This series of posts doesn’t really have a unifying theme and is just intended to serve as a collection of random thoughts on investing and notes to myself.
The #neversell mentality makes little sense to me, but seems especially dangerous when combined with unprofitable businesses and unproven business models at scale. As Uber and Twitter have demonstrated, scale doesn’t necessarily mean profits. To what degree has growth relied on what are essentially marketing “subsidies” from speculative capital, and what do things look like in a “normal” world?
The quintessential, unprofitable, #neversell growth compounder, Amazon, wouldn’t have been as successful with Amazon Web Services, which would have been nearly impossible to predict. Most quality compounders (MSFT, GOOGL) have had a historical record of profitability, because the inherent strengths of their business models practically demand it. Most companies are not the next Amazon.
It is difficult to distinguish between luck and skill in investing. If one-thousand people each flipped a coin ten times, you would expect one person to get ten heads in a row. In the investment world, this person would be celebrated as virtuoso. The mere fact that investment out-performance over a long period of time is so rare seems to imply that most investment “geniuses” are more lucky than skilled.
The more confident and self-promotional someone is about their investments, the more likely they are to suffer from a lack of awareness of their own objective ignorance, and the more likely that their success is based on luck not skill. The world is inherently uncertain and unknowable, and the best result that one can probably hope for is that they are correct 51% of the time, or that when they are wrong the damage is limited. This is why it is important to have a large margin of safety.
Investors are quick to attribute another’s success to luck, and their own success to skill. But in reality luck is probably the predominant factor in both cases.
Investor obsession with mental models, especially in stretched comparisons to other, more scientific disciplines, is likely just a futile attempt to make sense of randomness. It attempts to establish a scientific veneer to investing that probably doesn’t exist. At the end of the day, business is about whether you can make more money than you spend, and investing is about whether or not you can buy this business at a price that will generate an attractive return, on a mathematical basis. This doesn’t seem to require a complex understanding of systems theory, military warfare or evolutionary adaptation; most businesspeople would probably laugh at the notion.
When you find an undervalued stock, resist the impulsive tendency to over-concentrate in the sector (i.e. retail, banking, energy). Often, every company in the sector will seem “cheap,” and it can be easy to inadvertently expose yourself to systemic risk.
It is important to keep two seemingly contradictory thoughts in mind: (1) many companies (still) seem grossly overvalued and (2) there may be individual deals that are attractive. If you can get a good company at a cheap price, then the general condition of the market should not concern you, even if there is short-term pain. On the other hand, do not make any decisions out of fear of missing out. Be more worried about permanently losing capital than missing out on gains.
Disclaimer: Long GOOGL