Market Talk is a free Sunday issue, where I share a curation of the best things I have consumed during the week.
Each Sunday I will share:
• A quick update on what’s coming for IT Subscribers
• The greatest articles I have read during the week
• The best pieces of company-related insights I have consumed over the week
• One stellar podcast or interview
• Something interesting
For Subscribers
On Monday I will be sharing a quick write-up on Kura Sushi’s Q1 earnings. Now that the guest interview segment is back up and running, I have some responses, so expect a few of those in the coming months.
The Freetrade write-up (January’s spotlight) is almost finished. February’s spotlight will (probably) be Mitek Systems.
The CNN Greed and Fear Index measures market sentiment based on seven factors; momentum, price strength, price breadth, put/call ratios, junk bond demand, volatility, and safe-haven demand.
The current reading stands at 52 down from 62 last week.
I greatly enjoy listening to Michael and Ben’s ‘Animal Spirits’ podcast. In this post, Michael shares some of his observations from 2021, acknowledging that it’s “likely that some items on this list won’t age well”.
Nevertheless, this was a fun and concise recap of some of the events that took place in 2021, leaving some food for thought.
“Investors don’t necessarily get better with experience because markets are adaptive, unlike most of our learning environments. I won’t ever touch a stove again on purpose because I know it’s hot. I won’t go in a cold shower because I know it’s cold. But “I won’t ever buy stocks again when the CAPE ratio is above 25 because I remember 1999” is not the same thing.
To quote myself, “The greatest lesson we can learn from history is that those who learn too much from it are doomed to draw parallels where none exist.””
Ensemble Capital discuss the role of empathy in the investment process. More specifically, how understanding the perspective of the customer can help with understanding the nuances of the investment thesis. Some of which is unclear if one is not a customer themselves.
Using a case study of Costco (which Ensemble sold in 2012 before buying again in 2020 after realising their mistake), the authors discuss how the threat of e-commerce (an area Costco had no intention of exploring at the time) and the relative inferiority of Costco’s value proposition was part of the reason they decided to sell.
“When we added Costco back to our portfolio. I had been correct about the coming rapid shift towards eCommerce. And I had been correct in my assessment that Costco’s eCommerce offering was inferior and not something they planned to greatly improve. But I had lacked an empathetic understanding of why Costco’s core target customers didn’t care about the same things I did.”
“But what about empathy? Empathy isn’t a concept discussed much in investment management. But we believe that empathy is one of the most important traits for generalist investors like ourselves to cultivate. The fact is, when you manage a portfolio of companies across a range of industries, there is no way that you can rely on your own firsthand experiences to make judgements. Instead, you must cultivate the ability to seek to truly understand each of the stakeholders connected to a company and see the world through their eyes, not just your own.
Peter Lynch famously advised an investor to “buy what you know.” His point was that investors have an advantage when they invest in companies of which they themselves are customers. When you are a customer of a company yourself, you have a natural ability to understand the company from the customer’s perspective. Yet while this is helpful, the best investors need to cultivate an empathetic understanding of a company’s core target customers, not just the investor’s own personal feelings as a customer.”
It’s that time of year, so I have read many year-end reviews from various sources. This one from Peter Offringa (SSI on Twitter) stood out for me. Although the portfolio in question is largely related to software (not everyone’s cup of tea) the lessons shared should resonate with any investor.
I found the discussion on narratives and portfolio concentration particularly interesting. By opting to act briskly and cut 2020 winners because "the story changed”, Peter managed to avoid a nasty sell-off in names like Fastly, Teladoc, and Docusign in 2021.
“In these cases, I began quickly reducing my allocation the first quarter it happened and then closed out the position upon the second. This strategy clearly saved the portfolio in 2021 and explains the outperformance relative to ARKW, which has largely kept their allocations to 2020’s winners. This is where I think it is imperative for investors to closely track their holdings. For a concentrated portfolio, this is even more important. If the narrative shifts on a company that makes up over 20% of your portfolio, it is critical to change your allocation quickly. This approach allowed me to retain a roughly 3x gain in FSLY from my entry point in early 2020 with a basis of $24.50. In spite of the stock falling significantly from its ATH in October 2020, by the time I sold it, I still had a substantial gain for a 9 month holding period.
Had I not made any changes to the portfolio through 2021, it would have ended the year up just 1% versus the actual gain of 45%.
This one isn’t exactly an ‘article’, more so a textbook, but from time to time I like to share great resources that readers can store away in their repository of “digital books”. The same kind of vibe during weeks when I share PDF compilations of a certain fund’s shareholder letters.
There are a number of chapters that hone in on specific topics that I think everyone can learn something from. Thus far, I have only read one chapter (“Chapter 3: Identifying Characteristics of Resilience and Optionality Companies”) but will be chipping away at the rest throughout 2021.
“In investing and life there’s no such thing as a free lunch. Or, in the terms of physics, nothing cheats entropy over time. There is a price for growth. We see this in nature – animals quick to mature live relatively short lives and animals slow to mature live relatively long lives. Contrast, for example, the two-week lifespan of a fruit fly with the 80-year lifespan of a sea turtle. We often visualize lifecycle through an S-curve – quicker growth through the mid-point of a lifecycle and slower growth and decline later in the lifecycle. For investors, understanding S-curves can be critical to the ability to make money. As a general rule, most money tends to be made in a stock when the curve is convex and most money tends to be lost when the curve turns concave.
The duration of the S-curve, or the S-curve’s slope through time, gives us some indication of the life cycle of a product or a company. To take an extreme example, the S-curve of Groupon is more like a fruit fly while that of Procter & Gamble is more like a sea turtle. Ironically, it’s the hyper-growth, compressed S-curves that often get the most attention from investors. However, quick, unchecked growth is extremely dangerous to a company’s long-term health. These stocks offer plenty of allure, but usually end in investor tears.”
Other Items I Read This Week
Note: ($) indicates there is a paywall on this content.
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share one podcast I listened to during the week, that I feel is worth your time.
An Inside Look at Managing Investor Capital
Focussed Compounding
Geoff and Andrew are now entering their third year of managing a fund (founded in Jan 2020) and approaching the fifth year of their SMA arm (managed accounts).
This episode of Focussed Comounding sees the two hosts discuss how they have found managing outside capital, some of the lessons they have learned, and a broader discussion on their overall strategy.
Have you ever wondered what it would look like if you pushed an unmanned bicycle forward 800 times in a row? You are in luck because that’s what the below graphic, from Matthew Cook’s ‘It Takes Two Neurons To Ride a Bicycle’, shows.
If you have seven pages of time to spare, the paper assesses the difficulty in getting a computer to learn how to ride a bicycle.
Conor,
Author of Investment Talk
Disclaimer
These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.
Occasio Capital Ltd makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Occasio Capital Ltd does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Occasio Capital Ltd is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.
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