From: acquiredfm
As an investor, two primary skills are essential: the ability to assess a company’s future potential and the understanding of its current market worth relative to its selling price [00:00:00]. All equity investments are fundamentally valued by the discounted sum of their future cash flows [00:00:23]. This valuation requires judgments about a company’s future, regardless of how stable it may seem [00:00:43].
The Nature of Value and Disruption
Even seemingly unassailable companies can face disruption [00:00:50]. Newspapers, once considered impregnable businesses with strong moats, serve as a prime example [00:00:55]. They had local monopolies, low prices, and consistent demand for advertising, including local movies, want ads, and car ads [00:01:14]. Their one-day shelf life ensured repeat purchases [00:01:26]. Yet, within 20 years, most companies in this industry are struggling for survival [00:01:30].
The rapid shift in consumer behavior can seem unimaginable before it happens [00:01:38]. For instance, predicting the decline of newspapers due to the internet’s rise would have sounded irrational [00:01:46]. Similarly, foreseeing a Chinese short-form video company (TikTok) disrupting Facebook’s consumer attention, despite its acquisition of Instagram, would have been met with disbelief just a decade ago [00:02:07].
Accelerated Change and Durability
Technological adoption has significantly accelerated, leading to a reduction in the durability of companies compared to previous eras [00:02:33]. In 1950, one could confidently identify many businesses expected to remain consistent for a decade [00:02:47]. Today, that number is much lower, as businesses constantly need to continuously evolve, fend off competition, and entrench their moats [00:03:00]. Very few businesses can succeed today without active management [00:03:18].
In earlier decades, like the 1950s, 60s, and 70s, the world felt more stable, with a consistent backdrop for economic cycles [00:03:21]. Today, change is constant and rapid [00:04:05].
Implications for Valuation and Opportunity
The increased uncertainty regarding future disruption and the reduced permanence of competitive moats raise a fundamental question: should companies be valued less due to these factors [00:04:09]?
This evolving landscape presents a double-edged sword:
- Risks: Without proactive management, companies are more susceptible to disruption [00:04:28]. The notion of a business staying consistent without minding of the ship is largely outdated [00:03:10].
- Opportunities: For companies that leverage their competitive advantages and use them to enter adjacent markets, launch new products, or expand geographically, the potential for value creation has never been higher [00:04:35]. The internet, unlike local newspapers, enables businesses to address global markets, significantly expanding their reach [00:04:58].
Therefore, while the future is more uncertain, the potential for growth and expansion for adaptable companies is also greater. When considering what an investment is selling for, it is crucial to assess both the inherent risks of a rapidly changing market and the dynamic opportunities for value creation.