“Life is long, if you know how to use it.” – Seneca
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The two ways to create wealth in the market (and how to pick winners)
To paraphrase Michael Mauboussin’s latest report, there are effectively two main strategies to generate long-term returns in the market. The first is obvious: Own an index fund for many years, and you will naturally capture both the asymmetric winners and losers in the skew. The alternative is to own a relatively concentrated basket of companies. Given that only a small handful of stocks drive overall market returns—2% of stocks have driven 90% of aggregate wealth creation—it pays to be picky. These superstar wealth creator stocks are hard to find—but not impossible.
Of course, finding a winner is only the beginning. Being able to ride the investment for many years (during the inevitable ups and downs) is what separates a good investor from a great one. In this report, Maboussin explores a few common traits among these outliers, from big stock price drawdowns, rapid increases in net income, a rising return on assets, and more.
“The skewness in corporate wealth creation suggests two potential investment approaches. The first is to seek broad diversification in an index fund. If the future is similar to the past, the outperformance of the wealth creators will more than make up for the underperformance of the losers. The second is to build a portfolio that seeks to avoid the wealth destroyers while owning the wealth creators. Bessembinder finds that the wealth creators have certain financial characteristics that are identifiable, albeit difficult to predict. He also finds that the stocks of many of the top wealth creators suffered major drawdowns, events that often cause all but the hardiest shareholders to sell. He shows that a portfolio’s exposure to the skewness is a function of its concentration and rebalancing frequency. Portfolios that are concentrated and do not rebalance often are more exposed to skewness.”
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Principles of an asymmetric life
“If I had to summarize great investing in a single word,” writes the investor Graham Weaver, “it would be ‘asymmetry.'” In this essay, Weaver uses personal experiences to explore how the concept of asymmetry shaped his life, and offers several principles to use asymmetry across one’s investing path, career, and personal aspirations. “Apply one of these to your life,” Weaver writes, “and you will improve your life significantly.”
“I learned that, yes, it is possible to reduce one’s downside, but it is not possible to eliminate it. The better strategy is to seek opportunities where the possibility of gains wildly outweighs what you can lose, which is typically capped at 1x your investment. Further, there are criteria, which, when you stack them on top of each other, don’t stack linearly; they become logarithmic — or asymmetric. For example, if you have an incredible management team who builds a great team to support them, moves at a fast pace, operates in a large industry, can redeploy large amounts of capital at high returns, and is willing to do so over a long time – then you’re not playing for a 1.5x or 2.0x outcome, you could be playing for a 10x, 20x, or even 100x outcome.”
“Our guest today is someone we’ve mentioned frequently on this podcast, Liberty. It’s difficult to define exactly what Liberty writes about – but that might explain why we find his work so fascinating. He is a curator of great content and acts a sherpa for his audience, pushing them to find new things that resonate with them. It’s a role that feels increasingly needed as we live in a world of infinite content. During this conversation, we discuss that role, how Liberty has approached his craft, and how this led him to new opportunities like Infinite Media at O’Shaughnessy Ventures.”
“Our cognitive capabilities extend far beyond conscious use of reasoning through language. Many have experienced being stuck on a hard problem, stepping away from it, and returning later with the answer. Sometimes meditation, a walk, or a nap result in our subconscious producing the answer. What is happening? While we wish we knew more about the process, what we do know is that mental progress is being made subconsciously. This is valuable and useful.”
“Where does ambition come from? It is a lack of adjustment because if you were a perfectly balanced person, you wouldn’t have any ambition. You’re so happy with where things are, you barely have a reason to get up in the morning. But maladjusted people, they just have this disparity between where they are and what they want to do and what they want to prove. I like people that have attitude, that have a chip on their shoulder, that have a burning need and desire to prove something.”
This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. This article contains links to 3rd party websites and is used for informational purposes only. This does not constitute as an endorsement of any kind. While Nightview uses sources it considers to be reliable, no guarantee is made regarding the accuracy of information or data provided by third-party sources. Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request.
Reflection doesn’t come naturally to me, but writing—especially for others—makes it non-negotiable. These aren’t just lessons. They’re pieces of a year that shaped me.
