Sustainability of business performance

Sustainability of business performance

Charlie Munger once said:
Frequently, you'll look at a business having fabulous results, and the question is: ' How long can this continue?' Well, there's only one way I know to answer that, and that's to think about why the results are occurring now - and then to figure out the forces that could cause those results to stop occurring.

We have learnt that there is no mystery to measuring business performance. The numbers will tell you whether the business is good, fair or bad. Neither is there any point in hopng that things will change.

Buffett makes the point with some humour: Think of it in terms of marrying some gal that's the girl of your dreams, and having another one and saying, 'If I send her to the psychotherapist for five years and hve some plastic surgery, well maybe it will work'.

A business may have a fabulous track record of performance, and the value based on it may make the price look cheap. However, the price will only be cheap if the performance criteria used to determine the value are sustainable. We must, as Charlie suggests, 'think about why the results are occurring now - and figure out the forces that could cause those results to stop occurring'.

When researching a company, the positive glare of the highlights tends to obscure the dim glow of the negatives. We must be aware not only of the positive manner in which a company's history and prospects are protrayed by management, but also our inherent desire to encourage optimistic expectations by placing excessive weight on positives.

Conversely, one should not become paranoid about negatives. For instance, if you were looking at two great businesses such as McDonald's and The Coca-Cola Company, you might be deterred by all the publicity about how fast food and carbonated drinks are major contributors to obesity and heart problems. These are not new concerns, so examination of the accounts will tell you whether they have had any effect on revenue.

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