I’ve been working my way through the posts on muji’s Distillation Post, and I came to Tinker’s great post from April 2019 which was pretty far down the list and may have been missed by some. I thought its essence was beautiful, and I thought I’d reprint it here with my own paraphrasing, editing, shortening, and bolding.
Here it is:
If you listen to the conventional wisdom of the investing industry you won’t make money. You WILL revert to the mean.
We invest here in companies, not systems. If you want to invest in systems have at it. One thing learned is that the low-price on-sale growth stocks all faltered, all of them, and have never come back. PURE is one that is an enigma as its business never actually faltered but improved but yet, its multiple has contracted and contracted and remains that way.
On the other hand, the stocks that the market has chosen as the highest quality have stayed expensive and over-priced … THESE COMPANIES DESTROY THE MARKET AND MAKE THE RULES OF THE VALUE INVESTORS THAT ALL THINGS RETURN TO THE MEAN IRRELEVANT. Yes, IRRELEVANT.
This is not “things are different now,” this is how it has always been. Superior disruptive companies have always been expensive and they have always killed the market. That is what we attempt to identify and hold.
If instead you want to buy the market, or a general segment of the market, say SaaS, then you also have to hold the worst SaaS as well as the best. If chips then you also have to hold all the chips, etc. THAT IS NOT WHAT WE DO HERE. Well most of us, I am sure there are some who do. And nothing wrong with it. But that is not what most of us do here. And that is not what our conversations here are about.
What we do here is try to identify and invest in the leading hyper-growth disruptive businesses in the world. Through crowd-sourcing we do this systematically. And this is contrarian investing because 90%+ of the world calls us crazy for doing so. These market “darlings” that are extremely “overvalued” that will simply crash some day. “Enjoy the party while it lasts!”. We are enjoying the party.
If, however, you never want to find and invest in these, or the next generation of such companies, then you need to understand that for all rules there are exceptions. A very small number of all stocks create most of all the market increases. If you want to buy the market you will have mediocre returns. If you want to buy the premium businesses of the day…well use your own judgment.
Everyone, EVERYONE will take their lumps and have to lose sometimes. However, if you go into anything only responding to fear, conventional wisdom, and that everyone reverts to the mean then why even try. Settle for mediocre. We have proven that we are not mediocre here. We are the top 1% of all investors. We do not revert to the mean, never have, and we are not stuck buying the market (thus ensuring mediocrity), and we are not stuck investing in systems.
We invest in the best growth businesses in the world. A select few. And contrary to the pompous certainty of studies that show we are all idiots, the unequivocal evidence is that… we are not!
So no, things are not “different this time,” things are actually the same. If you want mediocre returns simply scare yourself into acting as if you are mediocre by investing in the mediocre or the market or a system.
Are we just lucky and a fluke? That’s what the 90% of everyone, who try to pull you back in the pack, says because you are doing better than they are? Make your own call.
Of course we understand risks. We are not daredevils! But statistics…put them into context, and then explain if those statistics are so valuable, then what is with all these outliers?
Silence. You will never hear an answer from the naysayers to explain them other than “luck”.