I’ve made a career of buying pessimism and making contrarian bets. Naturally, I should be getting excited about the current sell off… but I’m not.

Panics like this can be purchased 8 times out of 10, and work during bull markets. When bulls are in charge, you’re bailed out even if you buy early. Eventually recovery saves and rewards you.

But 2 times out of 10 even the smartest investors buy way too early and early is synonymous with wrong in this business. That is how intelligent people blow up.

The errors often occur after a long bull market has conditioned people to buy the dip, after dip, after dip. This is known as Pavlovian conditioning. Is the market panic overdone?

We don't think so. Go back almost 5 decades and you'll see the current sell-off is not that extreme.

Things can (but do not have to) get much worse.

1/ According to Bank of America's recent fund manager survey, global money managers are now holding one of the lowest cash positions... ever!

Fund managers can be considered dumb money and tend to be a fantastic contrarian indicator. 2/ US consumers are the most bullish on the market since the @Conferenceboard began tracking their sentiment.

The public is commonly considered as “dumb money” at extremes and a great contrary indicator.

Unless there is a year-end rally, the Chinese stock market is on track for the fourth down year in a row. This is exceptionally rare for any global market.

Several key names — Alibaba, JD, Tencent, etc — show just how much corporate value creation fundamentals (FCF per share in blue) have completely disconnected from sentiment-driven, market expectations (share price in black).

In many cases, FCF per share is at or near record highs while the share price is near multi-year lows (in some cases decade lows).

See the $JD chart below. Alibaba $BABA corporate value creation fundamentals (FCF per share in blue) have completely disconnected from sentiment-driven, market expectations (share price in black).

Despite a very strong 10-month rally in stocks, most global fund managers are still overweight bonds (risk averse) and underweight stocks (risk seeking).

Some sentiment surveys do suggest bulls are back, but the lion's share of capital (managed by funds) is still defensive. Asset allocation by an average retail investor (AAII) and an average fund manager (BofA).

The sentiment correlation is quite close over the last two decades, but it starts breaking down in 2016.

We think more & more passive LT indexers, hence retail is persistently bullish.

1) Global economy has completely changed since the 1970s.

Today, intangible asssts (brands, patents, software, licenses, IP, etc) are twice as large as tangible assets (factories, plants, etc), which dominated the company investments 50 years ago.

This has many consequences. 2) Intangibles are expensed via the P&L statement, so they often don’t show up on the balance sheet the way tangible assets do (they are capitalised via cash flow statement).

Now, think how framing an investment as an “expense” will have a meaningful on financial metrics.

If ROC is higher than WACC, growing revenue adds shareholder value.

If ROC is lower than WACC, focusing on growth destroys shareholder value.

If a money losing business attempts to grow faster by cutting prices to gain even more market share, it leads to an adverse outcome. How should management think about growth vs profitability?

If the business is generating excess ROC (above WACC) then focus on stable growth is intelligent.

However, if the business isn’t generating excess ROC, the focus should turn from growth to improvement in profitability.

Buffett repeatedly stated that value and growth are two sides of the same coin.

Graham purists (who disregard the asset's quality) commonly fall into value traps, because valuations tell them nothing without understanding the business's growth potential.

Simplified example. 👇🏽 Alphabet $GOOGL currently trades at 15.7x forward operating income.

Is that cheap or expensive?

We think that using such quick-and-easy metrics cannot help us in our due diligence process — it only leads to decision-making errors.

We are shareholders in Alibaba. $BABA

However, just because we are long the stock does not mean we should turn a blind eye to the folly going on in recent months.

bloomberg.com/news/articles/… "What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact." — Warren Buffett

It seems Alibaba investors are falling victim to confirmation bias the whole way down the slippery slope, which started in October 2020.

Earnings ≠ Cash Flows.

"A share of stock is a share of a company's future cash flows, and, as a result, cash flows more than any other single variable seem to do the best job of explaining a company's stock price over the long term." — Jeff Bezos (2001) Warren Buffett on earnings, multiples, time horizon, and cash flows...

"I wouldn’t look for a single metric like relative P/Es to determine how to invest money.

You really want to look for things you understand, and where you think you can see out for a good many years...

We disagree, even though we own $BABA. Poor capital allocation decisions; use more excess cash now for buybacks; valuations are dirt cheap.

Cost-cutting was/is slow; their CapEx + S&GA cost only recently started decreasing. They are mismanaging AliCloud. The list goes on...

https://twitter.com/johnwhi60696884/status/1641985803965407233

Talk is cheap; management promises to be delivered in numbers. $PDD + $JD are gaining market share. Even with mismanagement, $BABA should do ok.

I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will. — Warren Buffett

• we don't need to pretend we know everything
• an honest "I don't know" keeps you out of trouble
• we are not trying to succeed in our too-hard pile
• respect the limitations of your knowledge
• wait patiently til a no-brainer decision falls in your lap Other people are constantly trying to succeed in their "too hard" pile:

A few years ago they were experts in virology, then vaccines know-it-alls, all of a sudden turned geopolitical PhD followed by military experts.

Simplicity over complexity & layers.

Value investors’ most reliable information is costless.

It can be downloaded for free directly from the source itself: company’s annual report.

There are no agents or middle people in between, charging fees for newsletters or blog posts. The problem is, most people are lazy.

They won’t even read a quarterly transcript of earnings call which can be several pages long, let alone read a 50-100 page company annual report.

It is much easier (but also more harmful to your financial future) to take a shortcut.

Why doesn’t Berkshire avoid financial and banking stocks?

Perhaps Buffett has an sustainable edge over an average Joe.

Points listed below.👇🏽

https://twitter.com/geh168/status/1639456504662171649

Firstly, Buffett rarely buys common stock. He is always doing preferred equity or mezzanine financing.

This not only gives him a margin of safety, but priority of cash flows and contractual guarantees.

Secondly, Buffett doesn’t have asymmetric information since…

When tech advances affect company’s profits it is said to be fragile.

If the company operates in industries which aren’t easily disrupted, the company is robust (no fragility or benefit).

However, when a company destroys others through disruption… cnbc.com/2023/03/14/ama… …and it displays a consistent track record of disrupting other competitors as well as industries, that company is antifragile — it benefits from volatility, stressors, disruption and most importantly, time.

Time is the ultimate stressor on ideas, non perishables and businesses.

There are 101 personal finance metrics and thousands
of blogs giving us advice.

Personal finance gurus obsess about such simple concepts (not to be mistaken with easy), reframing the terminology over & over and in the process confusing themselves and others. The two most important pieces of information are your expense ratios (aka the savings ratio) and your net worth position.

Your net worth is the boat, while your savings ratio is the compass that shows you in which direction you're heading.

When you follow real estate twitter, you see just how much investors (over)value anecdotal evidence.

“I spoke to a guy yesterday and he said this”… “spoke to another guy today and he said that”.

We think other peoples opinions are not an important aspect of investing.

Why? With some systems, reductionism works: the idea that you can understand a whole by paying attention to smaller pieces.

However, complex systems (such as asset markets) have many interdependencies and layered interactions from vast amount of components.

Reductionism fails.

Valuation work is not maths or science, and in traditional sense is a bit of time waster.

Especially the way it’s done either by looking at current multiples (myopia and short-termism) or by forecasting cash flows into the future (all are guaranteed to be wrong).

So what to do? Consider reframing the problem by thinking about valuations from Charlie Munger’s inversion.

We can reverse engineer the DCF analysis to see what the market participants are currently discounting?

Then we ask whether that is below or above our cash flow expectations?

It is not a secret that growth stocks have been favoured by investors in recent years.

However, what most investors don’t realise is that not all growth is desired and not all growth produces shareholder value.

Assessing growth rates on their own, without returns on capital… …leads to fallacious assumptions and conclusions.

Summarising the concept, if a business can
earn excess returns over its cost of capital, then growth is a wonderful thing.

The faster the growth, the more value shareholders receive.

However, for business that cannot earn…

Two styles of investing:

1. Traditional Value Investing: the focus is on paying a low price for current or near-future cash flows, since confidence is quite low that larger cash flows will materialise in the future (deep value companies aren't necessarily high quality in nature) 2. Quality Only Investing: the focus is on paying a low price for cash flows further out in the future, but those cash flows will be much larger and with a high confidence interval that they will materialise due to the high-quality nature of a business model and the track record

1/ We’ve been told for the last 18 months that we’re wrong to invest in Tencent & Alibaba.

𝐇𝐨𝐰 𝐚𝐧 𝐰𝐞 𝐛𝐞 𝐰𝐫𝐨𝐧𝐠 𝐰𝐡𝐞𝐧 𝐛𝐨𝐭𝐡 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬 𝐚𝐫𝐞 𝐧𝐨𝐰 𝐩𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐥𝐞? 😂

People spew opinions, but the final arbitrager of outcome is Mr Market. 2/ Mr Market decides whether you’ll be profitable, irrespective of what others think.

Buffett famously said that the market is a device to transfer money from the impatient to the patient.

These bets are still in their earlier days & we hope they will do well over (many) years.

We participate in private debt and I believe your explanation is incorrect.

Just because an investment has a high return doesn't necessarily make it high risk. Thinking via "capital market line" is nonsense.

The goal of private debt is NOT allocating broadly to an "asset"...

https://twitter.com/MFintwit/status/1614048193070915584

...but rather, the goal is to pick flowers instead of weeds. In plain English, be very selective.

E.g. If one allocates to private debt in real estate: junior debt @ LTV of 70%, 2nd charge via land registry, fixed income portion @ 15% with a potential equity kicker...