Good Investing is Often Boring
(27th May 2021)
Good investing can sometimes be boring. Ian Cassel puts it eloquently:
“Often times your biggest risk is boredom as you wait for fundamentals to backfill into expectations. You look for reasons to sell because the stock isn't moving. You buy something else. The thing you sold immediately goes up. Then you realize you are just like everybody else.” -
I want to stipulate before I begin today, that my writing will always be scribed under the assumption of a long-term investing outlook unless otherwise stated. I gather that the themes discussed today, are not as applicable to a trader. Here is something for you. If you find yourself beginning to trade more frequently, becoming more impatient with respect to returns and time horizons, but profess to be a long-term investor, then you are potentially at risk of a bad case of speculation-itis, or simply boredom.
Here are two appropriate quotes from Ben Graham:
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
“Those who do not remember the past are condemned to repeat it.”
What Graham is saying here, is that for an investment to actually be an investment, the investor must calculate the worth of a stock, based on the intrinsic value of the business. Only when there exists some level of margin of safety, then one can invest. A speculator, on the other hand, is doing everything else. Now, this is a conservative, and perhaps awfully stringent, view on investment versus speculation. I tend to disagree, but the point he makes is valid. These words are merely illusions. For one to say a stock is an investment, another can say it’s a gamble. I try not to get too tied up with labels.
What I do think is the important takeaway, is the assessment of the business. In my mind, an investment is a bet placed on the future value and/or cash flows of the company, based on the current business and expected future market share. If I can be reasonably confident that this $25 billion company will be a $50 billion within 5 years, then, for me, it warrants an investment. Equally important, is the awareness of the fact that I may be entirely wrong, paired with a willingness to wait 5 years before I find out (excluding any obvious reasons to sell). My thesis won’t typically unfold over the period of two quarters, so any price action in that time should not bother me. What we know today, doesn’t always help us that much tomorrow. Reading historic filings is no doubt an important task, but understanding the probability the company succeeds in the future is an equally important task.
Great management can carry a business into more markets, pivot the business model, make suitable and tactical acquisitions. And so forth. I will save the obvious cherry-picking of examples, and simply state that some businesses change in dramatic ways to ensure they survive and prosper. Nobody bought the online bookstore with the idea it would become the Amazon we know today (okay just one cherry). What rational person would have invested in PayPal in 2011 with the idea that they would acquire the Venmo business (through Braintree), become crypto-enabled, roll out BNPL, become a super-app, move into POS, hire Dan Schulman, and all of these other variables? That took place over 10 years, in large part thanks to Dan Schulman, who became CEO in 2015.
My point being, 10 years is not an awfully long period of time for someone who professes to be a long-term investor. Even if the investor had waited 5 years, they would have experienced the early innings of Venmo and Dan Schulman. Yet, today, there is this obsession with rotating out of stocks based on a headline. I might add, this is not new. I can’t see this embodiment of the human mind ever escaping from public markets. Lip service is applied to the markets almost every day, and I personally think it would be healthy for investors to reduce the amount of time they spend discussing the day-by-day unfolding on a company’s history.
Here is a short story. On September 6th, 2018, I decided I wanted to own PayPal. I proceeded to pick up a position at $89 per share. The thesis, at the time, was pinned on the gradual (not rapid or unprecedented, but gradual) mass adoption of digital payments, as well as an ability to capture market share and grow suitably with two promising apps in PayPal and Venmo. By the end of the year, some 7 months later, it had barely moved. In fact, it was down maybe ~5%. I like to revisit historic moments in my own investing journey because it has the power of breaking free from whatever dynamic is unfolding in the current market. It’s like taking a shower. Washing the dirt of today, and getting back to your original self.
Here’s why. The last year (2020) was quite something, and what I personally noticed, was an apparent tightening of time horizons as people became giddy from their own returns. That is especially applicable if they were exposed to the tech sector during 2020.
We begin to see positions rise 8% on daily basis. At times our entire portfolio is up 3%, 4%, maybe 5% or more in a single day.
There are down days too, yes, but we become comfortable with this environment.
We soon forget what investing is really about.
So, when a position doesn’t move for, say 6 months, we get restless. Stocks come in and out of favour based on short-term technicals, and there are other stocks flying whilst ours sit still.
Every long-term investor suddenly becomes a technical analyst.
(technical analysis is fine by the way)
We are no longer discussing fundamentals, but price action.
Price drives our sentiment and our narrative.
I recall last year, there was a lot of hullabaloo around Teladoc. It exploded during the original pandemic, merged with Livongo (at which point I sold my Livongo shares) and stalled for a while.
Over the space of 4 or 5 months, it began to bounce around, building a “base” (see green area).
It was maybe a good trade during that time, but for a long term holder, who watched the price every day, it was frustrating. Then it soared through the base, reached all-time highs and crashed down to earn again.
During the second crash, where the stock cut in half over the space of ~3 months, the sentiment shifted once again.
I began to see some people selling, this company which was previously a high conviction.
But what was most interesting to me, was that the rationale tended to be surrounding the fundamentals of the business.
Why was this not a concern before the crash?
Investors can be guilty of creating a narrative that will allow us to exit a position without the admittance of a mistake.
Breathing for a moment, you would notice the share price was still up close to 80% over the space of, say, 15 months.
In what world is that a bad return over that period of time?
Note, this is not a direct inquisition in Teladoc, this happened a lot for many stocks.
At $165, Peloton was the future of connected fitness and equipment distribution.
At $90 it was destined to fail. A fad. It was “expensive”.
Despite the sentiment, the business continued to grow triple digits, acquire new facilities, make acquisitions, widen their market.
Subscribers were multiplying like rabbits in a gym sock.
Now back to PayPal.
By July of 2019, it reached an all-time high of ~$120 per share. By October, it was back down at $90 per share.
Then coronavirus happened and wiped out all of the returns.
Call it a 1.5 year holding period, and I have no returns to show for it. Very sad.
You can see (above) what happened next, which I obviously had no idea would happen. I was content with holding despite my 0% returns.
After all, it had been 1.5 years in a 5-year thesis.
The key points here is that we spend so much time surveying price action, that we often forget why we hold a position in the first place.
Was the PayPal business deteriorating?
- No, it had grown in almost every aspect.
Was the market for digital payments becoming saturated?
- No, quite the opposite
Was management not behaving the way I expected?
- No, nothing to see there.
Was there any legitimate reason to sell besides price action?
- In my mind, no.
This is why I like to think of investing as a boring passtime.
1.5 years is not a great length of time for any investment, and so, for someone to become bored of a position in the space of 3 to 6 months like I saw an awful lot last year, makes little sense.
They are more than likely speculating.
Either that or they are not in control of their aptitude to ignore short-term price action.
I would hope the latter is the case.
We are all guilty of it, and you have to understand my writing style is simply to convey that message, not to scorn or mock.
Lawrence Yeo shared the below chart, in a piece titled “Speculation: A Game You Can’t Win”.
Here we see the alternate universes of emotion that one experiences when we either;
a) Sell too early
b) Sell before a decline
Should we sell too early, only to watch the share price advance, we feel regret. It can be a trigger to seek new stocks that we won’t sell or miss out on those gains.
Should we sell at the peak, we feel an artificial sense of “being right” when in most cases, we were just fortunate.
This dynamic was more than likely strengthened last year. Burned into the muscle memory.
When markets begin to get back to normal, we have to unlearn those behaviours.
“Anything with the allure of an astronomical return within a short timeframe isn’t worth the mental (and moral) tension that comes with it.” - Lawrence Yeo
Quite simply, as Lawrence states, anything that you are investing in, where the emphasis is not on the longer-term future, but rather the near-term, is speculating.
Humans like to feel we are in control of the future.
The number of times I see people pulling up old tweets where they declared a prediction of some price action event occurring, only for it to come true, is astounding.
I rarely see people digging up their incorrect predictions.
I prefer to be comfortable in the unknowing, rather than the illusion of knowing.
If you are buying right (that is, buying companies you understand), then you should be granting more than 6 months for your thesis to play out, providing it is a long-term thesis.
Context always applies.
One instance, for me, was MGM Resorts. I bought at ~$16, as a beaten-down asset last year, trading below book. The market bounced back with vigour and I sold for more than $40 one year later. This was a pre-determined short to medium term thesis. Somewhat atypical of the rest of my investment approach.
Should we worry about valuation?
Yes, entry prices dictate your future return.
Brian Feroldi, said (I am paraphrasing here) that he would pay any multiple on a sub $1 billion business if he felt it could become a $10 billion+ company within 5 or so years.
The trouble lies in truly knowing which companies will make that jump to a ten-bagger.
Should a position like that, sized at say 1% to 3%, become a ten-bagger, then it will create an organic concentration in your portfolio.
If things go to plan, a little is all you need.
If things don’t, a little is all you want.
We do not have to swing at every ball, just the good ones.
Good balls can take time to come around, and we have to be patient to hit home runs.
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Lead Analyst at Occasio Capital Ltd