Circle Of Competence Issue #20
Second quarter fund letters are starting to come out and Q2 earnings season is kicking off! There will be some wonderful commentary on various sectors and trends in the markets for those interested. They will be at the bottom of the newsletter in 'Dept. of Letters'. Enjoy!
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DEPARTMENT OF GENERAL FINANCE
This is a classic discussion of quantitative vs. qualitative data and how collecting a lot of quantitative data but missing key qualitative points can give the wrong picture of reality. The masters of investing all have solid grasps on the quantitative aspects of business. But the real greats separate themselves from the rest by understanding the qualitative drivers of a business that drive long term returns. As Buffett has said, the sure money is in quantitative investing, but the big money is in understanding qualitative traits of businesses.
Although this article was written 6 years ago, all of the general principles given by Tren Griffin hold up because they are timeless wisdom from Uncle Charlie (Munger). I did think that it was a bit ironic that Tren wrote how strong ESPN’s moat was at the time. How times have changed! This is a great example of how technology can change so swiftly in less than a decade... which is the exact reason Buffett and Munger do not like to invest heavily in the sector because they are looking 10, 20+ years out. It took little more than half a decade for ESPN to be reduced from a powerhouse to its current form.
I like to track big investors like Warren Buffett and other Capital allocators such as the total capital sitting on the sidelines in private equity because these are solid proxies for market valuations. When valuations are attractive, the dry powder tends to shrink and money gets put to work, but when they are frothy, the opposite occurs. The record amount of cash sitting out the current market environment is sending a fairly clear signal of very low opportunity costs.