"In fact many were good ideas. Were there too many consumer startups? Yes! But there were also too many software companies, semiconductor companies, telecom equipment companies, and the list goes on and on.
As we later learned, over-funding (i.e., too many startups with too much capital) was the key issue, not the particular investment category. Low-cost, high-scale marketplaces do in fact exhibit increasing returns.
And these marketplaces have incredible “moats” (to borrow a Buffetism), that represent unprecedented barriers to entry."
2) Rationality set in first:
"As the first to fall, consumer Internet companies were the first that were forced to recognize that money is not in fact cheap, but expensive, and that profitability is the real goal to the game. As such, these companies adjusted and learned lessons earlier than most.
The results are apparent."
3) Quick capacity reduction:
"Unlike many other sectors, capacity adjustments come quite quickly in the consumer Internet space. There is no such thing as a web site that is selling ads at a discount just to help offset fixed costs.
There is also no heavy “infrastructure” that negatively affects the industry dynamics."
4) Internet usage growth is systematic, not cyclical:
"Consumer spending may be down 5%, but online spending is still such a small percentage of overall consumer spending that growth results from the continued increase in online usage.
With IT expenditures already at 50% of corporate capital expenditures, the opposite is true for traditional information technology spending."
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There aren’t many investors compounding capital at double digits over the course of decades and those that do are already well known (i.e., that guy from Omaha). However, in a small office above a taco shop, a man did just that.
[THREAD]
Allan Mecham ran a hedge fund called Arlington Value who has demonstrated the advantage in simplicity, long-term thinking, and the power of compounding.
Arlington Value doesn’t have a large team of analysts.
They don’t run advanced machine-learning algorithms or exploit esoteric satellite data and there’s not a single distinguished diploma on their walls.
Successful investing is an active rebellion against one’s instinctual proclivity to sabotage long-term returns.
In a perfect world, investing is like gardening. You cut the weeds (losers) and water you flowers (winners).
In practice, investors do the opposite.
We tend to sell winning stocks too early (cutting the fruit) while desperately clinging to losing positions (watering the weeds).
This habit is called the Disposition Effect.
Coined by Shefrin and Statman in 1985, the Disposition effect explains the tendency for investors to cut their winners short while riding their losers lower.
It’s an academic way of saying, “most investors suck.”
A week ago, @SagaPartners said something that's stuck with me:
"A potentially great idea is when no one agrees with you. A potentially bad idea is when no one agrees with you."
I've thought about some ways to help investors think about these two conundrums ...
[THREAD]
1/ Determine what you are disagreeing over.
If you're on two different "logic" planets, the argument will fail because nobody's gonna listen from that starting position.
Find common principles on why you're wrong and go from there.
2/ Give fair weight to your "opponents" POV and credentials.
If you're pitching a media stock and @AndrewRangeley is ripping it to shreds, that matters *WAY MORE* than say, someone like me who has issues with one or two points.