There are three big questions that I always return to when investing in companies big or small, public or private:
1. Does this solve a time, money, or meaning problem?
From a first principles standpoint, time, money, and meaning are the only problems we humans have. Thus, every company at its core must solve a time problem, a money problem, or a meaning problem for its customers.
- Google is a time company. Ask it a question. It gives you the right answer faster than anyone else.
- For Tesla to win big, it needs to be a money company. Transportation that’s cheaper per mile than anyone else.
Google was notorious for limiting the amount of words on its homepage. No distractions that take up time. Costco has always avoided taking more margin on its retail business because it would erode its ability to win on the money problem. They still sell $1.50 hot dogs, even in this time of inflation.
Apple started as a time company, somewhere became a meaning company (late 90s), and now, I think, is back to a time company. Meaning companies have a hard time maintaining on mass adoption.
2. How long until this company generates its valuation in FCF?
If the value of an asset is the sum of its discounted future cash flows, then a great investment must generate far more future cash flow than is priced in at the time of investment.
The power of the question extends even better to what not to invest in. As a general rule, if there’s no reasonable scenario where a company is even paying close to half its valuation back in free cash flow over the next decade, it probably won’t be a good investment.
3. Would I work for this company or founder?
Investors rely on management to understand where opportunity exists to drive sustained growth. This requires that management build effective strategies to capture the opportunity and to excite and retain talent to execute. The longer your investment horizon, the more important the dynamic.
The most instinctual way to solve the problem: ask yourself, would I work for this company or founder? Competence may be measurable on track record, but trust, believability, likability — all these are intangible.
If you’d quit your job and go into the trenches with some founder, chances are that other smart people would too. The most intelligent of those make sure they ask all three of these questions.