Revolve Group (NYSE: RVLV) is the forgotten champion of apparel retail. While Wall Street obsesses over hyper-growth names and retail investors chase the next meme stock, Revolve quietly operates one of the strongest, most defensible business models in the entire consumer sector. It’s dismissed as “just another overpriced clothing seller,” but that superficial take misses two genuine superpowers that are extraordinarily rare in the apparel sector. This unique combination creates a company that is antifragile in a brutal, cyclical, low-margin industry, a combination that deserves far more attention than it gets.
Superpower #1: A Pristine, Fortress-Like Balance Sheet
Revolve has more cash and cash equivalents than total liabilities. This isn’t total assets minus liabilities. This is cash-on-hand exceeding all debt. As of September 30, 2025, Revolve held $315 million in cash, with total liabilities of just $226, leaving it net cash positive by nearly $90 million. (Revolve Group Announces Third Quarter 2025 Financial Results, 2025) In an industry notorious for leverage-fueled boom-and-bust cycles, this is almost unheard of. Look at Revolve’s closest competitors and legacy apparel names:
The RealReal → Negative net cash, drowning in $500+ million of debt
Victoria’s Secret → $4 billion in long-term debt, with cash covering only a fraction.
Guess? → Leveraged with debt-to-equity over 2x
Macy’s, Kohl’s, Abercrombie in their prior incarnations → Perpetual debt refinancings amid endless store closures
Most apparel retailers use leverage as oxygen. Revolve doesn’t need it. Zero net debt (actually net cash) gives them a massive margin of safety that investors in this sector are simply not accustomed to. In a downturn, Revolve can keep the lights on indefinitely without ever visiting a bank. In an upturn, they can aggressively buy back stock (they’ve already repurchased over 20% of shares outstanding since their 2019 IPO, including $100 million authorized in 2023), or acquire distressed brands/competitors for pennies on the dollar. Having such a fortress balance sheet creates real optionality.
Superpower #2: Consistently Elite Gross Margins (54% and Climbing)
The average apparel retailer scrapes by with gross margins of 30-50%. Revolve delivered a 54.6% gross margin in Q3 2025 (up 350 basis points YoY) and has maintained a 50-55% gross margin range for years. For context:
Louis Vuitton (LVMH) → 66%
Lululemon → 59%
Zara → 55-57%
Most everyone else → 30-45%
Revolve is operating at the same rarefied level as the very best branded apparel players on earth, despite being a pure-play online retailer without a physical-store crutch. Why does this matter so much? Because elite margins are Revolve’s ultimate defense against Amazon. Retail investors see “expensive clothes” and assume the model is fragile. In reality, those premium prices are the moat. Millennials and Gen Z raised on Instagram and TikTok aren’t shopping for the cheapest white t-shirt: they’re buying an identity, or an outfit that photographs well at Coachella. Revolve sells social currency. Customers happily pay 2–3 times more for the outfit that might cost less elsewhere because they’re paying for curation, discovery, and status. That willingness to pay a premium is exactly what produces 54%+ gross margins and sustains an average order value of $306 in Q3 2025 (up 1% YoY).
And those margins are what keep Amazon at bay. Amazon dominates commodity fashion: fast, cheap, endless selection. If Revolve ever tried to compete on price, Amazon would crush them with its scale and logistics. But Revolve isn’t playing that game. They’re playing the art of the brand premium game, something Amazon isn’t going to win. Even after 25+ years and billions invested, Amazon has failed to crack premium or luxury fashion in any meaningful way, with a fashion gross margin hovering around 20-30%, far below the industry standard. Jeff Bezos himself has admitted that building a real fashion brand is one of the few things Amazon hasn’t figured out.
The Rare Combination
Put the two superpowers together, and you get something compelling:
A net-cash balance sheet → survives any storm, buys back stock aggressively, and is opportunistic with M&A.
54%+ gross margins → funds growth, defends against Amazon, produces torrents of free cash flow (up $265% YoY to $59 million in the first nine months of 2025.
This defensive balance sheet and offensive margin profile is the definition of antifragile in retail.
Revolve is clearly doing something different: one that builds on digital and social infrastructure to erect a curation and brand moat. They sell the Revolve experience, which allows them to charge premium, full-price prices (high Average Order Value). Using first principles, Revolve’s main product isn’t a dress; it’s the marketing expense. The influencer trip is not just a cost; it is the intangible asset that allows them to maintain a $300 price point for a dress. This experiential luxury marketing, powered by a network of 5,000+ influencers, has driven its owned-brand penetration to 35% of sales, further boosting margins.
The focus on experiential luxury marketing allows Revolve to build a digital model while using temporary pop-ups as low-CapEx market research before committing to a permanent location. Their Aspen pop-up in December 2024 converted to a full flagship in June 2025 after crushing performance metrics, and they’re replicating the playbook with a permanent store at LA’s The Grove. Focusing on brand experience, margins, and building a cash fortress creates optionality, which is a much different playbook than most apparel retailers play: heavy CapEx expansion to drive growth, which is more inflexible and likely requires leverage.
Very few companies in any industry possess both traits simultaneously. When you find one, especially one trading at a reasonable earnings multiple with a proven ability to grow, it’s worth paying attention. Revolve isn’t a “hot” stock. It doesn’t have 150% YoY growth. It is a quiet, compounding machine built on genuine structural advantages, like a pristine balance sheet and 54% margins that the market keeps overlooking.
Investing in the U.S. healthcare sector is akin to navigating a battlefield shrouded in fog. Stocks like UnitedHealth (UNH), Oscar Health, Progyny, Hims & Hers Health, or even Novo Nordisk may seem appealing, but a minefield of uncertainties surrounds them. I am skeptical whether UNH is the obvious value play.
Picture this: Deploying your capital is like sending troops into hostile, unpredictable terrain. If you’ve ever tangled with the American healthcare system, you know it’s a chaotic web of shifting regulations, bureaucratic red tape, and outright irrationality that can derail even the savviest investor’s plans.
UNH: A Distraction in the Fog
UnitedHealth is currently under a microscope, with the Department of Justice launching both civil and criminal investigations into potential fraud in its Medicare billing practices. These investigations, which are focused on allegations of overcharging and improper billing, could have significant financial and reputational implications for the company. For a long-term investor, this is a massive distraction. Regulatory scrutiny doesn’t just threaten your investment—it demands your time and energy, which are better spent hunting for truly innovative opportunities.
Is the broader healthcare sector undervalued? Signs suggest yes. But “undervalued” alone doesn’t justify making UNH a core holding. Short-term catalysts for a rebound are scarce. Unlike tech companies that can pivot swiftly, UNH is mired in a labyrinth of state and federal oversight, slowing progress to a crawl. This screams low-risk, low-reward: Park your money here, and you might watch it stagnate as inflation erodes your purchasing power.
The Opportunity Cost Trap
The real danger isn’t just losses—it’s opportunity cost, the silent killer that drains your portfolio’s potential. Opportunity cost is the potential benefit that is foregone when one alternative is chosen over another. Consider investors who snapped up ‘bargain’ Boeing shares during the pandemic. Sure, Boeing was cheap, with bankruptcy risks cushioned by its ‘too big to fail’ status and a near-duopoly in aviation. A Boeing bull might argue: ‘I’m up 30-50% over five years—what’s the problem?’ Two issues stand out:
That 30-50% lags the S&P 500’s 90-100% surge over the same period. Why take single-stock risk for returns that trail a broad index with far less stress?
Tying up capital in Boeing meant missing rockets like Nvidia’s jaw-dropping 1,500%+ run or the stellar gains from Palantir and MicroStrategy.
Piling into UnitedHealth feels like queuing for hours at a hyped-up New York City pizza joint for a $60 pie. Sure, it’s tasty, but was it worth skipping faster, cheaper (and equally delicious) options that don’t hijack your entire day?
I understand the appeal of this sector, having invested in healthcare stocks myself. But is now the right time to go all-in on UNH? I recommend a more cautious approach. In a market where value is hard to find, it’s important not to rush into a potential minefield just because it seems cheap. Patience and a keen awareness of opportunity cost can be your most powerful tools. Instead of making a significant investment in UNH, consider waiting for clearer signals where valuations don’t come with a heavy burden.
Philadelphia Phillies starting pitcher Zack Wheeler
As an investor, I’ve had a love-hate relationship with Lemonade stock. I loaded up too heavily right after its 2020 IPO, only to regret not buying more aggressively when shares dipped into single digits. If you’re considering this name, approach it with caution—it’s a classic high-risk, high-reward bet. Lemonade remains a young company in its growth phase, far from maturity.
In hindsight, the stock’s wild ride in 2021 was fueled by meme-stock mania. It skyrocketed to $188.30 on January 12, 2021, despite the company having under one million policyholders and no auto insurance offering at the time. That bubble burst spectacularly, but beneath the surface, Lemonade’s fundamentals are showing real signs of improvement.
Back to the Drawing board:
The company has always excelled in technology, innovation, and customer acquisition. Profitability, however, has been its Achilles’ heel. I’d liken Lemonade to a highly touted high school baseball pitcher: a laser fastball and a nasty arsenal of pitches, but zero command on the mound. Without control, even the most talented arm flames out quickly; a great repertoire of pitches means nothing if you don’t know where the ball is going.
For a while, its business model reflected this wildness: impressive growth and customer attraction (the 103-mph fastball and filthy slider) were negated by sloppy underwriting (walks and hit-by-pitches). Critics often hammered the company’s high loss ratio as an unsustainable business model.
Think of Lemonade as a young Roy Halladay or Zack Greinke. Both were first-round draft picks who bombed early in their MLB careers, getting demoted to the minors amid mechanical issues and poor results. But they adapted, refined their approach, and emerged as Hall of Famers. Lemonade is on a similar trajectory.
Rebuilding the mechanics
The data over the most recent quarters tells a story of Lemonade tackling its core risks head-on:
Loss ratios are improving dramatically, signaling better risk management and a tighter command of its underwriting.
It has slashed its quota-share reinsurance from ~55% to ~20%, meaning it now keeps more of the premium (and risk) in-house.
After pulling back on its auto insurance rollout, underwriting discipline has strengthened, setting the stage for renewed expansion.
At its core, Lemonade’s business isn’t as complicated as it seems. It’s exceptional at drawing in new customers through its AI-driven, user-friendly platform. If it can continue tightening risk controls, revenue growth should accelerate while losses/expenses stabilize.
The Bull Case Ahead
Wall Street is sleeping on the roadmap ahead. I expect Lemonade to rev up its auto insurance product, expanding beyond the current nine states. New offerings like phone or travel insurance could further juice growth, pulling more users into the ecosystem and unlocking bundling discounts for multi-policy holders.
I’m not hyping this as a sure thing, but my optimism feels more grounded now: rooted in a business that appears primed for scalable profitability. That said, risks abound: Lemonade lacks a deep moat against competitors or economic headwinds, and plenty could still derail it, much like a pitcher blowing out their elbow on a single throw.
Analysts will likely pile in late, chasing momentum rather than leading the charge. I could be wrong, falling into the retail investor trap of being too early or clinging to a thesis that fizzles. Uncertainties remain, but Lemonade looks increasingly deserving of a small portfolio allocation. The bull case could spark explosive upside volatility, especially as AI evolves from infrastructure plays (like Nvidia or Google) to application-layer disruptors. Lemonade’s AI-powered insurance model positions it to capitalize on this shift, potentially delivering venture-like returns in the years ahead. While it’s no Palantir clone, the ride ahead could be like an epic roller coaster.
Palantir redefined data analytics, while Gangnam Style redefined K-pop. Both achieved unexpected success through unconventional approaches, capitalizing on the right timing, transformative momentum, and cultural context.
Palantir, whose stock has surged over 400% in the past year, has become a focal point in the AI movement, despite its 20-year history. Similarly, Psy was already a veteran artist in South Korea, having started his career in 1999, 13 years before the global phenomenon’ Gangnam Style’ was released in 2012. The video eventually became the first on YouTube to reach one billion views.
Both share the same superpower: unorthodoxy, which helps them stand out in a competitive field. Palantir has unexpectedly fueled the spirit of AI-driven operations, just as Gangnam Style helped usher in K-pop on a global level. Alex Karp, an unconventional CEO, and Psy, the highly unconventional K-pop artist, embody this spirit of unorthodoxy.
Grappling with Valuation:
As a Palantir shareholder, am I saying this is the “peak” for the company? I don’t know. It seemed things were getting frothy when Palantir surpassed Lockheed Martin’s market cap; now it has a larger market cap than Lockheed Martin, Boeing, and Snowflake combined.
From a price-to-earnings or even price-to-sales ratio perspective, Palantir makes zero sense. While a projected growth rate of 36% is impressive, it falls short of what Zoom Communications achieved during the pandemic or what Nvidia has accomplished over the past three years.
It’s very possible that Palantir’s growth may have already peaked or is nearing its peak. I have little doubt, though, that the company has a long and successful future. However, I am highly uncertain if Palantir can grow enough to meet its sky-high valuation. Any signs of slowing growth could lead to a steep retracement. Any broader market correction or shift in sentiment could lead to a significant decline.
Even though I’m tempted to trim and sell more (if not all) of my shares every time the stock rises, it’s difficult to fight against momentum. Palantir is a profitable free cash flow machine, and its commercial business is in an early growth phase. The story remains compelling. There is little wrong with the actual fundamentals of the company; the focus of late has been predominantly on valuation metrics.
Lessons from Psy:
What Gangnam Style can teach us about Palantir is that a valuation doesn’t have to make sense to justify itself to keep rising. Momentum and narrative transcend numbers (even though Palantir’s numbers are solid).
As T-Pain said, words cannot describe how amazing the music video for Gangnam Style is. The video itself doesn’t make much sense, yet it has dominated globally:
This is an almost Dada-esque series of vignettes that make no sense at all to most Western eyes. Psy spits in the air while a child breakdances, sings to horses, strolls through a hurricane that shoots whipped cream in his face, there’s explosions, a disco bus, he rides a merry-go-round, dances on boats, beaches, in car parks and in elevators and generally makes you wonder if you have accidentally taken someone else’s medication.
I believe the numbers cannot fully capture the actual value of Palantir as a business. My brain struggles to grasp its market cap, and a voice within me says, “This is as good as it will get.” My heart tells me this growth story has a lot more breadth. It has the potential for a longer runway compared to unprofitable companies like Snowflake, CrowdStrike, and Cloudflare.
Perhaps this narrative about Palantir being grossly overvalued could be right and wrong at the same time. In the short term, Palantir is due for an inevitable and painful correction, but proves itself not as a ‘hype meme growth AI stock’ but more akin to a ServiceNow or Microsoft, where they are early in their business lifecycle and maintain a robust growth rate for an extended period.
Palantir’s story shows that powerful momentum can outpace solid fundamentals for a long time. Like Psy’s viral hit, its valuation may defy logic, but that doesn’t mean you sell the whole position. Stay disciplined: believe in the vision, but prepare for volatility.
Reflecting on my own experience, the seismic movement in Palantir’s stock price YTD led me to sell my original cost-basis two years ago. This decision was not made lightly; it seemed reckless not to convert some gains into actual profits.
A few thoughts:
Investing isn’t an exact science. A good story stock with solid fundamentals can sometimes have wild meteoric rises. The talent scouts who discovered Taylor Swift as a teenager probably couldn’t foresee what she would become today. Scouts watching Aaron Judge hit at Fresno State probably did not forecast his ability to hit over 50 home runs and bat over .300 an entire season. Companies can far exceed even the rosiest of expectations because a. the stock market isn’t static, and b. catalysts that propel a stock upward are not visible on a balance sheet.
Palantir has solid fundmantels. Although the upward volatility is similar, it isn’t a “meme” stock in the same vein as Gamestop or AMC. Long-term investors should consider this an investment, not a trade.
The stock is riding on euphoria in the short term, and traders are piling in on the AI wave. Even institutions or “smart money” ignore valuation and are piling in to catch up on AI. There is no way to predict how long this roller coaster ride up will last, but sentiment and “vibes” are variable factors. As good as a company’s fundamentals are, Palantir is punching well above its weight class by almost every financial metric, which creates a situation in 2025 where the actual earnings results won’t justify the current stock price. Investors buying the stock at these prices could be severely disappointed 6-12 months from now with demanding Year-Over-Year comparisons.
Palantir’s market cap has surpassed Lockheed Martin’s (if you are reading this now, it could have doubled), which indicates an overextended stock. Based on revenue and net income, the stock is overvalued today.
Why won’t I liquidate my entire position and try to buy back at a better price? I have a much more long-term mindset and believe Palantir will eventually grow into its valuation. I am willing to ride the inevitable wave downwards but concede that at least some profits need to be taken to build a more significant cash position for the potential of a better buying opportunity in the future.
Company
Q3 Revenue 2024
Net income
Adjusted EPS (USD)
Palantir
726 million
143.52 million
0.10
Lockheed Martin
17.1 billion
1.62 billion
6.80
Looking at the bigger picture:
High stock prices can lead to wildly optimistic, unrealistic expectations where investors do not consider things going wrong.
Cash is the lifeblood of any portfolio. Trying to build a cash position during a downturn is often a reactionary emotional response and not ideal. It’s crucial to maintain a balanced portfolio with a healthy cash position.
Cashing in on 500-1,000% long-term gains can seem like a victory, but I urge investors to be careful. Palantir’s focus on emerging technologies like AI and data analytics positions itself well for future growth. Anyone investing in this company should have patience (which most investors do not have) and a high-risk tolerance. It is overvalued, but the commercial business and AIP are in their infancy. As an investor, Palantir is a rare diamond. It is too valuable to avoid having this cash-compounding multiplier in your portfolio. At the same time, by not selling at least some gains, if the stock were to pull back significantly, it would be as if this rally and your paper gains never happened.
This rapid move-up reminds me of Nvidia from 2016 to 2018. Even for the best-performing company in the world, investors were given windows of opportunity to buy back in at more reasonable valuations later on. I am confident we will have similar retracements with Palantir.
Revolve Group:
The biggest position in my portfolio from a total cost basis, I am optimistic about where Revole is headed in 2025. My stance on the fundamentals of Revolve has remained the same:
It’s not a homerun investment but a solid double
There is no single catalyst to propel exponential growth, and there are no glaring red flags or company-specific risks that would cause me to panic.
Guided by two co-founders with an entrepreneurial vision, no debt, a history of profitability, and a proven business model.
I remain patient because the growth strategy remains intact. Revolve’s biggest competitors are Nordstrom and Macy, legacy companies with the same problem: an inability to attract a Millenial and Gen Z audience. For a luxury department store, this is an existential looming threat.
Big Department store chains have become stale and lack the nimbleness to pivot their business models. Macy’s and Nordstrom likely need to leave the public markets to stay afloat, which is an excellent opportunity for Revolve. While most department stores need to downsize their retail footprint, Revolve’s brand is growing, and its presence in physical retail is just starting.
Some investors may feel this growth story is not appetizing enough, but I see a clear and easy opportunity. Among its e-commerce peers, it’s one of the few growing and GAAP profitable. Revolve isn’t trying to reinvent the wheel, like becoming “The Uber of the Skies” or “Revolutionizing Fitness.” Doing something never done before in investing comes with a higher reward but much more risk. The history of profitability gives me enough assurance to bet that Revolve will be a steadily growing winner.
I am cautiously optimistic. Many analysts are sleeping on Revolve, a small market cap company, becoming an emerging brand set for impressive results in the next decade. Their legacy competitors are in apparent crisis mode. At the same time, most of their e-commerce peers in the luxury industry lack the same financial and brand strength.
Devon Energy:
A position I started recently, Devon Energy, provides great diversity for investors looking to add value and non-tech growth to their portfolio. Oil and gas are highly cyclical commodities, but investors shouldn’t confuse cyclicality with speculation. The price of oil constantly fluctuates. Although oil stocks are sensitive to macroeconomics and geopolitics, Devon is among the best companies in the oil industry.
Reduction of expenses and increase in efficiencies from the Matterhorn Express & Blackcomb Pipeline.
Increase of oil production from the Grayson Mill Energy acquisition.
Dirt-cheap valuation with a strong balance sheet and consistent cash flow.
A company aggressively buys back its stock when said stock is deeply undervalued
An attractive variable dividend that allows investors to be long-term patient.
A “green light” from the Trump administration (less regulation and taxes) that Devon could benefit from significantly.
Companies in the energy sector aren’t every investor’s cup of tea, but building a robust portfolio requires some diversification and value. Although having an asset’s value strongly correlated to oil price may seem risky, investors should consider this a hedging investment rather than just a hedging tool.
I am not a big fan of derivatives or “buying insurance” in your portfolio other than cash. But if you are overweight tech, having an asset that can move up, even with rising interest rates, is quite enticing. Also, suppose you have positions for which you have a deep conviction that you would rather not sell in your portfolio. In that case, Devon Energy can be a great addition to your portfolio because it generates income and will likely rebound when oil prices fluctuate higher. From a long-term viewpoint, the price of crude Oil WTI today is neither high (140.00 in June 2008) nor low (18.84 in April 2020). It could be a good time to start a position in Devon Energy or other oil/natural gas energy companies, with their value being fair-to-good in the near short term.
Pfizer/Moderna:
Every investor has to prepare for the inevitable “truths” that will impact their portfolio: Recessions, pandemics, natural disasters, and geopolitical events are unavoidable and will happen again. Investors must stay disciplined during volatility and take preventive rather than reactionary measures before catalyst events happen. The latest information regarding H5N1 is quite alarming.
My current goal is not to put new money into something already expensive and hope it becomes even more expensive. A long-term investor needs a strategy that fits their goals instead of following a trading strategy and succumbing to behavioral biases of only buying stocks when they go up.
While the market is overweight in AI, I have been building and diversifying my portfolio over the past year by adding energy and biotech.
Pfizer is a more established biotech company that has made a big bet on oncology (cancer). Although the transition has been slow, I expect meaningful breakthroughs with cancer drugs in the next five years.
Moderna carries much higher risk and more significant potential rewards. Its focus isn’t on a specific drug approval but on utilizing AI and mRNA technology to create a “bioplatform.” If it succeeds, Moderna has the potential to unlock the holy grail for pharmaceutical drug companies. Vaccines and drugs that do not have patent expirations (assuming Moderna owns the mRNA vaccine intellectual property). A lot of this comes with unknowns and “ifs” with this bull thesis; however, we already know through data and science that mRNA technology works, and the reward is high (essentially a potential 100x payoff) with probabilities much higher than lottery odds.
Quick hits:
Hims & Her Health—I cannot fully grasp what will give Hims a long-term competitive advantage beyond branding and slick marketing. A brand’s impact on purchasing behavior in apparel works quite differently in telehealth. Your friends and social circle may care what and where you buy your clothes from; I don’t think it matters much with weight-loss drugs and erection pills. I am not bearish on Hims; just unsure how sticky brand loyalty will work in a B2C subscription telehealth platform.
Lemonade—Too early to sell. Investors should wait until Lemonade fully launches its car insurance product nationwide. Unlike most companies I write about, Lemonade has never been profitable. It will stay that way for the foreseeable future. It will remain a small position in my portfolio, but the company seems to be moving in the right direction. Like Roblox, these companies are about a potential story unfolding. The potential reward is a significant return based on a small initial investment. Look at it like a small fire; it could slowly burn or escalate into a major blaze. The stock is volatile and remains higher on the risk scale.
Nike—The turnaround story remains in play. Although sales have declined and the overall brand has stagnated, I am confident that the new CEO, Elliott Hill, can get Nike back on track. Although it seems like a somewhat oversimplified thesis, Nike should benefit from a Caitlin Clark halo effect. Clark was named Time Magazine Athlete of the Year and #100 on the Forbes 100 Most Powerful Women. I believe it is a safe bet Clark will rise up this list, as she is not even at her athletic peak. Clark’s fandom/demand is simmering, and Nike is known to historically promote and market athletes better than any other brand. It will be hard for Nike to screw this up.
Mercadolibre—I remain bullish. Most investors associate Mercadolibre with e-commerce, as it is the most valuable company in Latin America. Its strong infrastructure has created a fortified moat to protect itself from Amazon and other competitors. Next up is becoming the premier fintech bank in Latin America by leveraging its online ecosystem to extend into financial services. Mercardo Pago may never catch up to Nubank; it doesn’t have to. Mercardo Pago is penetrating a large market, and its competitive advantage comes from its ecosystem integration, much like how AWS benefited significantly from its integration with Amazon’s online business. The momentum and growth indicate that Mercado Pago will one day drive most of Mercdaolibre’s operating income, just like AWS does for Amazon. I am not bearish on Nu Holdings, but they are a pure fintech play. In contrast, Mercadolibe has several potential growth levers to pull, making it a superior investment.
After Joe Biden dropped out of the 2024 Presidential race in July, something notable happened: Zoom, the videoconferencing app, was used as a political rally call for Kamala Harris. On a Thursday summer night, a Zoom fundraiser attracted more than 200,000 viewers, making it the largest Zoom call in history. Several other Zoom fundraising calls have followed, started by diverse communities like “White Dudes for Harris,” “Dead Heads for Harris,” “Cat Ladies for Kamala,” and “Swifties for Kamala.”
I am not interested in discussing Harris’s surge in popularity but in why her supporters decided to use Zoom instead of Google Meet, Microsoft Teams, or Webex Meetings.
Investors in Zoom should feel confident in the business. Zoom’s death as a pandemic company is greatly exaggerated. The stock appears hated, I guess it’s a symbol or a vestige of a depressing moment in history, yet the fundamentals remain intact.
Zoom is the people’s choice because, through empirical testing, its audio and video quality ranked higher than its competitors.
Due to its ease of use, consistency, and complete/advanced features, it also flexes its brand power, even over Microsoft and Google.
Why does this even matter?
Despite the exceptionally bearish sentiment from Wall Street and the financial media, Zoom has proven its resilience. Sentiment, after all, is subjective and can quickly turn around as expectations and emotions change. This should reassure investors of Zoom’s potential.
Perhaps the narrative of Zoom being a pandemic boom-and-bust company is incorrect. The business is operating just fine and taking the necessary steps to transition from a popular one-trick video conferencing app to a full-fledged AI enterprise platform.
The video conferencing space is crowded, with heavy hitters who do not have the same relevance as Zoom on a consumer level.
How many people do you know to use Microsoft Teams outside of a work setting? Shouldn’t Teams or Google have more relevance or usage if it has the same functions and capabilities as Zoom?
Since Zoom is an enterprise tool, consumers downloading and using the app don’t move the needle or meaningfully impact the balance sheet.
It creates a halo effect for the enterprise business and enhances brand recognition.
Zoom is not a social media platform, yet it has brought an impressive amount of users for fundraising purposes, creating a sense of community and energizing supporters.
Unnecessary negative-slanted wording from a Morning Brew newsletter
If Zoom can impact an election and help elevate a candidate into the presidential office, something about the platform gives it a potential competitive advantage with a long-term wide moat. You can argue that Zoom cocktail parties and Zoom Yoga sessions are more of a pandemic-era fad, but affecting voter turnout is much more impactful.
Despite the recent downturn in Wall Street’s sentiment, I remain optimistic about Zoom’s long-term potential. The demographic most comfortable using the platform will eventually dominate the workforce, while those resistant to technological change will phase out. This bodes well for Zoom’s future growth.
Zoom’s platform is not just a tool; it has gained cultural phenomenon status. It’s the preferred choice among Gen Z across various industries, from education to healthcare, legal, events, government, and personal use. Understanding this trend is crucial for anyone interested in technology and its impact on society.
Zoom meetings, classes, and virtual court hearings are here to stay because they are widely popular, in high demand, and in a growing market.
Strong balance sheet: Zoom has approximately$7.5 billion in cash and zero debt. Roughly 40% of the company is cash (cash divided by enterprise value), signaling a high margin of safety. Compare that to Salesforce, which has an enterprise value of about $274 billion, $10.6 billion in cash, and $40 billion in debt.
Founder-led with strong key executives.
AI-infused with innovative ideas like AI avatars that trend towards the future of enterprise work tools.
Popular among a demographic that will make up most of the workforce in 10-20 years.
Zoom has become a popular company to “hate on” from Wall Street for various reasons that I believe are mainly irrational and short-sided. I fully expect Zoom to see a lift in revenue and guidance due to its solid fundamentals and riding the right enterprise software trends. If this happens, the narrative of how the company will dramatically shift more positively.
I wouldn’t call what Zoom has a network effect, but the virality appears very sticky. An enterprise app that transcends enterprise and has a profound impact on society outside of just business. Zoom is an attractive investment with much of the downside risk already priced in.
Nvidia has demonstrated an impressive growth trajectory, surging nearly 2,200% from $6 to briefly touching $140 in under five years. This meteoric rise even saw it surpass Microsoft as the most valuable stock in the market for a brief period.
Long-term investors, your perseverance and discipline have paid off. You’ve demonstrated two of the most crucial traits of successful investing: patience and discipline. While many struggle to hold a stock for even a year, you’ve shown the strength to hold on for much longer. This is an achievement worth celebrating.
The stock has made parabolic gains, but based on logic, rationality, and sound judgment, it’s time for long-time investors to cash out at least a small portion of your paper gains.
Nvidia is a fantastic company with A+ growth, leadership, and profitability. However, it is not immune to the macro economy, slowing demand, or a change in momentum/sentiment, which will inevitably happen.
As share prices rise, predictably, people with full-blown FOMO are joining the bandwagon late to the party. During this AI fever, consideration for valuation and rationality is put on the back burner as “dumb money” enters the market.
The people buying Nvidia stock now are momentum traders or dumb retail money. They admittedly have no idea what they are doing and are paying a premium for a very aggressive future outlook.
When I refer to ‘dumb money, ‘I’m not implying that these investors are unintelligent. It’s a term used to describe those who enter the market without a clear understanding of the investment they’re making, much like a dog chasing a car.
Here is a question from Linda in Illinois on a recent episode of Mad Money with Jim Cramer:
“I’m a retired postal employee who worked for 45 years. I have no financial investment knowledge. I wanted to know how to buy stocks, and I wanted to ask you if I should try to invest my Thrift Savings Plan (TSP) money in S&P Index Funds, or Magnificant 7, or Nvidia or all Nvidia.”
Think about the person in your family or at work who exhibits terrible financial acumen. The last person in the world you would want to take financial advice from.
The people considering buying Nvidia stock may have just learned about the company this year. They still may not even know what they do. If you’ve never heard of the company before last year, what happens if the stock craters? History shows people will justify their fears of a recession or market crash by selling at a deep discount and retreating into cash or gold.
This is perfectly normal animal behavior. But you are neither a dog nor a cat!
Again, Nvidia is a fantastic company—a best-in-breed company. But every company has a numerical valuation. With a straight face, can you say out loud that Nvidia will be a $10 trillion company by 2030? If you chase high growth, you typically pay a premium price for it and will likely underperform the market in the long run.
The risk-reward profile of buying Nvidia today significantly differs from a year ago. This may sound hard to believe, but shares are less valuable today because the valuation is far more uncertain than last year.
How many companies have gone from $3 trillion to $8-10 Trillion? Answer: None. Saying this happens with a level of certainty or confidence seems misplaced. It also ignores the risk of things going wrong. We are in uncharted waters with no precedent.
I’m actually coaching 8/9 year olds. Hoping to move up to middle school in the next 3-5 years.
Recently, the Lakers hired former player and current podcaster/ESPN analyst JJ Redick as their new head coach. Redick is the same age as LeBron James. He also has no coaching experience beyond youth basketball. Yes, you have read that correctly—a professional basketball team has hired a coach who has not even coached middle schoolers!
There is nothing wrong with being optimistic about Redick as a coach, but how can anyone be confident that he will succeed when he has never done it before? Of course, Redick could be the next Pat Riley or Phil Jackson; it could happen, just like Nvidia can continue skyrocketing. Valuation is an imprecise art because the future is unpredictable. But can you say with confidence this is probable or more possible?
Let me summarize my gameplan:
Am I saying to go all-in cash or to sell out of everything tomorrow?
No.
There is no need to think so dramatically or immaturely.
Betting against Nvidia is extremely risky.
Putting fresh money into Nvidia is risky because investing is more than just about data points and figures. Investing has far more intangibles, making it both an art and a science.
The safe time to buy Nvidia was the second half of 2022 when the US government banned them from selling chips to China and Russia.
I will ride Nvidia long-term, but the growth path is not guaranteed or linear. Past performance is no guarantee of future results.
Jennifer Lopez’s It’s My Party tour grossed $54.5 million with 31 shows in 2019. She recently canceled her tour. The same is true for the Black Keys, while other stars like Pink and Justin Timberlake (pre-DWI) have canceled some tour dates.
Meanwhile, Olivia Rodrigo’s “Guts” tour tickets go for above $570 on the resale market. In 2019, Rodrigo was a relatively unknown 15-year-old.
There is nuance and context to life and investing.
As a long-term investor in Nvidia, I am strategically preparing my portfolio by gradually increasing my cash holdings during periods of strength. This approach allows me to prepare for potential market downturns while benefiting from the company’s growth.
Nvidia is undoubtedly a great company, but why pay premium prices for future assumptions? I am building my cash position not out of fear but of a rational understanding that market fluctuations are normal. This way, I am prepared to take advantage of more appealing risk-reward profiles in the future.
It’s a win-win situation. Hold most of your holdings and reap the reward if the companies perform well. Trim your position in small incremental amounts to build cash. If bad things happen in the market, you at least have more cash to take advantage of a more appealing risk-reward profile in either a cheaper Nvidia stock or another company with a better runway for growth.
The law of big numbers says Nvidia will not hit $10 trillion by 2030. We have never seen a $3 Trillion company triple in 5 years. I am a contrarian, but even that sounds like a stretch. There are compelling companies that can go from $1-10 billion to $10-$100 billion, which is more plausible and we have witnessed several times.
There is nothing wrong with using nuance and rationality in investing. Take some money off the table, even just a tiny amount.
That’s how you, as an investor, need to think. Buy stocks when the valuation becomes desirable. To buy stocks when they are desirable, you need cash on hand, which is best built during days like today. What better time to raise money when your initial investment has increased 10x or more?
Preparing for the future by slowly building a cash position is sound investing advice because the market will eventually experience an inevitable downturn, and prices will fall. When risk falls, that would be a more appropriate time to pounce (use that animal instinct) and buy more aggressively.
Great investing requires a solid strategy and not just emulating pure emotional instinct. Don’t be the dog chasing a car.
A Zoom court hearing in Michigan involved a defendant who was allegedly caught driving with a suspended driver’s license.
I invest in both companies.
I see solid fundamentals and strength in both businesses.
It is important to remember that the growth is still early in markets that are still evolving. Evaluating these companies based on traditional valuation metrics is problematic because these industries are far less static than other sectors. Both have bright futures, but Zoom would have a slight edge if I had to choose the better long-term investment based on a risk and reward estimation. This suggests a potential for high returns, inspiring optimism in potential investors.
Zooming in: Misunderstood as a one-product company:
Company
Revenue (Billions)
Gross Profit (Billions)
Earnings (Millions)
Palantir
2.23
1.8
209.8
Zoom
4.53
3.5
637.5
1. Core Functionality & Additional Services:
Zoom offers foundational features like video conferencing (Meetings), chat, and phone calls.
But on top of that, they provide additional services built around this core functionality like:
Rooms – dedicated video conferencing hardware for meeting spaces.
Events – hosting large-scale virtual events.
Contact Center – cloud-based call center solutions.
2. Openness and Integrations:
A key feature of platforms is openness. Zoom offers a Developer Platform (https://developers.zoom.us/docs/), allowing third-party developers to create custom applications that integrate with Zoom’s core services.
This extends Zoom’s functionality and caters to specific user needs. Imagine a Zoom app for scheduling meetings directly from your calendar.
3. Diverse User Base and Use Cases:
Zoom caters to a wide range of users, from individuals to large enterprises.
The platform’s flexibility allows it to be used for various purposes, such as business meetings, virtual classrooms, telehealth appointments, and even social gatherings.
In essence, Zoom provides a foundational communication platform and allows users and developers to build upon it to create customized experiences. This is a core difference from a product company that offers a fixed set of features.
Zoom has a larger TAM and a much easier pathway toward highly profitable growth.
According to the most recent reports, Zoom boasts 191,000 enterprise customers. While the exact number might fluctuate, Palantir has several hundred enterprise customers (1,300-1,500), significantly less than Zoom’s reported customer count.
Palantir primarily targets large enterprises, providing software platforms for data integration and analysis, often with over 10,000 employees and significant revenue. Zoom has a much broader customer base with businesses of all sizes.
One company targets a niche market of government agencies and large corporations with specific complex enterprise software solutions. The other offers a communication and collaboration solutions platform to businesses of all sizes, with its bread and butter being video conferencing.
Zoom is available in the Education, Financial Services, Government, Healthcare, Manufacturing, and retail industries. Palantir targets many of the same sectors; however, its platform is bulkier and has no actual application use for smaller enterprise businesses. Palantir’s software is generally considered expensive, with some estimates suggesting hundreds of thousands or even millions of dollars per year. Zoom offers a freemium model with tiered pricing plans, different features, and user capacities for businesses and government agencies.
A significant market opportunity ahead with an exceptional product:
Zoom saw 325.81% revenue growth in 2021 due to the pandemic. It is safe to say they will never see this type of year-to-year growth again, but it doesn’t need to.
Zoom is riding a consistent growth trend that began long before the pandemic. Work-from-home or Remote Work, whatever you want to call it, is the inevitable increased globalization of work. Fast Company coined the term “Gen Global” For Gen Z, who prefer “work from anywhere” and prioritize travel over education. Young workers grew up on social media and are more comfortable communicating via video conferencing.
Working full-time in the office is a dying trend. The new long-term trend is a form of hybrid work, from which Zoom will likely reap the rewards. As technology improves, the migration from On-Prem to the Cloud continues, and older CEOs phase out, companies will become more receptive to Zoom’s platform. Hybrid work is inevitably the future and growing; companies that resist the trend will lose out on talent, leading to a loss in profits. Zoom’s strategy to capitalize on this trend is to continue improving its platform and expanding its customer base, particularly in the government and healthcare sectors.
Zooms provides cloud-based products that the next generation of workers will use. Meetings offer a better mousetrap for workers and are becoming an essential product for employers to provide as an efficient way to communicate with each other.
It is popular among most workers who see it as a “perk.”
Reduced costs for real estate
Expanded pool of recruitable talent
Increased worker retention.
Adopted over time as hardline proponent CEOs of returning to work retire.
Fundamentals vs. Valuation:
Zoom and Palantir have been public for less than five years, so evaluating past performance based on limited data is difficult. With companies like these, it is more helpful to first zone in on the fundamentals to make an educated guess about the future.
The Artificial Intelligence Platform (AIP) is promising. I am a believer; however, the pathway is far from certain. Palantir’s commercial business is nascent, with even its most ardent supporters having to take a leap of faith that it will grow. Selling a product that companies don’t even know they need is almost impossible to map out five years out.
Palantir has a long sales cycle. Learning its solutions takes much longer because the learning curve is high. It will likely take a year before their platform shows any meaningful ROI.
AIP is intriguing and ambitious. The presentation deck is broad and alluring. It captures an investor’s attention when you help uncover human trafficking rings or battle the Russian army. I have determined the risk is worth the rewards as an investor, but valuing this as an investment is problematic because it assumes high optimism in a new space without a clear track record.
Can Palantir expand its commercial business and attract a broader and more diverse customer list? It is too early to know if the path is certain. A longer track record of low churn and increasing profits is needed to make a better determination.
Zoom’s software has already penetrated multiple enterprises, organizations, and businesses. However, its platform still has a lot of room to grow. Many analysts dismiss Zoom’s government business, which is largely untapped, more so than Palantir.
Another lockdown may not happen again, but the residual effects of the lockdown are seeing permanent work behavioral changes despite the pandemic being over:
Columbia University went fully remote due to Palestinian protests.
School districts in many U.S. cities went remote during the winter due to the flu/Covid outbreak.
Flu/Covid outbreaks will continue in the future.
Someone even had a Zoom court hearing while driving with a suspended license.
MLB’s league offices use Zoom Meetings, Zoom Rooms, Zoom Phone, and Zoom Webinar, while Zoom’s all-in-one collaboration platform is integrated across several MLB clubs, platforms, and broadcast outlets.
For a platform critics say is dying, people still use it daily. Zoom’s client list ranges from news broadcasts to hospitals, school districts, colleges, and courts. Its partnership with MLB is one of the best case studies of how Zoom’s suite of products can provide a large, multifaceted enterprise with various solutions.
The two biggest fundamental questions that I will be closely watching for the near future:
(1) Leadership execution, mainly if they can make intelligent acquisitions of smaller technology companies to complement and grow their existing businesses. Zoom has a large cash pile and will likely search for an acquisition target to grow its business.
(2) Increased sales and marketing. The CEO & Founder, Eric Yuan, acknowledged this on a previous earnings call: “One thing I think we did not do well, as I mentioned even before, is we did not do well on the marketing front. A lot of customers and users do not know Zoom has a greater presence in Team Chat functionality at no additional cost. And it works extremely well.”
Yuan has proven he can make great products, but Zoom must enter wartime sales mode. Zoom must ramp up S&M spending and sacrifice profits for growth. Zoom has a significant edge over Palantir because it has far more brand recognition. Conceptually, learning how Zoom’s products can help a business is easy. Practically, there is a low learning curve, with Meetings & Chat being extremely user-friendly. Foundry is a much more challenging platform to use and understand. Palantir would need to make Foundry less heavy to address many lukewarm and bad reviews. It’s an early and fixable problem but a potential red flag for future growth.
Both companies have potential opportunities, but Zoom has a bigger total addressable market. Despite the pandemic being over and Zoom becoming a target for other companies to criticize, Zoom’s platform is already becoming a mainstay in the enterprise ecosystem. The story is still early for its commercial and government businesses.
Low vs High Expectations and Sentiment
From a Price-to-Earnings Ratio and other traditional financial metrics, Palantir is an expensive stock. Is it overvalued? That depends on whether it can meet or exceed high expectations. Zoom is the opposite, an inexpensive stock with low expectations.
In the short term, Zoom has a low bar to jump. Analysts would view 5-10% YoY growth in 2025 as wildly optimistic and likely cause the stock price to double from today’s price. For Palantir, anything under 25%-plus overall growth would be disappointing and likely not well-received from Wall Street.
A company with high expectations can exceed them, but Zoom likely has better odds of meeting its target projections.
So why mention expectations? I discuss this to reflect the nuisance of investing and how to become a better, well-rounded investor. Suppose you are an investor and only consider the company’s qualitative aspects. That strategy probably works out in the long term, but you must ask yourself: Is there a compelling reason to buy the stock where it trades today? The better-discounted price you get, the more likely you have a higher return.
Analyst ratings for both companies are pretty tepid. Remember, Palantir traded above 35 in early 2021, and Zoom traded above 555 in 2020. Many bitter retail and institutional investors are underwater on their investments if they are still holding, but this is where the behavioral aspect of investing plays a factor. The mood of the market and macro environment was completely different during the pandemic than today.
The past is the past. An investor cannot change the price at which you bought the stock last year or five years ago. The company’s valuation is different, but if you are down 30-80% on your Zoom or Palantir shares, it doesn’t mean the company is 30-80% worse. Palantir has seen significant growth in its commercial business. Zoom is a high-quality company trading at a rare reasonable valuation with solid fundamentals. Zoom has yet to see its revenue decline, which likely would have happened if its platform was a pandemic fade. The low sentiment has manifested skepticism about the viability and feasibility of the Zoom platform. This creates a potential opportunity for patient longs who do not care about the lack of momentum. Shares for both companies are not overbought according to the relative strength indicator (RSI), a momentum-oriented technical analysis tool.
Final Thoughts:
Both of these companies have compelling evaluations. They meet the criteria for quality companies. I give the edge to Zoom because it trades more at a discount. Both companies have an opportunity because their balance sheets look healthy, and their cash flow is growing steadily.
I may seem down on Palantir, but as I said earlier, I invest in both companies. Although it looks fairly valued today, Palantir is not an overhyped AI company. I could be underestimating its fundamentals, meaning it is grossly undervalued today.
I love the fundamentals, but valuation matters. Can you ignore the possibility of an economic slowdown, a hiccup, or a U-turn in sentiment or the story’s narrative? Can you invest successfully, ignoring risk and assuming a large meteoric rise based on already-priced assumptions? I don’t have enough conviction to go all in on one name, but I do have enough of a risk appetite to stay on the ride and let it play out. Zoom’s sentiment today is low, and all the momentum it had during 2020 and 2021 seems to have evaporated. Although not dirt-cheap, Zoom appears like an inexpensive stock with better odds of overperforming.
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.
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. An entire book could be written about pro-wrestling fanaticism, but the popularity is likely to continue for a long time.
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.
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.
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.
Invest in Myself 