“It's remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” - Charlie Munger
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who does not, pays it.” - Albert Einstein
“Patience is bitter, but its fruit is sweet.” - Aristotle
The road less traveled
Who would have thought we would be talking about meme stocks and who would have thought that the stock market could become an entertainment platform for not only the weekend warrior investor but for everybody who is not on Zoom doing something semi-serious, armed with a Robinhood API and fully loaded with Reddit and Twitter accounts ready to go to battle?
Battles are fought with serious financial injuries – hedge funds have gone out of business; personal savings have evaporated – we don’t know the exact casualty count because capital losses, rumored to be many billions, are usually a well-guarded secret as opposed to the winnings, which are trumpeted loud and clear for everybody to read and entice.
Are you thinking of joining the amusement? It is fun playing, I know. You see, meme stock investing resembles playing pinball, where you control two levers at the bottom. You shoot your pinball up the table full of holes and pins with blinking lights and exciting sounds, and your score-teller only goes up. It is intoxicating and instantly gratifying.
But in the end, no matter how long you keep the ball in play, it will vanish in one of the sinkholes. Game-over! You hope to have another quarter to play. Otherwise, you are out.
I am not saying: "don’t play for playing." I used to play for hours in high school with great satisfaction. However, suppose we want to invest instead. In that case, we should consider a road less traveled: a road without the levers which insinuate control, a road without the light flashes, noises, and active positive teller to encourage you to feel euphoric and wanting more; a rather long road, even somewhat dull, without distractions, a road for traveling, to go somewhere, a destination.
Our roadmap at i-Cthru has a time horizon of five to ten years out. It might take some mindful exercises to reset your time horizon but let’s try something simple and think of the following: would you buy a MacBook, an iPhone, a Tesla, a house, or a dog for one quarter? Why would you even buy a company for one day?
Compound interest, the eighth world wonder
Do you know the Indian legend about a King who loves to play chess and asked a visiting sage to play against him? The sage asked for one grain on the first square and double the amount of rice on every square until the 64th. The King accepted and lost the chess game to the sage.
The King quickly realized he could not pay his debt because the first few squares were straightforward: 1, 2, 4, 8, 16, 32 … but on the 20th square, the King needed already 1,000,0000 grains of rice, and on the 64th, the King would have had to provide 18 quintillion grains of rice or 210 billion tons. Yes, such is the superpower law of compounding.
Investing and time go hand in hand. Unfortunately, time is necessary to make investments grow for companies to do their work. There is no magic to it. Companies don’t double their profits daily, quarterly, or yearly for years on end.
It takes time to grow, and it is rare to find companies growing consistently for 5 – 10 years. It is even rarer to double your investments owning these companies. If you can make 15% per year on your investments, you will double your assets every five years. The long-term average gain in the stock market is closer to 9% at best. Please look at Warren Buffett’s track record below; he was an early starter and a lot better than average.
Warren Buffett, the legendary investor, was 14 and had $5,000 to his name. By the time he was 30, he had become a millionaire. By the time he was 44, he had $19 million. At 56, he became a billionaire; at 72, he had amassed 35 billion and is currently, at 90, worth over 100 billion even after his enormous philanthropic gifts.
Now granted, Warren Buffett is exceptional, but you get the point. It takes time. But it also requires something else, which is crucial: don’t lose significant portions of your capital in sinkholes along the way. Losses are asymmetric to profits: they hurt so much more. It takes so much time to make back the losses, which you cannot afford if you want to travel far and take advantage of compounding.
Patience is the new meme; foregoing silly mistakes is the new playbook
There are many exciting new fields to invest in, especially innovative disruptive ones, with significant promises for growth. Venture Capital, Private Equity, Public Equity: we all want in on the next new theme. Fintech, Health-tech, Gene therapy, Biotech, EV’s, Robotics, Enterprise efficiency software, and AI.
However, it takes much reading and learning about these new fields. They can quickly turn into rabbit holes which are deep and often split many times on the way down, while it is never that clear who the winners will be. You can always opt for the spaghetti strategy: throw many against the wall and see what sticks. However, this might not give you the performance you crave and is hardly a sustainable process.
We think it is much better to concentrate on a few ideas and let compounding do its work over many years. If we are lucky, the selected companies will evolve and become even better at what they do every year. We have learned that it is not always the most prominent company that wins. Neither is it the most elegant method or most efficient new technology. It is a rare combination of elements that creates its own momentum. It takes patience to read, to reread, and learn to question yourself as an investor while trying not to be distracted by memes to find these rare companies. It helps if you can see long-term patterns most other people cannot see.
Homer, a Greek mythology writer, wrote “The Odyssey,” which was first published about 700 BC. The hero, Odysseus, wants to sail home to return to his wife, Penelope, and son. This trip will last ten years, fighting many temptations, not in the least the fatal attractions of the Sirens. The Sirens' sweet, luscious, seductive voices have killed many sailors. However, Odysseus does not fall for their temptations and keeps his eye on his destination. His patience and tenacity are rewarded by reuniting with Penelope and his son, at last, a sweet reward for his long bitter travels.
You see, we like the long-term; it filters out all short-term biases. All the companies i-Cthru invests in, in its qualitative strategy, have a promise of secular galactic growth with a very long time horizon. We are sector agnostic and have a strong preference for subscription-based business models and asset-light businesses, enterprise efficiency software-as-a-service models, or specialized platform companies offering transactional efficiency to providers and end-users.
A few of the current names we own are Blackline, DocuSign, Tencent, NOAH, Farfetch, Alibaba, BYD, C3.AI, and Baidu. For more information about our company selection process or the companies we own, please visit us at i-Cthru.com or call us.
We do not doubt that from time to time, our companies will go through serious setbacks, not in the least followed by significant stock price reversals, whether systematic or unsystematic. However, in the long run, our selection of companies, together with compounding growth and much patience, will reward us many times our initial investment.
We are working our way on the chessboard, aiming for the 64th square but taking it one square at a time, trying not to be distracted by memes or Sirens. We are taking the long road home and are enjoying the journey. We hope you will join us.