Yesterday I had a nice conversation with a very thoughtful investor. He noted that while investing is pretty simple — buy low, sell high — people often confuse its simplicity for ease.
I love this notion. Because over the years, I have come to realize that investment success is predicated on some pretty basic principles. Depending on your strategy, success requires a varied combination of hard work, thoughtful valuation discipline and underwriting, and careful portfolio construction. As an investor, this enables you to find unique opportunities, buy investments to sell at a higher price at a later date, while ensuring that the distribution of profitable and unprofitable investments in a portfolio, on average, delivers a solid return. This sounds pretty easy, right? Nope. It’s not.
After analyzing the strategies and results of countless public and private investment strategies, I have come to realize that no matter your “strategy” or “angle”, making profitable investments, especially above-average investments, is not just hard, it’s extremely hard and getting harder in certain market segments. (However, to be fair, investing is not rocket science.) Yet, due to the seductiveness of investing’s simple nature, I am always amazed by those with limited experience in complex investments boldly doing so with the assumption that making money is easy.
When the history books are written on “Unicorns”, I believe it’s this confusion of investing “ease” that will be an interesting tale to tell.
Professionally I don’t get too excited about consumer technology IPOs, but I sometimes find myself entrapped, following certain consumer names for personal reasons. Snap is my current haunt. Snap has been a fun saga to follow and experience. I went from skeptic, to Snap user, to Facebook Stories user, and now back to being an avid Snap user (for good). I used to live in Venice Beach and skateboard past Snap’s first office before Snap was Snap; my old boss is now Snap’s #3 exec; and I constantly toil with wrapping my head around the sheer size of the opportunity around this company (it’s a big one).
For all of these reasons, I wanted to put my brief thoughts down on paper to hold myself accountable and to share some insights with readers. For full disclosure, I am not buying IPO stock, I don’t own any stock, and this is not investment advice (see disclaimer below). This is just my initial set of high-level thoughts to focus in on what I believe are the key issues. If you want vast reams of analysis, metrics, and fun with numbers, I would point you to Snap’s S-1, Goodwater Capital’s review, RetailRoadshow, or here, here, and here. Lastly, apologies for the poor grammar below; I am in heavy GSD mode these days due to my two start-ups (family and company). (more…)
Sourcing, underwriting and constructing a portfolio of investments that produce attractive investor returns is tough and sloppy work. That is why I liked this quote from Michael Mauboussin on putting process around investing.
“We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process, we maximize our chances of good outcomes.” — Michael J. Mauboussin
I love this quote and often use it to keep things in perspective, especially careers.
When reading professional biographies and interviewing job candidates, it often seems as if careers are a linear process. However, as I grow older, while it is true that some people enjoy careers that are truly linear, I am coming to appreciate that careers are more like a journey with a rough destination in mind. Individuals are constantly striving to reach their long term career goal, while having fun (however you define it) and picking up pieces of knowledge at each stop along the way to help them do so. (more…)
As I continue to unwind from investment banking, I have been enjoying reading a lot again. I have already worked my way through more books in the past six months than I did during the the three years of working at Credit Suisse. At the same time, I have been back to writing more, too. My writings have mostly been investment memos at work, but I am beginning to consider posting on my blog again as well. Overall, I am feeling more reinvigorated than ever before.
At the same time, it feels like our little tech sector corner of the universe is reaching a turning point. It seems like the pendulum that has been swinging within the industry from fear to greed since 2005, (more…)
While analyzing stocks for buy/sell recommendations for the USC Student Investment Fund, I discovered one key factor that often flipped my valuation opinion from buy to sell. This factor is share-based compensation (accounting treatment, here). When it’s added back in a discounted cash flow analysis, cash flow goes up and a stock looks like a buy, yet when it’s subtracted out (like a cash expense), cash flow goes down, making a stock look like a sell.
Share-based compensation is the largest valuation issue that I see discussed the least. (more…)
This past week we held the USC Student Investment Fund (SIF) annual meeting. The annual meeting is an event that draws approximately 60 SIF alumni, during which each of the five student-run mutual funds presents its annual performance to the crowd. Based on last year’s interrogation of the students by the audience, which featured some tough questions about Netflix (among others), my classmates and I (pictured left) were a bit nervous leading up to the event. However, we did a great job – we effectively presented our performance, investment rationale and fiduciary duty.
Over the last twelve months I, along with my classmates Kai Wang and Abhinav Anand, managed the California Small Cap Fund (CSF), an approximately $1mm mutual fund which invests primarily in California-based small cap companies. Kai, Abhinav and I put a lot of work into managing the fund and the SIF coursework; however, it was work that paid off. We learned (more…)
“We don’t buy and sell stocks based upon what other people think the stock market is going to do, (I never have an opinion) but rather upon what we think the company is going to do. The course of the stock market will determine to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. Who would think of buying or selling a private business because of someone’s guess on the stock market?” -Warren Buffett
My dad recently sent me this quote. I like it because it helps keep short-term commentary from affecting long-term analysis and opinion, the true focus of investing (in my opinion). Through the SIF, I have had the chance to hear similar thoughts on investing from people such as Dave Iben at Tradewinds; he doesn’t want to hear anything unless it will be meaningful in five years. It’s nice to hear that others try to ignore CNBC and the like, too.
Last year while applying to USC’s Student Investment Fund, I put my stock pitch on my site to be used as a template by others. Admittedly, that model was a bit of a hackjob given my time constraint. But thankfully it was good enough to help me get into the Student Investment Fund (I now co-manage the California Small Cap Fund).
I recently created an updated stock pitch template for my SIF classmates at the request of Professor Ku based on my valuation background. Here is the new Excel valuation template. This model is much simpler, and it does a better job with sensitivity analyses. If you are going to use this model for a pitch, I would recommend creating a revenue build sheet to build up to forecasted sales. This will show your interviewer that you know the business’s revenue model. (more…)
Yesterday I held a session on the venture capital market for some of my Class of 2013 classmates. Getting into VC is elusive, if not nearly impossible, so I held this session to pass along the knowledge I have acquired through my limited background with the industry. My hope is that this information will help them get into the industry. I thought it would be helpful to also post this information here for a broader audience. The discussion below is intended to serve as a jumping off point for someone trying to learn more about venture capital, not a definitive guide. Also, there are many exceptions to VC rules or “standards” (if you can call them that); so if you have information to share, please don’t be shy about adding to the discussion in the comments section. (more…)