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Advertising has two functions: make people aware of the product, and shift out that V straw and increase the perceived value a customer experiences.
If you can nudge V out farther than the cost required, I’d consider that to be a sound strategic expense.
“You never know the fight someone else is struggling with. You don’t know their circumstances, so be careful with your judgments.
life can be damned unfair.
“The first thing you have to examine is your own motivations for wanting to do a deal. Be truly honest with yourself about why you want to do it.”
Humans have a tendency to follow leaders who are bold. It must have been a survival mechanism of some kind.”
Prestige is an awfully stupid reason for M&A. Like a bad king, you create a larger empire but with poorer citizens,”
If you’ve had some recent success, you might think you’re on a hot streak. Many don’t appreciate the dynamics of luck and skill in complex systems. Your hot streak may have a lot less to do with your abilities than you think.”
“You can basically forget about revenue synergies where two businesses sell more just because they’re combined. It hardly ever happens, and never to the degree that’s projected. Businesses are rarely complimentary in that way.”
real cost synergies will come up short against overconfident projections. Deals fail in practice, but they never fail in projections.”
The first thing you must understand is that equity--stock--is like having your own currency. If you issue shares for an acquisition, it’s like printing your own currency. At the same time, you are effectively selling part of your business. Therefore, a sound rule of thumb is that you never issue shares unless you receive as much intrinsic business value as you’re giving up.”
could you say that if you issue shares for less than intrinsic business value, you are harming your current family of shareholders? And if you are able to issue shares at above intrinsic value, you might actually be benefiting them?”
“Never trust pitch books put together by investment bankers. It’s funny--they can give you precise numbers for what a business will earn ten years into the future, but they can’t tell you what their own business will earn next month.
“Others might only be looking to sell their business horses when they’re walking well, not when they’re limping. So always buyer beware.”
most deals benefit the target company’s shareholders at the expense of the acquiring company’s shareholders.”
CEOs are herd animals. They travel in packs and emulate each other, including when it comes to M&A. There’s a first-mover advantage to being early in the cycle because there are more higher quality targets, fewer competitors, and usually lower valuations early on. Beware buying anything late in the cycle when everyone wants in. Usually the biggest and most colossally stupid activity occurs late in the game, near the top.”
“What the wise man does in the beginning, fools do in the end,”
There exists an odd correlation between a city setting a new record for the tallest building in the world and that city’s real estate market crashing shortly thereafter. It happened with the Empire State Building in 1929, Sears Tower in 1973, Dubai in 2009.
“Ask yourself, is it a better deal to get the roof through acquisition or potentially building it yourself? Or even some other creative means.”
“You’ll overpay when bidding against others. Bidding wars are bad news for acquiring shareholders.”
“When engineers build a bridge that’s rated for 10,000 pounds, they only let trucks that weigh up to 5,000 pounds use it. There’s a built in margin of safety, just in case. You don’t go near the edge.”
“Imagine if I thought it was worth one hundred dollars, but I was wrong and it was only worth seventy-five. In order to leave myself a margin of safety, I’d only consider buying when I can pay fifty dollars. Then when I’m wrong, it can still work out OK.”
a company’s balance sheet should be run conservatively, even if it means slower growth.
there’s a redundancy to carrying extra cash and very little debt. Yes, it’s expensive to maintain
Well-run corporations serve a critical social function. They need to be financially strong enough to act as economic shock absorbers to protect employees, suppliers, and customers from the volatilities of capitalism. Free markets can do strange things to find the right price level.
You need a conservative balance sheet to be a healthy shock absorber. Business done well actually protects the little guys from natural fluctuations.”
“One of the things that’s missing today in corporations is a feeling of partnership between shareholders, the board of directors, and management. If more CEOs viewed their shareholders as business partners, they’d do things a lot differently.”
“One of your responsibilities as the CEO of a publicly traded company is to make sure partners who need liquidity are able to get it. You don’t know what’s going on in their lives and why they might need cash. Maybe they have a sick relative they’re taking care of.
partners should benefit from the business doing well, not by taking advantage of each other through opportunistic buying and selling.”
We buy back a partner’s shares and make sure those who really need the cash can access it without being harmed.”
Word choices impact our thoughts.
the total amount of cash a business generates in its lifetime could be a lot of different numbers based on what happens in the world. There’s so much that can go right and wrong. Anyone who says they have exact numbers about the future is dangerously overconfident.
“The higher the interest rate, the less that dollar ten years from now is worth.
even if we had a crystal ball and knew the exact quantity of cash that we’d get out of our business from here to eternity, different interest rate assumptions would make that pile of cash worth more or less today. You can start to see why interest rates have a big effect on asset values. They’re like the gravity of the financial world. They’re everywhere and always tugging.”
when interest rates are low, there’s less discount applied to the pile of cash, so the intrinsic value appears higher. Which in turn makes the prices of everything higher.
If anyone were to have a sense what a business is worth, it should be the CEO in charge. It’s one of your responsibilities as a steward of capitalism.”
We’re blind to our own circumstances.”
the endowment effect. It showed that we generally think the things we own are worth more, just because we own them.”
There are seasons and cycles--remember our humble pinecone? Reversion to the mean is incredibly powerful. It’s easy to fool yourself otherwise and commit suicide by extrapolation.”
almost everyone is doing dividends wrong,”
Most executives believe that once they pay a dividend, they have to keep paying it. Maybe even increase it a little every year. They think they have to give the shareholders their allowance to keep them happy. It becomes the price to rent capital and keep their shareholders at bay.”
“If you’re one of the partners in a successful business, you should want to keep as much of your money as possible invested there. That assumes the business is doing good things with the money, by which I mean earning high returns on invested capital and redeploying the money intelligently. Do you remember our lessons
“If you’re an investor, you want management to unlock the compounding machine inside the business. Then you have to do all you can not to take any money out of it. You want to keep your money tied up in this machine that feeds itself and keeps growing. Taking money out would be a terrible idea--including to pay a dividend.”
“Paying a dividend should be the last resort for a rebel allocator. It’s like a confession that they have a lack of attractive ideas.
In some instances, especially for an older, established company, paying a dividend could make sense. They may have a profitable business that simply can’t absorb new reinvestment. They’re out of other good opportunities and are sending the money back to owners. If that was the reasoning used, it’s very honorable to pay a dividend rather than have the hubris of reinvesting in value-destroying projects.
the revisiting of definitions is the beginning of wisdom,”
Successful capital allocation means converting inputs like money, materials, energy, ideas, human effort, into more valuable outputs. It’s that transformation process.” “That
“Capital allocation is baked into all of business, every decision. Like water surrounding the fish--we don’t notice until it’s pointed out to us.”
view capital as goods, both tangible and intangible, that were previously produced that aren’t directly satisfying a human need yet. Capital is whatever bits, atoms, or energy that are available to eventually produce something that delights a customer.
Without capital, we’d all be living hand-to-mouth, barely surviving. So the more we save as a society and invest in our capital, the more sticks we create, the more berries we can all have.
