The news that Berkshire Hathaway bought a stake in Domino's Pizza provides an opportunity to apply the process of expectations investing as this company served as the case study in the revised and updated version of Expectations Investing (co-authored with Al Rappaport). 2/ We discuss Domino's Pizza in chapters 5-7, but the data and discussion are now three years old. But the book also has a website with tutorials, including one on estimating price-implied expectations: expectationsinvesting.com/online-tutoria…

Some of my favorite books from 2023 (in no particular order):
Outlive by @PeterAttiaMD
Changed some of my behaviors as a result of reading it Prisoners of Geography by @Itwitius
Helps explain some of the geopolitical issues the world faces today

We have a new report out today, "Birth, Death, and Wealth Creation," on the the demographics of public companies and their patterns of wealth creation.
morganstanley.com/im/publication… We focus on the last half century of results in the U.S. and review the “births” and “deaths” of public companies and discuss how they have changed the composition of the market. There are fewer public companies today than the 1990s, mostly because of the decline in micro caps.

We have a new report out today. This one extends our analysis of the return on invested capital (ROIC) for public companies in the U.S. and updates the data to cover the years 1990 to 2022. morganstanley.com/im/publication… 2/ We also examine the relationship between *changes* in ROIC and total shareholder returns (TSRs) and generally find that increases in ROIC are associated with attractive TSRs and decreases with poor TSRs.

Following Sam Zell's recent passing, it's worth revisiting his interview in the Graham & Doddsville newsletter from 2012. Some useful thoughts: @CenterDodd @Columbia_Biz
www8.gsb.columbia.edu/sites/valueinv… 2/"I start by not paying much attention to the market. I think the Street reflects the value of the last share traded, but the true value of the asset may be more or less than what's indicated publicly. "

During the podcast with .@tferriss, I mentioned a reading list I suggested for my son (@amaub) who was taking a gap year before going to college. I have received a lot of requests for the books on that list. Alas, neither of us saved it, but we were able to recreate a lot of it: So here goes (in no particular order):
* Influence: The Psychology of Persuasion by @RobertCialdini
* Thinking, Fast and Slow by @kahneman_daniel
* How the Mind Works by @sapinker (Andrew got to take his course)

We have a new piece out today, "Confidence: Methods to Assess Confidence Under Uncertainty" that emphasizes the distinction between probability and confidence. This can be useful for investors morganstanley.com/im/publication… 2/ This piece is based on work by Jeff Friedman @dartmouth and Richard Zeckhauser @Kennedy_School. They describe three relevant dimensions that may complement the probability assessments, and sharpen the ranking of opportunities, for investors. scholar.harvard.edu/files/rzeckhau…

We have a new report out today, "Cost of Capital: A Practical Guide to Measuring Opportunity Cost." The cost of capital is notoriously difficult to pin down, but there are some ways to be sensible and practical about it morganstanley.com/im/publication… 2/ the cost of capital is a little like hygiene: there's not a lot of upside to getting it right but there's a lot of downside in getting it wrong. The trickiest part is the cost of equity, but there are some market touchstones that can guide the judgment

Capital allocation is one of management's prime tasks. Today we are publishing our most comprehensive research ever on capital allocation: "Capital Allocation: Results, Analysis, and Assessment."
morganstanley.com/im/publication… 2/ Capital allocation is a skill that few executives have been trained to do -- and it is not easy even under the best of circumstances. John Graham, from Duke, provides excellent insight into how execs think about it:
onlinelibrary.wiley.com/doi/epdf/10.11…

Here's a quiz. Name the author and where s/he wrote this (without looking it up): "A business that sells at a premium does so because it earns a large return upon its capital; this large return attracts capital, and, generally speaking, it is not likely to continue indefinitely." 2/ "Conversely in the case of a business selling at a large discount because of abnormally low earnings. The absence of new competition, the withdrawal of old competition from the field and other natural economic forces may tend eventually to improve the situation and restore...

Attention valuation fans: we have a new report out today on return on invested capital (ROIC). It updates and extends work from 2014.
morganstanley.com/im/publication… 2/ We discuss how to calculate ROIC and explain how it is connected to free cash flow, economic profit, and growth. There have been numerous accounting changes in recent years that need to factor into the calculation.

We have a new report out, "Market Share: Understanding Competitive Advantage Through Market Power"
morganstanley.com/im/publication… 2/This report starts by examining market share and asks whether market share, and related concepts, can help inform the analysis of industry structure. This goes on a journey that includes life cycles, market share, concentration, markups, intangibles, and “superstars.”

The confusion and sloppy thinking about share buybacks is remarkable. The proposed excise tax on share buybacks is further evidence of this.
barrons.com/articles/stock… 2/ In an efficient economic system, you want capital to flow from industries and companies where there is less promise to create value to those industries and companies where there is more promise. Returning capital to shareholders is a means to achieve this.

Al Rappaport and I recently published a paper, "How to Settle the Corporate Purpose Debate." We start by noting that shareholder and stakeholder advocates are unlikely to find common ground any time soon. @Columbia_Biz onlinelibrary.wiley.com/doi/epdf/10.11… (unfortunately behind a paywall) 2/ We share the four roadblocks responsible for the impasse: 1/stakeholders and shareholder proponents interpret the law differently; 2/companies adopt lofty purpose statements that seek to engage and motivate stakeholders but have little to say about the company's priorities;

I thought this conversation between @collision and Stan Druckenmiller was outstanding. Whether or not you agree with everything Stan says, there are important lessons for all investors. Here are some things I would mention: 2/ Druckenmiller is a very skillful user of base rates. He does not use the term but does use the concept. Importantly, he is keenly aware that nothing is set in stone, so is very mindful about when certain base rates are likely to be useful or when they're not.

We published a new piece yesterday, "New Business Boom and Bust: How Capitalism Experiments," about how industries develop. This pattern has been highlighted by @wolfejosh in the past.
morganstanley.com/im/publication… 2/ We start by noting that a child's developing brain creates a huge number of synaptic connections, reinforces the ones that are used and prunes the ones that aren't. This appears wasteful, but creates a network of neurons that functions well in a wide range of environments.

The fourth and final part of what has changed over 30 years of teaching Security Analysis @Columbia_Biz and @CenterDodd. The course has four sections - the last is on decision making (i.e., how do you make good decisions under uncertainty?) 2/ This module was not part of the course originally. Then it became clear that the tools we teach are the ante to play and that what separates good from great is decision making. Here's my first report on the topic (25 years old!): hurricanecapital.files.wordpress.com/2015/02/fof2.p…

Part three of what has changed over 30 years of teaching Security Analysis @Columbia_Biz and @CenterDodd. The course has four sections - the third is on competitive strategy analysis (i.e., is this a good business with a sustainable competitive advantage?) 2/ To reiterate one of the early lessons from Al Rappaport: valuation and competitive strategy analysis go together. You can't value a business intelligently without understanding its competitive position, and the measure of a good strategy is that it creates value.

Part 2 of what has changed over 30 years of teaching Security Analysis @Columbia_Biz and @CenterDodd. The course has four sections - the second is on valuation (i.e., how do we value a business--including integrating competitive advantage?) 2/ To start, since the beginning I have discussed what I learned in Creating Shareholder Value by Al Rappaport. The three big lessons: a/it's about cash not earnings; b/strategic analysis and valuation go together; and c/stock prices reflect expectations. amazon.com/Creating-Share…

Earlier this month I wrapped up my 30th consecutive year of teaching Security Analysis @Columbia_Biz. I am often asked how the curriculum has changed over the decades. Here are some thoughts. The course has four sections - the first is on markets (i.e., are markets efficient?) 2/ I have always taught the efficient market hypothesis, in large part because it provides a valuable touchstone for thinking about results. That said, it is useful to distinguish between "prices are right" and "no free lunch." See work by @R_Thaler. nicholasbarberis.github.io/ch18_6.pdf

We released a report yesterday called "Wealth Transfers: Redistribution of Value via Capital Allocation." morganstanley.com/im/publication… Companies can affect wealth in a couple of ways. First, they can make investments in their operations that earn in excess of the cost of capital. These pass what Warren Buffett calls the $1 test (NPV+). The idea is that a $1 in investment is worth more than a $1 in the market.