Invested in Progress
At the end of the day, we’re investing so our savings beat inflation by a huge margin. What’s inflation, and what’s a huge margin? We define inflation in very touchy-feely terms – it’s what we feel is our loss of purchasing power every year. For us (and we’re overshooting a bit), that number is 5%. We intend to beat this annualized loss of purchasing power by beating it handily – by generating at least 10% annualized returns over the long-term. We prefer 15-20%, obviously. But the main point is that we want to do this by sleeping well at night. That’s the whole point of The Buylyst – we help investors make better choices by distilling a complex world down to a concise portfolio. We help investors “know what they’re doing”, so they sleep well at night.
Now, how do we generate high returns? We need to invest in exponential curves of what we call “near-inevitabilities”. We make money if we take a long-term view on cash flows streams that the market thinks will grow somewhat linearly but we think will grow exponentially. Essentially, we buy low market expectations – lower expectations of growth than what we think the business can believably achieve. The disagreement between the trajectory of a business, and consequently its cash flows,…and consequently its stock…is how we beat inflation and the market by a big margin. These disagreements are easier to spot in areas where growth trajectories are decidedly non-linear.
This makes us “thematic investors”. But most thematic investors take a top-down “spray and pray” approach. We take a bottom-up approach. We take concentrated bets on companies that either dominate a particular theme and harness the inevitable, non-linear tailwinds as prolifically as possible. There aren’t too many of these companies. That’s why our portfolio is focused.
While the word “concentrated” conjures up images of high volatility and high risk, we don’t think of it like that. Quite the opposite. We associate the word “concentrated” with “we know what we’re doing”. Well, we can’t possibly know everything, but we try to know enough to sleep well at night. We are (to borrow Herb Simon’s term) “satisficed” with what we know.
The best lesson in Risk Management was from Buffett: “Risk comes from not knowing what you’re doing”. We like to know where we’re invested and why. That’s how we manage our risk. That’s how we sleep well at night. So far, our approach is working. We’ve significantly beaten inflation and the broader equity markets.
In the next section, we’ll discuss what’s worked and what hasn’t. And then we’ll go over some improvements we need to make.
“It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a mispriced bet - that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time they don't. It's just that simple.” – Charlie Munger