Thread by @sebidscap

I really love this quote from Bill Ngyren (This is precisely what I do all day...):

"Yet every day, a portfolio manager has to make judgments like whether Alphabet is more attractive than Ford or whether Citigroup is a better investment than Merck." - oakmark.com/Commentary/Com…

In my terminoloy this is an example of concrete thinking versus abstract thinking.

"Specialists" use abstraction whereas concrete thinkers are always back and forth between specialization and concretion.

In investing, - as in the course of your life - if you "specialize" early on what you do is you chose a path even though you only have looked at less than 1% of all possible paths.

Thus, your outcome heavily depends on luck.

In real life a lot of paths lead to later regret...

Not so if you take Buffett's Moody's Manual adage serious: Start with A and read to Z.

Chosing roughly the right direction - generally - trumps specialization, especially over time.

Of all people I've ever known, less than 1% have a rough understanding what compounding means. I'm not even talking about the benefit of asymmetric opportunities or ownership in productive assets, - most don't even think in terms of investment.

Why? They fearfully specialized.

Chosing a path means actually walking it and not abstractly studying. There's another good metaphora for that: Peripatos.
The abstract-specalist just walks any path - thus is forced to stick with it no matter what.
The concrete thinker-practicioner walks, too, but peripateticly.

It's back and forth and there are dead-end streets.

If you're in business, you already know that failure is a necessary property of success and precisely because one is experimenting, the chance to find the right direction (which is 100x more important) is vastly superior.

You want to know current examples of 101 concrete thinking in the investment world?

Just imagine an arena where all companies fight against each other.

Your ability to add valueable insight increases with the number of companies you've studied because thinking works concretly.

One current example for me is Visa. $V is a beloved consensus long owned by many famous Hedgefunds: dataroma.com/m/stock.php?sy…

Now $V is above $405bn mcap.
Excluding tax reasons, why would one own $V over e.g. $TCEHY. Prices are similar, reinvestment/runway opportunities aren't.

Also, if you add $V, $AXP and $MA, you're probably above $820bn EV. That's already ~1% of total stock market value. In the meantime, you get $BABA and $TCEHY together for ~1%. From my perspective, because of this comparison, I derive: One group is cheap or the other is expensive.

Of course I might be wrong about it, but if I had to choose, I wouldn't pick $V at $405bn mcap over $TCEHY.

If it's true that $V underperforms $TCEHY, you can ask your multi billion $ AUM fund manager precisely how they could possibly have preferred it over $TCEHY.

One reason why I own $FB at sub $130 avg cost per share is because ... $T has roughly $400bn EV.

Of course this is an outragous alogical line of reasoning - but only for the specialist thinker.

In my world, thinking concretly and via opportunity cost gave me conviction in $FB.

By the way, if you really sit down and think for yourself, - and think concretely - I think it's pretty clear that $FB is the kind of company that should achieve 1% of total stock market capitalization. If you think concretely, this is consequencial for various reasons.

...Academia has a hard time teaching you investing because investments happen in real time whereas the knowledge as of 2018/2019 that $FB is more valuable than $T won't ever make it into a "timeless" text book.

Concrete thinking resists being put into models, too. Model=Abstract

Just like the sell-side consists of abstract thinkers that only bother with a small number of stocks, bears usually are similar.

For example: How can one be bearish on $NFLX's valuation when McDonalds is >$200bn EV?

Netflix to $200bn is 4y 10% CAGR.
Can NFLX > $MCD given 4y?...

Not a terrible bet, right? Sure, maybe $MCD is the problem.
But $PM has the same mcap as $NFLX. I care about the present value of future earnings power, hence I don't believe that $PM is worth as much as $NFLX.

For many, NFLX is more addicting & has less terrible externalities.

The single biggest advantage of concrete thinking is that your investment criteria get tougher and tougher the more concretely you think:

What is better: $SOGU at $500mn EV / Mid-single digit PE $WB via $SINA or $HUYA via $YY at no cost for YY live, a wildly profitable business?

This also leads to a state that inherently is un-academic: Academia teaches you where things should trade. In real life, when you learn investing, you are happy when you find cheap businesses.
Trying to find "cheap" businesses is a mediocracy trap.

Mr. Market isn't "irrational" when things are too cheap. That's still in a range that can be called normalcy. For normal good returns, you don't need irrationality. Facebook cheaper than $T was not irrational, - Mr. Market just had a rough period, but almost everybody is moody.

The upside of buying Mr. Market's moodiness e.g. FB at $130 is that it works very well and it was very likely that it worked.

But if you find investments that are so damn cheap that it's actually irrational, it's quite hard to insist on normalcy if things truly break down.

A current example where normalcy broke down is when one tries to own smaller Chinese companies that are listed on US exchanges. I looked into most of them and there's lots of "nonsense".

Price-Value relationship kind of broke down in this pocket (for maybe 30 to 60 stocks).
Psychology of buyers works like this:
If they get a reasonable price, they may pay.
If they get a good price, they happily pay.
If the price is too good, there's mistrust & they won't buy.

For example, I read 95% of China related articles on SeekingAlpha (Don't forget, concrete thinking means going back and forth in specializing in different areas, and that's an example what I currently do) and there aren't many people who do that...
seekingalpha.com/articles?filte…

so I am not surprised about the many "too good to be true" comments by people who only read about a couple of Chinese ADRs.

So this mistrust is measurable.

Trust compounds.
Hence, one has to hope for a bottom in this spiral.

Less capital controls for buybacks would help...

Further, what is the likelihood that every single Chinese management team is corrupt? Not very high.

But because of broken share prices that are extremely hard to explain rationally, corruption is the standard assumption because people don't look at everything & stopped caring.

Lastly, the only fund that I'm aware of that explicitly operates not merely on cheapness is @GreenhavenRoad, as they have a “it makes no expletive/common sense” test.

Doing so needs great clients, because cheapness is easy to explain, shorting non-sense can be explained...

but paying nonsensical cheap prices is counter to our emotions and instills mistrust and perenial fear that one does something stupid.

$FCAU over the last 10y is an example: People paid <$10bn mcap and got Jeep, $RACE...

Low prices lead to fear, fear leads to low prices, etc.

For me, two years ago I didn't have the slightest clue about investing.

But I moved into a new empty flat and was using eBay a lot. From 12/2016 to mid 2017 I definitely had over 200 interactions with buyers and sellers. Initially to make my flat beautiful, but after a while...

and probably typical for a cheapskate value investor - I bought and sold stuff - not really for money - but for fun and at some point also as a proof of concept.

This >$60 metal trash bin btw was in perfect condition, works flawlessly (opens cover automatically via light sensor)

and I bought it for €8.09.
Turns out, shipping wasn't €4.95 but €8.9.
Thus, the seller made -€0.81 on shipping alone.

So, having a little bit "real life" experience paying non-sense prices, I simply insist - until proven otherwise - that it works in the stock market, too.

As always, this is a working assumption and I'm willing to be 100% wrong and try something else, e.g. to buy $NFLX because it's cheaper than $MCD or sth like this - but for now, I'm patiently waiting for a comeback of the price-value relationship in Chinese "small" cap tech ADRs.

My "concrete thinking 101" thread so far aging well:
$NFLX touched $200bn mcap, demolishing $MCD and $PM.
$TCEHY outperforming $V handily.

Contrary to mainstream thought mega cap investing is relatively easy bc comparison universe is so small.

Simplicity is often quite hard in nanocaps because it's hard to compare ten thousands of ideas at the same time.

Constraints in life often enable most simple, most effective solution. Constrains of mega caps (= very limited comparison set) enforce simplicity which works well.

While it may be true that there are dozens of analysts researching each mega cap, there's a fine difference worth pointing out:

What matters is intelligent brain attention to enterprise value ratio.

This ratio can be quite high for ~micro caps: $WFCF, $ISDR, $XPEL or $BXC.

Important here is that people get rid of their unfounded a priori assumption that mega caps get more attention. (just another narrative-based excuse for underperformance)

Each company has to be looked at individually in regard to their intelligent attention per market cap ratio.