Sunday Finds + 3 Thoughts From Last Week
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Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. Does Value Finally Start Outperforming Growth?
I have no idea. But as an interested observer of what happens in the quantitative investing world, it will be fun to see what factors put up the best returns over the next decade. We can already see the value factor closing in on growth on the trailing three-year chart:
Over the past year, value is now outperforming the S&P 500 by 1.6%, while growth is underperforming by 6%. On a five-year basis, growth is still outperforming by 12% while value is underperforming by 16%. Going back even further, the 10-year performance is almost the same as the five-year, with growth outperforming the index by 14% and value underperforming by 18.7%. But this outperformance has slowly started to reverse in 2022.
Again, I have no idea whether this new trend will continue. But I think it is smart to be mentally prepared for a decade where the value factor outperforms the growth factor, and what it could mean for your portfolio. It has happened before, so why can’t it happen again? Set your expectations accordingly.
I don’t think these factor moves should be considered when making a fundamental investing decision. But it can explain short-term stock movements and why your holdings may be underperforming even if your thesis about the business was correct. Sometimes, all that matters is where the money is flowing.
2. Is Elon finally toast?
Maybe. Never count out the man who has continually proven the law doesn’t apply to him. But I think this new Business Insider story about sexual misconduct could end badly (I’m strictly talking about the impact on Musk’s empire, not whether the story is true or not). Why? Because if more and more of these allegations come out, the chances Musk has to step down from his role as the leader of Tesla increases. Losing Musk would be devastating to Tesla stock because the majority of investors own shares simply because of him.
Elon has always been on the edge of bold/visionary and reckless. This is great when everything he touches seems to turn to gold, his reputation is top-notch, and the stock is soaring. But when all those factors are inverted, things can spiral out of control quickly. Not saying this is guaranteed to happen, but the chances are not something investors should dismiss.
I don’t believe it is defensible to own Tesla stock anymore, even if the business looks extremely healthy right now. With all the other opportunities out there, why take the risk? What reward (in the form of stock returns) could possibly make up for all the uncertainty here?
If you dislike Musk, one way to potentially get back at him is to buy shares of Twitter stock. The shares are trading at a huge discount to his proposed buyout offer (one he increasingly doesn’t want to do) and Twitter executives seem keen on pushing the deal through. If it does go through, you will make a nice little return, courtesy of one of the richest people in the world and his financing partners. Obviously, this is not investment advice, and you should determine yourself the likelihood of the deal closing at the proposed price. And you should probably never make an investment decision out of spite. Seriously, don’t listen to me.
3. Minimizing Return on Brain Damage
With Twitter and Tesla on the mind, I’ve been thinking about the concept of “return on brain damage.” Previously, it is something I’ve disregarded because I didn’t know what people meant when they said it and I thought it wasn’t useful. Over the last year, that has changed for me,
I think there are two forms of “brain damage” that can make a stock/company less investable:
There is too much of a hurdle to understand the business. A recent stock we looked at that reminded me of this is Brookfield Asset Management. It has a good track record of creating shareholder value and seems to be benefitting from some industry tailwinds, but I knew immediately it would be going in my too hard pile. Sure, if I spent months having it as my top research priority, maybe I could get comfortable with it. But the potential returns from holding the stock do not seem worth all this time spent. I’d much rather research stocks with simpler business models.
Executives, the financial media, and/or politicians are constantly (whether intentionally or not) doing things that could potentially stress you out as a shareholder. Tesla is a clear example here, even though the stock is up a ton in the past few years. Twitter and Facebook could both be considered in this category for me due to the constant political shenanigans that won’t go away. Square/Block with its crypto initiatives are another example. Even Shopify, a high quality business with phenomenal fundamental growth in the past decade, could be inching its way to brain damage territory if the executives won’t stop tweeting about the stock price and the track record of financial analysts (Seriously, stop it Tobi).
Of course, deciding what has too much brain damage is highly personable. You might be perfectly comfortable investing in any of the stocks I just mentioned. But I think the concept is important for any investor to consider because it can help you stay in the game over the long haul, which is the most important thing in the end.
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.***
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Catch up on Our Shows From Last Week
3 Good Reads
Trying too Hard - Morgan Housel
Henry Ford banned his factory workers from documenting new ideas that didn’t work, because he feared it would create a list of things people refused to try again even when new technologies improved their chances of success. What was impossible in one era might later not only be doable, but the key to success.
Cable’s Last Laugh - Stratechery
The second takeaway, though, is that the cable companies are better suited than almost anyone else to rebundle for real. Imagine a “streaming bundle” that includes Netflix, HBO Max, Disney+, Paramount+, Peacock, etc., available for a price that is less than the sum of its parts. Sounds too good to be true, right?
AWS For the Rest of Us - Technically
Cloud-based apps have most of their code deployed on a big, powerful server in someone’s data center - not on your computer. When you load up Twitter, your browser is sending a request to a web server - that server runs a bunch of code, generates your feed, and then sends back a bunch of HTML that makes up what you see. The same thing happens when you use Office365 over the web, or Gmail, or any other cloud-based service.
1 Good Listen
The collapse of the Terra ecosystem, and the tokens Luna and UST, will go down as one of the most painful and devastating chapters in crypto history. Over $60 billion market value has evaporated, and numerous retail investors are nursing major losses. What's particularly bad is that this was a big project, championed by some of the most notable names in crypto. But some people obviously saw it coming, and understood it to be a disaster in the making. On this episode we speak with Kevin Zhou, the founder of the crypto hedge fund Galois Capital. He began warning about Terra publicly earlier this year, and was short Luna starting in early May. He explains the exact mechanics of the coin's implosion.
Smart and Funny Tweets:
