My investment thesis is no secret. In fact, I’ve written about it before. Over the years it has remained a stable and simple heuristic in my toolbox that has led to a 35% year-over-year return (and that’s not including the crypto investments 😉 ). But that being said, I think it’s high time I’ve returned to the subject and elaborated a little bit more on my approach to investing.
Before I dive into individual topics, I’ll give a refresher. My thesis, in one sentence, is the world moves towards convenience. That is, every major invention since the dawn of time has made things easier for people. The biggest companies in the world created things that made the world much more convenient, at scale. For the rest of this article, I’ll be elaborating on what I mean by convenience, as well as comparing the thesis to a few other more notable forms of investing. Let’s get into it.
Growth versus value investing
The convenience thesis is, of course, a growth investing strategy. I know that there is an endless war between growth investors and value investors, so let me write a few points on this topic:
- I do believe in the power of value investing. I would say that value has a much more proven track record than growth, albeit with slower and smaller returns. I use NNT’s barbell strategy, where 75% of my portfolio goes into value and 25% goes solely to the convenience thesis.
- The convenience thesis does not involve forecasting. In order to be considered for investment, a company must already have a product that builds convenience for its users that is already launched (i.e. no Theranos). Obviously, the return comes from the idea that the convenience will cause large profitable growth, but I make no projections for this. I sit and hold on to the company unless there is a good reason not to.
- I do take value logic into account. Marcus Andressen and Charlie Munger famously only agree on two things for investing: a good price and a good team. I agree with both of these as well. A good leadership team to me is vital, so much so that I will often sell a company if one of its key leaders has left or retired. And, of course, there are few things worth buying at a high enough price. I would never invest in Amazon, for example, because even though it does provide convenience it is already much too overvalued for its size. Of course, that does not mean I will ignore every stock that the market claims is overvalued – I suppose I lean closer towards Andressen.
In summary, I believe that value investing is a much safer bet (at least, as safe as you can be trusting your money to the stock market) and that forecasting/prediction/most of quantitative finance is still baloney. At the same time I acknowledge some level of uncertainty has to be taken to maximize returns, and I choose to entrust that uncertainty towards the convenience thesis.
Defining sustainable convenience
The next issue here is in defining what exactly “convenience” means. Fortunately, it’s relatively easy to do with examples. The first thing we need to note is that there is a “breaking point” where a product goes from a mild convenience picked up by a handful of people to a world-changing innovation. Take hotels, for instance. Hotels, of course, were a massive convenience upgrade in comparison to housing – people who wanted to go somewhere else had a place to stay in that new location. Hotels first began with the ye olde inn, and then for many years didn’t see much of an upgrade beyond the standardization of the living spaces at a massive scale (think something like Marriott) or different engines for finding particularly good hotels (think Kayak). These were convenience upgrades, certainly – but they did not fundamentally “change the game”, so to speak. The Hotel game only changed when Airbnb came into the scene during the early 2010s. Airbnb made it so that, now, everywhere is a hotel. This does not only disrupt the traditional hotel system by fractionalizing hotel living spaces, but also real estate by allowing homeowners an additional pathway of “creating their own hotel” rather than just renting out a place long term. Now that Airbnb exists, everyone will always expect Airbnb to stay. This is a good heuristic for what defines a scalable, breakpoint convenience.
Of course, there is a difference between convenience and sustainable convenience. During the early Internet boom of the 2000s, the idea of widespread grocery delivery – an incredibly disruptive convenience – was born and executed. The problem was that the global “technological trend” in software and logistics was not such that this industry was sustainable. Since it was not sustainable, it was not profitable. Since it was not profitable, the companies went bankrupt.
Flash forward twenty years, and Instacart is doing just fine. What happened? Well, the technological trends improved to the point where the product became economically sustainable. In Instacart’s case, the widespread adoption of mobile phones alongside the development of real-time marketplace infrastructure a la Uber was probably what nudged it along.
Competition is tricky stuff. It is good for the economy, but bad for business. In fact, I would argue that all of life’s problems boil down to the fact that competition is good for some and bad for others – but that’s a topic for a different post.
As an investor (and therefore capitalist), we fall under the “competition is bad” umbrella. Therefore, we’re looking for industries where there is a single dominant firm at any given time. While Uber certainly follows a sustainable convenience, for example, it wouldn’t be worthwhile investing in it because of its stiff competition with Lyft. It’s hard to tell which one will “come out on top” in the long term, if either, and so we avoid making the decision. On the other hand, we can argue that Cloudflare will stay on top of the DNS market for a long while before any startup disruptor comes in. Another, slightly different example of a sustainable convenience monopoly would be AMD. While AMD competes directly with Intel in CPU and Nvidia in GPU, there is no (current) competitor who competes in both. So, say that Nvidia beats AMD out of the GPU market – they are still safe in their CPU market and thus are hedged against competitive risk.
As I wrap up here, I wanted to talk a bit about exiting. Of course, once something is a sustainable convenience, it doesn’t just stop being one (that is, until something that is more of a sustainable convenience comes out). Because of this, there are some considerations when it comes to selling.
A big change in leadership is the first one. Some companies have key individuals that pretty much keep the whole process in check. Often these are founders, but they can also be particularly good CEOs – for example, Lisa Su at AMD. If these people begin to leave the company, it’s a pretty safe bet to start exiting yourself.
Another is when the company has a massive issue or otherwise fall in quality. Note that a “massive issue” doesn’t mean “Cloudflare was down for an hour, everyone sell!”. An example of a massive issue would be Solana having continuous outages, or Polygon’s continuous hacking scandals.
One thing that I think is NOT a valid reason to sell something is hearsay or negative discussion on the internet. Yes, it is important to take in the opinions of others, especially those that disagree with you. But it is another thing to FOMO out and buy and sell whenever there’s a little bit of news or a SeekingAlpha article that tells you “X is awful!” or “X is amazing!”. That will end you up with a net-zero return, if you’re lucky. For example, Ethereum – as one of the more popular cryptoassets – has gone under a lot of fire. Some of it is for good reason (its Layer 1 is congested to hell), but some of it is not. For example, there was a big news storm when one of the founders left the Ethereum project to go work for a competitor. Good reason to sell, right? Counts as change of leadership? Well, not when we look a little bit deeper and find out that Ethereum has somewhere in the ballpark of 15 different co-founders. The main leader of ETH has always been Vitalik, and he will tell you that he is still very much on the project, thank you very much.
So, this has been the post on my thesis. Yes, I do actively use it. No, past performance is not indicative of future returns. And more importantly, you don’t have to copy me! Take the bits of this that you like and add them to your own strategy. Ignore the parts you don’t. This strategy in itself was developed this way. Investing is, at the end of the day, a game you play with money. Play it and win your own way.