Author: Chong Ser Jing

During bouts of short-term underperformance and/or significant volatility in stock prices, it’s easy to throw in the towel and get out of them to relieve the psychological stresses that result. I believe that this is the worst thing an investor can do because doing so will cause temporary underperformance and/or losses to become permanent ones. It is difficult to stay the course – I get that. But it is crucial to do so because even the best long-term winners in the stock market can make our stomachs churn in the short run.

Don’t believe me? I’ll show you through a game. All you have to do is to answer two questions that involve two groups of real-life companies. Please note your answers for easy reference when you see the questions (it’ll be fun, trust me!).

Figure 1 below is a chart showing the declines from a recent-high for the S&P 500 and the stock prices of the first group of companies (Company A, Company B, and Company C) from the start of 2010 to the end of 2021. The chart looks brutally rough for the three companies. All of them have seen stock price declines of 20% or more on multiple occasions in that time frame. Moreover, their stock prices were much more volatile than the S&P 500 – the index experienced a decline of 20% or more from a recent high just once (in early 2020). So the first question is, after seeing Figure 1, would you want to own shares of the first group of companies if you could go back in time to the start of 2010?

Table 1 below illustrates the stock price and revenue growth for the second group of companies (Company D, Company E, and Company F) from the start of 2010 to the end of 2021, along with the S&P 500’s gain. The second trio of companies have generated tremendous wealth for their investors, far in excess of the S&P 500’s return, because of years of rapid business growth. The second question: If you could travel to the start of 2010, would you want to own shares of the companies in the second group?

My guess for the majority of responses for the first and second questions would be “No” and “Yes”, respectively. But what’s interesting here is that both groups refer to the same companies! Company A and Company D are Amazon; B and E refer to MercadoLibre, and C and F are Netflix. There’s more to the returns of the three companies from 2010 to 2021. Table 2 below shows that the trio have each: (a) underperformed the S&P 500 in a few calendar years, sometimes significantly; and (b) seen their stock prices and business move in completely opposite directions in some years.

There are two other interesting things about the stock price movements of Amazon, MercadoLibre, and Netflix. 

First, in every single time-frame between the start of 2010 and the end of 2021 that has a five-year or longer holding period (with each time-frame having 31 December 2021 as the end point), there is not a single time-frame where the annualised return for each of the three companies is negative or lower than the S&P 500’s. For perspective, the minimum and maximum annualised returns for the trio and the S&P 500 are given in Table 3. If you had invested in the three companies at any time between 1 January 2010 and 31 December 2016, and held onto them through to 31 December 2021, you would have not only significantly beaten the S&P 500 for any start-date, you would also have earned high annual returns.

Second, the returns for Amazon, MercadoLibre, and Netflix for all the same start-dates as in the data shown in Table 3, but this time for shorter holding periods of 1 year and 2 years, have been all over the place. This is displayed in Table 4. Notice the common occurrence of negative as well as market-losing returns for the three companies for both 1-year and 2-year holding periods.

After sweeping up all the data shown in Figure 1 and Tables 1, 2, 3, and 4, the critical highlights are these:

• By looking at just the long-term returns that Amazon, MercadoLibre, and Netflix have produced, it’s difficult to imagine that their stock prices had to traverse brutally rough terrains to reach their incredible summits. But this is the reality that comes with even the best long-term winners. It’s common for them to have negative and/or market-losing returns over the short-term even as they’re on the path toward fabulous long-term gains. For example, an investor who invested in Amazon on 9 December 2013 would be sitting on a loss of 20.4% one year later while the S&P 500 was up by 16.3%. But someone who invested in Amazon on 9 December 2013, and held on till 31 December 2021, would have earned an annualised gain of 30.7%, way ahead of the S&P 500’s annual return of 15.0% over the same period. In another instance, MercadoLibre’s stock price fell by 20.6% one year after 29 September 2014, even though the S&P 500 inched down by just 2.7%; on 31 December 2021, the compounded returns from 29 September 2014 for MercadoLibre and the S&P 500 were 41.4% and 15.1%, respectively. Meanwhile, an investor buying Netflix’s shares on 3 August 2011 would be facing a massive loss of 79.3% one year later, even as the S&P 500 had gained 10.7%. But Netflix’s annualised return from 3 August 2011 to 31 December 2021 was an impressive 30.7%, nearly twice the 15.9% annual gain seen in the S&P 500. 
• A company’s stock price can exhibit stomach-churning short-term volatility even when its underlying business is performing well. For example, Amazon’s robust 19.5% revenue growth in 2014 came with a 22.2% stock price decline, MercadoLibre’s stock price was down by 10.4% in 2015 despite revenue growth of 17.1%, and Netflix’s 48.2% revenue growth in 2011 was accompanied by a 60.6% collapse in its stock price. Significant short-term deviations between a company’s business performance and stock price is simply a feature of the stock market, and not a bug. 
• Having to suffer through an arduous journey is the price we have to pay (the fee for admission!) to reach the top of the mountain, but it’s a journey that is worth being on. 

Accepting that volatility is a feature of stocks can lead to a healthy change in our mindset toward investing. Instead of seeing short-term volatility as a fine, we can start seeing it as a fee – the price of admission, if you will – for great long-term returns. This is an idea that venture capitalist Morgan Housel (who also happens to be one of my favourite finance writers) once described in a fantastic article of his titled Fees vs. Fines.

Seeing volatility as a fee can also help all of us develop a crucial character trait when dealing with the inevitable ups and downs in the financial markets: Equanimity. Being able to remain calm when stock prices are roiling is important because it prevents us from making emotionally-driven mistakes. Another thing that can help strengthen the equanimity-fibre in our psyche is to focus on business results. Stock prices and business growth converge in the long run. But over the short run, anything can happen. 

It’s never fun to deal with falling stock prices. But as Josh Brown, CEO of Ritholtz Wealth Management and one of my favourite market commentators, wrote in a recent blog post: “Returns only come to those who are willing to bear that volatility when others won’t. The volatility is the point.”

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 Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, I currently have a vested interest in Amazon, MercadoLibre, and Netflix. Holdings are subject to change at any time.

One of my favourite investing stories involves one of Warren Buffett’s best – maybe even his best – investment returns. This return came from his 1973 purchase of The Washington Post Company (WPC) shares. Today, WPC is known as Graham Holdings Company. Back then, it was the publisher of the influential US-based newspaper, The Washington Post. 

Buffett did not invest much in WPC, but the percentage-gain is stunning. Through Berkshire Hathaway, he invested US$11 million in WPC in 1973. By the end of 2007, Berkshire’s stake in WPC had swelled to nearly US$1.4 billion, which is a gain of over 10,000%

But the percentage gain is not the most interesting part of the story. What’s interesting is that, first, WPC’s share price fell by more than 20% shortly after Buffett invested, and then stayed in the red for three years. Second, WPC was a great bargain in plain sight when Buffett started buying shares. In Berkshire’s 1985 shareholders’ letter, Buffett wrote (emphasis is mine):

“We bought all of our WPC holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see.

Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.”

Buffett has investing acumen and privileged-access to deals that many of us do not have. But there are also times when common sense and patience are more important traits than acumen in making a great investment. Buffett himself said that no special insight was needed to value WPC back in 1973. What was needed for him to earn a smashing return were simple and attainable things: The right attitude and patience.

How many investors do you think have the patience to hold on through three years of losses? Not many, would be my guess. But Buffett did, and he was eventually well rewarded. 

Not every form of participation in the financial markets requires patience. But for market participants who look at stocks as a piece of a business and are investing on the basis of a business’s underlying value, patience may well be necessary, even if you have purchased shares of the best company at a bargain price. This is why Jeremy and I often talk about the importance of having a long-term investing mindset in this blog.

Buffett’s experience with WPC – of first losing, then winning – is far from an isolated incident. Another of my favourite investing stories has the same element. The story starts on 2 July 1998, when brothers David and Tom Gardner – co-founders of The Motley Fool, and two of my investing heroes – were invited to an American television programme called The View. In the show, the Gardner brothers were asked to name a stock for the programme’s new host to invest in and they happily obliged.

About six weeks later, the Gardners re-appeared in The View. But this time, they were booed by the live audience. David even found out later from his friend, a long-time follower of The View, that no guest had ever been booed on the show prior to this. It turns out that the Gardners’ recommended stock had fallen by a third in value in the six weeks between their first and second appearances in The View. But the brothers still had faith in the investment and urged the host to hold on for the long-term. 

I don’t know if The View’s host ever did invest in the company that the Gardners recommended. But if she did, and had she held on since 2 July 1998, she would likely be very happy today. The stock in question is the global coffee giant, Starbucks. 

In September 1997, Starbucks had less than 1,500 outlets and was mostly a domestic growth story in the USA. Today, it’s a bona fide global company with more than 33,000 stores in many different countries around the world. On 2 July 1998, Starbucks’s share price was US$3.54. About six weeks later (on 14 August 1998), it was US$2.40. A year after 2 July 1998, Starbucks’s share price was US$3.45, lower than when the Gardners first appeared in The View. Today, the coffee powerhouse’s share price is more than US$110. In a similar manner to WPC, Starbucks looked like a loser over the short-term, but turned out to be a world-class winner over the long-term.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, I currently have a vested interest in Starbucks. Holdings are subject to change at any time.

The stock market is an incredibly resilient thing. A wonderful example can be seen through some astounding facts I found out earlier this year about Germany’s stock market, courtesy of a blog post from investor Anthony Isola. 

Germany lost World War I, which lasted from 1914 to 1918, and signed the infamous Treaty of Versailles. The peace agreement placed usurious repayment demands on Germany, which resulted in hyperinflation in the country and the ruin of her economy in the 1920s. This paved the way for Adolf Hitler’s rise to power in Germany in the early 1930s. After Hitler’s ascension, he dragged the globe into World War II, starting with his invasion of Poland in 1939. During the war, Germany suffered decimating air raids on its cities conducted by the Allied nations and by 1945 she had lost the war. Here’s how Germany’s stock market did from 1930 to 1950:

Unsurprisingly, German stocks were smashed shortly after World War II ended. But what happened next was remarkable. Germany managed to rebuild, as the victors decided to support the country’s rehabilitation rather than punitively punishing her as they had done in the aftermath of World War I. Germany’s stock market rebounded, and then some. Isola wrote:

“Amazingly despite losing not one but two World Wars, suffering a vicious bout of wealth destruction due to Hyperinflation, experiencing a Great Depression, and living under the rule of a fanatically evil dictatorship,  long-term German investors realized positive returns by 1960. The German market’s real return compounded at an annual rate of 2.4% from 1900-1960. From 1950 to 2000, German stocks posted an annual real return of 9.1%.”

So even after accounting for inflation – and bear in mind that Germany endured hyperinflation in the 1920s because of theTreaty of Versailles – German stocks still generated a return of 2.4% per year from 1900 to 1960. Here’s a chart from Isola’s blog post that shows the performance of Germany stock’s market from 1870 to 1994:

In his blog post, Isola also wrote that “stock markets can be way more resilient than you can imagine. Provided you have the luxury of time to work in your favor.” This is why Jeremy and I are long-term investors. We want time to be on our side.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.I have no vested interest in any company mentioned. Holdings are subject to change at any time.

Note: Data as of 2 November 2021; an earlier version of this article was first published in The Business Times on 10 November 2021

There are 7.9 billion individuals in the global economy today. According to the World Federation of Exchanges, an association for exchanges and clearing houses, there are at least 47,919 companies listed in stock exchanges around the world. Estimates on the number of small/medium enterprises (SMEs) worldwide vary widely, but the ones I’ve seen peg the number at between 213 million to 400 million. 

There is also a litany of problems currently plaguing our globe. The legendary US-based investor, Bill Miller, provided a list of worries in his latest 2021 third-quarter letter: “Today’s worries include, but are not limited to, China’s regulatory actions, high and rising fuel and food prices, labor shortages, inflation or stagflation, the effect of Federal Reserve tapering, disrupted supply chains, potential default due the debt limit standoff and the ongoing dis-function and polarization in Washington.” These are in addition to the ongoing COVID-19 pandemic.

With the statistics and information in the first two paragraphs above, it’s an understatement to say that the business world, and hence the financial markets, involve a lot of moving parts. This is a problem for investors and begets the question: What should investors be watching now?

A walk in the park

There was once a lady who liked to walk her young dog each morning in East Coast Park using a very long leash. The lady would take a 10 kilometre stroll from one point in the park to another, walking at a steady pace of five kilometres per hour.

Her dog was always easily excitable. It would dart all over the place, diving into a bush here, and chasing after something there. You could never guess where the dog would be from one minute to the next.

But over the course of the two hour stroll, you can be certain that the dog is heading east at five kilometers per hour. What’s interesting here is that almost nobody is watching the lady. Instead, their eyes are fixed on the dog. 

The tale of the lady and her dog is actually an analogy about the stock market that I’ve adapted from Ralph Wagner, a highly successful fund manager with an amazing wit who was active from the 1970s to the early 2000s. If you missed the analogy, the dog represents stock prices while the lady represents the stocks’ underlying businesses.

It’s the business

There are many ways to slice the dice when it comes to making money in the stock market. But one way is to watch the lady (businesses) and not the dog (stock prices). No matter where the dog is leaping toward, it will still end up at one point in East Coast Park after two hours, following the lady’s path.

The US-based Berkshire Hathaway is the investment conglomerate of Warren Buffett, who is arguably the best investor the world has seen. In his 1994 Berkshire shareholders’ letter, Buffett shared a long list of problems that the USA and the world had faced over the past three decades: 

“Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.”

But in the same period – 1965 to 1994 – Berkshire’s share price was up by 28% annually. This is the dog. What about the lady? Through shrewd investments in stocks and acquisitions of private companies, Buffett grew Berkshire’s book value per share by 23% per year from 1965 to 1994. Over 30 years of numerous geopolitical and macroeconomic problems, a 23% input of business growth had led to a 28% output of share price growth. 

It’s worth pointing out that Berkshire’s share price and book value per share did not move in lock-step. For example, Berkshire’s share price fell by 49% in 1974 despite a 6% increase in its book value per share. In 1985, a 94% jump in the share price was accompanied by book value growth of ‘only’ 48%. In another instance, Berkshire’s share price slid by 23% in 1990 even though the book value was up by 7%.

Berkshire is a great example of how the excitable dog will end up wherever the lady goes, even though it may be leaping all over the place en route. Berkshire is also, by no means, an isolated case.

The Nobel Prize-winning economist Robert Shiller maintains a database on the prices, earnings, and valuations for US stocks going back to the 1870s. From 1965 to 1994, the S&P 500, a broad stock market index in the USA, experienced a 6% annual increase in both its price and earnings, according to Shiller’s data.

At this point, some of you may wonder: Why are there some amazing dog-owners who are able to continue marching forward, despite the many obstacles they face? 

Optimism

One of my favourite pieces of business writing comes from Morgan Housel, a partner at the venture capital firm Collaborative Fund. It’s an article titled “An Honest Business News Update” published in August 2017 on Collaborative Fund’s website. Housel wrote:

“The S&P 500 closed at a new high on Wednesday in what analysts hailed as the accumulated result of several hundred million people waking up every morning hoping to solve problems and improve their lives…

…Fifty-five million American children went to school Wednesday morning, leveraging the compounded knowledge of all previous generations. Analysts expect this to lead to a new generation of doctors, engineers, and problem solvers more advanced than any other in history. “This just keeps happening over and over again,” one analyst said. “Progress for one group becomes a new baseline for the next, and it grows from there.””

This is why there are these amazing dog-owners: Because humanity’s story is one long-arc of progress. The arc is punctuated from time to time by disasters – of the self-inflicted and/or natural variety – but our human resilience and ingenuity helped us to pick up the pieces and move on. It took us only 66 years to go from the first demonstration of manned flight by the Wright brothers at Kitty Hawk in 1903, to putting a man on the moon in 1969. But in between was World War II, a brutal battle across the globe from 1939 to 1945 that killed an estimated 66 million.

At the start of this article, I mentioned that there are 7.9 billion people in the world today. The vast majority of us will wake up every morning wanting to improve the world and our own lot in life – this is ultimately what fuels the global economy and financial markets. This is the lady, walking steadfastly ahead, holding her dog on a long leash. And this is ultimately what investors should be watching.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have no vested interest in any company mentioned. Holdings are subject to change at any time.

There are many important things about the stock market that can change, such as the behaviour of market participants and their level of collective knowledge. I believe an interesting example of this can be seen in the 2008/09 financial crisis.

The period was an economic calamity and stock prices fell sharply. During the crisis, the S&P 500, a broad index for US stocks, fell by nearly 57% from peak to trough. But then-Federal Reserve chair Ben Bernanke prevented an even worse disaster from happening.

Bernanke was a scholar on the Great Depression that happened in the 1930s. In a wonderful 2002 speech for the birthday gala of celebrated economist Milton Friedman, Bernanke laid out the mistakes the US government had made during the Great Depression. He ended the speech saying (emphasis is mine): 

“I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

When the 2008/09 financial crisis erupted, Bernanke sought to prevent the same mistakes from happening. He largely succeeded and I think it’s telling that an 85% fall in stock prices – something that happened in the Great Depression – did not occur during the financial crisis.

I think that this trait about the market – that market participants can learn, collectively – has important implications for investors. Amazon’s founder Jeff Bezos once said (emphasis is mine): 

“I very frequently get the question: “What’s going to change in the next 10 years?” And that is a very interesting question; it’s a very common one. I almost never get the question: “What’s not going to change in the next 10 years?” And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection.” 

I believe this applies to investing too. It’s better to build an investment strategy in the stock market around the things that are stable in time. What is one such thing? From my observations, I think one thing about the stock market that has been stable over the long arc of history is that it has remained a place to buy and sell pieces of a business. And I think this trait about the stock market will very likely continue to be stable over time.

With this in mind, what logically follows is that a stock’s price over the long run will continue to depend on the performance of its underlying business over the same period. In turn, a stock’s price will eventually do well if its underlying business does well too. All these mean that a lasting investment strategy is to identify businesses that are able to grow well over a long period of time.

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 Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Amazon. Holdings are subject to change at any time.

In 2016, Michael Mauboussin, a highly-regarded researcher and author in the investment industry, co-wrote a research paper published by Credit Suisse titled The Base Rate Book. Mauboussin and his co-authors studied the sales growth rates for the top 1,000 global companies by market capitalization since 1950. They found that it was rare for a company – even for ones with a low revenue base – to produce annualised revenue growth of 20% or more for 10 years.

For example, of all the companies that started with revenue of less than US$325 million (adjusted for inflation to 2015-dollars), only 18.1% had a 10-year annualised revenue growth rate of more than 20%. Of all the companies that started with inflation-adjusted revenue of between US$1.25 billion and US$2.0 billion, the self-same percentage was just 3.0%.

The table below shows the percentage of companies with different starting revenues that produced annualised revenue growth in excess of 20% for 10 years. You can see that no company in Mauboussin’s dataset that started with US$50 billion in inflation-adjusted revenue achieved this level of revenue-growth.

But in a research piece published in June this year with Morgan Stanley titled The Impact of Intangibles on Base Rates, Mauboussin noted that Amazon had defied the odds. The US ecommerce juggernaut ended 2016 with US$136 billion in revenue and Mauboussin wrote (emphasis is mine):

“… work that we did in 2016 [referring to The Base Rate Book] revealing that no company with [US]$100 billion or more in base year sales had ever grown at that mid-teens rate for that long. Our data were from 1950-2015 and reflected sales figures unadjusted for acquisitions and divestitures but adjusted for inflation. The analysis was not specific to any particular business, but the clear implication was that it was improbable that a company that big could grow that fast.

Amazon will be at a [US]$515 billion-plus sales run rate by the second quarter of 2022 and will have a 6-year sales growth rate ended 2022 of 27.6 percent, if the consensus estimates are accurate… If achieved, Amazon’s results will recast the base rate data.”

In The Impact of Intangibles on Base Rates, Mauboussin also shared the two main ways of making forecasts: The inside view and the outside view. Psychologist Daniel Kahneman, who won a Nobel Prize in Economics in 2002, has an interesting story in his 2011 book, Thinking, Fast and Slow, on these two ways of forecasting.

Kahneman shared in his book that years ago, he had to design a curriculum and write a textbook on judgement and decision making. His team consisted of experienced teachers, his own psychology students, and an expert in curriculum development named Seymour Fox. About a year into the project, Kahneman polled his team for estimates on how long they thought they would need to complete the textbook. Kahneman and his team assessed their own capabilities and concluded that they would need around two years – this was their inside view. After conducting the poll, Kahneman asked Fox how long other similar teams took to complete a curriculum-design from scratch. It turned out that around 40% of similar teams failed to complete their projects and of those who managed to cross the finish line, it took them at least seven years to do so. This was the base rate, the outside view. Kahneman and his team were shocked at the difference.

But in a validation of the outside view, Kahneman’s team eventually took eight years to finish their textbook. A key lesson Kahneman learnt from the episode was that incorporating the base rate would be a more sensible approach for forecasting compared to relying purely on the inside view. 

In an investing context, taking the inside view on a company’s growth prospects would be to study the company’s traits and make an informed guess based on our findings. Taking the outside view would mean studying the company’s current state and comparing it to how other companies have grown in the past when they were at a similar state. 

Jeremy and I manage an investment fund together. The fund invests in stocks around the world, and we have invested nearly all of the fund’s capital in companies that (a) have strong historical growth and thus high valuations, and (b) have what we think are high chances of producing strong future growth. For the fund to eventually produce a good return, its portfolio companies will need to grow their businesses significantly, in aggregate, in the years ahead.

Before we invested in the companies that are currently in the fund’s portfolio, we studied their businesses carefully. After our research, we developed the confidence that they would likely continue to grow rapidly for many years. We took the inside view. But we also considered the outside view. We knew that trees don’t grow to the sky, that it’s rare for companies to grow at high rates for a long time, and that some of our companies already had massive businesses. Nonetheless, we still invested in the companies we did for two reasons. First, we knew going in that we were looking for the outliers. Second, we had suspected for some time that the base rates for companies that sustain high growth for a long time have been raised from the past. 

Mauboussin’s research in The Impact of Intangibles on Base Rates lends strong empirical evidence for our suspicion. He found that companies that rely heavily on intangible-assets grow faster than what the base rate data show. This is an important observation. According to the 2017 book Capitalism Without Capital by Jonathan Haskel and Stian Westlake, investments in intangible assets around the world overtook investments in tangible assets around the time of the 2008/09 global financial crisis and the gap has widened since. As more and more intangibles-based companies appear, the number of companies with faster-growth should also increase.

But intangibles-based companies also exhibit a higher variance in their rates of growth, according to Mauboussin’s data in The Impact of Intangibles on Base Rates. Put another way, intangibles-based companies have a higher risk of becoming obsolete. The quality of an investor’s judgement on the growth prospects of intangibles-based companies thus becomes even more important.

Why did we suspect that companies today are more likely to be able to grow faster than in the past? A key reason is the birth of software and the internet. In our view, these two things combined meant that for the very first time in human history, the distribution of a product or service has effectively zero marginal costs, and can literally travel at the speed of light (or the speed at which data can be transmitted across the web). Paul Graham shared something similar in a recent blog post of his, How People Get Rich Now. Graham is a co-founder of the storied startup accelerator and venture capital firm Y Combinator. He wrote:

“[B]ecause newly founded companies grow faster than they used to. Technology hasn’t just made it cheaper to build and distribute things, but faster too.

This trend has been running for a long time. IBM, founded in 1896, took 45 years to reach a billion 2020 dollars in revenue. Hewlett-Packard, founded in 1939, took 25 years. Microsoft, founded in 1975, took 13 years. Now the norm for fast-growing companies is 7 or 8 years.”

If you’re an investor in stocks, like us, then I think it’s important for you to realise that we’re in a whole new world of accelerating growth.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Amazon.com. Holdings are subject to change at any time.

One of the best books I’ve read over the past year is William Green’s Richer, Wiser, Happier. In his book, Green writes about the lessons he’s gained from his interactions with some of the world’s best investors over the past few decades. One of the investors Green profiled in his book was Nicholas Sleep, whom I admire deeply. Here’s a memorable passage from the book on Sleep’s experience while investing in Amazon:

“Skepticism about Amazon continued to swirl. In the midst of the 2008 market meltdown, Sleep attended an event in New York where George Soros spoke about the threat of an impending financial apocalypse. Soros, one of the most successful traders in history, named just one stock that he was shorting as the world fell apart: Amazon.”

Amazon’s share price ended 2007 at US$92 and eventually fell to a low of US$35 during the 2008/09 financial crisis in November 2008. So Soros likely earned a handsome profit with his short of Amazon. But what’s also interesting is that Amazon’s current share price of around US$3,500 is tens of times (even more than a hundred times) higher than where it was at any point in 2008. The chart below shows Amazon’s share price from the end of 2007 to 30 June 2021.

The passage about Soros from Green’s book, and Amazon’s subsequent share price movement since the end of 2007, reminded me of an article from venture capitalist and finance writer, Morgan Housel. In his piece, Play Your Game, Housel wrote:

“It’s so easy to lump everyone into a category called “investors” and view them as playing on the same field called “markets.”

But people play wildly different games.

If you view investing as a single game, then you think every deviation from that game’s rules, strategies, or skills is wrong. But most of the time you’re just a marathon runner yelling at a powerlifter. So much of what we consider investing debates and disagreements are actually just people playing different games unintentionally talking over each other.

A big problem in investing is that we treat it like it’s math, where 2+2=4 for me and you and everyone – there’s one right answer. But I think it’s actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they’re playing…

…2. Figure out what game you’re playing, then play it (and only it).

So few investors do this. Maybe they have a vague idea of their game, but they haven’t clearly defined it. And when they don’t know what game they’re playing, they’re at risk of taking their cues and advice from people playing different games, which can lead to risks they didn’t intend and outcomes they didn’t imagine.”

An investor who shorted Amazon early in 2008 and covered his short position later in the year, and another investor who invested in the company early in the same year but for the long run, both made the right decisions. They were merely playing different games. 

At the investment fund that I’m running with Jeremy, we clearly know the game we’re playing. We’re looking for great businesses, buying their shares, and holding them for the long run while knowing that the share prices can be volatile. Other market participants can say that Amazon’s share price may fall by 30% over the next year – and they may well be right. But it’s of no consequence to Jeremy and me. Guessing what share prices will do over the short run is not the game we’re playing, and it’s not a game we know how to play. What’s important to us – and what we think we understand – is where Amazon’s business will be over the long run. 

When investing, heed Housel’s words. “Figure out what game you’re playing, then play it (and only it).”

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Amazon. Holdings are subject to change at any time.