How Timing Uncertainty of Reinvestments Impacts Companies' Value Creation
Margin of safety: focus on truly high ROIIC and IRR companies that can keep reinvesting
Hi fellow Tortoise!
During this new bi-weekly update, we’ve talked about:
Some Q2 earnings reports, including names outside our coverage (and why they’re part of the “too hard pile”). Specifically, how today’s uncertainty and macro volatility impacts or doesn’t impact management’s mindset to keep reinvesting at great returns to become even better businesses.
Insights from McKinsey on allocating capital. We’ve shared our views on excess cash management, moving outside the circle of competence, and when reinvesting for future growth at tempoerarily lower profitability makes sense.
Finally, we’ve elaborated on a simple yet powerful framework on why we choose high ROIIC (ROIC) companies reinvesting for future growth, and the impact of cyclicality and/or delayed timing of reinvestments on their intrinsic value creation. Margin of safety is found in high IRRs over the whole cycle, rather than trying to time reversals in the cycle and/or valuation. It’s a very relevant topic in today’s market, where investors are obsessed with the short-term outcomes of earnings reports and headlines on skyrocketing stocks.
On that topic of short-term thinking, we wanted to publicly endorse the work our fellow friend has been doing on his Substack. We're incredibly impressed with the work our friend has been doing on his Substack. We had an enlightening call with him yesterday and were genuinely struck by his humility, rational perspective, and entrepreneurial spirit. You know you're in for profound discussions when an investor's reading list includes Ancient Roman and Greek philosophers. In just about two and a half months, his Substack has exploded from 300 to 7,700 subscribers with only a dozen posts.
He's on the verge of making an exciting announcement later this weekend, and we've already committed to becoming a paid subscriber (it's the only Substack we subscribe to, by the way). If you're aiming to become a smarter investor and a more well-rounded individual, his Substack is well worth your time and money. We want to be clear: there's no "quid pro quo" here. We're receiving no financial compensation for this reference; it's simply a sincere appreciation for the insights he's been sharing.
Reading should be a calming, challenging, and intellectually enriching activity. Unfortunately, the current financial newsletter landscape is flooded with publications focused on clickbait and quick returns. Even more concerning, many of these are one-way streets. Disagree with their views and you're often blocked, leaving no room for genuine discussion. The Intellectual Edge stands out as a refreshing, and above all highly objective, alternative.
Below: the slide deck of this week’s presentation, as well as the transcript and video itself.