3 Investing Primes and Their Toxic Variants

The Beautiful Primes:
Value, Growth, and Behavioral

The Toxic Variants:
Heuristic Bargains, MoMo Patterning, and Meme Skimming
1/
Investing styles like ‘value’ and ‘growth’ have been rather abused by the finance industry, in large part via productization: single-click ETFs with these words are now subbed out for the real thing.

But before that, they meant something.

Take ‘value investing’ for example.
2/
“Value” investing, properly done, is a type of systems thinking which aims to find a ‘fair’ price for things based on how they are systemically relevant to other things.

The price of corn will impact the price of hogs which will impact Hormel’s profits. That kind of thinking.
3/
In fact a value investor thinking about corn would know ethanol is a huge part of what drives the price. And they would watch weather patterns, and plantings, and know how Hormel is related through those hogs to the price of gas at the tank.

It’s a beautiful way to think.
4/
It thinks contextually about price, and when it thinks about businesses it does this there too.

Businesses are yield generating ecosystems, and so are evaluated not just by their own health but by the health of the broader set they are nested within.

Turtles all the way down
5/
But beauty is matched by difficulty.

And laziness spawns a ‘toxic shadow’ of value investing, which I think of as the Heuristic Bargain.

The Bargain picks some fixed set of metrics (P/E and etc) and then just blind compares these attributes across candidate investments.
6/
While this has the patina of sophistication, it’s not very useful.

Because of course corporations know people do this, so they simply game these metrics in their book and Goodhart’s Law comes into play and the whole endeavor becomes instantly useless.
7/
Then there’s the Growth style.

Growth investing relies on essentially two broad areas: 1) does the business have macro tailwinds that make it hard to fail?, and 2) do the unit economics of the business give it scaling advantages?

Let’s unpack these.
8/
“Macro tailwinds” mean things like being in a sector that’s expanding. I once helped build a platform we sold to software developers. As luck would have it the number of software developers is increases every year, meaning total TAM increases.

Why is this important?
9/
Well, the expanding TAM offers a naturally richer environment to hunt in every year, which gives the whole ‘attempt’ of becoming a big business more padding.

Contrast this with, say, cigarettes where less people smoke every year (or did, until covid).
10/
The other important bit is about scaling advantages. The aforementioned business ran at 93% gross margins - the incremental unit cost of a sale was functionally nothing, which is why software ramps so hard.

This means that your cost structure is different.
11/
Your COGS are very low and there is no production time, so you can dump a TON of money very quickly into taking market share so long as you track various relevant metrics (LTV, CAC, etc - it’s a whole science).

This is why it’s rational for a growth business to burn cash.
12/
But note that “it’s okay to burn cash” is not always true. It’s only okay IF you’re a proper growth business, as defined by having good metrics on all the growthy bits.

And again, proper analysis here is hard so here too we spawn a toxic variant: MoMo Patterning.
13/
MoMo Patterning is the inappropriate application of growth business wisdom to businesses that are not truly growth business. We know they’re not because they have shitty metrics (low margins, high acquisition cost, high churn, etc.).

They can ride MoMo hype for a time…
14/
…but in the end, this always catches up with them. This is where the sardonic quip, “we lose money on every sale but make it up in volume” comes from — it’s poking fun at the foolishness of the MoMo Pattern investor.

Many false growth businesses exist in markets today.
15/
And finally, there is what I like to think of as the Behavioral investor. These sometimes identify as ‘Macro’ but I don’t like that as it’s imprecise.

This is a person who looks at the large, recurrent cycles within humanity and attempts to position for these titanic waves.
16/
Gold investors have this quality to them, the good ones. You see, gold is funny — yes, it sells off somewhat if we run into a deleveraging, but these events also create fear.

And gold gets the fear bid, which so it blunts the downside and often gives it a nice followthrough
17/
The common thread for the Behavioral investor is understanding mass psychology and the movements thereof. They study geopolitics, the incentives of the large players on the field, and obsess about historical similarities.

It’s what Liberal Arts was designed to teach Royals.
18/
Properly done, this too is incredibly difficult — it requires an exhausting amount of study (near perpetual) and one can never really be sure how good one is at it, which is a challenge unto itself.

This exhaustion again spawns a toxic subtype: the Meme Skimmer.
19/
The Skimmer truncates history to only the recent phase they are comfortable with and declares all external knowledge irrelevant.

They specialize in niche history, in microcultism, in rapidly evolving and ephemeral subcultures, most only recent phenomena.
20/
They often uses data to track ‘narrative blooms’ and front run a trend, and the most toxic variant simply cheats and manufactures micronarratives to ride (as we saw with front running on Opensea).

Flitting between narratives, they are an asset's ultimate fair weather friend.
21/
Note that “toxic” does not mean ethically bad, it simply means non-accretive to the individual playing the game.

Whereas the Primes are deep wells that an investor can pour energy into, becoming forever better, the toxic subtypes are shortcuts — 'hacks' if you will.
22/
And as such, they tend to thrive briefly, self-confirming within market phases that ultimately collapse.

That said, they're fun.

But as relentless Platonist, I must nonetheless insist that pursuance of The Forms Themselves must, of course, be the highest pursuit of all.
/23

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Travis

Travis Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @coloradotravis

23 Nov
USDTRY isn't the only impressive chart in currency land, most dollar charts are starting to look kind of wild.

Euro has been on the run for a while. Image
Pound looks like it's about ready to pop as well. Image
CAD and AUD are not exactly screaming commodity strength here - seems like they'll join the party. ImageImage
Read 6 tweets
22 Nov
You know, there’s this thing about social media that is increasingly weirding me out.

It’s a subtle, de facto co-opting of free speech (a thing I believe in) to the service of concentrated, monied interests.

And no, not corporations.

It’s you, influencers.
1/
You see, the idea of directly monetizing your personality (without a corporate backer who produces it) is relatively new.

And frankly it’s a pretty interesting model — I’m not against it or anything.

But it has externalities.
2/
Like for example, a while ago we decided it’s maybe not a good idea to let big corporation sell cigarettes to kids, right? So we stopped it.

And various regulations exist in all sorts of industries along the similar lines.

But social media has blurred these lines.
3/
Read 8 tweets
17 Nov
Cannot believe this isn’t getting more attention, given that actual cash reserves are either minuscule (generous view) or totally opaque (skeptics).

Even if the rest was 2y treasury paper (which is not exactly aggressive) they would have a growing problem right now with the peg
It is a near a priori certainty at this point that stablecoins have a serious problem.
Those with access to RRP can simply warehouse cash there without the risk of base value deltas in the paper they hold.

Stablecoins however do not have this advantage.

How can you have reliably de-risked the peg during this period, especially if your bias was dollar down?
Read 4 tweets
17 Nov
Accidentally got a frozen pizza that’s vegan. Please advise.
Instant ratio.

Y’all making me tear up a little.
Okay I’m gonna cook it just because y’all hate it so much and I’m a contrarian. Will report back.

Disregard those things to the right.
Read 8 tweets
14 Nov
We spend a fair bit of effort helping our kid be aware of emotions. My wife is really good at it.

The goal is to have more 'ownership' over the feelings vs. having them be a background force that controls your behavior.

The more we've done this, the more I get the value.
1/
I think a lot of us learn to suppress certain types of emotional responses when we're young.

Not even necessarily from our parents, just like adaptation to a school setting or something when you're little.

Watching adults struggle with this on social media is so curious.
2/
Like someone will do a thing that's kind of embarrassing, and then realize it but not have enough self-mastery to be like "I'm embarrassed" so instead that gets channeled into an emotional response they're more comfortable with like anger and they go on the offensive.
3/
Read 5 tweets
7 Nov
I grew up gaming.

My first major purchase in life was a Gateway 2000 that I worked all summer to buy. It had a 32Mb of RAM and a 2Gb HD which I thought was the sickest flex.

What’s happening in the markets right now is about gamer culture.
1/
You see - there’s a huge audience of gamers about my age (I’m almost 40) who are underserved.

It’s not that the games these days are bad, necessarily, it’s that the companies who make them have decided they’re for kids.

They design around this axiom.
2/
Which means that game stories are designed to be “the hero’s journey” which appeals to teenagers and young adults.

And they’re also “nerfed” which means that any element of real loss or risk — even emergent elements — generally get stripped out of the game.
3/
Read 12 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Thank you for your support!

Follow Us on Twitter!

:(