“The idea that you can’t innovate in the public market is nonsense”

One of my favorite conversations from this past week was with Brad Gerstner, founder and CEO of Altimeter Capital, a crossover investment firm based out of Boston. The discussion is wide-ranging but Brad hits on something that I’ve thought about regarding the nature of investing in public markets: Namely, does innovation regress post-IPO? In my opinion, not at all. In fact, I’m inclined to believe the counterfactual, which is that over the coming decades, we’ll likely see the most technological innovation (and highest return streams) emerge from public companies, rather than private companies. Why? Generally speaking, I think a convergence of dynamics—from increasing returns to scale and winner-take-all consolidation effects—will create exceptional outcomes for a small cadre of public companies.  

“I hope that we start to see a return of earlier IPOs. I think it’s great for retail investors, I think it’s great for companies. They need the discipline. Having companies running around with billions of dollars on their balance sheets and ‘decacorn’ valuations—and not the discipline of public markets—to me is not a great thing for the company, nor for the employees or the founders… This idea that you cant innovate in the public markets is nonsense… I think the public markets not only is an important source of capital, but it provides discipline. Scarcity leads to ingenuity.”

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Outcomes are unreliable indicators of success—process is what matters

Michael Mauboussin of Counterpoint Global is out with another smart research note, this one centered on the improvement of investment processes in order to improve outcomes. As with all Mauboussin notes, his research is multidisciplinary, ranging from studies of football player performance to work on prospect theory and heuristics.  “Providing feedback to fundamental investors is inherently difficult because the process to make decisions is often poorly defined and the outcome, the rise and fall of asset prices, is noisy in the short run,” he writes. “One way to solve this problem is to break down decisions into measurable components. But it all starts with documenting decisions and how they are made. Without a record of what you expect to happen, it is difficult to measure the accuracy of your predictions.”

“Superforecasters and successful investors share a lot of the same qualities. They seek to anticipate outcomes
in a probabilistic world by understanding what has happened in the past, properly updating their views to reflect new information, and working hard. These skills do not come naturally to many, and the research suggests that how we think is more important than what we think.”

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A few more links I enjoyed: 

The State of Software – via Voss Capital
“The common perception here is that the so called ‘high-flier’ stocks which were trading at obscene 30x+ sales multiples a few months ago were in their own little bubble that is bursting and thus have borne the brunt of the severe deratings. The thinking goes that these high-fliers are primarily high growth and currently low margin companies, with most of their value deriving from cash flow several years out. As interest rates rise and investors put a higher discount rate on cash flows in out years then that value should get disproportionately hit relative to the lower growth, lower multiple names that are generating FCF right now.”
The Man Behind Ethereum Is Worried About Crypto’s Future – via TIME
“Buterin worries about the dangers to overeager investors, the soaring transaction fees, and the shameless displays of wealth that have come to dominate public perception of crypto. ‘The peril is you have these $3 million monkeys and it becomes a different kind of gambling,’ he says, referring to the Bored Ape Yacht Club, an überpopular NFT collection of garish primate cartoons that has become a digital-age status symbol for millionaires including Jimmy Fallon and Paris Hilton, and which have traded for more than $1 million a pop. ‘There definitely are lots of people that are just buying yachts and Lambos.'”
This Timber Company Sold Millions of Dollars of Useless Carbon Offsets – via Bloomberg
“The problem with carbon markets, he says, is that weak rules have created strong incentives for landowners to develop offset projects that don’t actually change the way forests are managed, and therefore do little to help the climate. Most forest carbon projects, including some from Lyme, fall into this category, Hourdequin says. ‘I believe in being intellectually honest about it,’ he says.”

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