There is a lot of fear in the market and economy right now. I sense it when I am talking to my relatives during the Chinese New Year holidays. I read it in the news. The economy is bad, industries are slowing down. And here I am invested in the stock market. Actually, the crash will come sooner or later… even when I am investing years back, I am always anticipating a drop sooner or later.
As mentioned by the below post by Living Investment (How bad was the carnage – Stock Indices (12 February 2016)), the STI dropped by 24.5% from 31-Dec-14 to 12-Feb-16. The Straits Times Index (STI) holds the dubious honour of being the worst performing stock index followed by Hang Seng Index.
Ok, this post is not about the market performance. I choose not to suffer.
From Haruki Murakami – we all experience pain in our lives. However, it is your choice to feel suffer or, (kind of) enjoy it.
I was watching this video (click here) – you can fast forward to 1.08min, and Peter Thiel was asked this question: “Many years ago (July 2006), Yahoo! came to Facebook and said that they want to buy Facebook for $1 billion dollar. Mark said no, while Peter said maybe. What happened?”
To this question, Peter explained that the two investors on the board felt that the billion dollar valuation sounded very good base on Facebook’s $40 million revenue that year. Facebook was not yet profitable at that time. It seemed like a good financial deal. They had a long discussion (6 hrs) with Mark as a billion dollar was a huge amount.However at the end of the day, Mark convinced the board that there was a lot of things going for this company and there are still many ideas not developed properly, and figured that Yahoo! would not go away. So eventually, Peter mentioned that this is the key difference between a founder led company and a professional CEO led company. A professional CEO would probably have accepted the deal.
By the way, just for your information, Facebook currently has a market capitalization of $290.35B. So in retrospect Mark (and the board) made the right choice.
Chris Sacca then added that sometimes it is not apparent to the investors how the company is driven by the passion and obsession of these founders, it is not a trade (simply can’t use money to quantify the passion).
In the investment ethos that I sometimes stumbled across, there is always this narrative vs financial fundamentals combination.
Aswath Damodaran simply define this as the “Numbers ” or “Stories” people. Watch this video, and fast foward to 14.20 min.
To him, valuation is not accounting (fast forward to 3.40min). Most of the tools that are developed for accounting is meant for mature companies eg. PE ratios, ROIC, but if we have a growth companies, it doesn’t work. The younger the company, the less accounting matters. Most growth companies are young companies. If he is asked to value a company, there are four basic questions that he needs answers to:
- What are the cash flow the company is getting from the existing investments?
- What is the value he sees the company is creating with future growth? Growth by itself can be worth a lot, worth nothing or destroy value.
- How risky are these cash flows?
- When will the business be a mature business?
Ok, so back to the definitions by Peter Thiel and Aswath Damodaran. I can’t help joining the dots between the two talks. To me the Numbers People are like the CEOs (they see a business in accounting terms), while the Stories People are like the Founders (who drive the company with passion and obsession). Aswath mentioned that he hoped that for Stories people to have discipline and Numbers people to have imagination. And if I stretch this further – some might even relate the Stories People as the Geek and the Numbers People as the Nerd (there is no logic here hahaha).
I like high growth non mature companies (GARP investing). As much as I crunch the numbers to calculate intrinsic values and PEGs or look at the financial fundamentals, I always like to insert a portion on the narratives of the company. Not as perfect as I like it to be – as you really need to know the people / ideas / competitors etc to imagine the future outlook.
In a down market, investing becomes much easier, it becomes more of a numbers game. You basically have a lot of mature companies trading below valuation. As mentioned earlier by Aswath Damodaran, numbers matter a lot for mature companies with long history of consistent performance.
Or during times when mature, fundamentally strong companies suffer a temporary setback. Take for instance Chipotle Mexican Grill and Volkswagen.
I know down markets may mean recessions for us, but for the weary investors who often saw little ‘value’ in the many mature listed companies, this is a golden opportunity. You don’t need to have much imagination to foresee better days (or higher stock prices) 5 to 10 years later in the future. At the darkest and lowest point, it is like shooting fish in barrel.
At times like these, people with very strong discipline (typically value investors) like Seth Klarman, Micheal Burry and John Templeton will be there waiting to offer liquidity.
2 Near-Death Stocks That Are Screaming Buys: Chipotle Mexican Grill, Inc. (CMG) and Volkswagen AG (ADR) (VLKAY) – read here.
However, on other days, if you are looking for a high growth company, you are looking for the Narrative, the Stories – the future – the subjective aspects of any companies.
Young growth companies are often driven by the passion and obsession of the founders. An open mind and strong imagination is required. In its purest form: An understanding of the key people in the management is also very useful. A belief in the idea behind the company is also paramount.
There are people who became very very rich by investing and getting involved in startups, people like Chris Sacca, Elon Musk and Peter Thiel. Their investment style is often difficult to emulate.
Even Chris Sacca (in the above mentioned video – fast forward to 16.50 mins) acknowledged that investing in startups is way more ‘people driven’ eg. he recalled back when he talked to the founders of successful startups (before they were successful or became the fabled “Unicorns”), it is clear from day one that the founders were sure in the inevitability of their successes. They don’t use conditional language, they use simple future tenses. They are often people with extreme personalities…
The investor literally has to look at the founder (who might be alone sharing a desk in a co-working space) and imagine into the future.
To digress a bit: Chris Sacca incidentally mentioned before that in his early years he day traded (while still studying law) and at one time made $12 million (think it was in 1998 -99), but over-leveraged, the dot com bubble crashed in year 2000 and he ended up being $4 million in debt (which later became $2.8 million after he negotiated with his debtors). He did not declare bankrupt and managed to clear his debt by 2005- if I remembered correctly.
Chris Sacca net worth as of June 2015 is US$1.07 billion.
In summary, there are many ways to invest, I think it is helpful to think differently when looking at companies which are in different growth stages. Whether you are a Stories Person, a Numbers Person, a Geek or a Nerd, a person who thinks like a CEO or a Founder…
To end this post off: What do you see below? Numbers or Dreamy clouds? :p
A Pen Quotes 