Creating Giants: Part 1

Future

There is a concept in technology known as Gates' law (covered in my last post), which states:

We tend to overestimate what can happen in the short term and underestimate what can happen in the long term.

I believe this concept provides a way to think about what happens in the stock market as we start to emerge from this dark tunnel of Covid 19:

• In the short term there has been significant bullishness around trends defined by the Covid 19 crisis and the associated companies. This is the overestimation and will work itself through the markets (although I am not sure how exactly).

• But, and this is a big but, some of the companies associated with these trends will become huge in the long run. How huge ? Next Apple ? No, bigger. How about the next Dutch East India company (valued at  $7.9T in 1637) ? This is the underestimation.

So which are these companies that we are underestimating but are likely to be giants in the future ? Let's try and answer that now.

Accelerant

There's a lot of great analysis around the trends that are strengthening due to Covid 19: One that I highly recommend is Bond Capital's coronavirus trends report.

Reading through it, I realized that coming into the lockdowns, certain existing long term trends either accelerated (e.g. On Demand Fitness) or decelerated (e.g. Air Travel) meaningfully. The stocks of the associated companies reacted accordingly and significantly e.g. Peloton (PTON) stock is up +485% since mid Feb 2020 while Southwest (LUV) is down -18% in the same time frame. This is the overestimation in the short term.

As this overestimation works itself out, it will create long term opportunities that most will underestimate.

Themes

With that, below are the themes that I believe will be dominant well into the future. There are more but I am focusing on the ones that resonate with me:

A. Health & Wellness

I have long believed that if I have my health, everything else can be worked on. Increasingly though, I found myself prioritizing life's responsibilities over my health which I suspect is the case for many of you too.

Covid 19 has served as a stark reminder that my health is the foundation for everything else. If I can't be assured my health, I'll literally stop everything else to seek assurance for my health.

Things that help us improve our physical and mental health will play a far greater role in our day to day lives going forward. On demand fitness is one of those things. Companies like Peloton (PTON) that embody this trend will likely thrive, as well they should, in terms of their impact on our wellness. (More details on this are here in my prior post)

Future Giant: Peloton (PTON)

Another winner: Nautilus (NLS)

B. Environmental Consciousness

One thing that has become crystal clear in my mind through this crisis is that we, as humans, are part of a much larger ecosystem: Our environment.

When we can't safely step from one key aspect of this environment (e.g. our home) to another (e.g. a beach) without taking unnatural precautions, life can start to get pretty dissatisfying. This underscores the importance of adapting our lifestyle to be more conscious of the environment.

As we start to emerge from this crisis and reflect on it, I believe more and more people will develop this point of view. Companies like Tesla (TSLA), that help us be more mindful of our environment and help us preserve it will likely gain more momentum. (More details on electric cars being better for the environment are here).

Future Giant: Tesla (TSLA)

Other winners: Nio (NIO), Ford (F)

C. Sustainable Foods

Continuing on the theme of environmental consciousness, there's the sustainable foods movement: I know that plant based diets are healthier for us but what I did not know is the ngeative impact of meat consumption on the environment. 

From deforestation to carbon emissions to resource intensity to the risk of disease, traditional meat foods just don't feel sustainable. Companies like Beyond Meat (BYND) and Impossible Foods (private) that are rapidly iterating to provide sustainable foods like plant based meat will not just be good for us, the planet but also for their investors.

Future Giants: Beyond Meat (BYND)

Other winner: Impossible Foods (private: impossiblefoods.com)

Part 2

That's three themes for now. Please "follow by email" for the next set of themes that are coming shortly. 

• The contents of this blog are the personal opinions and investment choices of the writer. Please don't treat them as investment recommendations.
•  I have long positions in  PTON, NLS, TSLA and considering long positions in BYND and F.

Stay safe, Stay healthy & Keep at it

Crash

Rewind 3 months and I was giddy as an investor. I would wake up richer every morning without having done anything meaningful to result in that outcome. 

It felt mildly uncomfortable. It did not add up. But, I brushed it aside and got back to thinking about my next killer investment, back to "supposedly" crushing it, back to thinking about buying a house...

Then came the crash. 

First I started to hear about the few Covid 19 cases close to home. Like most (I am guessing), I brushed it aside. Then my employer asked us to work from home, which seemed like a huge inconvenience (in hindsight it's turning out to be a great decision..touch wood). 

Rapidly all hell broke loose: everyone in the family was working/schooling from home, people were starting to stockpile essentials, recreational spots like gyms closed and the stock market started to crash.

Figure: S&P 500 drop into March 2020. Source: Google finance.

Panic

Those that know me well, know how invested I am in the stock market, both financially and psychologically. I have attempted a startup around this in the past. It's now a serious hobby. 

The crash started to hit me hard and I felt that familiar rush of panic...What if I lose it all ? All those years of hard work, deep research, difficult decisions, joyful ups and painful downs...wasted. And this in the middle of the chaos and the fear at the back of the mind...Are we going to survive this virus ? 

There was a strong urge to sell out of my rapidly falling positions.

Plan

Unfortunately, I have seen a  few crashes in my career: I caught the tail end of the dot com bubble, saw the effects of 9/11 and started to invest right after the financial crisis of 2007-2008. 

Fortunately, I have learnt (a little) from these painful experiences and (a lot more) from reading about human behavior and it's role in investing.  Over the years, I have formed certain rules that I try and abide by: a primary one being "When you don't know what to do...do nothing". 

So I did not sell. Instead I did what I do best in these situations...seek solace by compulsively consuming whatever information, opinions, advice were available (and trust me there are tonnes of those especially in a spectacular crash like this one). 

One piece of advice stood out: "Form a plan". So I got to work forming one and this is what it looked like for me (your plan was/is probably different and that doesn't matter. What matters is having a plan specific to your situation):

1. Protect yourself from the risk of ruin: This was inspired by a piece I read by Ray Dalio, where the first thing to do is assess and act to ensure that you are not going to be financially ruined. For me, this meant having a cash cushion, which I determined to be 30% of my investments. I frantically pulled out my investment spreadsheet to see what my current status was: I had about 25% cash already. Not bad. That led me to the next part of the plan.
2. Sell some positions likely to underperform in the future: I sold a little bit including my positions in T and BAC. T had been an underperforming position for me for a while and I did not think with interest rates being this low, banks will generally do well in the near future. Having said that, I held on to my JPM position as they are simply an excellently run business with an amazing leader.
3. Opportunistically buy into big future winners: I have been in the process of doing this already and the idea is similar to transitioning one's business from primarily relying on an existing successful line (like the iPhone) to future lines of business (services, wearables) to keep growing. I was confident and still am that events like these present unprecedented opportunities. I have been slowly executing on this piece and go into it in more detail later.

Revise

Only time will tell if I made the right moves by executing on my plan above. What I know for sure is doing so provided me with a sense of control which is now enabling me to navigate the turbulence better.

Which brings me to my latest learning: In unprecedented markets like the one we are in right now, one's plan can't be static. It's got to be dynamic, adapt to the constant changes. For example:

• I wasn't expecting the swiftness and scale of the monetary and fiscal response(per Reuters).
• I wasn't expecting the US to become the country with the most Covid 19 cases(per Johns Hopkins)
• I wan't expecting the staggering unemployment numbers of 16.9 million people(per Marketplace).

I am still working out what the above mean for the markets going forward and how should my plan evolve but here's an early sense I am forming:

1. Getting ahead: The rapid recent rally is getting somewhat ahead of itself especially since there is no clear idea of how we emerge from this and what the economic recovery looks like.
2. More volatility: With all the unknowns there will be more volatility resulting in opportunities to buy future great companies at what could be attractive prices.
3. Exercise patience: Be prepared and more importantly be patient to execute on #2 above. 

Future

There is a fascinating concept in technology, known as Amara's/Gates' law (per Farnam Steet), that goes "we tend to overestimate what can happen in the short term and underestimate what can happen in the long term".

I believe this concept provides a way to think about what happens to the markets from here on out: In the short term there will be significant bullishness around trends defined by the Covid 19 crisis like streaming, remote work, home fitness, healthcare, diy, online learning, etc (and the associated companies). This bullishness will be short lasting as the economic ramifications are felt. But, and this is a BIG BUT, some of these companies associated with these trends will become HUGE in the long run. How huge ? Now that's the trillion dollar question isn't it ?

Stay safe, healthy and tuned for my next blog post where I talk about my list of some of those companies....


• The contents of this blog are the personal opinions and investment choices of the writer. Please don't treat them as investment recommendations.
•  I have a long position in JPM, AAPL and other companies associated with the trends I mention above like, but not limited to NFLX, ROKU,  MSFT, PTON.

Peloton: Good-Better-Best.

Introduction

Recently, I laid out an approach to investing called Product based investing. Today, we'll apply the concepts in that approach to a currently relevant stock, Peloton (PTON).

First some background: Peloton, a provider of in home, on demand fitness, recently went public in Sep of 2019. They priced the IPO at $29, valuing the company at about $8 Bn. As of this writing the stock is trading at ~ $25.5, putting it's market cap at ~ 7.1 Bn.

With that, let's look into Peloton's expanding product portfolio and what that means for it's future.

Identify Products

Most people would agree that Peloton, with their blend of beautiful fitness machines and aspirational live classes, offers a unique, convenient and premium fitness experience for people who can afford it.
As Peloton's CEO, John Foley, often mentions in the company's earnings call, this is the "best" part of their good-better-best strategy, which means that the good/better products are still to come:

• Affordable Treadmill: Reinforcing this strategy is an article from Bloomberg in Nov, 2019 that Peloton will likely sell a cheaper (than the current $4000) treadmill in 2020. 
• Rowing Machine: The same article talks about Peloton introducing a newer product in 2020 namely a rowing machine.

Not content with sitting still with what they have built, Peloton is actively focusing on expanding their product portfolio, increasing their reach and making it more affordable:

• Germany Launch: In mid Nov 2019, Peloton launched it's products in Germany. It was the first time they offered classes in non-English, specifically German-speaking classes.
• Digital App Price Reduction: In early Dec 2019, Peloton reduced the price of it's app only subscription from $19.39 a month to $12.99 a month.
• App Expansion: In early Dec 2019, they also released an app for the Fire TV, so that users can stream the classes on their TVs. Additionally they released an app for the Apple Watch for users to monitor various workout metrics.

Determine their Importance

It's clear that Peloton is doing a good job of expanding their offerings and they are doing it in a huge market that is rapidly evolving in their favor:

• Huge Global Market: The global fitness market has quickly grown into a nearly $100 Bn market (per Business Insider). This is primarily because of people's increasing focus on health and wellness. I would argue that this growth is set to accelerate as adults redefine what old age looks like via healthy lifestyles (more on khn).
• On Demand Fitness Spike: Per CNBC, spending on fitness classes and gyms grew just over 5% last year, but on-demand fitness spending jumped nearly 59%. Guess who is the poster child of on demand fitness? Yes Peloton!

Predict their Performance

The next question is how do we know Peloton's upcoming products are going to be successful and consequently accelerate their share of this market. The following offer clues:

• Immersive Experience: I recently tried a power walking class on a Peloton tread for a brief 5 mins. It was clear to me, within the first minute, that the experience they are offering is much more immersive than anything I have seen before. Not only that, the instructor introduced me to some moves that I had no idea helped in something as simple as walking.
• Cult Community: If you are skeptical of my 5 minutes analysis of the Peloton experience (and you would be right to), just read this article in the Atlantic that talks about the fanatical devotion Peloton users have to the company and the sense of community it enables for them.
• Great Team: One quick look at the Peloton leadership team corporate page, instills confidence that there are several accomplished individuals working together for this company. That, along with their past execution, leads me to believe that they are more likely to pull this off as opposed to not.

Summary

The key takeaway is that we are in the early innings of a fitness revolution and Peloton is well positioned to win big as this long game plays out.


• The contents of this blog are the personal opinions and investment choices of the writer. Please don't treat them as investment recommendations.
•  I have a long position in PTON.

Product Based Investing

Introduction

I have wanted to do this since late 2016. "This" means laying out the investing approach I have adopted, often casually, to investing in tech and adjacent stocks. My hope is that I can help budding and seasoned investors alike, look at investing through an alternate lens.

Also, since everything needs a name, I refer to my approach as product based investing. With that, let's get to it:

Foundation

The rough idea underlying product based investing is that companies primarily provide either products or services to a market. Thus the performance of the products that a company has created is a great proxy for the company's performance. 

Additionally, in the stock market, the earlier, than the general market, one can estimate the performance of the product, the better the likelihood of making a winning investment. Ideally, you want to estimate the likely performance of the product even before the product has launched.

The above aspect in conjunction with things like the disruptive nature of the product, it's potential market size and underlying trends form the core of the investment thesis.

The How

Next, let's look into how one goes about implementing this approach:

a. Identify Products

The first step is to identify a company that is about to launch a meaningful product. We'll talk more about "meaningful" later but let's take an example to make this first step clearer. 

In mid December of 2016, AMD announced it's Ryzen CPU chips. These were processor chips to compete with Intel for high end gaming.  They quickly followed it up by introducing Vega GPU chips in early January of 2017. These were graphics chips to compete with Nvidia for again, high end gaming. 

The cannons were lined up. AMD was competing again. The stock was trading at roughly 10$.  

b. Determine their Importance

In retrospect, this was a pivotal moment for AMD. With Ryzen, especially, being a completely new design, they were back to challenging Intel for high end desktop CPU marketshare in almost 10 years. 

It did not take rocket science to figure out this was a big deal. A google search or two would give one everything they needed to determine how important this set of product launches was.

In theory the above steps sound easy, but in reality they require a keen interest in the tech industry and the time commitment to keep up with the news cycle around it.

c. Predict their Performance

This is where things start to get really interesting. There is no equation (Oh how I wish there was one..) that outputs that the products will be a smashing success or dismal failures. 

What this step requires is good old fashioned research which is a combination of google searches and more importantly industry specific blogs e.g. in the case of AMD, something like anandtech.com. Also, one needs to keep up with the news cycle, via sites like The Verge, especially around major tech events like CES.

Basically, what one is doing, is trying to predict how well the product will perform in the market. Again, this is more of an art than science and the more one practices doing this, the better they get.

It turns out these were successful launches. Over the next 3 years, AMD relentlessly enhanced these products to the point that in mid 2019 they had a significant lead over Intel with a 7nm process. The stock was now trading at roughly 50$. A 400% gain in 3 years. Not bad!

The When

It should be pretty clear that in the 3 years I mention above, there would be plenty of opportunities to make an investment. Having said that, the earlier in the cycle one can form a hypothesis, make the investment and then stay in it till the hypothesis changes, the better the returns.

Next Up

Alright, enough talk about the past. In my next blog post (coming soon!), I'll apply this approach to a currently relevant stock, PTON.


• The contents of this blog are the personal opinions and investment choices of the writer. Please don't treat them as investment recommendations.
•  I have a long position in AMD, PTON.