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0/n. Thread on various investing beliefs. My analytical style is to find value in duration by finding assets which have high barriers to replicate. Usually when there is some 'flaw' in the story. I invest in a handful of business models with a 10 year horizon.
1/n. Believability of a forecast is far, far more valuable than making a forecast. I try and assets at low multiples of earnings power which I can ascribe high probabilities to where the market is implicitly or explicitly ascribing a lower probability.
2/n. Contrary to popular belief in the age of ETFs, the market is very long term. Do not equate holding periods (few months) with pricing horizons (few decades). If pricing horizons were 6 months you’d find loads of stocks and markets at less than 1x PE. But they are not.
3/n. Share prices are reflexive to capital allocation. Rising or falling prices make management teams do things they otherwise would not. Grasping the impact of share prices on management psyche is valuable. The amorphous cloud that is the shareholder base also influences this
4/n. Diffused stock ownership can lead to diffused strategy at the Board level. Risk capital being adequately represented at the Board is almost never a negative, and almost always underappreciated over the long term.
5/n. The price chart is a random walk but most people are anchored/trapped by it despite 'knowing' that price is not value. Buying something that has gone up a lot can be as rational or irrational as buying something that has gone down a lot.
6/n. Alpha exists in identifying a moat as it is emerging (before reflected in the price) or identifying duration (when it might look like it is fully reflected in the price). Only way to do this is to have better business judgment about the future of an industry than the market
7/n. Analysing intra day or intra year or even sometimes longer moves is a useless Rorschach test. People see what they want to see. If you understand and internalise this you will waste way less time over the long term and hence be more productive.
8/n. 99% of the due diligence you do is alpha-useless as you’re just learning what the market already knows. Months of work on a single stock is a lot for one analyst but it’s nothing compared to aggregate market knowledge. True alpha-useful insight is very rare.
9/n. Base rates should be framed thoughtfully in a Bayesian sense.
Probability of turnarounds in general is low. But probability of turnaround is VERY different if 1. Stable duopoly, 2. Management incentives aligned, 3. Significant margin gap w peers and 4. Non cyclical demand.
Probability of turnarounds in general is low. But probability of turnaround is VERY different if 1. Stable duopoly, 2. Management incentives aligned, 3. Significant margin gap w peers and 4. Non cyclical demand.
10/n. Diagnose new information as it arrives as dispassionately as if you didn’t have a position on (how would you have priced risk if you had new info beforehand?). More valuable skill than understanding if rising inventory days are a red flag (which is just table stakes).
11/n. Most of the time your best alpha idea is simply doing nothing/waiting.
12/n. Lots of high quality businesses you wish you owned today were at some point on 7-12% normalised earnings/FCF yields. But you’d have found a dozen reasons not to own them. This is why value as an analytical style will always work. And yes, such valuations exist even today.
13/n. Not all opex is created equal. Learn to differentiate between growth opex and maintenance opex. Value businesses on normalised earnings (on conservative assumptions) and you’ll find the real reason most ‘value’ investors have struggled in the last decade.
14/n. Buying quality is not a winning strategy. Buying growth is not a winning strategy. Buying value is not a winning strategy. Buying a combination of them that you believe in through highs and lows... is a winning strategy. Find your own investing personality!
15/n. Most fund managers don’t outperform the market. And of the minority that do, most don’t outperform their own style adjusted factor benchmarks. Invest with managers who have the intellectual humility and capacity to accept this and try and beat the high hurdle.
16/n. Skeptical people sound smarter than they deserve. Smart people figure this out and are more skeptical than they should be. This might explain why great businesses continue to be structurally undervalued. Skepticism and conservatism should not be the goal - realism should.
17/n. Stock prices follow the probability-adjusted build up of long term earnings power 10+ years out, not current earnings or FCF. Even short term moves around earnings results can be framed as following this axiom.
18/n. Stock prices are set when buyers and sellers both agree on a price.
Buying frenzy = selling frenzy. Panic selling = panic buying.
A better way to frame price moves is as the constant re-pricing of risk and shifting of probabilities.
Buying frenzy = selling frenzy. Panic selling = panic buying.
A better way to frame price moves is as the constant re-pricing of risk and shifting of probabilities.
19/n. A differentiated view on risk as valuable as that in long term earnings. Perfectly rational to pay more for an asset you have more knowledge of compared to others. Your personal cost of equity is sometimes where alpha is.
20/n. DCFs are garbage in, garbage out. They are also treasure in, treasure out.
The blame for a swerving bus is more the driver, less the bus.
The blame for a swerving bus is more the driver, less the bus.
21/n. Analysing M&A and organic investments on whether there is duration-accretion is more valuable than even ROIC-accretion. EPS accretion is nonsensical except when it is a coincident indicator. However virtually no one I know thinks this way.
22/n. Stock option ownership by management has convexity in its pay-off and duration profile which shareholder alignment advocates rarely address.
23/n. A 'zero based dividend policy' will vastly improve capital allocation and force management teams to think about all sensible uses of capital regularly rather than sacrificing opportunities just to maintain a regular dividend.
24/n. Knowing more about the micro of several industries helps you see the macro. This is more useful than trying to do macro in the traditional sense. The number of variables in the latter make it hard to separate signal from noise.
