Valuation is overrated, and most other rules of investing are ‘total baloney’
I was reading Warren Buffett’s favorite book, “The Intelligent Investor,” one beautiful fall day, and I was intrigued with value investing. Many people believed in value investing, made popular by Warren Buffett since he had a successful career doing so. Despite his entire life, many people have said value investing has become obsolete, I personally think it has evolved. To me, value and growth should mean the same thing, and this is the misconception that people have to think that they are different.
However, I was talking to my friend who was working for Fidelity as an equity researcher intern, and we were discussing the mutual funds that I hold and my idol investor, Ray Dalio. I told him I am interested in the growth of alternative tech stocks, but he disagreed. He thought my ideas are dumb (this was 2019) and that tech stocks valuations are overpriced and unjustified with the insane multiples. He also thought Elon Musk (as he called Felon Musk) was going to jail because of the “stupid ideas.” He, similar to many male finance bros, has a massive ego that is more unjustified than these tech stocks. From this, he did share with me Mark Schmel because it was similar to what I was interested in.
Now (Dec 2020), Mark Schmel’s portfolio performance went up over 100%, and this friend of mine is working at a Boston investment firm covering… tech stocks. And now he says he loves it, and he likes it even more as he is learning about it. The moral of the story is: “Don’t trust the analysts, especially the loud talkers.”
So, moving on to the meaty part, which is why I like Mark Schmel and his philosophy.
Here is a video of him talking about embracing change and innovation:
Mark Schmehl said that he doesn’t believe in value investing, and personally, I agree. In my opinion, investing is changing rapidly, and the world is not the same as it was, and we need to learn and adapt as investors. Certain concepts and values still hold, but business models have evolved. I believe as an investor now, we need to find our own competitive edge, and value investing might not be the right strategy for you. And innovation is more valuable to the world and justifies the growth it has.
Events change quickly. People don’t. Recognizing those moments of change allow me to find opportunities that traditional investors overlook. — Mark Schmel.
There have been many occurrences in the past where people panic and become manic over hype. It is especially hard to tell back in the days whether or not it was a bubble, and it is only obvious after the fact. So, for example, we recently had a Bitcoin bubble. We had a rally that and the coin was going up like over 100% a day. It went on for months, and there were news articles around it. Despite how many bubbles have happened in the past and people lose lots of money over “investing” in these assets, bubbles still happen every few years.
When I was talking to the Fidelity intern, he was covering consumer goods, like candies and toys, so good cash flow, an old business model with strong execution. He was absolutely obsessed with earnings, cash flow, and price-earnings ratios because he was taught to do so in school and prior internships, but that no longer applies to the current tech-driven stock market.
Now that we are wrapping up in 2020, it has been proven that tech stocks are more “recession-proof” than traditional stocks. For example, luxury goods are known to be more of a recession-proof stock because rich people are not affected by the volatility of the economy as much as the average joe, so they still have purchasing power when times are tough. This is still the case since Louis Vuitton recovered 58% from the bottom in April (till Dec 2020). However, tech stocks had exponential growth from the market since there is more demand from the strong performance, reduced expenses from offline belief in investing at the extremes of the market instead, including Canadian cryptocurrency stocks because investing is a forward-looking business, not backward.
It is all about finding industries where rapid change is occurring. — Mark Schmel.
Mark focuses on the tails of the distribution curves: really cheap, broken, horrible stories that nobody wants to buy again, and stocks that everybody is excited about but their valuation is so high they can’t bring themselves to buy them. He finds industries with disruptive growth where you cannot find anywhere else in a mature industry. The beaten-down sectors show signals of hope or disruptions, like PayPal Holdings Inc. and video-game company Take-Two Interactive Software Inc.
Mark doesn’t believe in Warren Buffett, who is known for finding companies with strong MOAT and positive cash flow. Mark cares about new things, innovative things that are growing, that are changing the world.
I think betting against the consensus and being right is very important in investing and to execute well while being creative in investment decisions.
Those stocks that look expensive don’t faze Mark because like a luxury item, you pay a premium for things that is valuable. Valuation is an immaterial part of the process for Mark. It’s the least useful piece of information is the information that everyone knows, and since “Intelligent Investors” has commercialized valuations, they are no longer valuable.
In the current long-in-the-tooth bull market, Mark has noticed that there are fewer of the horrible stocks and more of the expensive change-makers. Mark also has been adding to positions in copper and energy stocks but otherwise is mostly focused on disruptors.
Among Canadian stocks, personally, I am investing in Shopify Inc., Canada Goose Holdings Inc., and “everything” in the emerging cryptocurrency space. Stocks that have sprung up in the Canadian sector like blockchain and AI.
For this type of investing, you have to have a pretty thick lining of your stomach because you can expect stocks to fluctuate to -20%, but I plan to hang onto those companies right to the end of the bull-market cycle, and maybe even beyond. Mark has said that he will ride this thing right over the top and will hold the best stocks right to the end.
During the crash in April 2020, my portfolio was down 50%, but that kind of double-digit loss didn’t frighten me. I bought more. And as a result, I am now up 100% in 2020 alone. And I am ready to watch for the next wave.
Unpopular, I know. You will either see me broke or super rich in a few years, only time will tell.