Shut Up and Hodl Basket

Missed investment opportunities

I tend to make investment decisions intelligently, based on understanding a business's fundamentals. This includes industry dynamics, the competitive landscape, the business model, the existence of economic moat, and so on. I then develop a conservative valuation and finally enter a position at a price that is below or not far above the valuation. Yes, this is essentially what most people call value investing. As Charlie Munger said, "all intelligent investment is value investment".

However, this approach has a significant shortcoming: it's limited by my intelligence! Obviously, there are good investments that I don't understand enough to make an intelligent decision about. In this article, I'll introduce two categories of investment opportunities that I find difficult to evaluate, and then describe my approach to them.

1. Growth stocks

They are companies with a high earnings growth runway that is beyond comprehension. Here are some reasons they are missed:

1. Potential profit margin expansion. Companies with high growth prospects often reinvest profits to fuel further growth: This might involve setting prices just above variable costs to acquire customers rapidly, operating with high fixed costs that require scale to become profitable, or investing in opportunities with delayed returns.
   
   For example, Amazon often appears to price below its logistics cost by offering "free delivery". However, they were investing in capital expenditures and waiting for the business to scale up so that the fixed cost component in logistics would become small relative to gross margins it can get per goods sale. They also constantly invest in new business lines and geographic expansion, which increase administrative and R&D expenses and hurt short-term profitability.
   
   While potential profit margin expansion is one reason that value investors miss growth stocks, I believe this is becoming less common (p.s. written in 2025/01). Value investors have learned from past missed opportunities like Amazon, Google, Facebook, etc. They now often assign long-term profit margins to companies with clear scaling opportunities. For example, after witnessing the profitability of AWS, value investors can now better value Google Cloud for Alphabet, or AliCloud for Alibaba.

2. Longer than expected growth runway. Valuation often involves estimating the duration of a company's high-growth period and assuming a lower terminal growth rate afterward. If a company grows many more years than anticipated due to underestimated sustainable advantages or larger addressable market, traditional valuation methods like discounted cash flow may undervalue the company, and thus easily cause a missed opportunity.
   
   Consider Apple's Iphone. It has led the mobile phone market for a long time (p.s. written in 2025/01) despite competition from different manufacturers of Android phones like Samsung, Xiaomi, Huawei, Google, etc. Iphones are also able to penetrate into the mid tier market if not the lower tier market because people are more willing to spend on phones nowadays despite the price being a big slice on their discretionary income due to the tremendous value of a smartphone that brings to people.

3. Better than expected products or business model. Netflix and Tesla are prime examples. Netflix steadily raises prices steadily because its streaming contents] provides significant values to users. Furthermore, its content production costs are lower than traditional studios because it has a better understanding of audience preferences and budgets accordingly. It also doesn't rely on blockbusters to succeed.
   
   Elon Musk at Tesla made a significant bet on electric vehicles by building Gigafactories and a Supercharger network before achieving large-scale sales. This initially made it seem like they couldn't sell cars profitably. Ultimately, Tesla outcompeted rivals with superior range per cost, accessible superchargers in major cities and along main routes over the United States, over-the-air software updates, and most importantly (in the United States at least) L2 autonomous driving with near-complete road coverage. Despite multiple delays, Robotaxi may finally come in 2025-2026 (p.s. written in 2025/01). Tesla still lags behind Waymo, but given Musk's intelligence, it has a reasonable chance to execute well enough to catch up Waymo shortly.
   
   Costco's membership-based retailing is a business model that was also long underappreciated. It allows them to sell goods at low prices by having higher quality customers (thus less spoilage), selling in bulk, and generating substantial profit from membership fees.
   
   These growth opportunities can be easier to identify through diligent research on a company's products and by looking for industry geniuses like Elon Musk.

4. New business lines. These are the hardest growth opportunities to spot. Consider AWS from Amazon, content streaming from Netflix (which started with DVD mailing), and competitive priced EVs from Tesla. Often it's not about hearing about a new business line, but but believing in its potential, often based on a CEO's vision.

2. "Religions"

This category includes companies like LVMH (LVMH Moët Hennessy Louis Vuitton SE ). where it's difficult to understand why people pay such high prices for goods with intangible value. However, the best examples are commodities like gold and Bitcoin (a.k.a. digital gold).

I call them "religions" because, like religious faith, their value isn't easily justified rationally, yet they keep thriving as evidenced by their prices keep going up. In fact, if you see that our world has different religions, and by their nature that they contradict each other, then some of them must be a scam. Of course for an atheist, all of them are scams. And yet, all of them have more and more followers, no matter if it's Christian, Muslim, or Buddhism. Same for gold and bitcoins that their values mostly come from people who believe in them having values, almost in a ponzi scheme like fashion: by having more people believe in them, their prices go up, which attracts more people to trigger a positive cycle.

Thus, another way to look at gold or bitcoin is that they are investable religions that bring monetary value to whoever believes in it and invests their money in it.

My approach

One approach to these missed investment opportunities is to just ignore them. As Lu Li states in his book "Civilized. modern. value investing and China", value investing is the most righteous way to invest because you earn what you deserve, not by luck or by scamming others.

I have another approach, mainly due to FOMO (fear of missing out). These missed investment opportunities have generated significant wealth in the past and there is a fair chance they will continue to do so in the future. My strategy is to allocate a small amount of money that I can afford to lose entirely. This amount should be small enough that I'm comfortable holding the positions for a long time. It is not a fixed percentage allocation, as that would require adjusting positions based on performance relative to the rest of the portfolio.

Once the money is in this speculative basket, I leave it alone. I would not consider valuation due to its speculative nature. That's why I call this my "shut up and hodl" (hold on for dear life) basket. hence the title of this article. Over time, if I remain comfortable with an investment, I gradually add to it with NEW money (never selling other investments to fund this speculative basket!). If I become uncomfortable, I simply stop buying, but I don't sell, as the amount should be insignificant, and I might as well lose it all.