Anybody driving slower than you is an idiot, and anyone going faster than you is a maniac.
George Carlin
I was driving the other day, and a thought occurred to me: why would anyone ever need to drive 100 mph? Seriously. It’s absurd and dangerous, not just for that person, but for the people and cars around them. I mean, I get it, you’re cool. You think you’re better than everybody else. You’re a thrill seeker and enjoy showing off, but honestly, it’s not that impressive. I would love to interview the person at that moment to ask them why in the world they are driving like that. Do they understand they are likely risking their life let alone the lives of other drivers? And for what? A negligible time difference in arriving at the destination? Do they understand risk/reward?
Sorry for the mini rant, but I’m sure some of you have felt similarly…
But, wait a sec. Are their circumstances that actually do make sense to drive that fast? Well, I guess if the driver is heading to the hospital, it could make sense. Or if someone is late to an extremely important meeting or gathering. Or, since it was a vague “anyone” question; what about an F1 driver? You better be going faster than 100 mph because time is of the essence!
If you thought of these or any other example before reading them, well done! You’re thinking outside the box. And you understand that your perspective isn’t always truth since what doesn’t make sense to you may make complete sense to somebody else.
As we interpret the world around us, it’s impossible to internalize others’ thoughts and feelings because we don’t live their lives. There may be completely valid reasons for other people to act the way they do that are unfathomable to you. Flipping that around, you may think you are acting rationally when your behavior seems so odd to other people.
I used to work for a famous defense attorney as a runner. My job was to get important documents to the courthouses on time so they could be time-stamped and filed. Sometimes, I was given a delivery task late in the day to file before the court closed. In those situations, I had to drive fast or the deadline would be missed and our client would potentially feel the consequences. Once (or twice) I took the shoulder to pass traffic and get to my exit sooner. Wild! What other driver would assume, “that person needs to get to the local courthouse by 4pm to prevent a technicality that would nullify a $5 million settlement.” Zero. They think, “what an insane, impatient idiot!”
Without even realizing it, we are constantly bamboozled or frustrated by the actions of others. Some people let it affect their mental state, while others ignore the unnecessary emotional toll.
So, how does this relate to investing? First, your portfolio will look completely different than someone else’s. And that’s fine. You’ve done your research (or not) and they’ve done theirs (or not). Your knowledge and circle of competence is different than theirs. Your personality is different than theirs. Your market experience is different than theirs. What would be completely mind-boggling is if you had the exact same portfolio as someone else. Secondly, bulls and bears could both be right, but over different time horizons. Thirdly, two people’s perspective of a business can both be valid because businesses, like people, are complicated, with good and bad parts. You shouldn’t take someone else’s opposing opinion personally, like it’s an attack on your identity. If your blood pressure rises when someone disagrees with you, that’s a terrible sign.
As I thought about this on my drive, I arrived at an analogy: investing is a lot like driving. Some people are more aggressive (concentrated) while others are more conservative (diversified). Some people prefer less expensive cars (“value” stocks), while others like to pay up for horsepower (“growth” stocks) or status (“glamour” stocks). Acceleration is like volatility. Higher acceleration isn’t necessarily riskier; risk is “chance of harm,” such as an accident. How fast you arrive at your destination can be thought of as how high a return you’ll achieve; some people like to speed (go for superior returns), while others go the speed limit (index). Whenever you speed (attempt to outperform), it’s costlier in terms of gas mileage/battery usage, more dangerous in terms of possibly getting into an accident, and more volatile in terms of acceleration and deceleration. Lastly, drivers are at the whims of traffic (market) conditions, and must react appropriately. So, driving, like investing, is a balance between time and cost, risk and return, volatility and stability, and the controllable vs the uncontrollable.
As for myself, I like to drive efficiently, but I want to get places quickly. When there’s empty road in front of me, I like to go fast. When there’s traffic, I’ll cruise. I’m always cognizant of how much gas (electricity, now that I have a Tesla) I’m using, but also how late I am to wherever I’m going. More often than not, I’m the “maniac” because I’m the one driving faster than everybody else! That person going 100 mph, was me. Possibly influenced by the video game “Need for Speed” or my competitive nature, I simply love the art of driving (any F1 fans here?) and figuring out the puzzle of how to get to my destination the quickest. For those who didn’t grow up in Los Angeles, this may seem unnecessary and bizarre. But those who did, get it.
I also consider myself fairly decent at driving, and I often shake my head at the way other people drive. At least I’m in the majority!
The survey by Michelin North America found that the majority of Americans don’t trust other drivers and say they witness unsafe driving behavior regularly. At the same time, an overwhelming majority – 81 percent – remain supremely confident in their own abilities behind the wheel.
First off, I hope the 19% aren’t driving often! Secondly, I love behavioral finance; it’s why I chose investing as a career. Old me, as I’m sure many others, would cite this as a classic example of overconfidence. However, what muddles any concrete conclusion is that everybody has a different interpretation of “unsafe.” Something that is “unsafe” to one person may actually be completely safe to another. If Louis Hamilton were driving a sports car 120 mph on an open freeway, is that unsafe and untrustworthy? Or is a mediocre driver going the speed limit in the far right lane consistently dealing with merging traffic more unsafe and untrustworthy?
Is having 50% of your portfolio in one stock more “unsafe” than diversifying across 100 stocks? Possibly. But if you’re Warren Buffett, I think not. Furthermore, it depends on the goal. If the goal is to beat the index, that’s more easily done via concentration. It’s also easier to underperform! The relative “safeness” is person-dependent and how skillful they are in identifying opportunities, understanding situations, and making decisions.
This also highlights the difference between risk and uncertainty. Obviously there is overlap between the two, but there are fine distinctions. Risk is connected with skill and how you act, while uncertainty is connected with an unpredictable future and external conditions. Risk can be increased or mitigated, but you can’t favorably influence unexpected future events. Volatility is not risk; reaction to volatility is risk. Skill can reduce risk; skill cannot reduce uncertainty. That’s why behavior is a skill to be honed.
Skill is also related to observation. If you really pay attention, you’ll notice patterns everywhere in life. Businesses have similar characteristics, even if they’re in different industries. People have similar personality traits, even if they’ve never interacted. Traffic moves in predictable ways, even though the cars and drivers are never the same. Certain lanes flow more smoothly than others because of road patterns. Traffic lights turn green at similar times, or turn green at an evenly spaced cadence. Some lights are sensor oriented, but only if you arrive at a certain time. Some things that seem unpredictable, can actually be predictable.
For example, when you’re approaching an intersection and the light is green, what do you do? Stare at the light, ready to slam on the brakes if it turns yellow? What if there was a way to know that it won’t turn yellow? Look at the crosswalk sign! If it’s a green walk sign, the light will stay green. Only if it has a red hand will it potentially turn yellow. If it’s counting down, you know you have at least that much time, and maybe more. Therefore, you can judge whether or not you’re in a position to drive through. Every time I approach an intersection, I know what the crosswalk sign is signaling. Seems pretty common sense to me, but I’m sure many drivers do not do this.
Now, I say I’m confident in my own abilities – I think I’m skillful at driving – but I’m not perfect. I’ve been in three accidents, but only one while I was the driver. That’s in over a decade and a half of driving; most of the time, fast. Those who haven’t been in any accidents will scoff, but there’s a lesson here. I had to drive to Palm Springs and back in a day (~6 hours non-stop of driving). At the end of the long and exhausting trip, I was taking a left at the exit intersection. The car in front of me proceeded to turn. Because it was an SUV, I couldn’t see any oncoming traffic. I assumed that because the car had gone, I’d probably be able to go too. As I began my turn, the SUV slowed down because there were cars in front of it on the side street. In the midst of my turn, I saw a car speeding towards the side of my car. I panicked. I couldn’t speed up or I’d rear end the SUV. Bam! The oncoming car slammed into the side of my car. Clearly, my fault. But it didn’t help that the kid said his “brakes are old.”
When I got my license, my mom drove home (pun intended) one thing about driving, “you have to expect the unexpected.” In other words, it’s not necessarily what you do, it’s what other drivers do that you don’t expect that can lead to trouble. Anticipating, rather than reacting, puts you in a superior position to make the correct decision because your brain is primed. You can’t assume others will act in accordance with how you think they will or should.
This was wise on many levels because any decision has embedded assumptions. I played soccer my entire life through college. Soccer is like a chess match; it requires the entire team working synergistically, and it’s impossible for one player to dominate the game (Messi being the sole exception). If I were to assume another player would be in a certain position or make a run so that I could play the ball, and he didn’t, we’d turn the ball over. What’s the phrase about ass-u-me-ing? Miscommunications and misinterpretations are killer.
Every time you get behind the wheel, there is a possibility you could get into an accident, whether it’s your fault or not. Every time you buy a stock, there is a possibility it could go down, a lot. Neither of those you expect at the outset, but knowing there is a chance is a good mindset to have going in. If you drive aggressively or (hopefully never) inebriated, you increase the chance of harm (risk), just like investing without performing adequate research or buying into hype.
In investing, assumptions are everywhere because it’s a forward-looking game. The collective market’s assumptions are the expectations embedded in the stock price. When you buy a stock, whether you realize it or not, you are betting that the market’s assumptions are wrong. Traders, on the one hand, think the price will go up based on price action or a shift in market sentiment. Investors, meanwhile, think that the market has misjudged the business’ future fundamentals and that the “wisdom of the crowd” is misguided. Knowing what game you are playing and the mindset necessary succeed at that game is crucial.
Similarly, awareness of your surroundings when driving can save you from disaster. As a byproduct of my parent’s teachings, I constantly check my mirrors and use my peripheral vision to know where other cars are, even if I’m not about to change lanes. I also scan the road far ahead to see if there are any dangers (cops), openings to exploit, or lanes that are moving the fastest. I want to get places! Running through my head are “if, then” scenarios so that I’m prepared for the unexpected.
Most drivers, however, are absolutely locked in on the road directly ahead of them. Hands at 10 and 2. Eyes straight ahead. Driving not a mph over the speed limit. Is “index” driving good driving? Possibly. But, they are likely oblivious to what’s going on around them. Only when they decide to change lanes do they check their mirrors, which means they’re presented with new information once they’ve already made a decision. Decisions take time to process, especially in a fluid environment. As they put their blinker on, cars are already passing, causing them to slow down since their brain needs time to determine if it’s safe to move over. Meanwhile, cars behind them have to also slow down, or change lanes to maneuver around. And changing lanes requires those cars to look in their mirrors to see if an adjacent lane is open while keeping a distance between them and the slowing car in front.
We’ve all experienced drivers who seem to be in their own little bubble, totally unaware of the potential chaos they’re causing externally. Unfortunately, they won’t see the angry glares from passing drivers, either.
To wrap up this really tortured analogy – stay with me – the market is like a freeway. Sometimes it’s wide open, with minimal risk to speeding. Sometimes it’s flowing nicely with moderate danger to driving fast. And sometimes it’s packed, forcing you to endure the pain with everybody else. Those who left early will still arrive on time (margin of safety). But those who are already running late (no margin of error), are in trouble.
Whenever there is traffic, I chuckle at those aggressive drivers tailgating and swerving lanes to try to get ahead. On top of the stupidity, it’s counterproductive; there is little upside (you won’t get far) and a lot of downside (possible accident). Why try to time a choppy market? When there’s been an accident (like a turn in the macro) it will affect the entire freeway (market) even if your car was not involved. Don’t be surprised if you arrive late.
To conclude – and congrats to those who made it this far – driving is a necessary, culturally accepted, interactive dance between complete strangers with only moderate inter-communication. Every car is unique, as is every driving style. Each driver has their own agenda, destination, skill level, perspective, attitude, awareness, and expectation of what will happen next. Same with investing. Your portfolio and style are uniquely yours. You can only control your behavior. Things you cannot expect will happen. You have to continually reassess the environment. You’re free to be as aggressive as you want, but certain environments are more dangerous than others. Judging whether it’s appropriate to drive fast means understanding your driving skills, the car you’re in, and the situation around you.
Whenever I had the pleasure of driving my family to a dinner or event, I’d often here “Peter! Slow. Down.” Parents show their love in all sorts of ways. I’d reply, “Mom, I’m going 85 mph in the fast lane with nobody in front of me.” That wouldn’t alleviate their concerns.
Maybe I should have listened to my mom in 2021, because I metaphorically crashed in 2022.
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As mentioned, the “way I drive” is fast, but efficient. What I mean by “efficient” is two-fold: I want to drive smoothly and avoid abruptly slowing down and I want to drive “gas conservatively” to get the most miles per gallon (gas prices no longer affect me, luckily, but the same theme applies to battery usage!). This seems paradoxical, I know, but it makes complete sense to me to balance the thrill and the cost, since it’s context dependent. What I will never understand are people that speed up to a red light. That’s like running to the crosswalk to press the button. You expended energy only to be forced to wait.
Similarly, I want to invest efficiently and outperform. Fortunately, these are more aligned in investing than driving. My portfolio is therefore highly concentrated and my turnover is low. I strive to own businesses that I believe are “quality,” meaning they have (or will have) high returns on invested capital, run by adept management in secularly growing industries. That way, intrinsic value will, hopefully, continually increase and I can sit back and enjoy the wonders of compounding (always the goal, not always the case!) without the tax and research consequences of jumping in and out of ideas.
Quality companies, like cars, are usually more expensive. Quality investments, however, must factor in price – you can get more value for the price from a Camry than a Range Rover, despite not being as “glamorous.” What does Warren Buffett drive? A 2014 Cadillac XTS (he clearly prioritizes comfort and reliability over status). Price is a critical factor in the investment decision.
Akin to me scanning the road far ahead, I often invest with a longer time horizon than most. I can “sit there” and endure volatility without needing to “do something.” Price movements are mostly noise, and action is usually only required at extremes. Additionally, this leads me to own businesses that I believe are long-term winners and that can continually deploy capital at attractive rates of return. As always, there is a tradeoff between growth and returns, so a large addressable market is key.
As I’ve written, “I do not have a concrete methodology for position sizing; it is purely based on conviction. My conviction is based on my estimate of the gap between price and value, my probabilistic discounting of future outcomes, and my assessment of the business’ durability, adaptability, and optionality. Similar to other investors, I more heavily weigh the potential downside than upside; meaning I focus more on what I could lose than on generating super returns.”
This results in larger weightings to large cap secular growers that are more predictable and have lower perceived downside, alongside smaller weightings in younger, less predictable businesses that I believe can be worth multiples of their current valuation, but can also, not be.
As for themes, I believe that the cloud and digital advertising will continue to grow steadily (AMZN, GOOG, META, TTD) and that oligopolistic tollbooths will continue earning their fees (MA, V, SPGI). I also believe that innovative and value-added software will see increased adoption over time (ADYEY, NET, DDOG, ADSK, CRWD, PCOR) and that entertainment will continue to captivate audiences (DIS, SPOT).
Clearly, I subscribe to the “digital transformation” structural trend and think that software’s “zero marginal cost” is a superior business model to providing tangible goods and services. This isn’t always the case, but that’s my bias. I avoid businesses with direct exposure to commodities (Berkshire being a partial exception) because I know nothing about the industries nor do I don’t think they can generate strong economic returns over the long-term.
Like all the great investors, every company I own must have a “sustainable competitive advantage” and a “moat” to fend off competition. However, that isn’t saying much. Accurately judging those is where the real money is made. Which, is always a work in progress.
The below are unedited comments I posted in Journalytic at year end 2022. Similar to John, except he’s an exceptional investor and I’m certainly not, I think writing and sharing thoughts are indispensable to learning, even if they aren’t fully flushed out.
AMZN – Cloud, ecommerce, advertising. Over-invested in fulfillment capacity hurt by ecommerce slowdown. Jassy seems competent. AWS remains the leading cloud provider though growth is slowing. Advertising is a high margin growth biz that will flow through to bottom line/cash flows.
Risks: fulfillment ROIC
GOOG – slowdown in advertising from a gangbuster 2021. Youtube hindered by ATT but consumers still love it. Search isn’t going away and Google remains a monopoly. Waymo still a moonshot but could become a fantastic business line/spinoff.
Risks: captures declining share of the growing ad pie. Ad load becoming too high. Users switching to ChatGPT is unlikely but could be marginal.
MA/V – toll road duopoly on payments. Take rates on nominal spending so inflation is less of an issue. International growth with EM coming online, particularly Africa.
Risks: government crackdown and FedNow/bank consortium bypassing the rails or some sort of blockchain based payment system
BRK – long the US economy and their culture. Insurance/manufacturing/transportation/retail/utility.
Risks: WEB/CM will die soon and capital allocation suffers
ADYEN – only full stack payments provider. Great culture. CEO is a legend in the industry, he re-created a payment stack from the ground up. Take rate will decline but volumes continue to climb. POS business is a gem for omni-channel. High EBITDA and cash flow conversion.
Risks: CEO steps down. Growth slows
DDOG/NET – best in breed SaaS. Continue executing land and expand to sustain high growth. Data infrastructure/observability and cybersecurity are mission critical. Need to dig into DDOG more. NET is a special company. Great management/founder led. I think NET can become another AMZN, the CEO studied Bezos.
Risks: high valuation, growth slows, customers churn
TTD – digital and programatic advertising tailwind. Self-serve/platform biz. Higher CTV ad spending. UID 2.0 replaces cookies.
Risks: competition from in-house ad divisions and other SSPs
SPGI – toll road oligopoly in necessary financial services. Debt issuance won’t stop. Benchmarks will still be needed.
Risks: slower growth. Acquisition synergies.
ADSK/PCOR – bullish on construction software platforms, the second least digitized industry. collaboration/waste reduction tailwinds. ADSK is a must use product and the leader in AEC. High gross margins. Like PCOR CEO more than ADSK
Risks: SBC/dilution, slower growth/lower adoption due to fragmentation
META – crazy cheap valuation on historical numbers. IG is sticky, Reels is improving. People are addicted to social media.
Risks: metaverse spending is a waste
ESTC – best in enterprise search and adding cybersecurity to the bundle. My biggest mistake in doubling down purely due to valuation (which is still high). Less bullish on, trim when macro subsides.
Risks: customers want to consolidate vendors from point solutions. Lower growth
DIS – Content is king. Loved Brand. Iger is back. Culture/re-org turnaround. Dis+ essential for families with kids.
Risks: ROIC on streaming. Parks pricing.
SPOT – best music streaming platform (imo). How much value SPOT captures should trend upwards. Podcast monetization upside.
Risks: Clash with music labels. ROIC on podcasts
CRWD – cybersecurity is necessary. Best endpoint solution/agent, and endpoints are growing in a decentralized working world. Platform adding more and more capabilities.
Risks: slower growth and valuation/SBC
SNOW – large runway for growth/TAM. Insights from data is critical. Apps being built upon their platform. need to dig in more.
Risks: slower growth and valuation/SBC
NVDA – gaming, datacenter, autos. great company, should revisit.
Reflections on Investing 