Thread by @hfreflection

PART 17: TIME HORIZON
Most investors are either short term or long term - ST will only invest when a biz is improving or inflecting (<6mo). LT doesn’t care and looks out years (2+). We like living in the middle - a 🧵 on time horizon in idea and alpha generation.

I’d argue there is the most competition in trying to predict what a biz will do in the next 2 quarters. Most datapoints - calls, alt data, etc tell you what is happening right now, usually with decent accuracy. Many investors won’t own a company where “numbers are too high”.

These people focus on comparing their ST estimates vs sell-side and vs the elusive “buyside consensus”. The problem with playing this game is that it’s very competitive, most people arrive at similar answers, and frequently reality is already priced in.

As such, these people frequently predict business outcomes right, but get sentiment wrong. Some people play this game extremely well and make a living out of it - kudos to them, but I can’t win here consistently.

Let’s go to the other extreme - the compounder bros, the LT focused. They have a vision of what a business will look like a in 3-10yr. They view short term weakness in a good business as a buying opportunity, or ignore it entirely. This can work - I’m just not good at it.

But they also fall in love with their companies, will often ignore price based on compounding math (eg something grows 20% a year if multiple stays the same you will make 20, so who cares what you pay). It’s also notoriously hard to predict the future (3-5yr out).

This is especially true today with the pace of change in all industries, the newness of many businesses, and the inherent inaccuracy of people’s forecasts - analysts, management, and experts. LT investors usually make money on multiple expansion, not compounding over 2-3yr.

LT investors are also the most gullible in my opinion. A good business and good management is often one where the stock and results have gone up. Theses are usually squishy, such that LT investing is frequently well meaning people momentum chasing.

The focus on both ends creates an interesting opportunity in the middle, a company no one wants to own, where the ST doesn’t look good and the LT is a topic of debate. Let’s focus on that universe.

The world is in a constant state of flux, especially with mediocre to pretty good business. This creates opportunities on both ends - in the ST businesses encounter hiccups that leave them orphaned or shorted by ST investors.

While a business’s LT quality and growth prospects change, they don’t change as rapidly as perception changes. When a good biz falls on bad times or encounters uncertainty LT investors often get scared as well.

This creates an air pocket where neither group wants to own them. Sometimes this is for good reasons - the business is truly impaired and/or declining. But often it isn’t.

We focus on buying businesses where there is more fear and uncertainty in the ST than there is optimism, or where optimism exists but just after you get through a bad quarter or two. Ideally, LT prospects are also good but in question.

We have 2 ways to win - either the ST gets less bad or is already priced in, or people are too pessimistic on the LT and that perception changes. If the market doesn’t realize this, PE usually does, and we get taken out.

We buy the FUD and sell the business again to the same people that abandoned it in the first place. If we get one side right we make 30-50%. If we get both right (good ST and LT prospects), and buy enough fear, we have a multi bagger.

But this is a lot of work. It’s certainty more or different work than LT investing where churn is very low. It’s different work than ST investing in that you can often look or be seen as stupid for buying businesses people don’t want to own.

But it’s where we think we can win, and so it’s where we play. It involves frequent idea gen, buying when no one wants to, and selling just as an idea becomes popular and accepted and improves. Ppl think you are stupid for buying and then for selling!

But this also takes advantage of perhaps the most universal cognitive bias of investors - people tend to extrapolate the present intro the future. Our strategy is to buy fear when mis-priced and sell greed when priced in.