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The Investing Extremes Dictionary
Forcing better decision making with radical language
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The Utility of Extreme Language
There aren’t many great companies. There aren’t many great founders. There aren’t many great investment opportunities.
The sooner investors accept that reality, the easier we make our lives. Focus on great companies and great founders. Ignore everything else. The hardest part is not fooling ourselves into believing the mediocre to be great.
“The first principle is not to fool yourself – and you are the easiest person to fool.”
— Richard Feynman
Great investors minimize the number of times they fool themselves. We do work on countless investments. We develop relationships with people. We grow fond of mediocre ideas. It’s enticing to say yes. It’s human nature, but if we want to be great at investing, we have to accept that almost every investment opportunity should be a “no.”
An effective way to avoid fooling yourself is by adopting a dictionary of extreme language to describe investments or components of investments. Using extreme terms forces you to test your subconscious for evidence of fooling oneself. If you can’t use extreme descriptions for the opportunities you’re analyzing, they probably aren’t great.
Here’s my dictionary of investing extremes for people, companies, and investments.
Alien - a person with uncomfortable levels of insight, perseverance, and conviction that can create world-changing outcomes.
The alien idea is stolen from Richard Burton who wrote about his alien framework to describe Stripe and other great startups:
Stripe gave me a mental model for potential. An alien founder assembles a group of Jedi to start a cult and go on a mission together.
The alien test works for both public and private investments. Only alien founders create gigantic venture outcomes, e.g. John Collison of Stripe. Only alien operators can ignite company-changing products in large public companies, e.g. Jensen Huang capturing the AI opportunity at NVIDIA 20 years into the company’s existence.
How do you know when you’ve found an alien?
Aliens intimidate you. The depth of thought that they bring to their life’s work and the intensity with which they approach it is uncomfortable. Aliens are one in tens of millions of people. If you can’t easily describe someone as an alien, they aren’t one.
B-player - a person that lacks the intensity and drive to achieve consistent success in business.
B-players hire B-teams, and B-teams inevitably disappoint with missed milestones or quarters, even in the greatest of markets and with the strongest of businesses.
Companies run by B-players should be avoided whether private or public. When you fund B-players in venture, the demands of winning the start up game eventually overwhelm them. In public markets, you convince yourself of the strength of the business even if you don’t believe in the team. You’re confident you’ll exit the investment before the B-team disappoints. You won’t.
Life’s work - the rarely discovered thing someone is meant to do with their time on earth.
When someone is doing their life’s work, they bring a passion and persistence that people just surviving don’t. Aliens can’t help but find their life’s work. It’s built in their alien DNA to collide with their meaning for existence. Normal people can find their life’s work too, but it requires the effort of persistent curiosity. Everyone’s mission on earth is to keep looking until they find their life’s work, then do it as long as possible.
Always bet on someone doing their life’s work, even if they aren’t an alien.
Beachfront - the most beautiful company in an attractive market.
Beachfront property is rare and exclusive. It commands a premium value because of its excellence and scarcity. Beachfront companies possess the same traits. There are few of them. They’re not cheap. They’re usually the ones you want to own for the long run.
Beachfront property is beautiful, as are the businesses of beachfront companies. Beautiful businesses create value that customers can’t easily get anywhere else, creating a loyal, high-margin relationship. A beautiful beachfront business is beyond mere “quality.” The beauty of the beachfront company forces you to admire the rare persistence of the business created by the unique value it creates for customers and its resultant ability to generate strong returns for shareholders.
A lot of houses three blocks from the beach will tantalize you with value and compelling stories, but they’ll never be beachfront. You’re better off looking for undiscovered beachfront that everyone else will discover later than buying second tier companies in obvious market segments.
Crack - hyper addictive products that support the creation of a big business.
Literally, I mean the product is addictive. Smartphones, social media, streaming content, gaming, alcohol, gambling, drugs, unhealthy foods. These all have crack-like qualities.
Great products are inherently addictive because they create pleasure in serving their purpose. I’m not saying social media is a great thing for people to use in some absolute sense. I’m saying social media is a great product because it’s supposed to keep you entertained with mindless content. It performs the intended task extremely well. If you don’t want to be mindlessly entertained, don’t use social media. If you don’t want to get drunk, don’t drink. If you don’t want to go broke, don’t gamble. You get the point.
Any time you can describe a product that isn’t a drug like a drug, it’s got the makings of a big business; however, businesses that only take advantage of people don’t last long. There’s a fine line between addictive and predatory. Users that partake in addictive products — and we all do in some way — invite pleasure with the risk of excess as part of the experience. Businesses that can moderate occasional pleasure from crack products while maintaining customer sanity create beautiful beachfront companies via loyal addicted customer relationships.
Cult - a company with a religious following of unreasonably loving customers that serve as zealous promoters of the brand.
Cult companies emerge by serving a customer segment long ignored by the market, while also adopting the identity of that ignored customer. Apple served tech rebels as rebels themselves. Nike served suffering athletes as athletes themselves. Tesla served cool environmental nerds who wanted great cars as cool environmental nerds themselves.
As a rule, when customers tattoo a company brand on their body, it’s probably a cult.
Cult companies either die by failing to keep their core cult customers satisfied, or they go mainstream while maintaining the cult aura as have Apple, Nike, and Tesla. Cult companies are often great investments as long as the cult remains alive.
Cult companies are also incredibly frustrating short ideas. Logic defies both the passionate customers and the stock. You’re better off looking for non-beachfront companies run by B-players.
Everyone company - a company that serves “everyone” in the world.
Ok, I don’t literally mean everyone, but I do mean billions of customers. Apple, McDonalds, Coca Cola, Microsoft, Google, Meta, Stripe, Johnson & Johnson all touch a billion plus consumers every year.
A company that isn’t yet recognized as an everyone company but could be one is almost certainly undervalued. Few companies reach the scale of billions of consumers. Serving a billion plus customers demands a combination of a unique product that meets an acute widespread need with an operational framework that spreads globally. That setup often enables persistent earnings growth through reinvestment back into the business — a beachfront compounder.
All everyone companies are beachfront. Not every beachfront company is an everyone company. Only aliens doing their life’s work create everyone companies.
Brain damage - excessive effort spent to convince oneself a bad investment is a good one.
Most great investments boil down to an easy decision, yet the investment profession glorifies deep diligence, deep dives, deep insights. It often results in work for the sake of work. All the modeling and diligence in the world can’t save an investment in a non-beachfront company run by a B-player. You might get lucky and time it right, but it won’t be a great long-term investment. Skip the brain damage and look for aliens sitting on beachfront instead.
When you find aliens sitting on beachfront, all the modeling and diligence in the world still won’t help you. You take those opportunities every time, and they shouldn’t take too much thought.
Hate selling - a point of maximum frustration amongst investors about an investment where objectivity is lost in a rush to exit.
Even great companies are subjected to hate selling once every few years.
When hate selling happens to a beachfront or everyone company, it’s often at near a local bottom if not ripe for a turnaround when more positive news about the underlying beauty of the business starts to emerge. If you own a stock that you want to hate sell, test your conviction on whether it’s beachfront. If it is, buy more. If it’s not, move on. If you see some beachfront being hate sold that you don’t own and the thought of buying it makes you sick because it can’t catch a bid, it’s time to buy.
Undeserved riches and beatings - when the market gives you reward or punishment beyond reason.
This idea is from Paul Enright, former Viking PM. Sometimes the market will reward you with undeserved riches, and an investment that shouldn’t work does. Sometimes the market will give you an undeserved beating, and an investment that should work doesn’t.
Undeserved riches should be monetized. Undeserved beatings should be leaned into. Beyond stock picking, the extent to which you can identify undeserved actions for or against you determines your effectiveness as a portfolio manager.
The riches/beating extremes are particularly worth embracing in illiquid venture markets. In market euphoria, everyone earns undeserved riches. Most don’t deserve it. It’s smart to monetize. In market crashes, everyone gets a beating. Only some deserve it. It’s time to deploy into those who don’t.
No-brainer - the exceedingly rare culmination of being able to use several extreme terms to describe an investment opportunity.
Beachfront company with crack products that just endured a bout of hate selling? No-brainer. Invest.
Alien founder building a cult that could form into an everyone company? No-brainer. Invest.
B-player, non-beachfront company that just rewarded me with undeserved riches? No-brainer. Sell.
Dum-dum - how you feel every time you ignore these simple extreme rules, whether through omission or commission.
Use extreme words to make investing easier. Act when the extremes resonate. Do nothing when they don’t. Don’t be a dum-dum.
Disclaimer: My views here do not constitute investment advice. They are for educational purposes only. My firm, Deepwater Asset Management, may hold positions in securities I write about. See our full disclaimer.
Intelligent Indices Update: AI vs S&P 500
Intelligent - using generative AI to create investment strategies that beat legacy benchmarks.
Intelligent Indices now tracks 27 equity strategies powered by generative AI.
Our AI index committee of ChatGPT, Bard, and Claude considers stocks based on market cap, industry, themes, and other factors, then builds an index of its favorite investments.
The early performance remains promising.
The large cap Intelligent Select is beating the S&P 500 by 20 bps. The intelligently equal weight version of the Select is beating the S&P 500 by 160 bps and the S&P 500 Equal Weight by 240 bps. The Intelligent Tech Select extended its lead on the Nasdaq 100 to 130 bps.
The Intelligent Indices approach differs from other AI strategies like the IBM Watson-powered AIEQ because we build a long-term investing mentality into our AI committee. AIEQ has annual portfolio turnover of over 1,000%. It’s almost a new portfolio every month. That’s not investing. That’s trading as defined by Warren Buffett.
Our AI committee chooses stocks that it believes represent Beachfront-type businesses than can generate superior returns over time through business performance, not just that the stock number will go up in hopes to sell soon after.
With the investment approach in mind, I highlight two specific strategies this week:
The Intelligent Differentiated Conviction index (AIDCO): A large cap index of 30 conviction stocks chosen by AI that are not in the S&P 500, Nasdaq 100, or S&P 400. AIDCO is beating the S&P 500 by 260 bps since its early September inception.
The Intelligent Mid Cap Conviction index (AIMDC): A mid cap index of 30 conviction stocks chosen by AI. AIMDC is beating the S&P 400 by 60 bps since its early Sept inception.
These two indexes highlight what AI can do as an investor rather than trader. An investment approach can be brought to a wide swath of specific exposures that investors may want like companies of a certain market cap or companies not in major indices. Those are big categories to disrupt.
I’ll say it again: I believe there will be $10 billion+ AUM ETFs powered by AI investment strategies over the next decade. Maybe many of them. AI is already capable of creating market-beating portfolios, and it will only get better.
The future of investing is intelligent.