“The ghost of higher inflation and interest rates is scaring many out of valuable positions”

I generally try to refrain from commenting too much on macroeconomic movements (my crystal ball is unfortunately on backorder due to supply chain issues and the semi shortage), but I found the Guardian Fund’s Annual Letter to be particularly discerning about what’s happening right now (and could continue to happen in the near-term) with regards to inflation, interest rates, tech multiple contractions, etc. Georg Krijgh, Guardian’s Managing Partner, makes an emphatic case that the recent contraction across the high-growth technology sector could be a wonderful dip-buying opportunity for certain business models entering a period of exponential growth over the next decade. “Today, especially after the sector rotation, our view is that many mediocre companies seem expensive while some of the finest internet-enabled companies seem as attractive as we have seen them,” Georg writes. “Significant value can be found at the frontier of technology and some of the world’s biggest fortunes will continue to be made in that field.” I agree. 

“Macroeconomic talk is an interesting intellectual exercise yet it does not help in achieving good investment returns. There is no monolithic economy, stock market or sector. While most businesses share some aspects with others there is a unique nature to most. Most market participants have a horizon of days, maybe months, and are concentrating all IQ and compute power on trying to guestimate near-term swings. That seems a zero-sum game to us for most. The gloomier and scarier the crowd is, the more attractive investment opportunities there are. Today, the ghost of higher inflation and interest rates is scaring many out of valuable positions.”

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Missing out on the winner in a winner-take-all game (i.e. errors of omission) 

Last week, I shared my conversation with the investor Christopher Tsai. This week, I’d like to share his Annual Letter, which he published yesterday. His opening quote from Marcel Proust (“The real voyage of discovery consists not in seeking new landscapes but in having new eyes…”) sets the tone for an insightful reflection on the opportunities (and challenges) of investing in disruption and technological paradigm shifts. One of Christopher’s observations that I found particularly resonant was his framing around two common investing mistakes: “errors of action and errors of omission.” Errors of action are relatively easy to assess (e.g. the investment failed), while errors of omission, on the other hand, are “commonly swept under the table by the perpetrator.” These types of errors, I believe, will become increasingly costly in an economic system that’s defined by a winner-take-all dynamic.

“The voyage of discovery necessitates that we constantly view the world with new eyes, to be dynamic, to not get trapped using models that may no longer align with reality. If your model of the world is wrong, you’re not going to understand why something is happening, and you’re going to make mistakes.”

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Our view of the decade ahead

If you missed it this week, I wanted to share our 2021 Annual Letter (yes, this week’s Nightcrawler edition is a full-on Annual Letter link-fest.) Our letter provides a general framework for thinking about the investing landscape over the next several years. Our thesis, boiled down into one bite-sized bit, is this: The 2020s could prove to be one of the best decades for stock pickers—ever. I don’t mean that in a starry-eyed, hyperbolic sense, either; I’m speaking purely in probabilities. What does the world look like 10 years from now? I have no idea, but I can say with a high degree of confidence the future will look significantly different than the past—perhaps profoundly so. This sort of industrial upheaval is actually quite rare, and it certainly creates risk—but it also creates opportunities. Personally, I’m optimistic—and excited—about where we’re headed. 

“In the S&P 500 this year, just five stocks accounted for about one-third of the index’s 27% return, according to Goldman Sachs. This trend is compounding off of an existing dynamic: A handful of winners drive returns. The researcher Henrik Bessembinder has found, for instance, that ‘just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years.’ Could this dynamic continue? In our view—yes, absolutely. In fact, over the next couple of decades, we think this dynamic could actually become even more extreme. Looking out over the next 20 years, we think there’s a good chance there may be a small number of enormously successful mega-stocks driving the indices—driven by power laws, scale, and network effects.”

A few more links I enjoyed: 

The Renaissance Man of Venture Capital – via Michelle Celarier
“Lux invests in what Wolfe calls “deep science” or “matter that matters” — in other words, companies you’ve probably never heard of. They tend to be at the far end of what’s possible and include everything from nuclear waste removal and space manufacturing to drone sailboats diving into hurricanes and a far-flung search for scarce genetic traits that could help develop promising new treatments for a variety of diseases.”
DeepMind Wants to Use AI to Transform Soccer – via WIRED
“AI won’t replace soccer managers, Tuyls says, but its impacts could be felt within the next decade. ‘The purpose is to have a seamless system that integrates well with the human player on the pitch and facilitates their work,’ he says. ‘I don’t think you will see big impacts in the next six months or a year, but in the next five years some of the tools will be more developed, and you could see something like an ‘automated video assistant coach’ that can help with pre- and post-match analysis or can look at the first half of a game and give you advice on what could be changed in the second half.'”
What A World – via Morgan Housel
“Everything we know about history is limited to what’s been written down, shared publicly, or spoken into a camera. The stuff that’s been kept secret, in someone’s head, taken to the grave, must be – I don’t know – 1,000 times as large and more interesting.”

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