Random Thoughts

More thoughts on #neversell and the market

Part of the reason I started this blog is so that I could hold myself accountable for my decision making by creating a real-time record of my thoughts. Most importantly, I wanted to guard against hindsight bias - “the common tendency for people to perceive past events as having been more predictable than they actually were.” I think that the extraordinary growth of a handful of tech giants over the past decade, the subsequent rise of #neversell, and the belief that such dominance will continue indefinitely into the future is a result of hindsight bias.

The reality is that most decisions are made against a backdrop of heavy uncertainty, and even if you make the “right” decision with the perceived highest probability of success at that point in time, you can still lose out due to bad luck. That doesn’t mean it was the wrong decision. If you’ve profited off of an overvalued security getting more overvalued, is the lesson really that you should never sell and that you are particularly savvy, or did you just get lucky? In times of excess, it seems far too easy to learn the wrong lessons and confuse skill with luck.

Perhaps I’m just bitter that I didn’t YOLO my life savings into FAANG. But I’ve seen too much in my own personal business experiences and those of friends, how fortunes can rise and fall based on completely unforeseen factors completely outside of one’s control, to believe that successes on the order of magnitude of FAANG can be reliably predicted. I’ve also worked with too many entrepreneurs and young companies to believe that there is much correlation between hard work and success; past some threshold, everybody works hard and luck and timing play more critical roles.

Some thoughts on the market in general and my current investment plan:

  • Stocks seem overvalued on a relative, historical, fundamental and, perhaps most importantly, psychological basis. By psychological, I mean the unbridled excitement of retail investors, whose enthusiasm in particular for SPACs, cryptocurrencies, outright frauds and meme stocks seems completely detached from reality.

  • The arguments people make for why stocks are not overvalued (there is no alternative, interest rates are low, this time is different, the Fed is all-powerful and won’t let asset prices fall, etc) are the same arguments that people have made throughout history for all prior bubbles.

  • As an aside, the idea that stocks are cheap because interest rates are zero seems completely insane. If apples are selling for $30 / lb does it make sense to buy oranges at $25 / lb?

  • As another aside, how many times can stocks go up for the same reason (“the reopening trade”)? The market may be forward looking, but it also appears to have amnesia.

  • At current price levels, it seems probable that prospective returns for US stocks will be low.

At the very least, this environment seems to argue for increased caution, conservatism, and defensiveness. At the same time, it is unlikely that everything is overpriced, and I’m trying not to be so pessimistic as to blind myself to the occasional, legitimate opportunity.

My current portfolio consists of the following:

  • Well-run companies that are not obviously overpriced and are likely do well for the next 5-10 years, regardless of macroeconomic or market conditions (ANET, RHHBY)

  • Boring, cheap companies where I think there is a high likelihood that I will “get my money back” (either via dividends or share repurchases), at a reasonable rate of return, regardless of macroeconomic or market conditions (KMI, WFC, ING, MO)

  • A handful of idiosyncratic, undervalued opportunities that don’t fit neatly into any other categories (WW - although I would not be a buyer at current prices).

  • A large amount of cash (60%)

As I’ve previously mentioned, it brings me no joy to hold cash. But I’d rather hold cash and risk possible inflation of even 2-5% / year than pay for assets that are almost certainly overvalued by an order of magnitude greater. My goal is to wait for obvious, no-brainer opportunities rather than stretch for yield out of a fear of missing out.

Also, despite my qualms about general market overvaluation, I’m still forcing myself to do valuations for new companies every day. Even if opportunities seem scarce, they still might exist, and I think there is equal danger in allowing a lazy inertia to set in.