Investing Desk picks #1

Public markets don't matter anymore & Morgan Housel Agony of high returns & Mohnish Pabrai lecture

October 16, 2020

Snir's investing desk is a newsletter focused on intelligent, value investing for the individual investor. The subjects are evergreen and deals with the essence of investing, mental models, and concepts.

Things I read

Public Markets Don't Matter Like They Used To - Matt Levine

Interesting perspective on the role of public markets today.

Matt starts by stating the role it used to have:

If you were a company and you needed money to build a factory, you could sell stock to investors. Investors would give you the money in the hopes that the factory would be profitable and you'd have more money later on

But then goes on to explain how this role is now in the private market and with private funding. That's in the case it happens at all, as businesses built around software or marketing today can easily be bootstrapped.

Public companies are older and larger than they used to be, stock buybacks are more important and stock offerings are less important

That is, public companies are so rich today they don't need our money anymore. Most of them are just money printing machines.

We are trading on the future earnings of the company, no longer fulfilling the role of capital investments to grow the company.

Especially with today's environment of 0 interest. You need money to build? just raise some debt.

What this means for us as investors in the public market is that we have one less game to play. It might have been a great specialization - learning how to find reliable managers and give them the funds to start new ventures.

This specialization exists - but just for private VCs. We need to focus more now on future prospective of companies alone.

The Agony of High Returns - Morgan Housel

Best investments does not mean a smooth ride to the top. I revistided Morgan's example for $MNST in these 3 tweets:

The main takeaway for me is: only invest in companies you understand.

Even the best investment in 20 years will be scary, as it will have huge drop (>50%) multiple times. The only way to endure it is to understand the business, understand the fundamentals and be sure for the long term.

Things I watch

Mohnish Pabrai in a lecture from a year ago. His main point, explained through multiple examples, is that a great business is not necessarily a great investment.

Mohnish is looking for great investments - which might come from not absolutely great companies. As if a company is really great, usually everyone else already knows it's great and it's priced accordingly - usually making it not a great investment. It might still be a good investment, but the potential upside is low.

I summarized one of his examples here: