Modern Value Investing W/ Jose Mayora

Why It Matters

Understanding capital allocation and ROIC redefines value investing, enabling investors to capture hidden upside in growth‑oriented firms and avoid overpaying for unrealistic expectations.

Key Takeaways

• Capital allocation drives true value more than low valuation ratios.
• Assess cash‑flow use: reinvestment returns outweigh simple cash generation.
• Modern value investing includes high‑growth firms with superior ROIC.
• Question optimistic assumptions; overvalued stocks hide unrealistic growth forecasts.
• Identify sustainable reinvestment opportunities to ensure long‑term compounding.

Summary

The video features Jose Mayora, author of *Wall Street's Blind Spots* and founder of Dvita Capital, discussing a modern approach to value investing that emphasizes capital allocation over traditional low‑multiple screens. Mayora argues that true value lies in buying assets below intrinsic worth, regardless of a company’s growth stage, and that investors must scrutinize the assumptions embedded in any valuation model. Key insights include the need to evaluate how firms deploy cash flows—whether through high‑return reinvestments, share buybacks, or costly acquisitions—and to focus on return on invested capital (ROIC) as the primary driver of compounding. Mayora highlights that low price‑to‑earnings or price‑to‑book ratios alone can be misleading, and that high‑growth companies can be value plays if their reinvestment opportunities generate superior returns. He illustrates his thesis with Apple’s evolution from iPod profits to the iPhone and subsequent high‑ROIC projects, and Amazon’s relentless reinvestment in cloud and logistics that justified premium valuations years before profitability. These examples underscore that assessing capital allocation decisions is essential to uncovering hidden value. For investors, the implication is clear: broaden screening criteria beyond traditional value metrics, prioritize sustainable ROIC, and remain skeptical of optimistic growth assumptions. This framework can reveal undervalued opportunities in both mature and high‑growth sectors, reshaping portfolio construction in a capital‑intensive era.

Original Description

The typical definition of Value Investing: Buying an asset for less than it’s truly worth. But according to this week’s guest, Jose Mayora, the concept is widely misunderstood.

Too often, value investing is associated with older, slower companies, think utilities, and traditional metrics like low price-to-earnings or price-to-book ratios. But those alone don’t define value. Every valuation comes with a set of implicit assumptions, and the real skill lies in unpacking them and deciding whether they’re realistic.

In fact, some of Jose’s best-performing investments would never have been labeled “value plays” by conventional standards. Instead, he describes his philosophy as a modern take on value investing. His book, Wall Street’s Blind Spots, explores this idea in depth.

Most importantly: you can’t judge a business purely by its cash flows – you have to look at what it does with them. Companies that reinvest cash poorly, such as buying back stock at inflated prices, can destroy value. On the other hand, businesses that consistently generate high returns on invested capital deserve a premium.

Jose points to companies that can achieve around 20% returns on invested capital (ROIC) as the gold standard. Apple is a classic example: the success of the iPod funded the development of the iPhone, the iPhone funded the launch of wearables, and enormous long-term returns were achieved. Amazon is another, continually reinvesting into new ventures and compounding value over time.

This framework raises important questions in today’s AI race. For instance, Google is expected to spend around $200 billion in capital expenditures this year. To justify that, it would need to generate roughly $220 billion in profit to achieve a 20% return – an outcome Jose views as far from certain. He draws parallels between today’s AI infrastructure buildout and telecom investments during the dot-com bubble: companies like AT&T and Verizon survived, but their stocks stagnated as they were trapped in endless cycles of reinvestment to maintain customers. The big payoff never came, while companies that used that infrastructure flourished.

His final takeaway: investing, especially value investing, is a game of patience. Avoid the temptation of FOMO and focus on long-term fundamentals.

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00:00 Intro

04:25 Defining Value Investing

08:11 Modern Value Investing

19:40 AI Bubble Risk

23:06 Value Investing Even as Growth Stocks Rally

28:59 The Rise of the Retail Investor

35:16 Best Valuation Metric

42:00 Common Valuation Mistakes