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i own hpq - a modest business, but a money marker - but crushed on slowdown expectations

it is tough
to be morally pure and hold your ground
or make money
the only goal is the last one
in the old days, things like this would be solved eventually
not now - not in the days of Amazon, where you can do billions in sales
and not make any money

No comment on the Blame Amazon First theory but your HPQ experience made me think about this Ensemble Capital two part post: "The Risk of Low Growth Stocks."

The articles utilize their Prestige Brands investment as an example to explore the market effects of slow growth companies.

Even a small change, like a 5% business slowing to 4% (in perpetuity) requires the cash flow yield to jump from 4% to 5%. This means a change from 25x cash flow to 20x or a 20% decline in the price. Ouch.

And I don’t just mean it might exhibit some volatility, I mean it will perpetually be worth 20% less than you expected. This is real risk. The risk of permanent impairment to the value of your investment.

All investing is uncertain. The value of a stock is nothing more than the value of the future cash flows that the company will produce. When the growth rate of these cash flows is high, it is easy to see how volatile future cash flows might be and so the risk associated with that uncertainty is clear. But when the growth rate of a company’s cash flow is low, especially if the company otherwise exhibits strong signs of being a high quality, competitively advantaged business, it is easy for investors to be lulled into thinking they own a “safe stock”.


Okay, I lied. I will comment on Amazon and P/S stocks.

If a company is worth its discounted cash flow appropriately discounted to its present value, both the presence of great FCF or the absence of FCF today suggest very little about its valuation.

I can't value Amazon (although my gut tells me it's worth a heck of a lot); I can't value lots of software companies that seemingly trade on P/S (my gut tells me nothing). So what?

What I do have confidence is that today's market is largely being priced off cash flow and earnings. Of course some predictions will be substantially too positive and others will be too negative. Again, nothing unusual there.

I've been investing since the 1990s.

People complained about markets in 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018 and lo and behold even in 2019 although the year is less than 1/4 done.

It's the most consistent attribute of investing :)

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