“Great companies don’t fluctuate nearly as much as the stock price—and that creates opportunity”

This week I’m publishing my conversation with John Huber, the managing partner and founder of Saber Capital Management. I’ve gotten to know John over the past year, so it was a treat to catch up and speak with him for the podcast. In the conversation, we cover a range of subjects: how he looks for value, his approach to stock selection, the behavioral elements of great investors, and much more. For those who are interested, I’ve shared some of John’s investing essays in previous editions of the Nightcrawler—see issues #34 & #41 for links to those pieces. 

“The best investments come from the best companies in the long run. I describe it [like this]: In any given year, the quality of the company doesn’t matter nearly as much as investor moods, sentiment, and maybe business momentum… [But] in the long-run… the best investments are going to come from the companies that create the most value. So I tend to look for quality. I like to find companies that have— number one—durability. Because the value of any business is defined as its future free cash flow—and more specifically, the free cash flow that will be generated after year ten. [But first] you have to be able to even get to year ten… which is why I place a huge amount of emphasis on durability.”

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The compounding of “good surprises”

Nick Maggiulli wrote a piece this week that shared an interesting thought experiment: If you were to go back in time and survey sell-side analysts in 2007 about Amazon, the bearish camp would probably have guessed that Amazon would be doing about $27 billion in top-line revenue by 2020. The bulls, on the other hand, would laugh at that suggestion—and suggest it would be closer to $37 billion.

The reality: In 2020, Amazon generated $386 billion in revenue.

I like this anecdote because I think, at its core, the idea gets to the heart of why thinking independently is both so challenging—and so important—in this business. Not every growth stock will be the next Amazon, of course. But identifying companies that have the potential to produce monstrous outsized surprises—compounded over time— will directly correlate to outperformance (and the ability to ride winners). “This demonstrates why Amazon has been such an exceptional stock,” Nick writes, “but it also demonstrates how upside surprises are often overlooked by investors.” 

“Why is this true? Because people hate losses much more than they love gains (*prospect theory has entered the chat*). As a result, they spend far more time thinking about downside surprises (market crashes) than upside surprises (extraordinary growth). Nevertheless, upside surprises happen more often than people realize.”

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What if crypto in 2022 is kind of like social media in 2012? 

This week Kevin Roose at The New York Times published a herculean mega-FAQ on crypto entitled, “The Latecomer’s Guide to Crypto.” Regardless of how you feel about crypto (utopian financial salvation or global fraud or maybe somewhere in between?) there was one particular section of his piece that I thought was smart. (Or at least a good mental model for crypto altogether.)

In the section, Roose compares crypto in 2022 to the perception of social media from a decade ago, around 2012. “In the early 2010s,” he writes, “the most common knock on social media apps like Facebook and Twitter was that they just wouldn’t work as businesses… The theory wasn’t so much that social media was dangerous or bad; just that it was boring and corny, a hype-driven fad that would disappear as quickly as it had arrived.” He continues:

“What nobody was asking back then — at least not loudly — were questions like: What if social media is actually insanely successful? What kind of regulations would need to exist in a world where Facebook and Twitter were the dominant communication platforms? How should tech companies with billions of users weigh the trade-offs between free speech and safety? What product features could prevent online hate and misinformation from cascading into offline violence?”

A few more links I enjoyed: 

Gaurav Kapadia – Everything Compounds – via Invest Like the Best
“To generate extraordinary investment returns, you have to go towards complexity—but then to realize those extraordinary investment returns, you have to decomplexify them. You have to simplify them in a way that you understand what the key value drivers are, and then you can hand that back to the company so they can do the same thing for their other shareholders.”
Why Global Supply Chains May Never Be the Same – A WSJ Documentary
“Every day, millions of sailors, truck drivers, longshoremen, warehouse workers and delivery drivers keep mountains of goods moving into stores and homes to meet consumers’ increasing expectations of convenience. But this complex movement of goods underpinning the global economy is far more vulnerable than many imagined.”

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