Most investors underestimate the frequency of moats and overestimate their size.

They assume large companies have moats and small companies don’t. Most competitive advantages are cost advantages.

And most of those don’t last.

But they keep excess profits in and competition out for a time.

Some interesting thoughts and charts from Apollo on interest rates, inflation, and the economy:

The Fed Will Not Cut Rates in 2024

The market came into 2023 expecting a recession.

The market went into 2024 expecting six Fed cuts.

The reality is that the US economy is simply not slowing down, and the Fed pivot has provided a strong tailwind to growth since December.

1) The economy is not slowing down, it is reaccelerating

2) Underlying measures of trend inflation are moving higher, see the second chart.

3) Supercore inflation, a measure of inflation preferred by Fed Chair Powell, is trending higher, see the third chart.

4) Following the Fed pivot in December, the labor market remains tight, jobless claims are very low, and wage inflation is sticky between 4% and 5%, see the fourth chart.

5) Surveys of small businesses show that more small businesses are planning to raise selling prices, see the fifth chart.

6) Manufacturing surveys show a higher trend in prices paid, another leading indicator of inflation, see the sixth chart.

7) ISM services prices paid is also trending higher, see the seventh chart.

8) Surveys of small businesses show that more small businesses are planning to raise worker compensation, see the eighth chart.

9) Asking rents are rising, and more cities are seeing rising rents, and home prices are rising, see the ninth, tenth, and eleventh charts.

10) Financial conditions continue to ease following the Fed pivot in December with record-high IG issuance, high HY issuance, IPO activity rising, M&A activity rising, and tight credit spreads and the stock market reaching new all-time highs. With financial conditions easing significantly, it is not surprising that we saw strong nonfarm payrolls and inflation in January, and we should expect the strength to continue, see the twelfth chart.

The bottom line is that the Fed will spend most of 2024 fighting inflation. As a result, yield levels in fixed income will stay high.

We recorded a pod today about Tom Murphy, whom every investor/manager should study

$1 invested with Murphy when he became CEO of Capital Cities in 1966 would grow to $204 by 1996 when he sold the company to Disney

This worked out to a 19.9% annualized return over three decades Buffett has said that “Tom Murphy and Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see.”

Here are our notes for the podcast, which we copied and pasted from articles and transcripts from other websites about Tom.

Most public companies don’t have highly persistent profitability.

They experience mean reversion.

This is because either: 1) They operate in markets (both those they buy from and those they sell into) where competition is not extraordinarily imperfect and therefore tends toward the “mean reversion” of profitability common in more perfectly competitive markets.

At the Berkshire meeting this year, Warren Buffett said:

"I was reading the other day, actually, the 1932 Annual Report of General Motors. And its one of the best annual reports I've read. Its a totally honest assessment of exactly where they were"

Earnings fell 99.9% in 1932. GM was three years into an industrial depression.

However, they had a significant amount of working capital, were still able to pay a dividend, and were being proactive about managing through it.

Jamie Dimon's 2022 Letter to Shareholders

On interest rates:

"When you analyze a stock, you look at many factors: earnings, cash flow, competition, margins, scenarios, consumer preferences, new technologies and so on. But the math above is immovable and affects all." • Risks in the banking system were hiding in plain sight

• Interest rate exposure, fair value of HTM portfolios, and uninsured deposits were known to regulators and the marketplace

• Stress testing by the FED did not incorporate higher interest rate scenarios

If you line up businesses by their ability to get a good yield on their own capital, the companies should be valued like this:

· Reliable above-average returns on investment – value on an earnings basis · Consistent companies with a mixed or impossible-to-evaluate ROI situation – value on a free cash flow basis

· Inconsistent companies with an unreliable or poor ROI situation – value on a tangible book value basis

My approach to buybacks is pretty simple.

One, I prefer them.

Two, I look at the share count history over the last 10 to 20 years as my guide to what the company might do in the future – I want a pattern of predictable behavior. Generally, that means a continuously shrinking share count that shrinks in bull markets and bear markets, panics and recessions and booms and busts and so on.

1/ The worst business in the world grows while earning a low return on net tangible assets.

This business is incapable of paying anything out to you.

And the only way it can even return 7% a year or better if you buy it at a P/E of 15 is if... 2/ ....it grows fast enough ON A PER SHARE BASIS – after issuing the stock it needs and taking on the debt it needs to grow.

The second worst business in the world would be something that has high or even infinite returns on net tangible assets but can’t grow at all.

1/ Capital allocation is especially important in capital intensive industries like railroads, cruise lines and telecom because those growth investments––both the good ones and the bad ones––will generate positive cash flow. 2/ It’s easy to know when you should shut a restaurant down. When it’s bleeding cash, you shut it down.

How about a cruise ship?

In normal times, it’s not going to burn cash.

The capital allocation mistake is never going to manifest itself that way.

🚨 A new article is out from $GEOFF 🚨

Six Books I’ve Read Recently

focusedcompounding.com/six-books-ive-… Limping on Water: My 40-year adventure with one of America's outstanding communications companies

amazon.com/Limping-Water-…

I want to build a working thread of the best timeless investing content on the internet.

Feel free to add your favorites 👇👇 4,953 pages of basically everything Warren Buffett has ever written publicly, as well as some transcripts.

I Ctrl-F investing topics on my mind in this document all the time.

focusedcompounding.com/wp-content/upl…

Warren Buffett turned $10,000 into well over $100,000 before starting his partnership.

My best guess is that Buffett compounded his money at an annual rate of no less than 50% a year and no more than 60% a year from 1949-1954.

Here is how Warren Buffett made his first $100,000. If you read Alice Schroeder's "The Snowball" you can easily find the investments that generated Warren Buffett's initial wealth.

Here, we'll go over just the first $100,000 Buffett made investing in stocks.

All Porter’s Five Forces are great to study, but the single force that matters the most is threat of new entrants.

If you can’t check this box, you should just move on to the next company.

#RandomThoughts If demand is so great to where any company can earn high returns on capital, other businesses will notice and enter the market to compete for the profit pool.

Walter Schloss was one of the greatest investors of the 20th century. He beat the S&P by 6% a year over 47 years.

A $1,000 investment made with Walter Schloss in 1955 was worth over $1 million in 2002.

That's turning every one dollar in 1955 into one thousand dollars by 2002. How many fund managers keep at it for more than 4 decades?

Not too many.

A lot of investment research can be analysis paralysis

Here's the first 8 things to look at when researching a stock to give you a good foundation for understanding the business

A Thread:

$GEOFF Here’s a full list of my usual sources:

You should not invest in a company if you do not understand the competitive landscape it operates in.

My mind immediately goes to competition when analyzing a new company + industry.

Here are 10 checklist items you can start with

A thread:

$GEOFF There’s a checklist you can work through to see. It’s made up of 5 items from Michael Porter and 5 items from Morningstar.

Most people wish they could find more time to focus on investing.

Here's a framework for investing when you only have an hour a day to do it.

A thread:

$GEOFF I’m going to ask you to spend 5-7 hours a week on investing.

But it must be an hour a day – every day – instead of five hours all at once.

There’s a reason for this. I want you 100% focused when you are working on investing.

Hunting for Hundred Baggers: What Stocks Should – and Shouldn’t – Go in a Coffee Can Portfolio

A thread from The $GEOFF Archives: From a “100-bagger” type perspective, the criteria are pretty simple:

1) Is it a small stock (probably a micro-cap, definitely a small-cap)? – We’re talking <$300 million market cap probably, but certainly like $1 billion or so – not multi-billions

If you read about how Warren Buffett applied Phil Fisher’s scuttlebutt approach, you’ll notice something interesting

He tried to understand the business.. like really understand the business When Buffett was interested in advertising stocks, he asked his advertising friends about the advertising business. He learned everything he could about insurance. He stood behind the counter at an Omaha restaurant and watched as people used their AMEX cards.

1/ How much is too much to pay for a great business?

What's the highest multiple you could afford to pay today and still earn a great return?

Let's walk through a hypothetical 2/ Say a stock compounds book value by 20% per yr for 20 yrs

This is equivalent to having a 20% after-tax ROC and always reinvesting 100% of the earnings back into the business

Let’s say you hold this stock for 20 yrs

What multiple can you afford to pay for this company?