does take time, right? And that's something that managers need to be patient about. They need to educate the board of directors about. And there's also often an opportunity to educate investors about that timing. I'll give you an example. There was a company, a retailer a number of years ago before it was purchased that used to publish in their annual report the return on capital for different age cohorts of the stores. So you can see the stores that had been open for four or more years what their return on capital is, which is gives you a sense of really how good the franchise is, right? And they also showed the return on capital of the stores that have been opened less than a year, which was obviously much lower, right? And knowing how many stores were in each category, you could get a sense of how good a job.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“But it's also important and very important to dive down into the units because typically, let's say you've got a company that's earning a 15% return on capital. When we dive deeper, we find that there are some units earning less than their cost of capital, less than 8%, some that are earning in the low teens and some that are earning in the mid-20s. That tells you something about your strategies. And so it's very important with the return on capital to not worry so much about precision, but worrying about more where are you generating that return on capital, where is it good, where's it bad, and what are the implications for strategy?”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Your return on capital, that kind of stuff, right? So you don't want to get hung up on those kind of things. We also do think it's important, though, one of the big questions that companies struggle with sometimes is whether to measure return on capital with or without goodwill and intangibles. We think you need to do both because they tell you different things, right? With goodwill and intangibles, which the number is often a lot lower, that tells you how good a job you did with your acquisitions. Without it, it tells you your operating performance. And you can compare that relative to your peers. And is that getting better or worse? So there are things you can do, but I generally advocate a pretty simple approach. And the other thing that's important when it comes to return on capital is not to look at it just, especially for a larger company, not to just look at it at the enterprise level. That really doesn't tell you anything. Some companies include non-operating things in there, which we need to take.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“With respect to return on invested capital, I think it's more important to get the numbers directionally correct than to refine it too much. I see some times companies where they are so focused on the extra decimal point that they lose sight of the bigger picture. So we do try to, or we do advocate moving away sometimes from the peer accounting results and calculating return on capital. We want to focus on the things that you can really drive and that are pretty simple to understand inventories, receivables, payables, fixed assets, et cetera. So focusing on the operating performance is the most important thing. So you don't want to get hung up on things like how is deferred taxes driving?”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Ours really don't cost more when you adjust for inflation, right? So there's been all this innovation and things that happen because of, or consumer benefits that occur, just think about how many people now have air conditioning that didn't have air conditioning 50 years ago, right? Most people in the US have access to air conditioning, for example. So we are so much better off because of innovation and innovation wouldn't happen without companies striving to create economic value. Now some of the companies, unfortunately, most of that economic value is passed on to the consumer, which is good for the consumer. And some companies are able to capture a bigger share of it, particularly companies like consumer branded companies where people become very brand loyal. But in general, the whole approach is essential to progress and to”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Think it's very important for companies to create value for society. I mean, we talk a little bit about that in our book, right? It's the whole element of competition that drives innovation, right? Innovation is why we can live the lifestyles that we lead right now, right? If you look at, you know, we've gone from in the US probably 40 or 50 percent of the population was involved in agriculture 80 years ago and now it's 2%, right? If you look at all the innovations, and you mentioned automobiles, right? The autos that we drive right now are so much safer. There's so much more comfortable. They handle better. It's amazing even, you know, even economy cars, you can drive them at 85 or 90 miles an hour, not that I'm advocating that. They're very stable, which wouldn't have happened 50 years ago. And yet,”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“The cash flows and the competitive advantage that you generate. So, for example, we talk about how if you want to get into, let's say, renewables, renewable energy, you have to have a competitive advantage. There's a lot of competition out there. A lot of people who are really good about building out wind and solar. And if you don't have a competitive advantage, you're probably better off returning your cash to shareholders rather than investing it as a also RAN or somebody who just has deep pockets.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Does it help me get new customers? Does it help me become more efficient? Because I can, you know, manage my costs better, et cetera. Those are the kind of things that ultimately matter, right? But then we also point out that when companies adopt new digital technologies, AI, et cetera, it's likely that their competitors are doing the same thing as well, right? So a lot of times those benefits flow through to ultimately to the consumer and not to the company or its shareholders because everyone is doing the same thing for the most part. And so everyone is cutting costs or competing in a better way for customers. Same thing with sustainability. Once again, it's not sort of proclaiming that you're good at sustainability isn't going to get you anywhere with investors, right? It has to be about.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Fundamentals, as you said, do remain the same, and we are constantly updating for things like accounting changes and tax changes and things like that. So those are sort of on the technical side. But what's changed is not so much the fundamentals as applying it in different environments to different sets of issues, right? So for example, everyone is thinking about digital and Gen AI. And so we talk about, you know, how do you think about that in the context of valuation? And then, for example, people think it's something big and mysterious. But for most companies, except for companies that are selling AI products, what matters is how they're using AI to improve the business, right? There's not something separate that happens. So it's all a matter of does this improve customer retention?”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Concerned about accounting or consensus or the impact of share repurchases on EPS, et cetera, they're really focused on the cash flows that the company is going to be able to generate longer term.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Miss every year, every quarter kind of thing. But if you're above or below, we find it doesn't really matter statistically. And when we asked investors about this, they said, we don't want companies taking artificial actions at the end of a period just to hit their numbers if it is going to be a negative in the longer term. We don't want companies cutting prices at the end of the quarter to sell something additional, right? We don't want companies cutting product development or marketing sales at the end of the quarter just to make the numbers because eventually that will come back. Push the problem forward. And we don't want them to do that. So the misconception is one is about who the investors are that matter. And once you understand those investors, you realize that they're thinking long term about once again generating real cash flow.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Long term sophisticated intrinsic investors in terms of both the strategies that you're pursuing, what they want, and listening to what they have to say and focusing on learning from them as opposed to trying to please all your investors. You cannot please all your investors. It's impossible. So the courageous CEOs focus on doing what's right for the company long term, which in general is consistent with what the intrinsic investors would want them to do. One example I give is, and that's a myth, is the importance of meeting consensus earnings forecasts, right? There's a lot of companies out there that will do whatever they can to meet the consensus. We did a survey of intrinsic investors and found that that wasn't very important to them. And it's not that you can make...”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“There's a whole bunch of misconceptions. One of the misconceptions is related to what you were saying is that the market is a monolith, right? And that all investors think the same way. And in our research, what we found and what we encourage our corporate executives to do, the CEOs, CFO, is to focus on the investors that matter. And our research suggests that the investors that matter are long-term intrinsic investors. There's a lot of noise out there, a lot of different trading strategies. Some investors are short-term oriented. They want to know what the next piece of good news is. The analysts, the sell side analysts, some of them are short-term oriented. A lot of short-term questions. So there's a lot of noise that CEOs, CFOs, and their boards face coming from the market. And we think it's important to focus on those.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“To the shareholders. So you want to focus on real value creation, things like share repurchases or return of capital. They're not additional value creation, choices of accounting methods in the end, they all flesh out in terms of eventually translating into cash flows. So focus on the real. Don't focus on the short-term share price. Although for the most part, we find that the real short-term share price does reflect the economics of the company. So basically focus on real value creation, not accounting things, not gimmicks, and then finally going back to it's all about return on capital and growth that drive cash flow as the drivers of real value creation.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“Long term revenue growth and return on capital as the drivers of cash flow and therefore value creation. The other part of your question is about you use the word real value creation. And I think what we're trying to get at there is that you can fool the market for a while, okay? So if you are doing things that make your accounting results look good, it may be not transparent to the market, but eventually that will come through. So companies that, so for example, focus only on cost cutting and don't invest in product development or sales and marketing or other types of growth, typically that will come back to hurt them and it will eventually become apparent.”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT
“That's a great question. I'll need to break it up into two parts. One is sort of how do you create real value for your shareholders, for the company, for the economy? Ultimately, what matters as with any investment is the cash flows that you generate. And the way you generate cash flows is by earning more than your cost of capital. So we focus on the return on capital. And the way companies create value is by investing money and then generating a return on that capital. And that return is the biggest driver of whether or not that company is going to create a lot of value or not. In combination with how much capital they're investing and how fast they're growing their revenues as a result. So the common theme throughout the book is, and this is what I emphasize to whenever I talk to corporate clients, is it all boils down to”
2025-05-30 · We Study Billionaires · TIP725: First Principles of Valuation w/ Tim Koller · IDENTIFIED FROM THE TRANSCRIPT