Thread by @iamschoeb

1/25 Fantastic insights below from @bradsling of NZS Cap re: investing in innovative bizes & non-zero-sum outcomes. Tagging some who may appreciate alongside their many followers: @BluegrassCap @MinionCapital @BrentBeshore @LibertyRPF @verdadcap @bgurley nzscapital.com/about

2/25 "When we try to squeeze power laws into normal bell curves, we expose ourselves to overly narrow predictions."

"One common sense approach to valuation is simply asking, “How many predictions and what kind of predictions is the valuation forcing us to make?”

3/25 "The distribution of customer revenue for a company generally follows a power law, and the long tail of small customers frequently can be cultivated into very large customers. Focusing on disruptive innovation for this group of customers creates future Resilient revenues."

4/25 "Through this disciplined pursuit of context, we’re often able to connect non obvious dots – and it is the connection of non-obvious dots that yields insight not yet valued by the market. "

"Quality derives from the simple act of caring enough to pay attention."

5/25"Our fav. investment is when a company embodies Resilience & Optionality, BUT the market values the Optionality deep out of the money, while questioning the company’s Resilience. This is where the analyst can most fully express skill: where returns are at their most nonlinear

6/25 "Unfortunately, the investment industry has an ingrained tradition of using “broken” math and cognitive shortcuts to convince ourselves that we are great at predicting the future under a narrow range of normally distributed outcomes."

7/25 "If we start with the assumptions that extreme events are more norm than exception and humans aren’t that good at predictions, we end up in a VERY different spot when it comes to allocating capital"

8/25 "By optimizing for Resilience & Optionality & eliminating the unproductive middle, you avoid the illusion that you can predict the future"

"[Successful companies] tend to have highly empowered employees, usually structured in small teams, and decentralized decision making."

9/25 "Resiliency teaches us to plan for the future based on what’s NOT going to change."

"Complexity teaches us that as we harden the edges of the network through formalization, we make the system less adaptable and thereby more fragile"

10/25 "Companies that tend to thrive in complex adaptive systems operate increasing returns platforms with strong network effects. These companies build strong ecosystems in which their customers usually benefit more than the companies"

11/25 "A decentralized organization run by a small group of people at headquarters tends to be the fingerprint of a management team that understands their role to be capital allocators"

12/25 "Because complex adaptive systems are best explained by power laws and thwart our ability to predict, the best way to figure out how to experience large gains is to make as many mistakes as possible for the least possible cost per mistake."

13/25 "While traditional investors seek businesses with “high barriers” &“wide moats,” we believe this practice is misinformed. A barrier or moat today becomes a vulnerability tomorrow..rather than create large barriers, companies should focus on maximizing non-zero sum outcomes.

14/25 "..attacking an industry with large existing switching barriers, which allows the challenger to grow slowly (small pos. in a large market with the neg. feedbk loop of high switch costs) & invest for the LT with a disruptive model that creates more NZS for the ecosystem."

15/25 "are 2 types of network effects that combine to mazimize NZS – price & quality. [Some] grow through lower priced products, while [others] grow [via high quality]. When you combine a very high quality product with a low price, you have the Nirvana of network effects and NZS"

16/25 "Create so much value for their customers over the long term it is very hard for a competitor to come in and change the game..pricing power could actually be a bad omen in this framework."

17/25 "For optimal NZS, pricing well below the point of maximum value extraction combined with long term focus and a big, addressable market with relatively high switching costs (negative feedback loop) creates very long duration growth"

18/25 "While fast growth is certainly sexy, it’s slow growth over a long time that the market serially undervalues...we argue that slow, long-duration growth stocks represent the ultimate value investment."

19/25 "For example, 15% growth over ten years (1.1510) would deliver more than a 300% return. Not bad. But 15% growth over 15 years would almost double the 10 year return."

20/25 "As long as the growth curve remains relatively flat, these stocks can be bought w/out much risk over a long period of time (tho they almost always appear expensive relative to market) because their period of compounding extends well beyond investors’ typical timeframes"

21/25 Take "W. W. Grainger..compounded op. inc. at 13.4% over from 1962-2012. Because of Grainger’s long period of compounding, an investor could have paid 200x earnings in 1962 and still made the market return of 8% per year before dividends assuming a current multiple of 18x."

22/25 "According to economists, it’s impossible to outperform the market without taking more risk (higher beta) than the market. With the types of stocks we’re talking about that statement is empirically not true."

23/25 "Hyper growth is dangerous and slow growth over a very long time is nirvana."

"A new variable in a complex system changes the nature of the overall system in a nonlinear fashion"

24/25 "Value trap: betting that the company uses their large hoard of cash & know-how to disrupt themselves by stacking a new S-curve on top of their previous one. Leveraging existing or slightly different products into a new TAM
seems..easier."

25/25"Extended growth duration is extremely powerful because time acts as an exponent to growth. These companies tend to have lower risk than the market as measured by beta, but outperform the market because of their steady growth through time"