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The podcast is finally going somewhere
I started a podcast a couple of months ago with the main objective of it being a place where I could think aloud. Finally, after 30 episodes, I think I found an enjoyable format that’s in the line where I wanted the podcast to go. Here are the two pertinent episodes, hope you enjoy them:
Not all information is equally relevant. Investment books are much more important for me to retain. When I read these, I take notes. Annotations made with The Innovator’s Dilemma contributed to finishing the first (hopefully of many) notebook. I think it’s a good occasion to go over old notes and see if there’s any insight I haven’t yet shared here. Additionally, I haven’t absorbed much new information since arriving to Boston. With accommodation, the internship search, school and work, it has been a decently crazy week.
Note: If you are from Boston and would like to go for a cup of coffee, you can text me at +54 3585485456 (WhatsApp). I’d be more than happy to.
Philip Fisher, in his book Common Stocks and Uncommon Profits (1958), posed the following question:
“Does management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines has largely been exploited?”
Wow, two big implications here. Firstly, I believe Philip was one of the first investors to recognize that companies that aim for high optionality will more likely have longer runways than those who do not. Moreover, it seems as if he vaguely spotted the problem managers face (the innovator’s dilemma) and is very clearly looking for a management that doesn’t fear to disrupt themselves. Reinvention is a need in a world where innovation will certainly kill you given its time.
Moving forward, in chapter 11 Philip asks:
“Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?”
One of the answers he gives is that expanding margins by handling costs in an efficient way might be a decent indicator that the company’s strength is larger than that of its peers. Nonetheless, my notes include a particular point regarding patents, which links to another book. Philip writes that patents allow for higher margins temporarily, but that depending on them is a point of weakness. In Warren Buffett and the Interpretation of Financial Statements (2008), chapter 13, my perceived conclusion from Mary’s writing is that companies that invest a lot in R&D, and depend on it, have an inherent flaw in their competitive advantage, making them insecure for the long run. This is interesting, I ask myself:
How could a company like Zoetis, then, survive and thrive for so long? More importantly, why would I expect this to continue?
Buffett laid the foundation for my attempt to answer:
“A textile company that allocates capital brilliantly within its industry is a remarkable textile company – but not a remarkable business” 1985 Letter
He starts to give us a sense that industries have intrinsic fundamentals and companies cannot escape them. Similarly, in chapter 3 of The Innovator’s Dilemma, Clayton describes something I don’t yet fully understand. He says something like products, and the products required to building these, conform a ‘value network’, and the value network determines, in some way, the needed gross margin to compete in such universe.
Having said this, the animal health industry is, I believe, intrinsically designed for there to only be a few players, which should most likely be established ones. The average product here has a small addressable market, which makes it unattractive at an initial standpoint, gross margins are lower than in human health which makes it more difficult to compete in prices with generics, there is no big company focused on generics, competitors act rationally with what regards to generic pricing, you have patents protecting products over a decade, lifecycle innovation is more likely to come from the established firms, etc.
Taking the article to the last line of thought, the stock market is an almost perfectly oiled pricing machine. In chapter 8 of The Intelligent Investor, Graham writes:
“Any approach to moneymaking in the stock market which can be easily described and followed is, by its terms, too easy to last”
When you give this mechanism enough simulations, it will get to ‘intrinsic values’, which I believe is from where the market efficiency theory derives from. Nonetheless, the mistake authors made relied on not giving consideration to the fact that, over the short term, its psychology what prevails.
Nick Sleep and Buffett must have noticed this very early on, for which they opted to follow an unconventional path, thinking. Because of each person’s particular circumstances and accumulated knowledge, it is impossible for them to arrive to the same conclusions as the market, in the strict sense. If the individual in question knows enough, controls their emotions and is decently capable, thinking might be the best path forward for that person. Curiously, Buffett writes:
“A public opinion poll is no substitute for thought.” Jan, 1965
And Nick quotes Ayn Rand:
“No substitute can do your thinking” 2004 Letter
There’s infinite wisdom in that notebook. I wish I retained more of what it has written in it (by myself haha). Once I get completely settled and return to normal routine, I’ll get back to the hard readings and be bringing as many insights as I find. Hope you enjoyed the article and!
Note: Zoetis final research article will be published on Wednesday after the market closes.
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