Thinking Beyond Big Tech

While it’s difficult to say whether Big Tech is past peak growth, investors should start thinking beyond 5-10 ticker symbols, no matter how incredible they are.

An obvious point needs to be made: If you have been investing for the past 10 years and have yet to own at least one of the big tech companies, you likely have been missing out. Any fund manager who has ignored these names has committed financial malpractice. The most significant single-day market cap gains in the past four years have come from Meta, Apple, Amazon, Nvidia, and Microsoft.

If you don’t own one of these names, you might ask yourself, “Why?”

These companies have a significant competitive advantage, allowing them to maintain their market share. They are well-positioned to benefit from several long-term trends, such as cloud computing and artificial intelligence.

It also helps that these companies can write blank checks to fight against regulatory scrutiny. They also can burn through a lot of cash on projects or initiatives that are unprofitable yet still maintain pristine balance sheets.

If you already own these names, there must be a compelling reason to sell them, and I don’t see any obvious red flags. These are companies you typically hold and don’t trade. However, strong evidence shows these names are no longer must-buys at any price.

In 2022, Facebook’s user base stagnated for the first time.
Apple’s revenue growth has been 5.5% from fiscal years ending in 2019 to 2023
Digital advertising, which accounts for over 80% of Alphabet’s revenue, slowed down in 2022. While Google Cloud revenue is still growing, the growth rate has slowed compared to previous years. The same goes for Amazon Web Services (AWS).

Although these are not necessarily signs that these companies are in peril, they signal cracks in the foundation. These companies still have high expectations for future growth. Yet, there is clear evidence of saturation and slowing growth in their core markets.

Revenue growth has already slowed, and it will get more challenging for them to get bigger. Acquisitions are a costly way to grow, but with regulatory pressures, that is not likely a realistic option anymore.

Meta also authorized its first-ever dividend, joining Apple, Microsoft, and Nvidia. A dividend usually means transitioning from a volatile, high-growth company to a stable, slower-growing one. Anytime a company offers a dividend, it gives away value to become more widely held by large institutions like pensions and mutual funds. This is the trade-off a company makes when issuing a continuously growing dividend.

What’s happening is that these companies are maturing. They are more predictable and closer to the consensus, aligning closer within parity to the general market. The Magnificent 7 is no longer a group of companies that produces alpha; it is a risk management group. The days of these names creating outsized gains in your portfolio are likely over. These companies will succumb to the law of large numbers, even Nvidia.

Is this a bad thing? Not necessarily. However, the ability of these companies to grow in size in the next ten years will likely be slower than in the past ten years. Looking at these names for supercharged growth is the wrong mindset for an investor. It’s wrong on both a fundamental and a valuation viewpoint.

Probabilities, Probabilities, Probabilities

The secret is out. These are high-quality businesses, and much of the value has been priced. The more new money you add to these names, the higher you will have to pay and the lower your future return.

There is still a place for adding stable, high-quality businesses in your portfolio, but better strategies exist to build a portfolio that outperforms.

Valuation and Quality Matters

An investor aims to find undervalued assets and dislocations in the market. Undervalued in valuation and fundamentals. Investing is not always about zigging when everyone else is zagging. An investor should also buy and hold quality, even at a premium price. Not every move is a contrarian bet, but a well-rounded investor must be able to do both. Having flexibility in thinking but a structured discipline process. Investors that can do both of these things will likely rise above the median.

As an investor, you must think like a general manager of an NFL team. Not owning a company in the Magnificent Seven is the equivalent of trying to win a Super Bowl without a star quarterback or pass rusher. Teams need quality players, but cost and value matters.

Patrick Mahomes is the best quarterback in the NFL. You can call him the Nvidia of Quarterbacks. That doesn’t mean the Kanas City Chiefs should trade him for draft picks and sign a lesser quarterback to save money. It also doesn’t mean the Miami Dolphins or Chicago Bears should mortgage their future and take on Mahome’s salary by trading for him.

The one luxury of being an investor in your portfolio is that you are the GM and Owner. You can enact your vision and strategy without the fear of being fired. If you want to “win,” you must make good decisions and not think in such a pedestrian matter.

Expensive players come at a high price that can and will diminish when they can’t keep up with overhyped expectations. Continuously overpaying, even for quality players, is a losing strategy because teams will run out of cap space. You will get less bang for your buck and likely cannot field a well-rounded team. The Chiefs’ success largely depends on getting production from their core stars and signing and drafting overlooked players in free agency and in the draft.

Buying stocks based on the market’s direction is not an investing strategy but a gambling strategy. You are not investing in companies; you are betting, period. You are falling into the trap of the allure of the market: Chasing gains and buying based on superficialities. This is emotionally a draining investment strategy when the inevitable business cycle fluctuates.

Nvidia was trading below 120 in October 2022. How many analysts had buy ratings on the company then?
Meta was trading below 100 in November 2022. What was the mood and sentiment of the market back then?

Who was pounding the table to invest in these names?

Finding quality value

As a long-term investor, think about sleepers and good bargains. Will it work every time? Of course not, but this is a proven winning investing strategy.

Build core positions in high-quality companies and add to them when undervalued. It also requires pulling the trigger when the street sits on the sidelines. There is absolutely zero edge or creativity when you follow the consensus agreement.

Every investor should, at minimum, look at the company’s balance sheet they invest in. While a balance sheet is valuable for understanding a company’s financial health, it doesn’t capture everything.

Characteristics of a good company that goes beyond the numbers:

Strong leadership: A clear and inspiring vision from ethical, transparent, and accountable leaders.
Brand reputation: A robust and positive brand image that resonates with customers and stakeholders.
Intellectual property: Valuable patents, trademarks, and other intellectual assets.
Customer & Supplier Relationships: Strong and collaborative relationships with key customers and suppliers.

These characteristics are not found in a balance sheet or screener. It requires more unconventional research and abstract thinking. I still have certain investing principles. If a company has negative gross profits (Revenue minus cost of goods), It’s almost an automatic no-touch investment. When revenue cannot cover the basic expenses incurred to create a product or service, it’s like a diner paying $6 for raw materials to sell a $5 burger. Fundamentally, the business needs to be fixed and likely won’t scale. This may seem rudimentary, but money continues to be poured into Rivian, Lucid Motors, and many other unprofitable businesses.

My playbook? I will only add to specific names in the Magnificent Seven if they become significantly undervalued, which will eventually happen, but less often than before. These names are becoming in lock-step with the herd, which means less opportunity. I will not be shy about adding to these names when the herd and the street flood out of these names. This strategy is a lot easier said than done. Heavy buying is usually best when you don’t hear a company like Nvidia is a “must-buy” stock, even though it has been up almost 2,000% in the past five years. I am OK with holding these names and increasing my ownership through a dividend reinvestment plan but not adding to them at these levels with fresh money.

Good solid investing requires creativity and outside-of-the-box within a framework. Look at traditional metrics, but be willing to go against the grain.

Two examples of looking beyond the numbers:

WWE fans are dedicated and incredibly loyal. The amount fans spend on scripted sports entertainment is quite astonishing. The revenue growth since the company went public in 1999 has been consistent. You would think fans’ interest would drift towards another form of entertainment, but it hasn’t. Fans of the product in the 90s and 00s are still engaged and driving consumption today. Pro Wrestling still hooks newer and younger fans, even though the format hasn’t changed.

Taylor Swift: Her current “Eras Tour” has an average ticket price of $1,088.56. Compare that to Dua Lipa for her past Future Nostalgia Tour, the average ticket price was around $97, or Olivia Rodrigo’s Current Guts Tour, which falls between $117-$637.

Explaining why a fan would spend so much on a Taylor Swift ticket is based on a combination of the artist, music, physical presence, and live experience. Explaining Swift-fandom is a complex phenomenon beyond rational or conventional thinking. Life itself is not static, and you must look at investing similarly. Swift’s meteoric rise wasn’t an accident or purely based on luck. In a different life simulation model, Swift is likely to be successful, even under worse circumstances. That’s because her success is influenced by various personal factors, not just based on one or two songs. Good investing is a process, not just being lucky in 1 or 2 ticker symbols. Investors who can develop a framework for success will likely avoid the pitfalls that the majority fall into.

Moderna: AI Leader in Medicine

Moderna created the Spikevax vaccine, a miracle vaccine that saved millions of lives during the pandemic. Something not mentioned enough is how AI algorithms aided the vaccine in analyzing vast datasets to optimize the mRNA sequence in Spikevax.

While Spikevax isn’t an AI drug, it showed the potential of AI in accelerating and improving drug discovery. Moderna has always been an AI company since its founding in 2014. The impact of AI is seen almost everywhere in Moderna’s value chain, which makes it a leader in the space rather than a company responding to a hot secular trend.

mRNA vaccines have a bright future in medicine, and the story has just begun. mRNA is a molecule that teaches your cells how to produce antibodies that help fight certain diseases. The breakthrough discovery was utilizing Lipid Nanoparticles as a bubble to safely deliver the RNA (a fragile molecule) to its target cell. Once this happened, the technology was no longer theoretical but a signal that medicine had evolved.

The biggest challenge to Moderna and RNA technology is achieving efficient and targeted delivery to the suitable cells within the body. Optimizing RNA delivery efficiency to the desired cells remains a work in progress, but AI is streamlining this process with data analysis, experiment design, and manufacturing processes. These advancements have dramatically improved drug development efficiency, where we are no longer growing our drugs; we are printing them.

With Moderna experiencing tremendous advances in its platform, what does that mean for its future financial outlook?

Moderna estimates its combined annual revenue from its respiratory virus vaccines (COVID-19, RSV, and flu) to reach $8 billion to $15 billion by 2027.

Getting an approved RSV and flu vaccine would help Moderna return its revenue close to its peak during COVID-19, bringing in a whopping $19.3 billion in 2022.

Three approved respiratory virus vaccines may not propel its stock to all-time highs, but it would likely be significantly higher than where the stock trades today: In the 70-130 range.

What would be a paradigm shift for Moderna?

Moderna expects to add $10 billion to $15 billion in annual sales five years after launching new Oncology, Rare, and Latent diseases products by 2028. This is in addition to the previously announced $8 billion to $15 billion of expected sales from the Respiratory Franchise in 2027.

Moderna stock is undervalued and has a good chance of bouncing back. Whether it surpasses where it was in 2021 depends on how many approved vaccines it develops, the pricing, and the market adaption of each new product it launches.

My prediction. Moderna has 1-3 potential home runs in their pipeline outside of Covid. With a plan to launch 15 products in the next five years, one or two will likely be a blockbuster drug.

mRNA-4157 is a potential home run as a future cancer vaccine. Vaccines or therapeutic cancer treatments are always potential game changers because there is no effective cure for cancer. The timeline for a cancer vaccine is a long, unwinding road, but the results have shown promise against Melanoma, the key word being promise. Cancer therapeutics have always shown potential but are primarily unsuccessful. Although progress is very likely in the next five years, whether that will lead to a robust ROI is a complete mystery.

Moderna has many potential vaccines dealing with herpesviruses. There are over a hundred herpesviruses, but eight infect humans. Most people in the world have at least one of the eight herpesviruses:

Herpes simplex virus: double-stranded DNA virus

HSV-1 (oral Herpes): The most common type causes cold sores around the mouth. It can also cause genital Herpes, although this is less common.
HSV-2 (genital Herpes): This type of HSV causes genital Herpes, which can be painful and itchy. It can also be transmitted to a newborn during childbirth.

Human herpesvirus 3 (HHV-3): Varicella-zoster virus (VZV):

VZV is a viral infection that causes chickenpox in children and shingles in adults.

Human herpesvirus 4 (HHV-4): Epstein-Barr virus (EBV):

EBV is a widespread virus that infects most people at some point in their lives. It usually causes no symptoms, but it can sometimes cause Mono, a fever, and swollen glands.

Human herpesvirus 5 (HHV-5): Cytomegalovirus (CMV):

CMV is a common virus that can cause mild symptoms in healthy adults but can be severe for newborns and people with weakened immune systems.

Human herpesvirus 6 (HHV-6): Herpes 6

HHV-6 is a common virus that causes roseola, fever, and rash in young children.

Human herpesvirus 7 (HHV-7): Herpes 7

HHV-7 is a common virus that is often found in people with roseola, but it is not clear if it causes the disease

Human herpesvirus-8 (HHV-8): Kaposi’s sarcoma-associated herpesvirus (KSHV):

KSHV is a virus that can cause Kaposi’s sarcoma, a type of cancer, and multicentric Castleman disease, a rare inflammatory disorder.

There is a common theme with all Herpesviruses:

No cure.
Most people with herpes are asymptomatic: People can be infected with Herpes and not experience any symptoms. These cases often go undetected, contributing to the undercounting of total infections.
Very contagious and easy to spread in various ways.
The CDC does not recommend herpes testing for people without symptoms.

***My test results indicate I have tested equivocal/positive for Herpes Type 2. Herpes Simplex Virus II is also commonly known as Genital Herpes.***

Moderna has programs in development for Herpes simplex 1&2, VZV, EBV, and CMV.

Based on most conservative estimation models, 50% of the global population has oral Herpes, but more than 2 out of 3 people likely have it. Far more people, by a significant amount, have oral Herpes than are obese.

About 1 out of 8 people are more likely to have genital Herpes, but those estimates are likely conservative as well. The exact number is unknown, but it is expected more than 2 out of 10 people worldwide have genital Herpes. The complexity of the virus is that it is easy to spread even without symptoms, and it likely will not require any medical attention. Most people with Herpes do not know it, and the number of those who have recurrent painful outbreaks is in the minority.

Going through the process of getting tested for Herpes gave me insight into how profitable a vaccine would be.

**My Western Blot results for Herpes Type 2, The Gold Standard for Herpes blood tests.**

I recently took an STD Panel test and tested equivocal/positive for Herpes Type 2. I was pretty shocked as I never showed any symptoms. Mentally, it was starting to take a toll on my physique as I became worried every itch or pain was the beginning of an outbreak.

I learned that most standard blood tests for Herpes, when there are no sores or symptoms, are inaccurate. These tests are likely misinterpreting HSV-1 and HSV-2 antibodies with other antibodies your immune system produces.

I live in the only state in the United States that conducts the most accurate or “gold standard” for Herpes blood tests: The Western Blot at The University of Washington Virology Research Clinic. Through a referral from my provider, I was able to get my blood tested in person (anyone out-of-state has to mail their blood sample) and, after a week, received an official negative diagnosis for HSV-2.

Due to the complexity of the virus and the high number of asymptomatic cases or those that experience mild symptoms, a vaccine would create a massive opportunity with high demand and a large market.

Anyone who suffers from frequent outbreaks of Herpes is likely interested in a potential vaccine. More people would probably get tested if a safe vaccine were available, revealing a more prevalent virus than current studies suggest.

Even though Herpes doesn’t seem like a big deal, the stigma and psychology of the virus are real, particularly genital Herpes. How much money would you pay for a vaccine that would likely make having sex more accessible and safer?

Cancer and Herpes are only two potential growth catalysts for Moderna. The company has a long runway for growth, with over 45 developing drugs and 38 ongoing clinical trials. There’s a buffet selection of diseases, even though most of these trials will fail. Getting 10-15 drugs approved in the next five years could give Moderna a higher market cap than any other biotech company.

mRNA technology is still in its infancy. There are hurdles and uncertainty ahead, but the future looks exponentially promising. With many potential applications, this has the feel of the Internet or mobile phone in the early 1990s. Ten years from now, we will not look at mRNA as a fad but as a widely used technology much more significant than we could conceive today.

What’s wildly exciting is that we likely don’t know many things. Investing in what you don’t know is typically seen as a negative, as you can have blind spots toward risk factors. It’s important not to downplay the potential for a blue-sky scenario. The more we understand RNA and how to improve its delivery, the more likely we can see its capabilities and applications increase. Our current expectations may not be high enough. Moderna is developing drugs that can change the world and revolutionize medicine. It is important to remember the miraculous progress made in the past five years.

Debunking Investing Myths

***I told Rick Barry I’d rather shoot 0% than shoot underhand. I’m too cool for that.***

Myth #1: Quants, sophisticated algorithms, and the brightest minds in the world struggle to beat the market, and most do not. The odds are that Sam from Nebraska will not outperform the market and is better off not playing around with individual stocks. Just invest in index funds.

The problem you have, and will continue to see, is the word “invest” being interchangeably used with trading, gambling, speculating, etc…

Not everyone buying stocks is investing, certainly not long-term investing.

Many fund managers or professionals you read about do not even invest in their own fund.

Why would you invest in a fund if the fund manager isn’t doing the same?

Wall Street’s strategies differ from what you should mimic.

Investors need to understand the fundamental difference between generating income and building wealth. Typically, stocks are a wealth-building tool. Generating income from stocks requires more short-term thinking and trading strategies.

The more I see investors tinker with their portfolios or trade in and out of positions, the more confused I become. Price movement in the short term is often volatile and unpredictable. It also can be stressful and gut-wrenching. Emulating Jesse Livermore or Steve Cohen is more challenging than being the next Ronald Read or Geoffrey Holt.

As for index funds, the fundamental problem with this instrument is that it is a self-defeating investing practice. You have chosen to match the market rather than outperform it. The technical framework of most index funds is capping your gains by taking on less risk. This investment vehicle may suit some people, but I find it unacceptable.

Investing in index funds that follow a benchmark may be suitable for those who can generate a lot of income or have multiple income streams. It also may work if your portfolio is already large enough to live off without supplemental income.

You get what you deserve: The equity investor is entitled to a bigger reward because they took on more risk. Investing primarily in an index also does not change behavior or protect investors from the psychology of investing. Remember, future returns are not guaranteed. Index investing is popular because it has done well historically. Once again, a 10-15% average annual return is not guaranteed, and there is no way to assess the probability of future annual returns with pinpoint accuracy.

“A really wonderful business is very well protected against the vicissitudes of the economy over time and competition. I mean, we’re talking about businesses that are resistant to effective competition…”

“There is less risk in owning three easy-to-identify wonderful businesses than there is in owning 50 well-known, big businesses.”

– Warren Buffett

I never understood the attraction to wanting to own the entire market. It insulates yourself against a particular risk, but this diversification is unnecessary and can show a lack of focus and conviction.

Owning ten or more index funds or ETFs in your portfolios is “analysis paralysis” on steroids. There likely is a lot of overlap and bloat.

An investor must ask themselves, “What is the bigger picture?”

Diversification could help against risk, but over-diversification will likely hurt performance.

Diluted returns: Being right on a particular holding in a fund or index won’t make a material difference. The percentage of your portfolio is too insignificant to make a meaningful move.
Unnecessary risk protection: Some companies have a market cap equal to greater than the GDP of a small country. Not wanting to own these companies individually due to their potential to go to zero is not the best way to assess probability and risk.
The Brock Purdy/Tom Brady effect: The 49ers got lucky when they drafted Brock Purdy in round 7, pick #262. The Patriots got lucky when they drafted Tom Brady in round 6, pick #199. If these teams were confident that these quarterbacks would turn out the way they did, they would have drafted them in much earlier rounds. These teams took a small risk that paid off handsomely. Investing has similar scenarios. Investing $5,000 isn’t a lot of skin-in-game or conviction. A $5,000 investment in Microsoft in the 90s would be well over one million dollars today – and guess what? Microsoft is, by many analysts, rated a must-own stock today! These types of gains you will never see solely investing in an index.

Myth #2: I would have to spend countless hours researching individual companies and monitoring the market daily. Why invest in stocks with the odds out of favor in beating the S&P and its proven returns?

As I explained earlier, investors who primarily invest in an index are entitled to a lower return than a direct equity shareholder in companies who take on more risk.

The research barrier people make not to invest has always perplexed me. Looking at a company’s balance sheet is a relatively simple exercise. Earning reports are quarterly events and typically get recapped in a 1-page article.

Should an investor pay attention to current events and occasionally read business news? Everyone should be doing this, but is it necessary to spend several hours a day of research to be a successful investor?

Monitoring the market is a behavioral choice, not a requirement of being an investor. If you are a long-term investor and have already committed to holding a stock for an extended period, watching the price movement of a ticker symbol every day or every hour is an addictive habit that doesn’t help advance your investing skills. A company’s fundamentals do not change daily, even monthly, so worrying about daily price fluctuation is an unnecessary risk of losing your sanity.

No one can accurately predict the future. Every investment is a bet. You will likely succeed if you have a consistent framework for investment decisions and can understand the basic plumbing of how a company makes a profit. In most cases, the research advantage is not a true advantage. There is no significant correlation between time spent researching investments and investor performance.

Investor A: Invested $100,000 in Apple Stock in 2007 due to how innovative the iPhone looked during its launch.

Investor B: Invested $100,000 in Apple Stock in 2007 after doing hours and months of research in the company, reading balance sheets, plugging numbers through several financial modeling tools, reading articles, etc.

Investor B has more formal education than Investor A. Most people would consider Investor B “smarter” than Investor A. Investor B is an extremely hard worker, shrewd at business, and knowledgeable about the stock market.

The result is the same if both investors sell at the same time. Investor B may have been likelier to sell the stock, trying to time the market by mistaking research for market noise. For a long-term investor, selling Apple stock in the past 15 years would have been a mistake, even if the reason was valid.

Putting hours of research into investments doesn’t give you a guaranteed edge in investing. Having high cognitive intelligence doesn’t correlate to investing performance.

Investing does not require you to write a 200-page dissertation to be successful. “Time in the market” refers to the holding period, not time spent researching.

Being a highly-rated brain surgeon requires years of studying and training. The same goes for being a world-class athlete or chef.

Investing is a rare activity where sitting on your ass and doing nothing pays off more than trading in-and-out of stocks. The investor’s hidden superpower comes from having discipline, patience, and emotional intelligence. The stock market is auction-driven, where you cannot drive the outcome of the results outside of buying, holding, or selling a stock.

The skillset required is a behavioral one. That is the secret weapon needed to beat the market. In all likelihood, investors A and B have already sold their positions in Apple stock for various reasons.

“On the other hand, although I have a regular work schedule, I take time to go for long walks on the beach so that I can listen to what is going on inside my head. If my work isn’t going well, I lie down in the middle of a workday and gaze at the ceiling while I listen and visualize what goes on in my imagination.”

-Albert Einstein

The problem with the research argument:

Investors must understand that this game of critical thinking. Being an investor is a thought-job. Success comes from curiosity and continuous thought work.
Research/Investing is subjective. One person can determine Bitcoin as ‘rat poison,’ and another person can evaluate it as the future of money.
Investment returns directly correlate with how much risk you are willing to take, not how many hours of research you have done. No matter how much research an investor does, it cannot accurately predict future prices or events.

Myth #3: Pick the right company takes a lot of work. It is simply too risky, and the odds are not in your favor.

It is an easily debunked myth because the proof is an investor’s brokerage statement. Many professional and retail investors correctly invested early in companies like Nvidia, Apple, Amazon, and Tesla. These investors correctly picked the right company that generates life-changing results. These companies are well-known and have recognizable brands.

The problem is that most of these investors sold out too soon, indicating poor investment behavior. Investors frequently let fear and other emotions guide their strategic investment process.

Many investors also incorporate too much of a “market timing” tactical approach in their investment strategy, leading to how powerful psychological forces play into investing decisions. If the secret to wealth building is to buy and hold companies like Apple and Nvidia for a long time, why do so many people refuse to do so?

The answer is complex and simple at the same time. It would be like asking why don’t all poor free throw shooters in the NBA use the ‘Granny Shot’ free throw motion, where the player holds the ball at his waist with both hands and hoists the ball at the hoop in an underhand motion, with arms spread apart.

There is actual evidence that the Granny-style form works:

One argument in favour of shooting underhand, compared with traditional overhand, is that it requires less movement and is therefore easier to repeat. There are physics behind the form as well. Shooting underhand creates a slower, softer shot, because a two-hand shot, gripped from the sides of the ball, allows a player to impart more spin than a shooter launching the ball forward with one hand.

John Fontanella, a professor at the Naval Academy who wrote “The Physics of Basketball,” said most shots spin at two revolutions per second, but an underhand free throw will rotate three or four times per second. The additional backspin means more shots that bounce on the rim fall through.
NBA rookie brings back ‘Granny-style’ free throw

Shaq attempted 13,569 free throws in the regular season and playoffs for his career. He made 7,103, just 52.3%, which is pathetic.

If Shaq worked on and adopted the granny shot the day he started the NBA, say, his career free throw percentage would improve to 70%. That’s 2,395 more points. How many more games and championships does Shaq win by doing this?

Despite the empirical and analytical evidence, no NBA star has adopted this shooting style since 1980.

Why? The answers players give are silly:

Shaq: “I’d shoot zero percent before I’d shoot underhanded.”

“They’re gonna make fun of me.”

“That’s a shot for sissies.”

The reasons why most poor free throw shooters don’t adopt a technique that is proven to work are similar to the same reasons why most investors can’t buy and hold stocks for a long time:

Fear of standing out

Outside of your comfort zone

Pride and ego

Herd mentality

Many investors invest like Shaq shoots free throws.

Shaq didn’t want to shoot underhanded because it wasn’t for him, even though it would have dramatically helped his free throw percentage.

People want to invest successfully, but they want to do it on their own terms. The rewards are life-changing, but it requires you to embrace chaos and uncertainty. Outside of your emotions, an investor has no control over the economy or geopolitics. For many investors, long-term investing means: “If I make money, I’ll stick with it, and if I don’t, I’ll sell and do something else.”

The most significant risk factor for investors is themselves.

It is not the economy, interest rates, or the threat of war. The biggest threat to your portfolio is your behavior.

My advice:

Do not get too cute with your overall portfolio strategy.
Stay focused and adopt long-termism.
If you have the discipline, adopt something similar to the coffee can strategy, an investing strategy where you mostly stay still during market volatility and sell recommendations.

Do not sell winners like Nvidia or Apple simply because someone says it is time to sell. These are companies you buy and hold, not trade. Selling a stock because someone said it’s wise to trim your position has been dud advice for high-quality companies. Keep asking yourself, “What is the bigger picture?”

People managing funds are investors at heart. They research solid companies in attractive industries that can grow from a long-term perspective. But they inevitably engage in profit-taking and market-timing based on news/rumors, drastically shortening the time horizon. We then become hyper-influenced by analysts’ recommendations and hyper-fixated on valuation metrics. Long-term investing involves holding during downturns, but letting your winners run is equally important.

RNA Vaccine Revolution

Now that the science is well recognized for mRNA, do you think we’re going to see some kind of RNA vaccine revolution?

We already are. There are about 250 clinical trials going on right now using RNA therapeutics and vaccines. Five years ago, there might have been one. So there’s an enormous number. They cover every imaginable infectious disease from genital herpes to influenza to hemorrhagic fever vaccines, to HIV and many others. … All of this came from COVID.

You should still get the COVID-19 vaccine. The Nobel Prize winner who helped discover it explains why.

RNA is the producer of proteins. Proteins are vital to build and repair body tissue and fight viral and bacterial infections. When you use an RNA vaccine, you only need the sequence. The RNA makes a copy of the individual protein.

Beyond the COVID spike protein, the technology has huge vaccine and therapeutic applications potentially for genital herpes, influenza, HIV, and so many different diseases.

Breakthrough technologies across different drug classes to revolutionize medicine

mRNA medicines we are currently developing

Investing and Wegovy

Before ending the year, I wanted to discuss why investing is so difficult for many of us.

Investing is complex because several factors influence our decision-making and behavior. Some factors are within our control, and others are not. If you believe investing is only about math and financial modeling, you will likely struggle as a long-term investor. Investing is unique because it is a science and an art. It requires more than just analytics. There is a behavioral and psychological side that is much harder to measure.

Long-term investing: Much of what you’re willing to endure and risk to achieve a reward.

Investing behavior and decision-making are rarely caused by a single factor. There is an interplay of various influences that determines your risk tolerance and expectations. The better you understand these factors, the more likely you are to develop effective strategies to improve your performance.

When you think about successful investing, compare it to dieting and exercise. There are no shortcuts or one-size-fits-all answers. Generic solutions often become platitudes. Advice like weight is calorie-in-calorie-out, becomes a platitude. Someone morbidly obese could have the same diet as a marathon runner; the results may not be the same. Several key factors contribute to a healthy lifestyle. The same goes for investing. A financial expert who tells you the best way to support is to “index fund and chill” is oversimplifying a solution that doesn’t work for everyone.

Generally, people need to be motivated to lose weight. It is challenging to feel motivated if they do not see short-term results or if it takes too much time and energy to maintain a diet. Knowing vegetables and fruits are good for you doesn’t necessarily lead to a change in action. Understanding that you need to do more cardiovascular activities doesn’t mean you will start running daily. Without goals or action plans, you will get situations where people want to eat healthier but do not make meaningful changes in their diet or exercise.

Improving your outcome relates to your behavior. How do you change your behavior? Create goals to help develop your strategy. The more personal your goals become, the more likely you are to become motivated to achieve them.

Why invest:

Buy more material things.
Buy more experiences or influence.
Be able to support your spouse or family.
Fund your retirement.
Pass along your wealth to your children.

Why lose weight and exercise:

Improve external appearance.
Feel better physically and mentally.
Not be bedridden later in your life.
Be there for your loved ones.
Live a longer and more fulfilling life.

Investing is a mixture of science and human behavior. Human behavior is very imperfect, different, and subjective. Your behavior needs to change to see different results.

Financial experts say the best way to invest is through ETFs or index-weighted funds. Such advice is generic and does not change your behavioral psychology. It does not change the bad habit of consistently buying overvalued assets and selling them at a much lower valuation.

What happens when the index you invested in, based on the advice of experts, is down 10% or more?

Do you sell?

What if, after ten years, your portfolio is flat? Did you even plan on having a holding period that long?

If you are a long-term investor but continuously trade in and out of stocks.
If you enjoy highly volatile growth companies but have little tolerance for risk.

If you are health conscious, but your diet consists of fried food and sugary drinks.
If you spend a lot of money on athletic clothes but do not work out

Your actions do not align with your goals.

Align your goals and timeframe with your actions; the outcome should improve.

The problem with professional investing:

Most people can agree long-term investing works, and allowing high-quality companies to grow and compound requires a long-term holding period. So then, why is the average holding period of an individual stock just 6-10 months?

Professional fund managers: A profession where their income depends on quarterly performance. Income comes mainly from fees charged to investors who invest in them.

Funds flow out of underperforming funds and into those performing best, creating a casino environment where most fund managers chase gains and trade in and out of positions. Institutional fund managers’ informational and analytical edge over retail investors is almost useless, as they act more like traders than investors.

Institutional and Retail investors: Actions and goals not aligned with long-term performance.

Retail Investors: Freedom to invest without restrictions or deadlines. The behavioral edge often goes unrealized as retail falls victim to the same pitfalls as institutions – panic selling, over-trading, chasing gains/momentum, and emotional decision-making.

It is not your fault:

If you are struggling as an investor, it is not your fault. If you are struggling with losing weight, it is not your fault.

In 1942, the Metropolitan Life Insurance Company made standard tables to identify ‘ideal’ (and later ‘desirable’) weight, and with the naming of weight-to-height ratios as the body mass index (BMI) by Keys and colleagues in 1972, obesity was understood as a health risk that required medical intervention.
The politics of disease: Obesity in historical perspective

It has taken a while, but society is starting to accept that genetics, medical conditions, and other factors that contribute to our weight are outside an individual’s control. The American Medical Association (AMA) recognized obesity as a disease in 2013!

Labeling obesity as a disease is helpful as it takes pressure off the patient, not putting the blame all on themselves.

The same goes for investing. Human nature works against good investing. There is a tremendous fear of non-guarantees and a need for certainty. Human nature can work against us when it comes to investing. How does it feel to bungee jump 700 feet above the ground? You can only understand the feeling once it happens, just like how you will feel and respond to watching your portfolio fall 20% in a week. For most people, it’s likely a combination of fear, depression, and panic.

If lousy investing habits and obesity aren’t your fault entirely, how do you fix it?

The answer:

Every patient is different.

Every investor is different.

Each requires personalized attention and solutions.

I hate the phrase, “It isn’t your fault,” because even if true, what now? It does not give people the mindset that they have the power or control to change their circumstances.

Genetics, human nature, and upbringing play a role, but we are all not destined to be victims of circumstance. It is within our control over what’s preventing the desired outcome – Maintaining a healthy weight or having enough for retirement.

With the proper motivation and mindset, behavior can change gradually. There are no quick fixes.

Can GLP-1s like Wegovy or Ozempic help with weight loss? It could be part of the solution but only part of the solution. Medication does not replace a healthy lifestyle, what you eat, or daily exercise. Anyone struggling with weight should consult an endocrinologist and obesity medicine physician to develop a beneficial outcome.

Investing does not have one-size-fits-all solutions. Depending on your circumstances and financial goals, investing in funds that track broad-based indexes can help a portfolio. Should you consult a financial advisor? If that person can take the time to understand your needs based on your situation, it could help. Any effective solutions need to be customizable according to individual needs. As an investor, your primary objective should be to obtain greater knowledge and, as a result, steer you to more control over your finances.

Zoom: Evolving How We Work

**Zoom CEO Eric Yuan (right) takes the photo opp on Zoom’s IPO day.**

Zoom was a company I wanted to avoid. An app I was forced to download during the pandemic to communicate with the rest of the world. Since Cathie Wood made Zoom one of the more significant holdings in ARK Innovation ETF (ARKK), I assumed it was a hyper-growth, deeply unprofitable company with more hype than actual substance.

With the stock cratering since its pandemic day highs, I have done a deeper dive into the company and realized I may have judged this book superficially by its cover. The company is highly profitable, has no debt, and has proven it no BlueJeans, not even close. The company was built from scratch as an enterprise tool nearly a decade before the pandemic. Although its use as an app for virtual cocktail parties and meet-and-greets is declining, Its use in the business world is expanding rapidly.

Expectations for Zoom are ridiculously low for such a high-quality company. It trades at such low valuations it is screaming potential great opportunity. Many analysts have either given up or taken a wait-and-see approach. It appears there are two reasons why Wall Street is sitting on the sidelines:

Microsoft Teams will cut into Zoom’s videoconferencing software market share.
2022 was the peak for Zoom because of lockdown restrictions. It will not likely see this type of growth in a non-pandemic environment.

Analysts do not provide the specificity and context for why Zoom will lose its market share. Analysts assume Teams, Google Meet, and other big-name players will continue to erode Zoom’s 55% market share lead in video conferencing. Even if losing market share is inevitable, Zoom will remain an entrenched leader. The TAM for this market keeps accelerating and evolving, with hybrid work models now a permanent fixture.

The video and audio communication market alone is big enough for multiple winners. It isn’t a winner-take-all scenario. Zoom doesn’t have to be the leader to succeed, just one of the leaders. Audio and video communication in the enterprise sector was saturated before Zoom was founded. More likely, the industry is still growing and evolving with increasing AI adaption and innovation velocity. Even better, Zoom has less than a 6% market share in the overall office-suites market. Google Workspace is the dominant player in the market, providing Zoom and its suite of products an opportunity for solid growth over the next decade.

Zoom’s Edge over Microsoft and Google:

At its core, it is an artificial intelligence company. Its rapid implementation of AI into its products is slowly helping it create a powerful network effect for its enterprise business. They have built from the ground up and patented their cloud-based technology stack instead of being based on decade-old code trying to fit it into new technology; Zoom is a pure cloud-based platform based on Amazon’s AWS and Microsoft’s Azure servers. Its best-in-class products provide users with superior video & sound quality and overall better user-end experience. Zoom has a significant advantage over smaller players who do not have the capital or resources to bring a competitive product onto the market.

Regarding reliability and quality, Zoom ranks highly because of its premium technology stack infrastructure. Zoom’s growing patent portfolio shields itself from Microsoft or Google stealing or copying their products. Zoom holds patents in videotelephony, voice-over IP (VoIP), and AI-driven technology. These patents give Zoom a premium evaluation in the case of being acquired. These fundamental qualities are a hidden secret weapon that you cannot see on the company balance sheet or just based on the numbers.

Zoom’s technology and products integrate seamlessly with other applications like Salesforce, Slack, and Dropbox. Once integrated into the enterprise connective tissue, this creates a situation where the product becomes too costly and time-consuming to remove, creating a powerful network effect. Enterprise customers typically use several third-party application vendors, depending on their use case. Some customers want all their applications to be Microsoft products, which is atypical of how the enterprise ecosystem typically works. Most clients do not want to be completely locked into the Microsoft Office 365 ecosystem or have Microsoft as their sole vendor. As long as the multiple applications flow cohesively within the enterprise workstream, many companies will hesitate to go all-in on Microsoft.

Aside from having the best product, Zoom is pouching away key-level executives from Microsoft. Zoom’s Chief Product Officer, Strategy Officer, Development Officer, and Technology Officer bring over 84 years of experience from Microsoft! Overall, the leadership team is seasoned and well-rounded, many coming from Webex/Cisco. This team is a potential dream team in the making. The company is led by the founder and CEO, Eric Yuan, who is intensely focused and visionary. The leadership team understands the enterprise market and rapid product rollout, with a long-term plan to execute a go-to-market (GTM) strategy. They have already passed a real-time stress test during the pandemic, essentially repairing and upgrading a plane while in the air. Management passed with flying colors.

One of the biggest compliments of Zoom came from the CEO of Upstart, Dave Girourad, a former product manager at Apple and President of Google’s Enterprise division. In an interview with the Motley Fool last year, Girourad gave high praise about the team at Zoom:

Obviously you don’t want to act in fear, I’m one who has not historically done a lot of singular stock picking. I do it occasionally, but I usually will not do a lot of that myself. But occasionally I just have conviction and I have conviction through experience in seeing a product, and I will just give you an example. I put a big chunk of money recently, the first time I bought a singular stock in a long into Zoom. I was I know that business, we’re trying to build products like that at Google. I know how hard it is. That company executed incredibly well when suddenly their business just went through the roof in early 2020, and I had just so much respect for what they’ve done, and I know how hard the problem is to solve. How many times has like doing video like this has been just a nightmare in the past despite the fact that Microsoft’s coming after them, Google’s coming after them whoever else.
Upstart Holdings CEO Dave Girouard Talks About the Company’s Balance Sheet and More

High praise from a highly credible executive in this industry. I value his opinion and personal experience much more than most Wall Street analysts.

**Zoom Notes offers a robust editor with extensive formatting options like font, styling, bullets, colors, and more.**

Technology stack advantage, quality of products, and execution by management will be the winning formula for Zoom. As we see rapid and intensive AI integration, this will likely force companies to take on higher expenses in multiple industries. Typically, the CIO or CTO decides to take on Zoom as a vendor vs the legacy apps. Video conferencing tools will be viewed as more of a need than a want. Taking on Microsoft Teams simply because it is free or provides several features businesses rarely use won’t be good enough. Is it intuitively running better for clients of Teams after collecting their data and information? Is the Teams platform increasing productivity? I and many others argue it underdelivers.

Imagine if Zoom automatically takes notes or creates an action plan during a meeting. It has already launched these products, and the higher costs associated with superior AI-implemented products will be worth it if they can unlock significant cost savings in the long run or significantly boost meeting productivity and collaboration. Zoom is winning the popular vote as its tools and applications are viewed as more intuitive and user-friendly than Teams. This will become more noticeable as technology improves.

From a valuation standpoint, ZM stock is trading at dirt-cheap levels. You have to ask, will Microsoft grow faster than Zoom? Which is more likely? One has a market cap of around 22 billion, and the other almost 2.8 trillion. Even if Zoom doesn’t achieve Ark’s $1,500 share price projection by 2026, the stock will likely be a big-time winner, even if management meets baseline expectations. Today, the stock is undervalued based on most financial metrics:

ZM Price to Sales ratio: 4.92
MSFT Price to Sales ratio: 12.81

ZM Price-FCF ratio: 17.07
MSFT Price-FCF ratio: 44.2

An investor in Microsoft is paying a premium for a superb business. Expectations are sky-high, and they must deliver great numbers to maintain their high valuation. Is it possible? Absolutely. Is it more likely than Zoom, trading at low valuations and expectations, to outperform Microsoft? The probabilities appear to favor Zoom. These are the types of questions investors should be asking. I started a position in Zoom, hoping that not only is it undervalued but also misunderstood, with the growth story still early.

I see an investment in Zoom similar to that of Moderna. Two companies that multiplied during the pandemic for areas not of their original focus – Moderna developing cancer treatment and Zoom acquiring B2B customers. The narrative has shifted quite a bit for both companies as they have grown significantly from their start. Although the headlines read companies struggling to adapt in the post-pandemic world, they are fundamentally strong. Zoom may have received an artificial/temporary boost from consumers downloading the app for reasons outside of enterprise; what isn’t artificial is the increased brand awareness, obtaining verb status (zoom, tweet, google, Airbnb), and cash windfall, which can be invested in the overall business to further separate itself from Skype, FaceTime, and Google Hangout.

***A glimpse of the future: Zoom changed how the world communicated from Zoom yoga sessions, weddings, and funerals. The transformation of workplace communication is still evolving.***

Pros of Zoom as an investment:

Exceptional and best-in-class product offerings.
Impressive technology foundation and patent list.
Founder-led company that shined bright during a global emergency.
The beginning of a new intuitive human work communication system?

Risk factors:

A lot of execution risk and pressure.
The best product does not always win.
There is insufficient data to show that Zoom customers will keep them long-term and pay higher prices instead of switching to a less expensive platform.
The stock is inexpensive. That reason alone does not indicate future growth will be impressive despite lowered expectations. A short-term bounce back or recovery is possible, maybe even probable, but a sustained price increase will require consistent growth.

Invest in Meghan Markle Stocks

According to royal expert Katie Nicholl, King Charles reportedly nicknamed his daughter-in-law Meghan Markle ‘Tungsten’ because of her toughness and resilience. The Oxford English Dictionary defines tungsten as the chemical element of atomic number 74, a hard steel-gray metal of the transition series. It has a very high melting point (3410°C) and is used to make electric light filaments.

Being nicknamed after a rugged metal seems peculiar, but Meghan Markle, Duchess of Sussex, seems like someone with a strong backbone who gets what she wants. Meghan is opportunistic and cunning. Although these may seem like critiques of her personality, they complement her inner strength. Companies with tungsten-like qualities can turn into fantastic growth stocks to invest in.

Here is a list of some companies I would qualify as a Meghan Markle stock:

Alphabet
Shopify
Nvidia
Chipotle
Revolve
Airbnb
Taiwan Semiconductor
Zoom Video
Pinterest
Palantir
Moderna
Intuitive Surgical
Duolingo
Monday.com
The Trade Desk

So, what characteristics do I look for in a Meghan Markle stock?

Companies that have significantly more cash than debt: A company with more debt than cash is not necessarily a bad business – see Live Nation, Netflix, and Uber, as their debt is in use for future growth, but this does create higher risk, especially if a companies revenue plummets. Blue Chip companies like Apple and Berkshire Hathaway are in a separate category. They can safely take on debt for strategic reasons due to their strong balance sheets, track record, and business models.

Investing in the company’s future growth could pay off tenfold (Amazon investing in AWS) or backfire (Peloton expanding showrooms and acquiring Precor during the pandemic). Companies with more debt than cash risk serious liquidity issues, which may further dilute shareholders through equity raises or breaching a loan covenant.

A couple of companies that are NOT Meghan Markle stocks are Carnival Cruise and Royal Caribbean Group. We know why they took on significant loans, and although the pandemic was not their fault, they are far less attractive now than before 2020. These companies have recovered and are seeing healthy booking demand, but it will take several years (if not more) to right their financial health. The increased debt limits their options and leaves them with less wiggle room if the economy were to turn.

Low Capex and G&A ratios: Lower Capex and G&A spending can lead to higher free cash flow and a better return on capital. Relatively low costs for assets like factories or equipment mean the company can focus on capturing more market share and expanding into international markets. For tech companies, you want them to spend heavily on R&D rather than on upgrading stores. For apparel brands, you want them to spend heavily on S&M to build up their brand rather than on office furniture because when Capex and G&A make up a meaningful percentage of a company’s net income, that could indicate excess spending. If profit margins are increasing faster than Capex, that’s typically a sign of healthy financial growth.

Market cap higher than their Enterprise value: This characteristic echoes a company having more cash than debt. Companies like these have a low probability of going into bankruptcy and are attractive acquisition targets. Companies sitting on a lot of cash and little debt are typically more nimble and opportunistic. They can wait for the right time to issue share buybacks, reinvest in their business, make acquisitions, or be acquired themselves.

Proven more than two or more consecutive years or eight straight quarters of being free cash flow positive: A solid growth company has to prove it can be profitable in the long term. Being free cash negative is not a long-term sustainable business model. At some point, there needs to be a long enough track record of consistent growth; if not, the investment is just a speculative bet. If free cash flow exceeds net income every quarter, that could signify a money-printing business. Yelp has always been free cash flow positive since being a public company. The business may not seem appetizing, but its performance and return to investors have been much better than the companies that get the most airtime on CNBC and Bloomberg.

Important things to consider:

Asset light does not equate to a moat: Amazon is more debt-intensive than other big tech companies, which has helped them create a durable moat. How many companies will outspend Amazon to build a better logistics network? The same goes for Uber and its global ridesharing network. Debt and high spending can help a company have true pricing power, so there are potential trade-offs when a company sacrifices immediate profits for future growth.

Rising Free Cash Flow drives growth: A company that can produce consistently growing free cash flow is worth looking into, even if it has increased expenses, debt, or equity dilution. Apple is miraculous as they have higher free cash flow than most other companies, bringing in total revenue! They are more of an anomaly as they have so much cash and can increase their dividend while buying back their shares simultaneously.

Industry matters: Certain industries, like e-commerce, have more competition. Getting market share can be difficult during a challenging macro, creating a cash burn. The lower the startup costs, the easier for new entrants to disrupt the market. Specific sectors in technology are volatile, so a pristine balance sheet may reflect little returns for investors.

The critical aspects of these Meghan Markle stocks are toughness and resilience. Consumer headwinds can persist for several quarters, and if these companies remain profitable during a touch macro, that is a good sign of long-term durability. Like cockroaches, a company with low debt, consistently rising revenue, and free cash flow is almost impossible to squish. A company’s financials are easily accessible on a balance sheet, and any investor should know these basic figures to establish a framework of understanding before making a more thorough analysis and deep dive.

Revolve: A Royalty Business on Influencers

Revolve remains one of the largest holdings in my portfolio. The stock has suffered due to softening demand in the U.S. Consumers are spending less on discretionary items due to high-interest rates. Revolve and most luxury brands are directly affected when aspirational shoppers spend less money. When you add economic uncertainty and a tense geopolitical landscape, it creates a rather unsettling picture. The company has lost favor with Wall Street, and analysts have written off the company, but not so fast. Signs of a retail rebound are emerging, and Revolve can bounce back strong.

Despite retail headwinds, the underlying fundamentals of the business remain intact. The leadership, vision, and strategy have stayed the same. Revolve, as a business, has many traits that I love in an investment:

No long-term debt.
Low CapEx spend.
Proven history of generating an operating profit before the pandemic and even during a tough 2023.
No significant share dilution.
Buy back shares at an appropriate price when the stock price is low.

Revolve is still the same: a profitable e-commerce fashion platform that leverages social media and influencer marketing.

The broader slowdown in the luxury market has occurred as we have seen some cracks. Saks Fifth Avenue has been months behind in paying some of its vendors. Farfetch, which is, in my best comparison, the Shopify of luxury fashion, is either on the verge of insolvency or going private. Although these are disturbing headlines for the industry, they are incremental to the vast online luxury space ecosystem and insulated from these poorly managed companies. Saks issues predate the pandemic, while Farfetch has an extreme governance issue. Early signs point to a rebound or a normalization of luxury spending.

Farfetch was a company I considered investing in due to its innovation. Fast Company named it the 19th most innovative company in 2022. My concern with Farfetch was its large debt load and a lack of clear direction. The company tried to emulate Amazon’s growth strategy, but that approach has been costly. Instead of being innovative, they have become bloated with a complicated business structure.

The advantage of being an asset-light business is that you can remain innovative, be agile, and have excellent margins. Farfetch was asset-light in its early days but went on an expensive acquisition spree over the past eight years, entering into physical retail and drifting away from being solely a technology fashion platform. A lot of these investments have gone south. As their growth slowed due to a changing macro-environment, the story became muddled as they piled on more debt, further delaying the likelihood of becoming profitable anytime soon.

Revolve has avoided Farfetch’s mistakes by not expanding into physical retail or entering ambitious endeavors outside their core business, like the resale market. Farfetch will likely survive operating, but not as a public company. The stock is down over 97% from its all-time high in 2021. Many of its key executives have already departed, and they will likely have to offload many of its investments at a steep discount.

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Revolve remains intensely focused on brand engagement and building a dedicated army of influencers who promote the company. The strategy is working, and Revolve is seeing meaningful growth in its virality on TikTok. The business model is becoming like a perpetual royalty business on influencer marketing. The Brand Ambassador Program becomes a money-printing advertising business as its digital channel presence on Instagram and TikTok grows; it generates more cash on every new post. Having such little debt and low CapEx spending means Revolve can continue investing in its brand. I will eagerly see how much Revolve and Forward can develop in the next 5-10 years.

Investing: Focus on Psychology, Not The Numbers

“If you want to be a successful investor over time, and you find a handful of great businesses, doing nothing but owning them is an amazing strategy. It’s underappreciated as a successful way to make money.” – Bill Ackman

I once dated a girl and frequently visited her home, where she lived with her mother. Around the corner from their home was a vacant lot. Through the years that followed, I saw that vacant lot slowly get cleared and construction for a house to be built on.

I would occasionally see one person, who I assume was the property owner, doing all the work in the evening or on the weekends. Nearly 10 years later, the house is vacant because it is still unfinished. I’ve driven past that house in the last couple of years, and progress has yet to be made. What happened to the owner? I have no idea, but the result remains the same: He didn’t finish the work on his home.

As an investor, I asked myself, “Have I finished my work on my portfolio? Have I accomplished everything that I needed to when I began investing?” I didn’t need a long time to come up with my answer, “No.” There is still so much more that needs to be done.

Many investors have abandoned their portfolios like that man who never finished his house. The average total investment in a Robinhood account is under $4,000. For many of us, there is fear, anxiety, and uncertainty. When stocks drop, many sell and never return to the market. Economic times are tough, but if you get food delivered on Uber Eats or DoorDash, you likely have enough spare cash to contribute to your brokerage account.

The reality is investing is a lonely journey. An investor’s road is like an acid trip. Your portfolio must fit your specific risk profile and time horizon. Unfortunately, this is typically an experience we learn the hard way during economic downturns. The market becomes a harsh and expensive place to find yourself.

When people start investing, the world and terminology can appear confusing and daunting. How on earth do you analyze a company’s EV-to-EBITDA ratio?

I have said this several times and will continue to repeat the same message: Investing is a simple game if you have the right temperament and can control your emotions. The game is simple- not necessarily easy, but simple.

Warren Buffett is considered the greatest investor, but I suspect many of his colleagues in private begrudge and dismiss his success. Why? I have said that Buffett isn’t the most brilliant investor or trader. He doesn’t have the highest IQ or work harder than everyone else. Buffet invested in companies like Apple for a long time and just held. Nothing too sophisticated or exotic. While others made impressive returns on more “illuminating” investments, Buffett still beat most of them by holding a well-known big-cap company that smart money said was overvalued.

To better understand investing, it is good to know what prospect theory is, a psychological theory that explains decision-making based on perceived losses and gains. Two central tenets of prospect theory are that humans have loss aversion and put a premium on certainty.

Prioritizing certainty over potential: 5-6% interest-saving accounts are popular for a reason. Needing a form of certainty or waiting to buy after a consensus is formed can be an expensive habit.

Loss aversion: The pain of losing is twice as powerful as the pleasure received from a gain of a similar size.

The problem with investors with little risk tolerance is that they will likely lose or barely beat inflation. If the goal is to build generational wealth or get an excellent return, you need a higher tolerance for risk. As Jeff Bezos famously said: “Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs.”

My message is repetitive, but since I hear the same questions about stocks being asked repeatedly, it is a message that bears repeating. Humans can be very emotional and irrational. Fear and ignorance have led to distorted opinions on investing. Since most people do not have the right temperament to invest, they become scared and may end up taking low-risk decisions like this:

One of my biggest goals for 2023 has been working on the state of my finances — especially what risks I’m taking. Over the past few years, I’ve infused too much risk into my financial portfolio, investing in individual stocks and cryptocurrency, and faced steep losses. I wanted this year to be a time when I rebuilt my overall net worth and grew my finances back to where they were before I made bad trades in the market.

At the start of the year, I asked a financially savvy friend of mine to eyeball my portfolio. One of the biggest pieces of feedback he had was to move ⅔ of the cash I have sitting in my savings account into a 5% APY CD with a 1-year term.

I decided to follow his advice.

Putting 2/3 of your cash into a 5% APY savings account or CD isn’t a wealth-building activity. This is too conservative of a strategy for most people to make financial sense. Even if you are already wealthy, there are more sophisticated ways to protect your funds while gaining a higher return.

If you cannot handle watching your life savings evaporate 5-10% in a day and have severe anxiety when you go to bed worrying about your portfolio, buying individual stocks or concentrated ETFs may not be something you’re built for. I mainly avoid options because I do not have the appetite for this type of investing (it’s more like gambling.)

Long-term investing in Buffett’s style is often considered the “right” way to invest. In practice, though, very few people have the discipline to follow it. Long-term investing requires you to be a contrarian, which is not in the makeup of the average person. The key to successful investing is having the conviction to hold and buy more when the macroeconomics deteriorates. A stock can soar more than 1,000% from your initial purchase price if you do not let the noise from the market allow you to capitulate.

There is no such thing as a flashing signal to buy or sell.
A “brilliant” person can be a terrible investor – See Isaac Newton.
A “dumb” person can produce greater returns than someone who spends hours analyzing balance sheets or plugging numbers into an analyzer tool. Of course, his neighbors and coworkers will call him lucky, but life isn’t fair.
Hard work, complexity, and active intervention may provide success in many aspects of your life, but this likely won’t translate in the markets.
Many investors are obsessed with stock prices and price movements; unfortunately, the price tells you very little about what you’re buying.
Valuation is important but highly subjective, dynamic, and complicated.

Many analysts thought Netflix was insanely overvalued when its P/E ratio hit 70. Taking gains seemed rational. However, its P/E ratio shot past 400 more than once.

When investors sell because the P/E ratio is “too high,” “too expensive,” or “richly valued,” they risk losing a lot of money, perhaps 10-100 times more than what they sold for.

Investors who can use the right side of their brain and see a company beyond its balance sheets will likely be successful. You likely won’t be able to determine good leadership based on the balance sheet alone. You must invest in a company’s executive team based on contextual factors and sometimes even use…. intuition – something really smart people don’t want to hear.

**Pretty Woman Budget $14 Million. Box Office Performance: $463.4 million. Pretty good for a Disney movie about a prostitute.**

The market is not static. A surgeon has more control in the OR than an investor in managing his portfolio’s performance. As an investor, you have absolutely zero control over the economy or consumer behavior. Let’s consider box office hits. At the time, Titanic was one of the most costly films ever made, but it also became one of the highest-grossing films ever. In this case, the hype was justified. John Carter had a big budget but lost Disney $200 million, an epic flop.

Despite not getting the best reviews, Grumpy Old Men was a sleeper, bringing in double the box office from its $35 million budget. If the Terminator was a stock, it would be considered a 10x, bringing in ten times at the box office from its $6.4 million budget. However, every Terminator movie released since the original has yielded a lower return. Compare that to the Fast and Furious franchise, which is almost guaranteed to print money. One of the biggest sleeper hits was My Big Fat Greek Wedding, which had a budget of $5 million and brought in a whopping $368.7 million, making that a 70-bagger!

The reality is no one can accurately predict with absolute certainty the next big growth company, just like nobody can predict with absolute certainty the next Pretty Woman. Nobody can accurately predict the future, not Michael Burry, Warren Buffett, or Bill Ackman, no one. But successful investing requires a little luck, a lot of patience to ride out the ups and downs, and a bit of critical thinking to increase the probability of success.

I have no idea where Tesla’s stock is headed in the short or near term. Tesla has slashed automobile prices, which kills its margins. Although they remain profitable and are in far better shape than legacy automakers, cutting prices on their Model 3 and Y is a headwind for the stock. What is not being priced into Tesla is its humanoid “Optimus” robot, which I would bet will bring in significantly more revenue than their cars. If that comes to fruition, the stock is likely massively undervalued, just like Amazon was from 2008-2012, where potential revenue from AWS was not fully priced in.

Take a look at global warming. If the temperature continues to rise, companies like Moncler and Canada Goose, who sell luxurious puffy coats, could see their profits deteriorate. In contrast, companies like Revolve, mainly known for their summer wear and dresses, could benefit.

If the earth continues to get warmer, you likely will see an increase in cases of skin cancer, which could benefit a biotech company like Moderna, who, along with Merck, is developing a personalized cancer vaccine to help treat adults with high-risk melanoma. Such a breakthrough vaccine from mRNA-4157 could bring in similar revenue to what they brought from Spikevax in 2021 or 2022. When you add potential income from an RSV, Flu, and CMV vaccine, combining the profits from all these potential drugs would dwarf the revenue from their lone approved drug, giving Moderna the road map for an accelerated growth path. Time will tell, but I do not believe Spikevax will be known as Moderna’s magnum opus.

But as much as we talk about the potential and possibilities of future growers, investors still must use the left side of their brains and invest in boring companies. Putting all your eggs in a few disrupters can sink your entire portfolio, and a simple goal of investing is survivability.

Companies such as Apple, Meta, Alphabet, and Amazon aren’t likely to sink. In some cases, stocks like Microsoft can go nowhere for over a decade. The company was never in danger of going bankrupt, but they were becoming stagnant. Those patient investors were eventually rewarded as Microsoft appointed a new CEO and shifted priorities. Some investors went from being in the red for over a decade to a 10x gain from this sleepy, boring tech company.

**PHOTO: PATRICK T. FALLON/AFP VIA GETTY**

In football, teams sign and draft offensive and defensive linemen. These aren’t considered sexy or flashy moves, but a star quarterback won’t have time to throw the ball if his offensive line cannot block. If a quarterback can’t throw, his receivers won’t get the ball, no matter how fast or talented they are. A poor offensive line could sink the entire offense.

The offensive line is equivalent to investing in ballast companies- those that are not likely to grow 10-20x but provide a foundation for your portfolio. Having these companies in your portfolio would give you stability and sanity. Imagine having all your eggs in Chegg, whose 52-week high is 30.05 and 52-week low is 7.32. I have not researched Chegg, but the company appears too speculative to make a core position. Sure, if it does 10-20x, you will look brilliant, but it initially seems like ChatGPT has fundamentally disrupted its core business. It is prudent to diversify into more sure bets.

Real wealth is made in waiting and having the proper discipline and patience for a long-time horizon. The market constantly deals with uncertainty, but how you harness that uncertainty to find asymmetric opportunities is something a successful investor has to get used to. A stock can do nothing for years, and having conviction when the market doesn’t agree with you is a lonely feeling, but that is how this game is played. The better you can go contrary to human nature and find comfort in volatility, the better odds you create a portfolio similar to the house that was untouched amongst the surrounding wreckage caused by the Maui fires.

I Got To Meet Rod Stewart

What a tremendous experience it was to see Rod Stewart perform at Caesars Palace! Rod’s team’s hospitality was genuinely unexpected and greatly appreciated. I want to thank Micah, Jueying, and Megan for setting up the flight hotel booking and coordinating the meet and greet.

I had the opportunity to join Rod Stewart on stage and sing along to one of his hits, but I cowardly turned it down. I did the over 4,000 fans who paid to attend the concert a favor by not having to listen to my terrible singing voice! If I did somehow gain the courage to sing along, it would have been to my favorite Rod Stewart song, “In a Broken Dream,” which many casual fans have heard of since it was sampled in “Everyday” by ASAP Rocky featuring Miguel and Mark Ronson.

The energy and passion Rod brings to his performance are a source of joy and inspiration. Watching him live in person was truly remarkable. I also want to thank Rod’s incredible band members. These fantastic musicians and singers will likely never get the full recognition they deserve but are as much part of the show’s tapestry as Rod. Meeting them backstage was indeed an honor.

Thanks once again to Rod’s team for this incredible gift. Rod was put on this earth to be a singer, and I’m deeply grateful for the chance to watch and meet a rock legend.