Thread by @heymaxkoh

1/15 Thread:

1 simple sentence every investor must understand to do well:

2/ "The intrinsic value of a business is determined by the sum of all its future cash flows the business can generate, from now till kingdom come...

Discounted back to the present".

Warren Buffett

3/ Even if you have no intention to calculate the specific intrinsic value of your business...

Or you are unable to do so because the business is in hypergrowth and loss making...

You still MUST internalize this one sentence.

Here's why:

4/ Reason 1:

It forces you to focus on the longevity and durability of the business

The value of a business is determined by all its future free cash flows, from now till extinction.

The key here is "from now till extinction".

5/ With that in mind, you need to spend time thinking about whether a business is able to continue growing and surviving for years.

Thinking in this way helps you zoom into the real factors that truly affect a business

Instead of just short term revenue spikes or bad news.

6/ It pushes you to consider what the business moat really is...

whether it can survive the attack of competitors in future?

Those are the key ingredients that help you hold onto a great business, and give you conviction to weather storms.

And that's how wealth is created.

7/ Reason 2:

It forces you think whether the business has the advantages it needs to grow free cash flow in future

Even if a company is burning cash today and not generating any free cash flow...

This lens is still crucial to have.

8/ Because you need to ask yourself whether the business is indeed able to build up an advantage over the next few years?

It might be losing money today.

But can it continue to execute and innovate such that it's able to achieve scale and dominance in future?

9/ If they can do that, then they will be able to generate cash.

So you can see... you don't even need to calculate the intrinsic value of the business.

That's NOT what this sentence is about.

Instead, it's about finding out what are these specific advantages of the business.

10/ Reason 3: Helps you become a clear thinker

Most investors know they need to think long term.

But that's lip service.

They're still easily affected by short term price drops or bad news.

It's tough to tune out the noise in such a crowded world.

11/ This 1 sentence by Buffett gives the antidote.

In order to know whether the business can generate cash from now till kingdom come, you first need to set your sights at "kingdom come".

Doing this helps you think clearly.

12/ You’re forced to zoom out from the near term distractions, and consider what are the 3-5 key variables that really determines the business performance in a decade.

So you won't get sidetracked by the temporary set backs that don't matter in the long run.

13/ Here's a quote from one of my favourite investors, Allan Mecham of Arlington Value, that nails this down:

"The value of a company is derived from what it produces for owners over its lifetime—usually many years, often decades.

(continued...)

14/ "This supports a mindset calibrated towards longevity, forcing us to hone in on variables related to durability:

- barriers to entry

- technological obsolescence risk

- bargaining power

- value being provided to customers

- and threats of all kinds.

END/ "In most cases, what’s critical is not next quarters earnings, or next year’s numbers (what Wall Street emphasizes).

But rather the earnings over the next decade and beyond."

Recap:

You don't need to know how to do a DCF.

But you must have a DCF mindset.

Watch this video if you'd like to understand how Buffett explains intrinsic value:

That's it!

If you like this, follow me at @heymaxkoh

I share my journey on:

- How I attained financial freedom before age 30

- My investing strategies and principles

- How I research companies to buy