A 36 Month Investment Lesson

During the end of 2025, creeping up till today, the time I am writing this, I had realized a large flaw in my investment philosophy. Despite listening to and reading a bunch of materials on famous investors such as Warren Buffet, Charlie Munger, Peter Lynch, Monish Pabrai, Guy Spier, Terry Smith and recently François Rochon, I had far great of a confidence, thinking that picking the right business was easy. Coming from few courses taken in university relating to corporate finance and valuation had made it seem way too easy. Just plug some numbers and assume certain assumptions, BOOM, you get the estimated valuation of an entire enterprise. 

Obviously, this was a very wrong and flawed way that we are being taught. It is not the fault of our lecturers but rather the material that is being transmitted. It makes finance seems like a black and white kind of exercise. My best example of detrimental flaw within the corporate valuation class is the going concern assumption. In our valuation models we plug in that terminal growth rate should equate to that of the country’s  GDP growth rate. The fundamental flaw within this assumption is the assumption that businesses, regardless of their economic qualities, grow indefinitely. This is a very wrong assumption especially  in our high-paced capitalist market today. Many business good and bad have went bust. Disruptions can lead to many business to abandon their position in the market. In a capitalist economy, most business do not survive more than couple decades, let alone 100 years. Despite this, we are taught that all businesses deserve a terminal growth rate above 0%. This is not to say that all businesses are going bust but rather only a few great business with great economic moats and qualities are deserving of the assumption of positive terminal growth rate. 

Another related flaw is my attachment to numbers. I would spend most of the time researching on their financial numbers and gathering data to forecast. This would eat up a lot of the time as I would often adjust the numbers every time a dataset would change. For instance, if the US fed fund rate (FFR) changes, my whole valuation would NEED to change because the FFR would shift the risk free rate calculation part in the weighted average cost of capital (WACC) section of my valuation model. So my focus was on the numbers. I really wanted to polish the valuation models. The problem here is, your valuation “forecast” will probably not materialize the way you entailed it in your valuation forecast. Management of the businesses themselves do not know the right growth rates or margins let alone a retail investor who does not have additional information but that which has been made public. Therefore, it is my belief that investors should not focus on forecasting the numbers but rather study the dynamics of the business model and the sustainability of their numbers. A great business with a “great economic moat” will most likely continue to compound their earnings indefinitely, sustaining their great numbers at the same time. This is where investors must focus, whether the great financial performance can be sustained for decades.