The Importance of the Certainty of Cash Flows
I recently had a post that drew an important parallel between the investing process and some thoughts on entrepreneurial strategy from Steve Blank. Here’s a quick summary: Blank proposes that Customer Development is a superior process as compared to Product Development. Customer Development revolves around the idea that there needs to be an underlying demand (i.e. customers’ needs) that you can successfully address with your good or service in order for the business to be successful. Similarly, a successful investment relies on the idea that the business has unmet/potential demand that it can capture more effectively (and cost effectively for the investor) than competitors. This includes future demand of current products, as well demand in new product markets.
What this essentially boils down to, in both entrepreneurship and investing is the certainty of future cash flows. I’ll elaborate a bit:
Where Do We Stand?
As of right now, Brent Crude is down 43.7% year over year. This has been a result of a massive supply glut, due in large part to the fracking boom we’ve seen in the United States. With Saudi Arabia unwilling to cut production, the unconventional producers that operate with much higher breakeven points have struggled. As a result, the rig count is down 33% since a year ago. The effect of falling oil prices has been widespread, some of the results include:
- Increased discretionary spending (the drop in prices is like a tax cut)
- Oil importers have saved a lot of money. It was recently announced that China will be saving about $100 billion in just six months. Exporters have not fared as well.
- Just like how importers benefit on the macro side of things, companies that have energy as an input price have benefitted. A recent article did a nice job of laying out the effect it’s had on the airline industry. Delta, for example, will save an estimated $2 billion in 2015. That’s nearly 5% of the company’s revenue for the trailing twelve.
- The energy sector has not fared so well. Exxon Mobil is down almost 20% since July. Others have suffered even more. Chesapeake Energy is down more than 40% in the same time period.
- As a result of the drop in crude prices, inflation has been low. This poses an interesting issue for the Fed that has been well covered in recent months.
Most of this has been discussed in hundreds of articles of the course of the past few months, so I’ll focus on what some of the potential scenarios we could see unplay are:
Four Steps to the Epiphany, the renowned entrepreneurial handbook by Steve Blank, tells us a lot about the investing process. In his book, he claims that what successful startups do differently from the failures is that they identify their customers’ needs and the market that has demand before actually creating or shipping the product. He calls it Customer Development, opposed, of course, to Product Development. The point is that the underlying demand has to be there in order for the venture to work. Remarkably, new corporate product developments suffer similar fates if attention is not paid to the customer beforehand. Brilliantly, Blank writes:
I just wanted to make a quick post to notify any visitors to this site of why it seems so vacant. I’ve had it for quite some time, but there’s only a few posts. The reason for this is that I am writing at Seeking Alpha (see my articles here) to build a following, gain valuable feedback from the editors, and create more of an income stream than I would be seeing from this website. I plan on launching my free newsletter in early 2015. To learn more, head over to the “Newsletter/Investing Strategy” page. Thanks!
On January 27th, Apple (AAPL) reported earnings to the public, and it fell about $45, a loss of 8%. Clearly, the market wasn’t very happy with what Apple had to share. And to me, it’s quite unclear why.
Throughout 2013, the Dow reached a new all time high multiple times. With this type of a bull market, investors begin to struggle to find stocks that they can “buy low” and eventually “sell high”. Although valuations are continually rising, business prospects in America have been improving as well, as many companies increase their earnings. In this article, I will give two examples of stocks that still have room to grow: Apple and Cisco.