By: Zachary Lash, CFA | COO, Nightview Capital

Investing is a unique discipline. It’s both effortless to be average (e.g. by investing in an index fund) and extraordinarily challenging to outperform over the long-term. In fact, unlike other disciplines, the only way to outperform significantly over the long-term is to be willing to underperform in the short-term.

In the world of equity investing, there are multiple paths one can take in an attempt to meet their goals or outperform over a sustained period of time. An investor can choose to optimize for stable single-digit returns, stocks that offer attractive dividend yields, and so on. Of course, there are many investors who seek to identify and invest in the handful of stocks that 10x+ every decade. We’d count ourselves among that class. Perhaps this is an obvious point, but identifying those stocks—and riding them for many years to capture their maximum value—is an extremely difficult task.  

The wonderful thing about this type of investing, however, is that those 10x+ opportunities do exist. Even when markets are captivated by doom and gloom, and sentiment is bearish, these 10x opportunities are often right in front of our nose. And yet, like a camouflaged animal, they are extremely difficult to identify.

I have learned many important lessons from our CIO Arne Alsin, but chief among them is this: If you’re seeking to identify the next 10-bagger, your mindset—and your approach—must take a “blank sheet of paper” type of attitude. To be able to see—actually see­—an opportunity like this requires you to rethink old views and legacy frameworks.

When Arne talks about taking a “blank sheet of paper” approach to equity research and valuation, he means that it is imperative to ask the right questions and refuse to make assumptions during analysis. An internal motto at Nightview Capital is simply, “no opinions.”

Having studied Arne and some of the greatest investors—from Buffett to Lynch— there are a few main characteristics I’ve seen in people who are able to consistently identify some of the top performing stocks.

These are:

1.     Extremely competitive

2.     Have curious minds and think independently

3.     Are perpetual learners who like doing deep research

4.     Have the ability to be extremely patient (in both research and holding periods)

5.     Are very confident, but at the same time quick to recognize and admit if they are wrong

If I try to distill down the essence of what we are trying to achieve for our partners, it’s this: Our main goal is to identify these types of 10x+ opportunities and invest—for the long-term—when we have the utmost conviction in the outcome.

And while there is no guarantee of finding these stocks consistently, if at all, I have concluded that in prioritizing the search for them, you are more likely to find other very compelling opportunities, even if they don’t have that 10x+ potential with conviction you are looking for. 

Investing is arguably the most competitive game in the world. The stakes are almost unimaginably high. Our credo is that we must aim extremely high and attempt to be the very best in the world at what we do. It may seem outlandish, but I have come to conclude it is the only way to be a serious investor.

Approaching investing with that mindset also has a nice ancillary benefit: You are almost always going to end up in a better spot, even if it is short of what you set out for.  In practical terms, what that means is this: When picking stocks, you are more likely to find great opportunities if you are seeking outstanding opportunities. And as you accumulate knowledge in a quest to become the best analyst on a particular business, all knowledge may come in handy in future years. There is no wasted time, so long as your time is spent studying and analyzing the field.

The pitfalls of reasoning by analogy

In studying the markets over the years, I have also concluded that one of the main hindrances to great investing is an over-reliance on one of worst shortcuts in the business: reasoning by analogy. 

This is when one proceeds from the observation that two or more things are similar in some respects, to the conclusion that they’re probably or should be similar in some other respects as well. 

In the investment world, it’s often some combination of assuming a new company in an industry will be like the incumbents you think are similar, and therefore should trade at similar valuations, and/or assuming the incumbents can re-produce or exceed any perceived competitive advantages the new player may have at the time.

Reasoning by analogy isn’t entirely useless, but if you’re looking to identify the top performing stocks every decade, I don’t believe reasoning by analogy will help you very much. In fact, it actually may point you in the opposite direction. 

And if you overestimate its usefulness and underestimate its limitations, you are more likely to miss the key differences that can make an opportunity outstanding and unique.  These key differences can often be subtle if you are not asking the right questions, making too many assumptions, or simply not doing enough deep research.

Tesla as a case study of reasoning by analogy

The most divisive stock today, and potentially of all time, is Tesla.  In my view, much of the skepticism surrounding its prospects and valuation are due to the inappropriate use of reasoning by analogy.

When it comes to Tesla, so often I have heard analysts and talking heads in media make certain points like “all other auto companies trade at X multiple, and TSLA trades at Y multiple.” Or “the rest of the auto industry is worth X and Tesla alone is worth Y.” That’s essentially their entire thesis on why they believe Tesla is overvalued, and a reason for them to stop working on the analysis. 

When I hear these types of comments, they seem shallow and devoid of meaningful analysis.  (Another less charitable word could be “lazy.”)

If you reason by analogy in a situation like this, you are de facto taking the view that there is no material difference between Tesla and legacy auto, and that legacy auto is more correctly priced, and therefore should trade at similar multiples…

  • Regardless of differences in business models, profitability, market opportunities, etc.
  • Regardless of current and potential ancillary business lines outside of auto that exist for Tesla and not incumbents (energy, FSD, AI, robotics, etc.)
  • Regardless of Tesla’s competitive advantages (vertical integration, technological capabilities, talent, etc.)
  • Regardless of legacy auto’s clear competitive disadvantages and structural issues (unions, dealer networks, legacy ICE production lines, potential stranded assets, massive debt loads, etc.)
  • Regardless of legacy auto’s continued inability to innovate or produce a competitive EV product after years and years of supposed “Tesla killers”  

By the way, this type of thinking and reasoning by analogy did not work out well for the detractors of the iPhone. 

When the iPhone was launched, it was viewed by many as a new and somewhat unique product, but ultimately just a niche gadget for Apple fans. Many analysts viewed it as an expensive toy in an otherwise commoditized industry that could easily replicate the product.

Reasoning by analogy led to the product to being analyzed by many on Wall Street through the lens of what phones were at the time—i.e., tools that were simply used for calling and texting. Ergo, the analysis also perceived a limited opportunity in a mature industry. 

In retrospect, it’s clear today that very few analysts viewed the iPhone for what it would ultimately become: A computer/game system/camera/media player all-in-one—and a home for a hugely successful app ecosystem.  In the years that followed the iPhone release, many analysts and talking heads continued to doubt the dominance of the iPhone, claiming Apple could not outdo the incumbent phone manufacturers for long.  Yet the “iPhone killer” never arrived. The reason: Apple had created an irresistible product with network effects and compounding value proposition.

Amazon is another great example of the pitfalls of reasoning by analogy.  Through its early days, and certain in the early 2010s, Amazon was almost uniformly considered an extremely overvalued, profitless online retailer with no competitive advantages. The analysts would suggest over and over that Amazon would never make money and it would ultimately be destroyed by incumbent bookstores/retailers.  Not only would you have been wrong on that front, but you also would have totally missed the completely unrelated to e-commerce monster within Amazon that is Amazon Web Services (AWS).

Prior to TSLA being our largest holding, that mantle was held for years by Amazon.  We were frequently questioned, and sometimes outright laughed at for holding it from the several hundred-dollar range, all the way up to the thousands when it was ultimately “accepted” by Wall Street and many mainstream hedge funds. 

The entire time, AWS was a key crux of our thesis and valuation.  But many we spoke to couldn’t get past the prevailing mainstream narratives and analogies that it was “just an over-priced online bookstore.”  Regardless of how much detail, information, or analysis provided, it is very difficult to change someone’s opinion on a stock (especially if it is something unique, novel, or outside the box) if they are not willing or able to take the time necessary to truly understand it themselves. 

This is what we see playing out in Tesla now.


I want to reiterate that reasoning by analogy can be a helpful tool and appropriate to utilize depending on the circumstances.  I’d say it’s certainly more helpful in analyzing more “stable” industries than those potentially going through some sort of paradigm shift.  But then again, how do you know if an industry is truly “stable” unless you are doing a deep dive on all the players and their customers?

What I have found is that reasoning by analogy distracts investors from asking the only question that really matters when analyzing the opportunity in a given stock: how much is THIS particular business going to make in the future? 

When that question is asked, and you seek to find the answers for yourself, you’ll find that the shortcuts are extremely insufficient in providing meaningful answers or leading to conclusions that you can have much, if any, conviction in.  Asking that specific question forces you to dig deeper, research longer, and learn about new ideas.  These are the things that will make you a better investor.

In my view, it is clear that the risks of reasoning by analogy far outweigh the potential rewards.  Maybe 9 times out of 10 it saves you some time and leads to an approximately correct conclusion.  But that one time it doesn’t could be the one that makes all the difference.  That could be the one that not only leads to a generational opportunity in and of itself, but one that completely redefines an entire industry, making other companies obsolete.  Or it may even create completely new industries.

The great thing about generational opportunities is that time is on your side.  From our perspective, rather than reasoning by analogy, we take that blank sheet of paper approach, seeking to ensure we aren’t missing those details that could make all the difference.  Sure, doing so takes more time and effort, but that’s okay with us.  We have a duty to our investors, and we genuinely enjoy the deep research that we do.  We’re a competitive group that strives to do the best job we possibly can, we refuse to take any shortcuts, and we try to make the decisions we believe are best, regardless of mainstream views or sentiment.

At the end of the day if you seek to find those “best of decade” stocks, it is key to have a unique blend of imagination and optimism, but at the same time skepticism and realism.  Some things thought to be impossible are indeed so, and you can’t get caught up believing in fairy tales and story stocks.  But if you ask the right questions and do the research required, you may be surprised to figure out that some of “the impossible” is not only possible—but probable.


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