Part II – Q&A Series: “From Turnaround Stocks to Investing in Disruptive Technology”
In Part II of this Q&A Series, Philip Bland, Nightview Capital’s Director of Investor Relations, interviews Arne Alsin, Founder and CIO of Nightview Capital, about his professional biography and how he formed (and refined) his investment philosophy over the last 20 years.
They also talk about valuation frameworks, the comparison of investing to poker and chess, and what Arne considers his edge as an investor.
Let’s start from the beginning for people who don’t know anything about you. How did you start your career, and when did you start investing?
Well, I started my career as an accountant in the 80s—first as a forensic accountant for Peat Marwick, which later merged into KPMG, and later as an independent CPA. I also have a law degree from the University of Oregon but I never practiced law full-time—just not for me. But really, ever since I was a young guy, in my early 20s, I was hooked on investing. I was always obsessed with numbers and games of strategy and that’s why I like investing: It’s the ultimate game of strategy. For years and years in the eighties and nineties, I read everything about Warren Buffet. Everything he ever wrote, I read.
Starting in the 90s I managed money for myself and a couple of family members, and I’ve always just been super-competitive about it, right from the very start. It’s just how my brain works—pretty obsessive, roll up my sleeves, shut off all distractions, have-to-be-number-one kind of mentality. In my experience, you have to be obsessed to succeed and deliver returns in this business. The investment world is hyper-competitive, and there’s plenty of smart people on the other side of the trade.
Anyway, at that time, and this is going back a few decades – I managed some money for my father-in-law, and he challenged me, ‘Look, unless you can make a significant return on my retirement account, I’m going to have to move in with you.’ Literally – he said that. I mean, he said it with a grin and laughing, but I had kids already in the house, and that would just be too much pressure. I stayed really focused. I liked the challenge, and, as you can imagine, I really, really grinded. I learned a lot in that process.
Ok – it’s the 90s, and you’re investing on behalf of your own capital and some friends and family—what was the next step to becoming a full-time money manager?
So, the short answer is that Jim Cramer—now of CNBC’s Mad Money—gave me a start in the industry. He founded TheStreet.com, and I never would have had a chance to get some publicity if it wasn’t for Jim. I had written a piece about Xerox, I think, and I sent it over to Jim, and it sat on his desk for maybe a few months before they finally read it and asked me to be a columnist for The Street. This was around 2001.
From there, I started getting requests by individuals who were reading my columns to manage their money, and so that’s when Alsin Capital Management really started to grow — I started managing several million dollars on behalf of people I met through writing columns. I also launched The Turnaround Fund, a mutual fund, in 2003, which ran until 2008. Later, I had columns on RealMoney.com and The Financial Times, but initially, it all came from Jim Cramer.
In 2016, I wanted to rebrand the firm and have a more flexible business structure as we grew, so we launched Nightview Capital, but the process, clients, and team all stayed the same. And since then, we’ve grown the team, added a new strategy, and opened up to new investors.
Going back 20 years, your investment philosophy really focused on this idea of value investor—cigar butts, looking for bargains, Buffet-and-Graham philosophy, etc.—right? How did that evolve to what it is today?
Right, so I’m a big believer in this idea of constant evolution, but initially my foundational strategy in the first half of my career was to look for value—basically, bargains. And the intuitive thing is when you’re looking for bargains, you go hunt where the prices are low. You don’t go where prices are high. I mean, that’s the natural first step. And in my three decades as an investor, that was probably my critical, number one fundamental mistake — thinking that you can find these stocks where the price is way down, and therefore you can get a bargain.
But fast-forward several years – I’m living through the credit crisis and, and I’m realizing that, you know, my win-rate isn’t good enough. The strategy wasn’t cutting it—I’m thinking, ‘I’m not beating the market, I feel like I’m working harder and I’m smarter than the competition, but something’s not right.’
I started re-thinking my entire philosophy about investing. With my personality, I’m obsessed with doing well—again, investing is a game of strategy, and I want to win—and it was just hard with turnaround situations, because even if you’re right three out of four times, it’s not good enough.
Around 2010, I had started reading quite a lot of Clayton Christensen’s theories on disruptive innovation, and I had this idea of starting with a blank sheet of paper—a completely First Principles approach. My number one insight from his books was really, you can’t see future value by looking in the rear-view mirror. In other words, when you’re looking at an industry that’s changing rapidly because of a new innovation—and trust me, things are changing extremely fast now—looking far down the company’s income statement to see earnings per share is pretty useless in a land-grab environment. You have to think like a venture capitalist, even if you’re investing in public equities.
The other idea that clicked for me was that, post-Internet, we’re all connected, 24/7, and we’re all sharing information constantly. So this realization—that the Internet is the principal catalyst of the disruption—shifted my view of how to define value and, ultimately how to invest for the long-term. In 2011 or so I began to theorize that every business, and every industry, will need to be re-imagined. It started with retail moving online, but every industry eventually will be disrupted. Cars will go electric. Movies and TV go streaming. Clean energy will disrupt fossil fuels.
I learned the hard way as a turnaround investor, but this experience gave me the insight necessary to really understand the difficulty incumbents faced ahead. Again, the connecting thread through all of these disruptions is the Internet: With a free-flowing distribution of information and ideas, inefficiencies get discarded while innovation increases and flourishes. Plus, it tends to be winner-take-all, meaning the opportunity is massive.
Let’s stay in the period, 2010 to 2012 or so. You had this realization—the turnaround stocks are, well, not turning around, and the incumbents might not survive these disruptive transitions—and that strategy doesn’t, and won’t, work. What did you do next?
I basically said screw it—I want to start from scratch, I want to create my own playbook. I always thought in the back of my mind, you know, I could be a great manager. But you have to bring something special to the table. Period. You can’t just copy Buffett. That’s not how it works. Plus, I felt like I had the experience—you know, in sports, a competitor really only has a few years when they’re at their physical peak. But in investing—or really any game that involves strategy, like chess or poker—age and experience can be used to one’s advantage.
By 2012, I really felt like I was ready—and let me set the scene for you. I’m sitting around with this stack of Wall Street research and this stack of company 10-Qs and transcripts, and I’m realizing, ‘Hey, none of this Wall Street research is helpful.’ Literally none of it. It’s all commoditized and everyone’s saying the same thing.
So I just wanted to build something better: my own proprietary investing framework that looked forward—not backwards. I called it the “Nightview Playbook.” I spent months on it. I was essentially devising a research protocol that was forward-looking in a disrupted economy.
I literally took white boards and blank pieces of paper and I just started asking basic questions. What is value? Where does it come from? Just basic stuff like that. And then, how do you find it earlier than the consensus? The process is designed to find innovation, and it’s totally organic, totally original. All of this just led to me to start rethinking valuation processes, and how to value high-growth companies. I can assure you, EPS and P/E ratios are just not helpful in this context.
In some ways I wanted to completely turn the tables upside down, throw everything away because I think a lot Wall Street research is, to put it bluntly, bullshit—lots of conflicts of interest and surface-level work. Anyone can come up with a discounted cash flow and throw together a spreadsheet—it’s a lot harder to look at an industry like a 1,000-piece puzzle and start putting everything together and attempt to determine the winners and the losers.
And the truth is, all this emphasis on history and earnings and EPS and P/E ratios—it’s all meaningless when entire industries are getting disrupted. Looking at EPS, in a disrupted vertical, is pointless—it does not exist to help anyone become a smarter investor or pick stocks.
So my idea was, and it still is, we’re playing chess as investors. Every move counts. And the thing is: You’ve got to get in position—you need good theory and you need a good playbook. You have to be 20 steps ahead of your opponent if you’re ever going to win the game, and that’s how we think. I could care less if a company missed earnings by a couple cents if they’re on the precipice of disrupting a trillion-dollar industry—but that’s not how Wall Street thinks, and that’s what gives us opportunity.
Also: this doesn’t make us “contrarian,” a word I hear tossed around pretty often. It just means we think for ourselves. We have our own theory. So, without giving too much away, that’s the high-level view of the “Nightview Playbook.” It’s a unique research protocol, exclusive to Nightview investors, that’s forward-looking—and it’s designed for a disrupted environment. It’s done quite well for the last nine years, but really, I think we’re just getting started.
You learned a lot from Warren Buffett—but what did you want to do differently, philosophically, from him?
Right, so Buffett is better than 99% of other money managers, so I don’t like to criticize him, but I take issue with his concept of staying within your “circle of competence.” Buffett famously doesn’t like technology or companies that are too “complex” and prefers to own what he considers simple business models.
Well, it turns out everything today is technology. The whole idea that if it’s too difficult, don’t touch it—that just doesn’t work anymore. You know, it might take you a couple of years to get up to speed, but if you take a scientific approach to the research, and you take your time, there is no such thing as complexity.
I tell this to my team all the time: There is no such thing as complexity. Complexity is an illusion. Everything can be broken down to just a pixel. It’s just a matter of taking enough time to understand it. Over time, you can figure anything out.
In a lot of ways, this framework for valuation is a lot like how venture capitalists think—it’s a different way of determining future value. VCs look at a business through the lens of: What are customers saying? What’s the end-market potential? How do we get to market? What’s our marketing plan? How do we expand? How do we get into other countries? So that’s a starting point for a theoretical basis to pick stocks. It’s less about price than it is about opportunity. VCs understand that valuation is more than just examining a company’s bottom line.
So, that’s what we do now. We’re quasi-venture capitalists, but we’re just focusing on companies at a later stage, after they’ve gone public.
At a higher level though, we view the market as a competition: buyer vs. seller. One of them is making a mistake. We get our edge in this landscape through this organic, original research process. We break complexity down into pixels, and gather data from original sources. We follow every exciting growth company, public or private, on the planet.
We also are not looking at the next quarter—we’re looking at 2025, then we reverse engineer who has the best opportunity today to be dominant five years out in the future.
What was an example of your frustration with Wall Street research?
Ok so here’s an example: Back in 2012, 2013, when I was studying Amazon, the Wall Street consensus was pretty much that Amazon was overvalued and it could never earn a profit, and virtually every analyst on the Street came out with a report saying as much—it was a Sell, Sell, Sell across the board.
But with my playbook, my framework, I was looking at Amazon and its opportunity in a totally different sense—I put myself in Jeff Bezos’ shoes and I saw the opportunity he was chasing after—both in e-commerce and in cloud computing. And it was huge! I mean, the Wall Street analysts were complaining about Amazon’s P/E multiples while I’m looking at the next five years of Amazon taking over online retail and cloud computing through AWS. It was a land-grab for the future, and the analysts were talking about how Barnes and Noble were investing in their website—it was ridiculous.
In the early days of the strategy, Amazon was the largest percentage of our portfolio, and at that point in time, there was no question in my head that Amazon was a must-own. And it still is, eight years later. Of course, today, Amazon is a consensus pick—but back then, it was probably the most controversial stock pick in the market. But look at the performance since then–it’s been 10x for us. So, what’s the lesson there? Well, I think it just shows the importance of forming your own viewpoint, doing your own research, and coming to your own conclusions.
One of the things you’ve articulated is this dogmatic belief in the need to do original, organic research — that there are no shortcuts, and you have to get obsessed with it to really succeed over the long-term. Can you talk a little more about how you do that?
Sure, so I think it may have to do with my personality—I like to slow down the research process, cut out all distractions, and just allow myself to go super deep into something. I don’t know—maybe this is my edge—but it’s my desire to get so entrenched in a company or an industry that I know everything about it 10 times better than anyone else on the planet. As you know, I’m on the spectrum, so I’m not out there taking marketing calls and I certainly don’t have expensive hobbies—my happy place is in my house, with my family and my dogs, just digging into the numbers and the stories of these companies.
Again, it’s like a puzzle—every public company is a 1,000-piece puzzle, and I just love to put it all together. But to do that takes incredible focus.
So I suppose it’s just my personality: Going back to when I was young, I’d get obsessed with memorizing baseball statistics from 100 years ago. Literally—it was one of those obsessions with numbers and memorization and I’d spend hours doing it. It had no profit, but to me, it was a lot of fun.
Along the way, I realized, you know, I could turn this obsessive trait into focusing on other things, and so that’s just my process. I’d spend 100-hour weeks just buried in the minutia of Amazon 10-Qs, reading and re-reading the footnotes, memorizing the cash flow and income statements, connecting all the pieces together. For me, this is a big puzzle, and it’s fun, but it takes time. I mean, to really understand a company like Amazon and Amazon Web Services takes years of this intense focus.
So it’s like in poker, I look at investing like a one-on-one contest. At the point of transaction, it’s a zero-sum game: there’s a winner and a loser.
In fact, I remember working on IBM a few years ago, and Buffett was on the other side of the table from me on that trade. I was a bear—and he was a bull.
I actually wrote a six-page letter to Buffett in 2013 that never got a reply, but I explained to him that cloud was taking over, and IBM was on the decline and somehow I thought I could get through to him. I mean, I knew Amazon AWS was going to crush IBM and I wanted Warren to see this since he was so heavy into IBM at the time.
You actually wrote Buffett a letter? Did he read it?
I published the letter publicly, but I also had it delivered to him—seriously. I hope Warren read it—but I never got a reply. I really wanted Buffett to get out of IBM and into Amazon—he never did.
Anyway, to go back to your question, yes–the whole philosophy with Nightview Capital was to create a firm where we did 100% organic research, and we pretty much avoid whatever Wall Street says. That’s how we operate, and it’s been quite successful so far.
Last question – looking forward, why are you excited?
In the big picture, we’re in this huge disruptive supercycle – it’s like dominoes where one vertical after the other is falling. In the not too distant past, it started with bookstores going online, and it’s just working its way through everything. Everything will be disrupted in the next 50 years. Everything. The catalyst is the Internet—all of a sudden, everyone is connected.
And so when everybody’s connected, well, we share information and we get inefficiencies out of the system. And that’s essentially what this whole disruptive cycle is about: We get rid of inefficiencies, and we allow the company with the best value proposition to succeed. More often than not, this createswinner-take-all dynamics, which is why it’s so essential to be positioned correctly—and why we think there’s a crazy amount of opportunity over the next decade.
But really, we’re looking at everything with fresh eyes. We ask fundamental questions like—why are we even driving dirty cars when we could be driving clean cars? And one thing that gets us really excited about the future, it’s not just the opportunity set—it’s that we think we’re really early. And we think lots of investors will begin to see the world how we do, it’s just a matter of time. I think many investors are tired with the same-old Wall Street approach, and we’re offering something new—a new way to look at the world.
The last thing I’d say is this: The world is changing fast. Really, really fast. You need to be in position. There are rapidly expanding markets—we believe transportation is going electric—and you need to get as far away from Wall Street as humanly possible to cash in on this transition. You don’t want to be owning has-beens and the incumbents. This is a time where investors can invest really successfully, but they need to get in position today. It’s like the chess analogy: You need to be 20 moves ahead. That’s how we think at Nightview Capital, and that’s the firm we’re building. Frankly that’s what investors should want in a manager. No fancy office, certainly not a fancy name. I mean we’re called Nightview Capital—it’s like the Smuckers catchphrase: “With a name like Smuckers, it has to be good.” That’s us. We’re just committed to the returns, the process, the Nightview Playbook, and the best possible portfolio we can build. And we’re damn excited about the future.
Disclosures:
This has been prepared for information purposes only. This information is confidential and for the use of the intended recipients only. It may not be reproduced, redistributed, or copied in whole or in part for any purpose without the prior written consent of Nightview Capital.
The opinions expressed herein are those of Arne Alsin and Nightview Capital and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This is not an offer to sell, or a solicitation of an offer to purchase any fund managed by Nightview Capital. This is not a recommendation to buy, sell, or hold any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Nightview Capital makes in the future will be profitable or equal the performance of the securities discussed herein. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. Nightview Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations made in the last 12 months are available upon request.
Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request. WRC-20-12
