Fishing Where the Fish Are
Competition and Opportunity in Stock Market
“The first rule of fishing is to fish where the fish are.” Charlie Munger
Thanks to the Internet, Twitter, Medium and financial newsletters, the ability to learn from successful professionals has never been easier. This is the golden era of learning from the best minds across disciplines and fields of interest.
Gavin Baker is a money manager whose investing acumen I very much admire. He is an ex-Fidelity Investments portfolio manager, who has invested in publicly traded stocks and also in Uber, Facebook and other giant successes while they were private, and now runs his own money management firm called Atreides Management. He graciously shares his thoughts on investing through Twitter and Medium. He recently shared his thoughts on a mistaken investment in Intel (NASDAQ: INTC). My thoughts after reading his post, was how important it is to understand where you are investing and knowing who you are competing with.
Consider this passage from the post which I highly recommend everyone read (Gavin Baker’s post on Intel):
“Intel decided not to insert EUV at 10 nm and instead rely heavily on multi-patterning. This was effectively a message to the world: “We are so good that we do not need EUV. We can do this with DUV, which no one else can.” On top of this, Intel tried to scale aggressively at 10 nm. Moore’s law is actually not constant. The scaling at each node is different. Intel tried to scale transistor density by 2.7x at 10 nm rather than the more common 2x to 2.4x without using EUV.”
I know this is English, and I recognize the English words, but what is DUV, EUV or multi-patterning?
I immediately thought about competition and Charlie Munger’s quote about fishing. It is clear from Gavin’s writing that he possesses an expertise in semiconductors and the landscape of the industry. In addition, he has a deep understanding of Intel’s past mistakes and decision making, but also Intel’s competition with companies such as AMD (NASDAQ: AMD). It is very apparent that his knowledge hasn’t occurred in the last year or even two, but instead has accrued over decades.
How in the world could I compete with that advantage? And better yet, why would I want to?
And I think this highlights a big dilemma. The large cap class of investments, especially big cap tech companies are simply overfished. There simply isn’t enough outperformance or alpha to go around. I think about Gavin and others like him. Then add in computers, quant and algorithmic trading and I literally have no chance, outside of blind luck. I also think of the advent of computers and quantitative trading as the giant trawlers of the investment world. Whatever Gavin doesn’t get, those computers are guaranteed to.
Recently, investment professionals have suffered because of a giant storm (COVID), which has churned the waters, moved fish around and caused chaos. In midst of this chaos, retail investors have made a lot of money and feel pretty good about themselves. All of that investment luck that retail investors have enjoyed will most likely soon disappear, they just don’t know it yet.
Professional investors like John Hempton with Bronte Capital, are already recalibrating to the new environment. John is another investor I follow and admire. He recently shared his mistakes on the short side of his portfolio in a thread on twitter:
John and other great investors like him reassess and adapt when something goes wrong. When they find that they aren’t in the right position, they often adjust and quickly return to their stellar performance.
And the end of retail investors run most likely won’t just come from improved competition from professional investors like John Hempton and others, but also from insiders of companies, which are happy to sell shares, boost their salaries, dilute investors or come out with advantageous structures like SPACs to take advantage of the retail money pouring into the stock market. They will “feed the ducks.”
So what is an investor to do in this environment? For part time investors, if you are not spending most or all of your time researching, you are probably better off investing in low cost indices. Or just get comfortable with the fact that you are likely to underperform, or are just gambling.
But for those of us who spend most of our time investing for a living, its time to remember the Charlie Munger quote featured at the beginning of this post. To me, fishing in the large caps, exciting SaaS companies or any high-profile company, is likely going to lead to frustrating results.
That is why I focus on where people aren’t fishing. I ask: “What niches or parts of the market are being ignored or have been left for dead and the fish population is reconstituting?” Here are three opportunities:
1. Small cap value, which I have written about in a post called 1999 the Sequel.
2. The energy sector is interesting as well. I have written up an opportunity in Black Stone Minerals (NYSE: BSM) called Opportunity in small cap energy
3. International Stocks is an area I plan to detail in future posts.
The only time I will venture into bigger cap companies is when I feel I have a differentiated view and understanding of a company that is based upon at least a decade worth of knowledge. I have written about Nintendo (Mama Mia! Nintendo is 2013 Microsoft!) and Twitter (The Great FOMO Trade of 2020). I might also ride along someone’s coattails like Gavin or John. But to be honest those situations are rare.
Understanding your competition, where outperformance may lie and avoiding sectors and investments that draw the most intense scrutiny is just as important as picking what and when to invest in.
I’m grateful to Gavin, John and every other investor who is publicly sharing knowledge, especially when they share their mistakes. It makes me a better investor, even if I don’t fully understand what they are talking about.
Even more important, recognize the reason they are sharing this information with us. They are trying to learn and write down what they did wrong. The best investors are curious, lifetime learners. This constant learning is what makes them the best and most successful investors, because they never rest on their laurels and are always striving to understand where they went wrong.
As a fellow curious investor, I’m very grateful to learn from others and thank John Hempton and Gavin Baker for sharing their thoughts.
P.S. If you want to follow Gavin Baker and John Hempton, you can do so on Twitter: @GavinSBaker and @John_Hempton.
Lovely article! Much appreciated! I’ve read a few articles already and you have a new subscriber. I feel my brain working when reading this blog.