Time horizons are everything in this game

Market swings are typically a good time to reflect and ask a fundamental question: What game are you playing? Our game as long-term fundamental investors is relatively straightforward. We spend our time and resources identifying companies that offer the highest likelihood of thriving well into the 2020s and beyond. We study the field, and determine who is best poised to win.

That’s it. That’s the game. In this context, short-term price volatility, while potentially unpleasant, is a sideshow. It’s the amygdala of the market. Bill Ackman gets this. In his recent letter, he shares some of the reasoning behind his decision to purchase shares of NFLX after a steep drop in the stock price: “While we do not know what the stock market will do tomorrow, next month or even over the next year or two, we believe that our companies will continue to compound their intrinsic values at high rates for the long term.”  Exactly. It’s all time arbitrage—and opportunity presents itself to those who can play the long game. Ultimately, I think some of the recent market gyrations will prove to be healthy for the market over the long-term. It will flush out the weak and force the concentration of capital into the select winners.

Stories alone will no longer sell to the public market—results are what drive returns. Meanwhile, valuations have dropped to pre-pandemic levels, while business growth, in select companies, has accelerated. Like we said in our annual letter, we think it’s a fantastic time to be a stock picker. Positioning in this environment—and playing the long game—is the key to compounding success. 

“Many of our best investments have emerged when other investors whose time horizons are short term, discard great companies at prices that look extraordinarily attractive when one has a long-term horizon.”

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What an animal’s metabolic rate tells us about growth companies

I enjoyed this week’s biology-themed research note by Counterpoint Global’s Michael J. Mauboussin. Using work by Geoffrey West, a theoretical physicist, Mauboussin creates a new framework (using biological growth rates) for thinking about corporate longevity and the effects of technological disruption. Of course, there are limitations to this framework—non-linear growth patterns in corporate America don’t exactly correlate to a raccoon’s body mass—but there’s some worthwhile ideas in the piece that can be extrapolated to thinking about markets and technology businesses more generally. “Many organisms, including mammals, follow a trajectory called ‘determinate’ growth,” Mauboussin and his colleague Dan Callahan write. “With age, the allocation of resources shifts from growth to maintenance. Growth stops at the point that maintenance needs consume all of the incoming energy. Companies appear to follow a similar pattern.”

“Technological obsolescence creates the risk that a company overestimates an asset’s useful life. For example, the costs for companies in certain industries addressing climate change, or for automobile manufacturers migrating from internal combustion engines to electric vehicles, are potentially massive. These costs are necessary to maintain market position, sales, and competitiveness.”

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A re-rating in multiples is healthy: It’s a good setup

Gavin Baker, CIO of Atreides Management, made a smart point on his recent podcast conversation with Patrick O’Shaugnessy: Valuation multiples for software stocks have pretty much round-tripped to 2018 levels. At the same time, many of these businesses (not all, of course) are in much better financial positions. “And I think one thing that is missed in these analyses that you kind of see, whether in multiples today versus then, is these companies are much better,” Gavin says. “So software multiples are back to where they were in ’18, but software companies today are growing faster and broadly speaking have better margins.”

“I do find it encouraging from a go-forward perspective that we’re already where we were or below where we were in 2018 when rates were higher, you’re much deeper in a tightening cycle…. Same thing with a lot of the internet companies. These industries have continued to mature from a cash generation perspective, but they’re not really maturing from a growth perspective.”

A few more links I enjoyed: 

Gigacasting // Super Vacuum, Argon Injection, Die Coatings, Thermal Regulation – via The Limiting Factor
“What are the challenges of die casting that apply to gigacasting and the engineering solutions inolved in solving them? This video covers the supporting cast of the gigapress, including Argon Injection, Super Vacuum, Die Coatings, Thermal Regulation, and Elon’s comments about machining and datums.”
Big Skills – via Morgan Housel
“It’s tempting to want to find the one big skill that will set you apart. But most incredible things come from compounding, and compounding isn’t intuitive because the incremental inputs are never exciting on their own.”
Tiger Global, Alkeon Slash Startup Valuations Amid Public Stock Selloff – via The Information
“For more than a year, startup founders have watched in awe and some trepidation as hedge funds and other large investors flooded private startups with big checks, pushing up valuations and making it easier than ever to raise money. Those freewheeling days may be numbered as a sell-off in public tech stocks bleeds into the startup world.”

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.