Sunday Finds + 3 Thoughts From Last Week
ZoomInfo + Q4 Roundtable Discussion
***In December we released season 2 of our new podcast, A History of Financial Markets. Check it out on Spotify, Apple, or wherever you listen to podcasts.***
3 Thoughts From Last Week:
Keep it simple, stupid. I’m seeing a lot of people/professionals in the finance industry trying to make things complicated at the moment. Omnicron, rising rates, Fed tapering, inflation, 2021 comps, supply chain issues…and much more. Honestly, I think it is futile for 99.9% of investors to focus on these topics when making investment decisions, as most of them are unknowable on a time horizon of more than 3 years. I’m a proponent of the K.I.S.S. system, which stands for “keep it simple, stupid.” This is a design principle started by the US Navy in the 20th century, with the philosophy that, all things equal, a simpler system is always better than a complex one. In other words, avoid unnecessary complexity. In investing, I’ve found that keeping it simple is usually the best course of action for making rational decisions that you can stick with over the long term. When thinking about an investment, I usually ask myself three sets of questions:
How much cash will this business generate over the next 3, 5, 7, and 10 years? How confident am I in each of these predictions?
What price do I have to pay for this business? (i.e. what is the market cap/enterprise value)
Do I trust management to act responsibly with the cash that is given to them?
The first and third questions might spawn dozens of other questions that need to be answered, but I think this is as simple of a framework you need when deciding whether to buy a stock or not.
Favorite part of the recent bubble. Even if the indices are close to all-time highs, the bubble that formed in many small, mid, and large-cap technology stocks has started to deflate over the past few months. Jerry Capital on Twitter started a nice discussion about this, asking the question “What was your favorite signal of the top in the tech bubble?”. I have two personal favorites. First, the renaming of the Los Angeles Lakers Arena to Crypto.com Arena was the clearest signal to me that the craziness was/is about to end. This happened at the end of the 1999/2000 bubble as well. Without much data to back it up, I think this happens when companies/start-ups have more money than they know what to do with and/or are leaning headstrong into sacrificing good unit economics for growth at all costs. The only two times in recent history that this has happened en masse are the dot-com bubble and today (I think). My second favorite moment was Elon Musk cashing out $16.4 billion worth of Tesla stock in late 2021 with the company trading at a market cap north of $1 trillion. As our good friend Jim Gillies reminded everyone in the replies to Jerry Capital’s tweet, this happened at the end of the dot-com bubble as well, signaling that the party was over (even if executives said it was for other reasons).
Revisting Square (Block). I threw out the following question on the Twitter machine this week: “What are everyone's thoughts on $SQ now? Back down to (potentially) reasonable GP multiple of ~17.” Most responses were as you expected, with growth investors saying they were adding here and value-types still hating on the company. I’ve followed Square/Block for a long time, but haven’t owned it in over a year. I used to love the business, but the Afterpay acquisition and big pivot into Bitcoin have made me nervous about its future prospects, which is why it continues to stay on the watchlist at the moment. There’s one thing that keeps me following the business (and what a lot of people in the replies misunderstand), which is the Cash App. To me, it is clearly the superior personal finance app in the United States, blowing the competition like Venmo out of the water. I’ve switched to using the app and its free debit card (the Cash Card) for my day-to-day spending needs because of the consistent discounts and cashback rewards it gives me on daily purchases. It also is a much easier app to manage than my traditional banking app, which I just use for my emergency fund now. I see no reason why I would switch away anytime soon. Square/Block might blow its potential by wasting money on Afterpay and Bitcoin initiatives, but there’s no denying how much of a beast the Cash App is. There’s a reason it is the 3rd ranked app on the Google Play store right now, ahead of Instagram and Zoom Video.
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
Catch-up on Our Shows From Last Week:
Navigating Market Volatility (Appearance on 7investing Podcast)
3 Good Reads:
1 Good Listen:
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Smart and Funny Tweets:
