“This Time It’s Different”

There’s a line in invest­ing, usu­al­ly attrib­uted to Sir John Tem­ple­ton, that the four most expen­sive words in the Eng­lish lan­guage are: “This time it’s dif­fer­ent.”

I think about that one a lot.

Long-time lis­ten­ers to the QAV pod­cast will remem­ber that one of Aus­trali­a’s most respect­ed finance com­men­ta­tors once said exact­ly those words to us, on air, with a com­plete­ly straight face. He was wrong. They almost always are.

The phrase gets pulled out when­ev­er a new tech­nol­o­gy, a new eco­nom­ic par­a­digm, or a new busi­ness mod­el is being sold as the rea­son it’s now safe to throw out the rule book. AI today. Cryp­to in 2021. The “new econ­o­my” in 1999. The Nifty Fifty in 1972. Rail­roads in 1869. The South Sea Com­pa­ny in 1720. Tulips in 1637.

We don’t buy it.

As Tony likes to say, his­to­ry may not repeat but it rhymes. (He stole that from Mark Twain, who almost cer­tain­ly nev­er said it. Either way, the point holds.)

There are always new busi­ness mod­els and par­a­digm shifts that are the flavour of the month. So far, none of them have fun­da­men­tal­ly changed the basic prin­ci­ples behind invest­ing — which is to find com­pa­nies that are well run, that know how to make a dol­lar, and to only buy them when you can get them at a dis­count.

I Was There For The Last One

Tony and I were both around for the dot-com boom in the late 90s. We remem­ber the hype. We remem­ber being told all the rules were obso­lete because the inter­net had changed every­thing.

And here’s the thing: it had. Sort of.

The inter­net real­ly did rev­o­lu­tionise large parts of the econ­o­my. Ama­zon and Google emerged from that era and pro­duced tril­lions of dol­lars in share­hold­er val­ue. But that did­n’t mean every dot-com start­up was a good invest­ment. Most of them were spec­tac­u­lar­ly bad ones.

Between March 2000 and Octo­ber 2002, the Nas­daq fell from 5,048 to 1,114. A drop of about 78%. Pets.com, Web­van, eToys, Boo.com, Koz­mo, Flooz — all vapourised. Com­pa­nies that had been val­ued at bil­lions on the strength of a slide deck and a clever URL went to zero.

I was per­son­al­ly invest­ed in a num­ber of those star­tups. Friends of mine were run­ning and float­ing them dur­ing those heady days, with huge dreams of build­ing dot-com empires that all end­ed in dust like the king­dom of Ozy­man­dias.

I had a front-row seat in Sil­i­con Val­ley dur­ing those years. And I can tell you with con­fi­dence that the loud­est voic­es sell­ing the future had no more idea whether they were right than you or I did. They just had more con­fi­dence in pro­mot­ing their ideas. That’s not insight. That’s mar­ket­ing.

When peo­ple get caught up in the hype of a par­a­digm shift, it’s easy to for­get that the peo­ple sell­ing them the brave new world are mak­ing it up as they go along.

So What Is A Quality Business?

The ques­tion every “this time it’s dif­fer­ent” pitch tries to dodge is this: how do you tell the real busi­ness­es from the hype machines?

Is it the qual­i­ty of the slide deck? The pro­mo­tion­al video? The amount of ven­ture cap­i­tal raised? The mar­ket cap the day after the IPO?

Obvi­ous­ly not. We can all rat­tle off a list of very flashy, very splashy com­pa­nies that did­n’t sur­vive their own hype cycle.

A ven­ture cap­i­tal­ist once told an audi­ence I was sit­ting in, back in the late 90s: “A big vision and 50 cents will buy you a cup of cof­fee.”

What mat­ters is exe­cu­tion. Can you turn that vision into a real busi­ness? And the only hon­est way to answer that ques­tion is to look at the out­put.

The out­put takes the form of finan­cial reports. What did the busi­ness actu­al­ly pro­duce in the last 12 months? Two years? Three years? Five years?

That’s where the rub­ber meets the road. And it does­n’t mat­ter what tech­no­log­i­cal rev­o­lu­tion or busi­ness mod­el inno­va­tion is sup­pos­ed­ly dri­ving your sec­tor. At the end of the day, for a com­pa­ny to be a suc­cess­ful invest­ment, it needs to be mak­ing mon­ey. Real mon­ey. The kind that shows up in the cash flow state­ment, not the kind that lives in a pitch deck.

Why We Anchor On Operating Cash Flow

This is why QAV’s pri­ma­ry val­ue met­ric is oper­at­ing cash flow. Not earn­ings. Not adjust­ed EBITDA. Not “annu­alised recur­ring rev­enue at scale.” Oper­at­ing cash flow.

Cash is hard­er to fake than almost any oth­er line on the finan­cial state­ments. A com­pa­ny can tell you a beau­ti­ful sto­ry about its future. It can man­age its earn­ings with­in account­ing rules. It can find cre­ative ways to describe its loss­es. But it has a much hard­er time invent­ing the cash that phys­i­cal­ly lands in its bank account each quar­ter.

When AI is the next big thing — and right now, it very much is — the same rules apply. A hand­ful of real busi­ness­es will emerge from the cur­rent cycle and pro­duce cash for decades. Hun­dreds more will look iden­ti­cal from the out­side, until the music stops.

The QAV check­list does­n’t care which sec­tor is in vogue. It cares whether the num­bers stack up.

That’s why we don’t get caught up in “this time it’s dif­fer­ent.”

Because every time, it isn’t.

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QAV Myth Killers is a week­ly col­umn in the QAV newslet­ter, tak­ing apart a piece of
invest­ing con­ven­tion­al wis­dom. Read the series, or
get it by email every Fri­day.

Gen­er­al advice only. Space­craft Pub­lish­ing Pty Ltd
trad­ing as QAV is a Cor­po­rate Autho­rised Rep­re­sen­ta­tive (CAR 001292718) of MF & Co.
Asset Man­age­ment Pty Ltd (AFSL 520442). This is gen­er­al infor­ma­tion and does not take your
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