Investing for the Long Term: Durability, Growth, and Valuation
The key to successful investing lies in identifying and holding companies that are built to last and consistently generate cash flow. Instead of chasing quick profits, focusing on the long-term sustainability and growth potential of a business is crucial for building wealth. As the saying goes, "Say you only get one good idea a year. One or two, if we're lucky, yes. But that's enough."
Super Durable Companies: The Foundation of Long-Term Investment
The value of a financial asset is determined by the present value of the cash it generates over its lifetime. To accurately model future cash flows, the underlying business must endure. Investors should seek out businesses that can grow sustainably over the long term and that they ideally will never need to sell. These "super durable" companies, while rare, are the bedrock of a solid investment portfolio.
Avoiding the Trap of Unsustainable Growth
Many publicly listed companies experience rapid, but ultimately unsustainable, growth. While such companies may show impressive returns in the short term, their performance often falters, making them unreliable long-term investments. Getting caught up in linear predictions based on a year of high growth can lead to overvaluation and significant losses. Instead, investors should focus on companies that can maintain steady growth over extended periods.
Valuing Sustainable Growth
A company with consistent, sustainable growth is much easier to value accurately. This allows investors to determine when the stock is undervalued or overvalued, providing opportunities for strategic buying and selling. Accurately predicting growth over the next 5 to 10 years, rather than focusing solely on short-term performance, is critical for effective valuation.
The "Nursing Home" Theory: Protecting Long-Term Growth
A company's "nursing home" refers to its durable competitive advantages and the factors that ensure its long-term growth. If a company lacks a strong "nursing home," its long-term growth potential becomes highly unpredictable. Long-term investors should prioritize companies with inherent advantages that protect their future prospects.
Investment vs. Speculation: A Matter of Perspective
The core difference between investment and speculation lies in the motivation behind the purchase. Buying a stock with the intention of selling it quickly for a short-term profit is speculation. Conversely, buying a stock with the goal of holding it for the long term (at least five years) is investment. If you don't plan to hold a stock for 10 years, then you don't have to consider holding it for 10 minutes.
The Royalty Model: Earning Without Capital Investment
The best businesses operate on a royalty model, generating revenue without significant capital investment. These companies create a platform or brand and allow others to use it in exchange for a percentage of their earnings. Examples include:
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Franchise restaurants: Franchises like Tim Hortons, where franchisees provide the capital and pay a royalty on sales.
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Music companies: Companies like Universal Music, which earn royalties on music streams.
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Hotel brands: Brands like Hilton, where owners operate the hotels and pay royalties.
The key is to identify royalties that can endure. The company doesn't have to do anything, and the listed company mainly controls the brand and the authorization alliance. This is similar to the business models of internet companies.
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YouTube, TikTok
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Alibaba, Uber, Airbnb
Avoiding "Businesses with Wheels": Focusing on Real Estate
Avoid investing in "businesses with wheels" that require heavy asset investment, such as airlines or car manufacturers. Instead, focus on "real estate" businesses that control brands or resources and allow others to handle the operational aspects. The business world is actually not very fair. If you want to buy heavy assets, you need to invest a huge amount of capital. And you also need to face the risk of high-risk debt and the risk of inventory. And in the case of real estate, those companies actually mean lying down to make money.
Uber as an Annuity: A Platform for Demand Aggregation
Companies like Uber operate as platform businesses, aggregating demand and connecting it with suppliers (drivers). Uber does not own the cars or employ the drivers but takes a percentage of each ride in exchange for providing the platform. If there is confidence that the Uber platform will be the platform a decade from now and two decades from now.
Data-Driven Analysis: Validating Investment Decisions
While qualitative analysis is valuable, investment decisions should be validated with objective data. Static analysis needs data to verify it, and it takes a lot of analysis to verify it. The long-term sustainability of a business can only be confirmed through continuous monitoring of key financial metrics such as profit margins, net profit margins, and return on assets. You need to track its data for verification.
Value Investing: Buying Low, Not High
Value investing involves buying undervalued assets, often when a company is facing difficulties. This approach requires a long-term perspective and a willingness to buy when others are selling. They don't like to chase that kind of popular stock. When the company is in trouble, the stock price will fall. On the other hand, they will be more happy and will look for opportunities. Sometimes you look long and short, and the conclusion you get may be exactly the opposite.
The Importance of Risk-Reward Analysis
Investing is fundamentally about managing risk and reward. Buying popular stocks at their peak can expose investors to significant downside risk. Conversely, buying unpopular stocks at a low price point can limit the potential losses and offer higher potential returns.
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