Brief Truths
Nothing in this post is investment advice- companies mentioned are for example only.
What is briefly true today- and what is true forever? Most things that we know to be true become falsehoods (or vice versa!). Finding transitioning truths can provide lucrative opportunities, if done correctly. Although this post is finance-centric, this framework can be used outside of finance as well!
Here is a generally accepted truth: Apple is a great business. Below are some useful (pre-pandemic) metrics to back this up:
Return on capital of 40% (most public companies do 10%)
Growing 15%/year with plenty room to expand (most public companies do 10%)
Gross margins of 40% (most public companies do 30%)
Now ask yourself- is the truth that Apple is a great business brief or permanent? I have talked to people who say that Apple’s competitive advantages are impenetrable! Apple is the best business in the world! Apple will be around forever!
Well- forever's a mighty long time- and few things can evaporate quicker than a business model. Those metrics I just showed? They describe **Bed Bath & Beyond. **Yes, these numbers are indeed from Bed Bath & Beyond- albeit from 2011-2015. Interestingly, these numbers are similar to Apple’s metrics pre-pandemic!
If we take the same data and spread it out over a few more years, here is what happens to this Apple-like performer (the red toast-looking circle is what I showed you above):
3 year return on capital of ~3%
Growing -9%/year and “downsizing” operations
3 year gross margins of 34% (still holding up!)
So what was once briefly true- that Bed Bath & Beyond was a great business by any metric, became a falsehood. Maybe they will one day recover to their former “glory”, but nobody is arguing that Bed Bath & Beyond is a great business.
Investors need to ask: when will Apple start declining? Even if Apple continues to dominate 100 years from now, there will surely be a time when Apple starts to deteriorate. Not knowing these signs will get any investor in trouble!
Other Brief Truths
Service businesses are the best businesses
Software is the best business model in the world
Paying 20x revenue for companies is a good idea
I am sure you are questioning how this helps you. Well- the answer is that finding transitioning truths can be powerful. Tracking inflecting truths and falsehoods can make you a lot of money, if done right (which is the hard part!).