My family and I saw what is said to be the final installment of the 30-year Mission Impossible movie franchise this past weekend. Some of the marketing for the movie leading up to its release touted “filmed for IMAX.” So naturally we couldn’t just watch it in a standard movie theater. The on location signature stunts in the IMAX format reminded of yet another story told by Jim Collins in Great By Choice about David Breashears and his team, who in 1996, became the first ever film crew to shoot a documentary about reaching the summit of Mt. Everest on an IMAX camera, which weighed 42 pounds, referred to as “The Pig.”
The documentary and its creation is a tale of courage, determination, and most notably, preparation against uncertainty and unfavorable conditions—similar to our current investment climate—as described by Collins and his team in the chapter called “Leading Above the Death Line.”
What separated the IMAX crew from other groups ascending Everest at the time was that their leader, David Breashears, constantly asked What if? questions, channeling his worry into extreme preparation with a mindset to always expect the unexpected. Breashears and his crew ensured that they maintained a healthy, if not an irrational margin of safety, bringing extra supplies and oxygen canisters sufficient for more than one roundtrip to the summit. Even though it meant a much heavier load to carry up the mountain, the added cost and effort was viewed as a net benefit should things go awry along the trek. Other climbing teams on the trail at the same time were not as prepared unfortunately, which led them to take undue risks, resulting in 8 deaths when a severe storm on May 10-11, 1996 hit high on the mountain. Breashears and his team, according to Collins, understood deeply that the only mistakes you can learn from are the ones you survive.
So how do we screen for companies that behave like a highly-prepared crew of expeditioners that’s about to climb to the top of Mt. Everest?
As the team at UVstocks.io works to pinpoint the next generation of great companies, specifically small caps within the Russell 2000, that are in the early stages of tremendous outperformance as compared to their peers and the broader market, we’ll continue to leverage the empirical and qualitative insights derived from Collins and his team’s research that span multiple decades and several books.
Case in point, Collins and his research team concluded after reviewing 300 years of public company balance sheets that the greatest of companies (i.e., 10xers) that outperform during uncertain, unstable and chaotic times carried lots of extra “oxygen canisters”, up to 10x cash-to-assets. In fact, the data shows that the following fundamental financial ratios, centered on cash and debt, were statistically better for the best performing companies relative to their comparison counterparts throughout their dynastic eras—the time period where the 10xers significantly outperformed the general stock market—and even during their early years from IPO to 10 years in.
Current ratio = (current assets)/(current liabilities)
Cash to total assets = (cash and cash equivalents)/(total assets)
Cash to current liabilities = (cash and cash equivalents)/(current liabilities)
Total debt to equity = (long-term debt + current liabilities)/(stockholders' equity)
Long-term debt to equity = (long-term debt)/(stockholders' equity)
Short-term debt to equity = (current liabilities)/(stockholders' equity)
“Financial theory says that leaders who hoard cash in their companies are irresponsible in their deployment of capital. In a stable, predictable, and safe world, the theory might hold; but the world is not stable, predictable, or safe. And it never will be.” — Jim Collins
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P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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