Pessimists look smart and optimists make money. Which one do you wanna be?
Howdy readers of the blog.
Sometimes I have a hard time understanding how you guys keep coming to my blog even though I update the blog rarely.
Thank you for coming!
I wanted to talk about optimism today and how it impacts to everything.
I have always been an optimist. I don’t have time to waste about anything that drags me back.
Pessimism would have pulled me back big time.
If I worried about the risks of anything, I would never immigrated to Canada.
When March stock market crash brought down my portfolios by 40-50%, I did not even flinch.
All I could think about in my extra time after 10+ hours of work from my day job was to take the most advantage of the discounts of the markets rather than crying over my net worth that got halved.
To be honest… I cried a bit in my mind but accepted the fate fairly quickly and was very confident that I would get back up again.
I have 2 older brothers and one of them is an extreme pessimist. He works at a tourism company which got devastated by Covid.
Korean government pay tourism companies to keep their employees so he has been getting paid almost full but he has been just too negative about the whole thing and extremely worried over his job…
His financial situations?
He has a fully paid condo (through diligent saving) and $100K in saving…
Yes, in saving… and the funds have been in saving even in Feb and March when I told him that this market crash is a once in a decade or two opportunity and would make him easy 30-40% returns within 1-2 years (it actually did within 5 months) but he was afraid and has kept the funds in saving account… that gives him 2% per year.
2 wrongs here.
First, He did not take advantage of the capital
Second, the more importantly, if someone’s fate is heavily dependent on a job, I would really re-look at life and do something to change.
If Covid took away my job, I would have thought that as an opportunity to move on.
Someone popular in investing said something like this
‘Pessimists look smart and optimists make money’
I don’t know who and probably I will never remember the name.
What’s important from that phrase is the message.
The nature of humans evolve. We all want things done better every day.
Look at how much progress we made in telecommunication.
If I look back just 20 years when I had colorful pagers and public phones to call back friends, my past myself won’t believe what I can do with my phone now.
What about cars? Not only cars are on electric but we will soon have fully self-driving cars.
Do you have Netflix account? It knows what I want to watch next by using AI.
The user experience of anything that we use is improving every day.
When I visited my home country- South Korea several years ago, I could not believe how much changes have been made.
The buildings were tall, flashy and architecturally beautiful.
Everything was so connected like crazy.
You can literally do anything with your smartphone.
Can’t find inconvenience anywhere.
If someone felt a bit of inconvenience then someone else already came up with a new product to made us feel convenient again and the changes were happening daily.
Everything needs to happen now.
What about Amazon?
Prime 2 days delivery.
Prime 1 day delivery.
Prime same day delivery.
Prime 2 hours.
Then eventually we will go towards ‘Prime before’
Amazon will know and send you the product before you even know you need it or worse ‘want it’
Think about many consumables like soaps, detergent, cereal, milk all that stuff.
I think we are in the greatest time ever to be an optimist.
Everything is so connected in this digital connected era where the growth can literally happen overnight.
What was the biggest market cap companies in 80’s? 90’s? 00’s? 10’s? I don’t have the data but probably like Walmart, Exxon all those companies.
They have been overtaken by these Microsoft, Amazon, Apple, Facebook, Alphabet and trust me companies like Exxon or Walmart will probably never overtake the top spots ever again.
Historically speaking, the markets have been rewarding investors since like many hundred years ago.
So why waste your time being a pessimist?
The more you are pessimistic, the more you will hesitate buying greatest companies of all.
Vicario told me many times. Don’t be cute. Just buy!
It is never about thinking about what can go wrong.
It is all about what can go right.
How likely that things can go right?
I think one of my readers asked me a while ago why he isn’t making money from stock markets.
I think everyone knows fundamentals are important. Like free cash flow, debt level, revenue growth, insider holding etc.
All very important stuff for sure but I think the one of the most important things that we need to understand are opportunities…
What are the opportunities for the company that you want to buy?
What can go right that gives you amazing returns?
If you focus on downside, you will be blinded to see the biggest opportunities of all times especially right now when things changes daily or even hourly…
If this does not work out, then I guess you will learn your lesson and move on (Just risk comfortable amount to lose)
There is no one can shame you if you get it wrong.
You are an individual investor and you only report to yourself.
You have tremendous advantage over hedge funds guys as they can’t take too much risk.
Their clients call if the hedge funds guys bought some random companies that they never heard of.
The clients want the hedge funds managers to have General Electric than a random Argentinian e- commerce company disrupting entire retail ecosystems in the countries they operate.
The hedge funds guys worry more about how angry clients would be if a great stock shows red for a few weeks to months before it takes off to sky.
It is your own money so you can take the risk and if you get it right, that will compensate for all the wrongs then some.
How to do it?
Be an optimist and don’t dismiss anything even if that makes you extremely uncomfortable.
You gotta be comfortable with uncomfortableness
You need to constantly evolve and think about why other people are doing well in the stock markets but you are not.
Why so stubborn?
If someone did better than you, then can you at least try to copy some of the ideas to see whether that works?
There are million ways of making money and get rich. You just need to find one that works.
If you found your style and has been working well then figure out how to strengthen your style further.
Don’t dwell on your past success because things around you are changing why aren’t you?
Again if you are not sure about the new thing that you just learned then risk the amount that you are wiling to lose.
What’s the setback?
A monthly worth of saving?
That may pay you yearly worth of saving if that works?
At the end of the day, you will at least learn your lesson and get to know yourself better.
Don’t dismiss anyone’s ideas even if you are more experienced and intellectually smarter.
Kids may make more money than us if they just buy stocks of the companies they love.
Remember Tesla? Netflix? Youtube? Spotify?
Shame on me for missing out on Tesla even though the company should never be on any fundamentalists radar. EVER!
Whoever dismissed Tesla because their number sucked and will suck for a while just missed 5000% returns.
Little kids wouldn’t have missed it and would have done tremendously better than us.
I read some time ago that a big hedge funds head guy put a relatively young guy in charge and made young guy’s bosses reported to the young guy.
The young guy did really well and is quite famous now. I forgot his name though but the point is sometimes you need to have young blood in you to make a simple but bold bet when times are right.
Look at the forest (Opportunities) before the trees (Numbers) then bulldoze the forest with Optimism. (Look… I kindly underlined, bold-ed and bracket-ed for you so you don’t miss it)
You will either make money now or learn your lesson that will make you money in the future.
Hey BSR. Great article! I learn much from you.
opportunities > fundamentals > charting
I think so.
Opportunities is for really long terms.
Fundamentals is for mid terms.
Charting is for short terms.
100% agree with u. Simple but brilliant thoughts be smart rich!
You described value investors who are obsessed with P/E make no money in this world because they are obsessed with details. Cheap should work are they right? Their experience weigh them down. People dont get rid of old habits and hope that their obsolete method keep working forever and ignore the massive opportunities of the expensive stocks. Look no further. Buffet. His successors bought apple stocks not Buffet.
When I started investing, I was obsessed with P/E and ended up buying all the cheap utilities, phone service providers and banks.
Comparing where they were 6 years ago and now does not look encouraging for young people (say 20-50) who would need right dose of growth.
Low P/E stocks are better suited when people need income (50-death) as they typically provide growing dividends.
Thank you for another interesting post. I would like to be both somewhat smart capital allocator as well as make some money, if it is possible… 😉
Relating back to my comment in the previous post from May as well as discussion from Patrick’s August blogpost, I was wondering if you could help reveal a little bit more about your security selection and due diligence process to help educate pessimistic cavemen like myself. I agree and understand most of what you have written but it still does not quite “click” in my head (and Gab, I am not an old value investor who lost his train… I am in my 20s and still cutting my teeth). I would really like to learn more about how to do a quantitative assessment of the high growth companies… how the numbers layout on the paper… how to assign realistic amortization adjustments for R&D and marketing expenses… how to discount future dilutions/share-based compensation/convertible debt (in the end, is there any difference between debt leverage and massive future equity dilution leverage)… how to account for greater uncertainty of ever being returned the invested capital due to much longer horizons, et cetera.
I would like to offer to do grunt work to help formalize/quantify your investment thesis/thoughts on how high growth companies fit the GARP narrative in exchange for your mentorship/guidance with the process. My background is in life sciences and not finance. I have, nonetheless, taken two introductory accounting classes and regularly review quarterly reports for TSX companies in my portfolio. I could draft the spreadsheets/summaries/models in exchange for your feedback. I often get lost in the financial statement notes and do not know how to properly make adjustments since I do not understand the GAAP/IFRS rules and how they skew financial results for different types of industries with different cyclical behaviours.
I have not been very successful in meeting my investment return expectations. The companies which fit least my quantitative expectations seem to do the best while the companies which seem to have the best potential on paper often end up in large disappointment. As a result, I ended up with a bifurcated portfolio of very expensive high growth and high ROE business that I very hesitantly bought small positions on one hand… and discounted cyclical stocks with very high free cash flow yields that no one wants to own on the other hand. My current due diligence process and investment thesis is thus broken. Over the past few years, I have been learning from my own mistakes that growth in free cash flow per share seems to be much more important than even high ROE for a company (especially if it requires large leverage). However, I think it is very difficult to reliably forecast future growth of most companies since management and analysts rarely provide reasonable projections and often a single bad decision might send the company into a death fall [especially if it is small or in a regulated industry]. This is especially relevant in high growth companies that you mention since the assumptions are much more important because many do not post any profit and often do not even have positive operating cash flow… while often exhibiting worrying divergence between revenue and expense growth and continuing to dilute the ownership stake in the business. The market has been telling me for years that my simplistic understanding of the underlying value of the future cash flow of the businesses is flawed but I am just not sure what concepts I misunderstand and why. There must be some rationale behind the stock price… even for high growth stocks and I would like to know what it is, what underlying assumptions it relies on, and how to derive it on paper. As an accountant and growth investor, I presume you must have more insights into the pricing mechanism than almost anyone else.
Many high growth companies provide very interesting services and high quality products, but there often seems to be very unclear path into how they will ever monetize it and actually return all of the invested capital back to the shareholders/owners. I have tried to do some back-of-the-envelope projections for some high growth companies several years ago, but the numbers without major positive paradigm shift did not seem to square, even at prices which were several times lower than their current share price and at investment periods of many, many years… sometimes even longer than my own life expectancy [I’m still in university!!!] and often with half or less than the current diluted share count. With increasing regulation, the big tech also seem to be more threatened than several years ago. China now requires being registered with government ID to be able to have an online gaming account, use an internet cafe, or get a payment app while restricting maximum monthly spending limits, maximum play time and hours of play to combat internet addiction, etc. Western countries are increasingly restricting labour rules which might destroy the gig economy and labour outsourcing business model. Antimonopoly investigations, greater protectionism, and gradual elimination of law/tax evasion loopholes also continue to more and more impede the ease of “disruption” of many tech companies compared to the traditional businesses. Instead of mergers and unicorn acquisitions, big tech will have to focus on organic growth and innovation to avoid being dissolved. There is a much more palpable push back against many of the older tech companies from communities and consumers (AirBnB bans, Lyft contractors vs employees, politics and censorship on social media, digital tax in Europe, etc). Could the disruptor companies still return the capital to their owners with all of these additional hurdles eating away at their margins and potential “exit” strategies once they mature? Most larger and more mature businesses also do not have large margins and have to survive against very stiff competition. Will SAAS be any different or will it perpetually struggle against endless supply of “new” irrational “disruptors” with rich backers, who are keen on burning some cash on a new sexy startup just so that they can brag about it and feel cool at parties to score some gullible young tail? When does a startup become a normal company with the same expectations as regular businesses? If there will be a technological revolution like general AI or fully autonomous cars, why would new startups not disrupt the existing companies since they would not have the overhang of the existing equity/debt holders and could thus provide much higher, undiluted returns to the new money which will need to be raised anyways to actually pay for the societal transformation? With digital businesses, installing a new app or going to a new website to make an order has never been easier than before – especially with all of the free viral hype on any “new invention” (theranos, hyperloop, etc.). I have thought about many of these things and still do not have a clear answer for most of them. Perhaps fixing my incorrect assumptions and putting things down on paper with your guidance could help me see the sunshine and get rid of my grounded doom-and-gloom.
I hope you and your family in both Canada and Korea are doing well.
With all the best!
PS: since you mention companies like Tesla, which have been heavily shorted in the recent past… and since you use leverage in your investments… do you also set up stop-loss orders on your holdings… and if so how do you decide on the stop-loss price, how often do you adjust it, how did this strategy survive the covid stock market collapse? Again big thanks for sharing your thoughts and experiences.
Wow Mike. Thanks for your comments here.
For all fundamentals that I really look for are already presented in my previous posts. You know all the important stuff like revenue growth, free cash flow growth, smart capital raise, stock comp, insider buying/selling/holding etc.
Just wanted to point out what made me think about importance of the opportunities is investigating all the successful companies (the ones with enormous stock returns) in the past and they all have many things in common- They are disruptive, are dominant or becoming dominant, their products/services can really scale at minimum/no costs, huge TAM, founder with skin led, huge assets that aren’t showing in the balance sheets (brand power, customer loyalty etc.), industry tailwinds and many other qualities that people/analysts can’t value properly.
I appreciate your offer of working with me but I really don’t have time/energy to guide nor I believe I am in a position to mentor anyone as I am still learning from tones of mistakes that I make.
I am just pointing out in my blog what I learned that may help people to think about things that could be overlooked that are important in my opinion.
I don’t use stop-loss. I just put my head down and wait patiently. Using leverage can be very risky as that would prevent me holding stocks that I love to hold and would likely recover.
My small/experimental portfolio lost 40-50% during March crash so I don’t recommend using leverage to anyone. I don’t use leverage on my main portfolio which is doing a lot better than the one with leverage.
I know Vicario does use stop-loss and I think he does very well with it. I think using it makes senses as when markets are irrational at all times and some stocks can be punished very hard. It certainly protects from the losses. My MTY stocks lost 40%-50% of value and that was one of my highest conviction pre-Covid. If I used it, I know I would have done better but again, I did not. That’s why I am in no position to guide anyone. Just sharing what I feel through my blog.
Thanks for the wishes. Best wishes to you and your family as well!
Nice article i like coming back to this blog every few months to catch up on the latest reads.
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