Rule #1 Finance Blog

With Investor Phil Town

PREDICTING A COMPANY’S LONGEVITY

From the Comments under the YHOO post:

Question Phil. (And thanks for answering the email I sent to you.)  QUOTE:  "Still, as you pointed out, it would be very difficult to predict that YHOO is going to be around for sure in 20 years."

How did we know this early in GE or IBM's lief [sic] that they were going to be around 20 years? How do we know Whole Foods is going to be around. I think with any company there is a bit of speculation don't you think?

Do we have to wait for a comapny [sic] to be around 20 years to know that it is a good company to invest in?

Here's what I told him:

Excellent question:  How can we know that a business will be around in twenty years?

It's all about the first three Ms.  And in this case it's most particularly about the Moat

And here's the correct question:  Do I know enough about Yahoo!'s
industry and business to be fine with this being my only investment, say, for the the next 20 years?  Like I'd put the money in and forget about
it.

To do that, the business has to be both predictable and durable since
I'm expecting it to continue to be a great business in twenty years.
The problem comes with trying to make that kind of a decision about a
technology business.

Technology changes can come out of nowhere and destroy what appears to
be a solid Moat.  That is a lot less likely to happen suddenly to
strong consumer brands, companies with switching monopolies, toll
bridge products, low pricing power or products protected by patents.

You've made the case for YHOO having brand and switching moats, but do
you understand how YHOO is making money and plans on making it in the
future? 

That's what I'd dig in on next if I were you.  I'd want to
really be sure that YHOO is not on the slippery slope with Google and
Microsoft up there ready to let loose some sort of technology avalanche.

Regarding GE and IBM: GE is such a huge conglomerate that I'd have to
be a lot smarter than I am to know how to predict their future, except
to just hope it's like the past.  And IBM –  another tech company that
ruled the world but didn't see the PC revolution coming.  And it's still
trying to catch up.

I'd say these kinds of businesses are pretty much advanced.  And as
attractive as the price to value looks to us, knowing the business and
industry well enough to be sure you've made a good call is more
important… because otherwise it's impossible to put a decent value on the
stock.

Now go play,

Phil