Case studyDecision principleCrises and market historyRiskCapital allocation
In a crash, long-duration cash flows move far less than the price, if you stay solvent
Bruce Flatt · Bruce Flatt's March 2020 update to Brookfield shareholders · 2020
The idea
Flatt's March 2020 update opens with liquidity before any reassurance: about twelve billion of largely undrawn credit lines, five billion of liquid assets, and no near-term corporate maturities. Only then does it argue the case. The value of a toll road or an office tower's cash flows over decades had changed far less than the share price had in three weeks, provided the owner could stay solvent through the gap. The structure of the argument is the point: the right to be long-term depends on the balance sheet, so the letter proves the balance sheet first.
State the liquidity first, because the argument that prices overshoot value is only available to those who can wait.
When it works
Any crisis communication, any question about buying in a crash, and infrastructure or real asset valuation.
When it may fail
A company's cash flows can also change in a crash, and the letter was written before the length of the pandemic was known. The method is sound; the forecast was a judgement.
How to use it
Before making the overshoot argument about any company, list its maturities and liquidity for the next two years. If the list is short, the argument is available; if not, the price may be right.
Where it came from
Letter Bruce Flatt's March 2020 update to Brookfield shareholders · Bruce Flatt
What the source says. Flatt opens with about $12 billion of largely undrawn credit lines, about $5 billion of liquid assets and no near-term corporate maturities, then argues the value of long-duration cash flows had changed far less than the share price, provided a company stays solvent.
Connected ideas
Worth knowing first
The duration and covenants of a loan matter as much as the amount of leverageAsk when the debt comes due, what it can reach, and what trips it, before asking how much there is.
Says something similar
When investing, pessimism is your friend and euphoria the enemyThe price of risk tracks the mood, so the useful time to buy is when the mood is worst, and the dangerous time is when it is best.
Concepts
Put it to work on L3VLUP
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