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Will Thrower: Deep Value Opportunities in Japan & Australia (Ep. 47)

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Will Thrower is one of the most under-followed investors on Twitter. In fact, his Twitter profile is like the companies he hunts for: undervalued with long runways for growth. Our conversation took us from chicken farms in China to equity trading offices in London.
How Will got started in markets is such a fascinating story. It was one blog post, picked up by Bloomberg, that led to a job as an equity analyst.
We spend over an hour discussing how Will finds ideas, the opportunity set in Japan and Australia, and why US investors should think twice before passing over an International business because, “A US competitor can do the same thing.”
Here’s the time-stamp for our chat: 
  • [0:00] The Chicken Farm
  • [5:30] What led you to become an equity researcher?
  • [20:30] The Beenos Thesis (3328.T)
  • [33:20] Questions that You Want Management to Answer.
  • [35:20] An Ideal Investment
  • [40:40] Nano Cap Investments and Competitive Advantages 
  • [54:00] Positioning Sizing
  • [1:01:10] Advance Nano Tek (ASX: $ANO)
  • [1:16:00] More from Will Thrower
  • [1:19:22] Closing Questions
This was one of the more esoteric conversations I’ve had on the podcast. Will is intellectually bright, honest and has a thirst for learning. He’s also a good investor. Two of the companies he wrote on his blog have gone on to generate monster returns. Beenos (3328.JP) is up over 30% since he wrote about it. And Base (4477.JP) is up nearly 40% since late August. 
If you enjoyed our conversation and want to learn more about Will Thrower, check out the following resources:
Display ballet dancer because Darvas was a ballet dancer

How Nicholas Darvas Made $2M In The Stock Market, A Book Review

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“I shot upright in my chair. My 50-cent BRILUND stock was quoted at $1.90. I sold it at once and made a profit of close to $8,000 … I decided I had been missing a good thing all my life. I made up my mind to go into the stock market. I have never gone back on this decision. But little did I know what problems I would encounter in this unknown jungle.”

We all remember our “first”. You know, that one profit that hooked us into the stock market. Nicholas Darvas was no exception. At 23, Darvas began his career as a dancer. Touring the world light on his feet.

But when Darvas wasn’t dancing, he was reading. In fact, Darvas consumed over 200 books during his down time on tour. Some say he read up to eight hours a day. He studied markets, speculation and how those before him raked millions from the market.

Darvas ventured into Wall Street, armed with 200+ books of knowledge in his head. What resulted was a rollercoaster of wins and losses. Triumphs and defeats. A near decade’s effort that culminated in over $2M profits in an 18-month span.

Darvas’ journey from loser to winner reads like a movie. With painful lessons, simple insights and dogmatic application to what worked. Luckily, he wrote it all down for us in his book How I Made $2,000,000 In The Stock Market.

This book review will highlight three things:

1. Darvas’ early losses and lessons learned

2. The Darvas Box Theory: The Strategy That Made Darvas A Multi-Millionaire

3. Why You Should Distance Yourself From The Market

Darvas was mainly a swing trader. But the lessons in this book are useful for even the most long-term focused investor. As such, I use the words interchangeably.

Are you ready to learn how to make millions?

Darvas’ Early Days: The Antithesis of A Good Trader

Take a second and think about what makes a great trader … Got some ideas? Good. Darvas did the opposite of all those things.

He doesn’t hide it either. Within the first six pages of the book Darvas hints at two major issues with his early trading strategy:

    • Buying based on “hot tips”
    • Turning losing trades into “pet stocks”

Never Trust A Hot Tip

Buying stocks off “hot tips” from friends, neighbors or FinTwit accounts is a bad idea. It’s also not a new idea. Darvas notes on page 5:

“I listened eagerly to what they had to say and religiously followed their tips. Whatever I was told to buy, I bought. It took me a long time to discover that this is one method that never works … All I knew was what the last head-waiter in the last nightclub I had performed in had told me was good.”

Tip-based investing never works because you can’t buy a person’s conviction in an idea.  If you don’t do the work yourself you’ll never have the confidence to hold on when you’re right.

Even worse, if the stock goes down, who do you look to for confirmation? That friend.

Lesson: Do your own work. It’s okay to get a head start from a friend/someone you trust. But do your own work to develop your own conviction before buying.

Date, Don’t Marry Your Stocks

Warren Buffett’s ideal holding period is forever. Ideal is the key word. Never fall in love with a stock or a company, no matter the circumstances. Darvas learned this painful lesson early in the book. Here’s a quote from page 8 (emphasis mine):

“For some of them [stocks] I acquired a special liking. This came about for different reasons. Sometimes it was because they were given to me by a good friend of mine — other times, because I had started by making money with them. This led me to prefer these stocks more than others, and before I knew what I was doing I had started to keep ‘pets’”.

This paragraph reveals something all traders struggle with: confirmation bias. And the temptation is worse in the social media age. God forbid you write a long, detailed write-up on a recent investment only to find out you’re wrong. What do you do then? Can you cut your loss and admit defeat?

It’s tough.

Darvas continues with the pet stock analogy and shows how much damage this mentality can cause to a portfolio (emphasis mine):

“I thought of them as something belonging to me, like members of my family. I praised their virtues day and night. I talked about them as one talks about his children. It did not bother me that no one else could see any special virtue in my pet stocks to distinguish them from any other stocks. This state of mind lasted until i realized that my pet stocks were causing me my heaviest losses.”

Stocks are hard. On one hand, you need the conviction to hold an idea as it executes, despite what the general market thinks about the company. But at the same time you have to be willing to accept that you’re wrong and cut your losses.

Cut too soon and you can abandon a potential big winner. But failure to cut at the first sign of danger might blow up your entire portfolio.

This is especially true for value-oriented investors. If a stock you own falls in price, the first reaction is to buy more. After all, if you loved it at $X you’ll really love it at ($X – % decline)! You’ll conjure reasons for the decline that have nothing to do with the fundamentals of the business.

And sometimes you’re right. But other times the fundamentals have deteriorated. And now instead of cutting a loser you’re nursing a pet stock.

Lesson: You need a system to judge whether you should buy, hold or sell your stocks. Whether you’re a swing trader or long-term investor. You need a system. Preferably something quantifiable. That way there’s less room for ifs, ands or butts.

Darvas’ First System: The Seven Rules

Before Darvas’ Box Theory there were the Seven Rules. These rules shaped Darvas’ latter portions of his early trading days.

Here were his rules:

    1. You should not follow advisory services. They are not infallible, either in Canada or on Wall Street.
    2. You should be cautious with brokers’ advice. They can be wrong.
    3. You should ignore Wall Street sayings, no matter how ancient and revered.
    4. You should not trade “over the counter” — only in listed stocks where there is always a buyer when you want to sell.
    5. You should not listen to rumors, no matter how well-founded they may appear.
    6. The fundamental approach worked better than gambling. Study it.
    7. You should hold on to one rising stock for a longer period than juggle with a dozen stocks for a short period at a time.

What do all these rumors have in common? One thing: cut out the noise and focus on what matters: the stock and its fundamentals.

Darvas loved this strategy. Finally, he thought, a way to cut the Wall Street noise and focus on the business. Analyze the balance sheets, income statements and cash flows. Determine what a company should trade for, and buy it at a discount.

After all, if it’s hard numbers, the market will eventually agree with you. Or so Darvas thought.

Quantitative Metrics Aren’t Enough & Why You Should Match Style With Personality

It’s at this point in the book where we experience Darvas’ first major loss. He found Jones & Laughlin after culling through a list of “B-rated” stocks in a hot industry. To his excitement, this “no brainer” was for the taking.

What made this stock a no-brainer?

    • Strong industry
    • Strong B rating
    • 6% Dividend Yield
    • P/E was better than any stock in the group

There’s not much about the actual fundamentals of the business in the analysis above. All we know is that it pays 6% and has a lower P/E versus its peers.

Yet to a gambler in markets (like Darvas), this analysis proved unbreakable. Here’s his thoughts (emphasis mine):

“A tremendous enthusiasm came over me. This undoubtedly was the golden key. I felt fortune within my grasp like a ripe apple. This was the stock to make me wealthy. This was the gilt-edged scientific certainty, a newer and greater BRILUND. It was sure to jump 20 to 30 points any moment.”

Run the other way if you read the words “sure” or “certainty” in an investment write-up. Darvas leveraged his “sure” bet to the hills. He mortgaged his home, took a loan out on his insurance policy and got an advance on his paycheck.

He then dumped all of that into Jones & Laughlin. Darvas recounts the memory, saying, “The 23rd of September, 1955, I bought 1,000 shares of Jones & Laughlin at 52 ¼ on margin, which at that time was 70%. The cost was $52,652.30 and I had to deposit $36,856.61 in cash. To raise this amount I had put up all my possessions as a guarantee.”

You know where this is going.

Three days after Darvas’ purchase, the stock began to freefall. This is where Darvas went wrong. He bought on fundamentals but used price action to confirm/deny the validity of his investment thesis.

That’s not to say that one way is better than another. There’s countless traders that make money focusing only on price action. Just as the world’s best long-term investors (Buffett, for example) don’t pay any attention to price action.

Darvas didn’t have a strategy. He was helpless and treading water in no-man’s land. Listen to his excruciating relationship with Jones & Laughlin (emphasis mine):

“I saw it fall and yet I refused to face reality. I was paralyzed. I simply did not know what to do. Should I sell? How could I? In my projection, based on my exhaustive studies, Jones & Laughlin was worth at least $75/share. It was just a temporary setback, I said to myself. There is no reason for the drop. It is a good sound stock; it will come back. I must hold on. And I held on and I held on.”

That’s when Darvas realized he needed a strategy that matched his personality. He tried the fundamental approach and it didn’t work (emphasis mine):

What, I asked myself, was the value of examining company reports, studying the industry outlook, the ratings, the price-earnings ratios? The stock that saved me from disaster was one about which I knew nothing. I picked it for one reason only — it seemed to be rising.

It’s at this point Darvas developed his Box Theory. From pure fundamentals to pure technical analysis.

Darvas’ Method: The Box Method

I might lose all the value investors that have read until this point. Darvas’ success took off when he switched to pure technical analysis: price and volume.

Darvas noted in Chapter 4 (emphasis mine), “This experience did more than anything to convince me that the purely technical approach to the market was sound. It meant that if I studied price action and volume, discarding all other factors, I could get positive results.

His studies led him to the cornerstone of his trading strategy:

“Stocks did not fly like balloons in any direction. As if attracted by a magnet, they had a defined upward or downward trend which, once established, tended to continue. Within this trend stocks moved in a series of frames, or what I began to call ‘boxes’.

The boxes. That was the secret. Darvas waited for periods of compressed volatility.

In essence, that’s what a box is. A fierce war between buyers and sellers. Each burdened by the psychological effects of their previous decisions.

Then when the market tips its hand as to the direction of the next magnetic trend, you buy (or sell) in the direction of that new trend.

Here’s Darvas’ explanation of The Box Method (emphasis mine):

“This is how I applied my theory: When the boxes of a stock in which I was interested stood, like a pyramid, on top of each other, and my stock was in the highest box, I started to watch it. It could bounce between the top and the bottom of the box and I was perfectly satisfied. Once I had decided on the dimensions of the box, the stock could do what it liked, but only within that frame. In fact, if it did not bounce up and down inside that box I was worried.”

Examples of The Box on Price Charts

In short, he waited for stocks to form box patterns on a price chart. Here’s a few examples of what Darvas would call a “box”:

CELH moved between its $3 and $7 box for nearly three years before breaking out of the box into new highs.

TOBII bounced between its $24-$28 box before breaking out and moving higher before forming another box at $34-$38 (disclosure: I own shares of TOBII).

Currently, HEAR is in the middle of its $16-$21 box.

These are only three examples of stocks forming boxes on daily, weekly and monthly price charts. Mr. Market presents these opportunities every single day, 365 days of the year.

How To Buy and Sell in The Box Method

Darvas’ buy and sell instructions were simple:

    • Buy when the stock broke out of its box
    • Sell for a loss when the stock moved back into its previous box

The other, more difficult decision, involved selling a stock at a profit. Darvas already knew the danger of taking quick profits. Here’s how he defined his profit-taking strategy (emphasis mine):

“I decided that since I could not train myself not to get scared every time, it was better to adopt another method. This was to hold on to a rising stock but, at the same time, keep raising my stop-loss order parallel with its rise.

I would keep it at such a distance that a meaningless swing in the price would not touch it off. If, however, the stock really turned around and began to drop, I would be sold out immediately.”

This is the hardest and least scientific part of the strategy. How do you know when your stop-loss is close enough? How can you tell if it’s too far?

Honest answer: there is no right answer. Find what works for you.

What we see by the end of Chapter 4 is a man with a defined strategy. The polar opposite approach to the beginning of the book. Let’s listen to Darvas’ newfound confidence (emphasis mine):

“I knew that I had to adopt a cold, unemotional attitude toward stocks; that I must not fall in love with them when they rose and I must not get angry when they fell; that there are no such animals as good or bad stocks. There are only rising and falling stocks — and I should hold the rising ones and sell those that fall.”

Power in Simplicity

Darvas’ actual trading method is very simple:

1. Find a box pattern on a price chart

2. Buy the stock if it breaks out above its box

3. Sell the stock if it falls back into its previous box

But before he finished the book, Darvas added one element to his technical strategy: fundamentals.

Darvas’ Final Form: Technicals + Fundamentals

After perfecting his technical approach, Darvas added one last element to his stock selection criteria: improving earning power or anticipation of it.

Darvas became a Techno-Fundamentalist. We’re big fans of this approach at Macro Ops and employ it in our own stock selection criteria. Here’s his reason for adding fundamentals (emphasis mine):

“I would select stocks on their technical actions in the market, but I would only buy them when I could give improving earning power as my fundamental reason for doing so.”

In other words, Darvas didn’t buy a stock on the chart pattern alone. He needed a fundamental confirmation from improved earnings.

Darvas also took the long-term view when picking stocks. It sounds counter-intuitive, right? Looking out 20 years into the future for swing trades that may last weeks or months. But that’s what Darvas did (emphasis mine):

“I looked out for those stocks which were tied up with the future and where I could expect that revolutionary new products would sharply improve the company’s earnings.”

Said another way, Darvas wanted to invest in forward-looking industries. Industries with long runways and strong tailwinds behind them.

So now we can add two more rules to our simple formula above:

4. Buy a stock with improving earnings or expected improvements

5. Buy stocks in strong industries with long-term tailwinds

But as Jesse Livermore says, “It’s not the buying or the selling that makes you money. It’s the waiting.

The real genius in Darvas’ book is his ability to make millions touring the world as a dancer. It’s his occupation that helped Darvas make (and keep) his millions. In fact, most reviews of this book completely forget this crucial detail.

Let’s examine a few reasons why.

Darvas’ Greatest Weapon: Distance From Wall Street

“Being thousands of miles away from Wall Street, I succeeded in disassociating myself emotionally from every stock I held.”

Darvas, like Buffett or Templeton, knew the power of distance. Buffett barricaded himself in Omaha. John Templeton took frequent beach walks and moved to the Bahamas to escape Wall Street’s snare. As a dancer, Darvas spent most of his life away from Wall Street.

Yet Darvas wasn’t immune to the sweet song of New York. With his newfound trading success, Darvas set up shop at a Wall Street brokerage firm. What followed was a complete unraveling of a perfectly good trading plan (emphasis mine):

“As I began trading day to day from the board room, I gradually abandoned my detachment and started to join them. I opened my ears to the confusing combination of facts, opinions and gossip. I read the market letters. I also started to answer questions like, ‘What do you think of the market?’ or ‘What do you know that’s cheap?’ All this had a deadly effect on me.

The closer you are to the markets the higher your odds of following the herd. This makes sense. We’re social creatures. It’s how we survived. Yet following the herd is what gets you killed in financial markets. That’s the moment you start buying at the top and selling at the low. Darvas reveals first-hand the dangers of herd mentality:

“Instead of being a lone wolf, I became a confused, excited lamb milling around with others, waiting to be clipped. It was impossible for me to say ‘no’ when everybody around me was saying ‘yes’. I got scared when they got scared/ I became hopeful when they were hopeful.”

Lesson: Stay as far away from Wall Street as possible. Move to the Bahamas if you must.

The Last Word: A Life Changing Book

Darvas’ book changed my life.

It made me realize it is possible to make life-altering profits in financial markets. Moreover, Darvas took readers on a journey through the highs and lows of speculation and trading. We witnessed his early losses. Celebrated his victorious improvements. And cringed when he almost lost it all at the end.

But the most important part of Darvas’ book is that his strategy works. It worked in the 1950s and it works today. The stocks change names and the participants come and go. But business fundamentals stay true. And basic human psychology doesn’t change.

I can’t wait to read this again.

How To Write A Great Investment Thesis w/ Morgan Housel

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Morgan Housel is a man that needs no introduction. He’s a NY Times Bestseller, prolific writer for Collaborative Fund and great conversationalist. I’m still amazed I was able to swindle him into joining the podcast this week. As a writer, I’ve wanted to chat with him and pick his brain about his writing process, how he thinks about new topics and the power of reading.

Morgan and I spend an hour discussing investment philosophy, the power of writing and what makes a great investment thesis. This was arguably my favorite and most challenging podcast to plan. I struggled with the question, “What do I ask the man that’s been asked every question under the sun?”

Well, here’s how it turned out:

  • [0:00] Who is Morgan Housel?
  • [1:32] Most Challenging Parts of Writing a Book.
  • [7:45] Investing Psychology
  • [14:10] Topics that Haven’t Been Written About in WW2 and in Finance.
  • [19:50] Becoming a Writer
  • [28:00] How to Write an Investment Thesis?
  • [30:00] Examples of Good Investment Theses: Dandelion Energy & Beyond Meat
  • [34:00] The Reasons Behind Complex Business Models
  • [39:00] How to Look for Ideas.
  • [45:00] Writing is a Thinking Process.
  • [48:00] How Has Writing Changed Your Life?
  • [50:00] Closing Questions: What Writer Would You Like to Write Your Biography?

This episode is a testament to scratching my own itch. Asking questions because I wanted to know the answer, not because I thought it would make for a great podcast. I hope you enjoy this episode as much as I did.

Thanks again to Morgan for coming on the show. If you want to learn more about Morgan, check out the following links:

***Disclaimer: Nothing you hear on this podcast is in any way, shape or form to be construed as investment advice. The guest on this podcast may hold positions in any/all names mentioned during the podcast. This is not investment advice and investors should always conduct personal due diligence before investing in any security. Past performance of any funds mentioned are not indicative of future returns.***

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$NTDOY, $TWTR and The Hard Break w/ Aaron Edelheit

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Aaron Edelheit is the CEO of Mindset Capital and author of the book, The Hard Break: The Case for a 24/6 Lifestyle. He also runs the newsletter, Mindsetvalue. Aaron’s a tried-and-true value investor searching the globe for undervalued businesses.

We spend the early portion of the podcast discussing Aaron’s early investment philosophy, his real estate endeavors and how he grew his small partnership into $25M.

From there, we talk biggest winners/losers over his investing career and why he wrote The Hard Break. 

Finally, we spend the bulk of the conversation diving deep into Nintendo ($NTDOY) and Twitter ($TWTR). Aaron lays out the NTDOY bull case, the bear case and exciting new technologies on the horizon for NTDOY. Aaron also dives into TWTR’s bull thesis, the bear thesis and what investors should know about the company’s future. 

Finally, we spend the remaining time discussing international investment ideas and where Aaron’s looking for value (hint: its Japan).

Big thanks again to Aaron for coming on the show. He was a fantastic guest and I can’t wait to have him back on for another episode!

Here’s the time-stamp:  

  • [0:00] Who is Aaron and how did you get started in investing?
  • [6:33] What was your style for growing a small sum into 25 million?
  • [7:00] Biggest Winners: ATL Ultrasound
  • [12:00] Biggest Losers? Doesn’t matter how people sound or how they look, you really need to be very skepticism.
  • [17:15] The dangers of overworking and Aaron’s Book “The Hard Break: The Case For The 24/6 Lifestyle”
  • [35:00] Nintendo: A 2013 MSFT?
  • [56:00] Risks for Nintendo
  • [1:01:00] Value investor’s case for Twitter
  • [1:22:00] Besides Nintendo and Twitter where can value be found? (Energy and Lincoln Educational Services)
  • [1:32:00] International Investments: Japan
  • [1:40:00] Closing Thoughts and Questions
If you want to learn more about Aaron Edelheit, check out these links: 
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$SE, $GRVY and Digital Transformation w/ Mads Christiansen

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Mads Christiansen is a private investor specializing in digital transformation, e-gaming and technology. He freely shares his thoughts and ideas on Twitter and also runs a YouTube channel (both you can find in links below). Mads got his investing capital from his job as a medical practitioner. While working, he parked his money in passive index funds.

As his itch for investing grew, he found himself drawn to e-sports, gaming and digital transformation companies,. These are companies with long secular tailwinds at their backs. To Mads, if you start your fishing trip in the best ponds, you’ll end up catching a few big winners. And that’s exactly what he’s done. A couple of Mads’ big winners include Sea, Ltd. (SE) and Gravity (GRVY).

Mads and I chat about poker, investing, bet size, portfolio management and specific investment ideas. Check out the time-stamp below:

  • [0:00] Who is Mads Christiansen?
  • [4:30] Specialization vs Generalization
  • [8:00] How to develop the specialization skill?
  • [11:00] How to not suffer from FOMO?
  • [13:00] Poker and Investing: $MELI Case
  • [20:00] Gaming and eSports
  • [24:30] Challenges in Analyzing the Gaming Industry
  • [27:30] eSports
  • [30:30] Mads’ Portfolio Picks: $SE and $GRVY
  • [35:00] Valuing $SE
  • [41:00] $GRVY
  • [47:00] Portfolio Construction
  • [49:50] Customer Attention and the importance of it for a Value Investor.
  • [56:00] New Opportunities
  • [57:00] Closing Thoughts
  • [1:00:40] Closing Questions

If you liked our conversation, consider following more of Mads’ thoughts:

Thanks again to Mads for coming on the podcast! I look forward to reading more of his ideas and watching his portfolio reviews.

***Disclaimer: Nothing you hear on this podcast is in any way, shape or form to be construed as investment advice. The guest on this podcast may hold positions in any/all names mentioned during the podcast. This is not investment advice and investors should always conduct personal due diligence before investing in any security. Past performance of any funds mentioned are not indicative of future returns.***

$UBER Deep Dive w/ Abdullah, Mostly Borrowed Ideas

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Abdullah runs the Mostly Borrowed Ideas newsletter and Twitter account. He’s one of the sharpest value investors on Twitter and I look forward to his emails every month.

Abdullah got his start as an equity analyst and realized he wanted to create his own newsletter and achieve financial freedom. The ability to work anywhere and do what he loves. You can hear his passion in the way he talks about business models, valuation and investing.

We spend the early part of the show discussing Abdullah’s background and general investment philosophy. After that, we dive deep into Abdullah’s latest research report: Uber (U).

There’s a lot of information in this podcast, so you might want to listen twice. Abdullah walks through the bullish thesis, Uber’s specific risk points/competitive challenges and valuation. What I loved about Abdullah’s research is that he ended the report not bullish on the company.

Pay close attention to his thoughts on valuation and how he backs into it using an Expectations Investing approach.

Time-Stamp:

  • [3:23] Intro Questions
  • [9:13] Why did you start a newsletter?
  • [16:34] Uber Deep Dive
  • [22:04] Why People Use Uber
  • [28:06] The Troubling Economics of Uber
  • [39:26] Driver & Customer Incentive Structures
  • [42:18] Uber Eats Unit Economics
  • [53:15] The Consumer Disincentive for Uber Eats
  • [63:12] Performance-Based RSU’s
  • [69:34] Closing Questions

Where To Find Mostly Borrowed Ideas

If you want to learn more about Abdullah and his newsletter, check out the following links:

This episode is brought to you by TIKR. Join the free beta today at TIKR.com/hive. They’re constantly releasing new updates that make the platform better including a new Business Owner Mode that hides share count, market cap and enterprise value. I couldn’t be more excited to partner with TIKR.

***Disclaimer: Nothing you hear on this podcast is in any way, shape or form to be construed as investment advice. The guest on this podcast may hold positions in any/all names mentioned during the podcast. This is not investment advice and investors should always conduct personal due diligence before investing in any security. Past performance of any funds mentioned are not indicative of future returns.***

Avoid Value Traps With One Simple Scoring System

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How do you avoid buying value traps? How do you avoid thinking Mr. Market isn’t as smart as he really is? Ask this simple question: Why is this stock being sold at this price?

Markets are generally efficient the majority of the time. This isn’t breaking news. Yet as value investors, we sometimes try to see the market as a weaker opponent. We step into the arena thinking Mr. Market doesn’t really know what he’s doing. And when we’re wrong, we call it a “value trap”.

Again, in a select number of cases that’s true. The short-term voting machine quote triggers in your brain right about now. Yet we think this happens more often than it does.

Can you blame us? We read The Intelligent Investor, run a low P/E screen and viola! We find hundreds of stocks completely ignored by Mr. Market. Ripe for the plucking.

Therein lies the danger. Investors that don’t ask the right question fall victim to value traps again and again.

How To Avoid Value Traps 101

In early June I recorded a podcast with Brad Hathaway. Brad’s the managing partner of Far View Capital. Far View is a hedge fund focused on special situations and long-term value investing.

One of the most important topics we discussed was the idea of asking the right question. Brad understood that there’s usually a reason why a stock is selling at such a cheap price. He understands that Mr. Market is generally right most of the time.

So how does an investor like Brad avoid value traps? He asks the question: Why is this stock being sold at this price?

Here’s a snippet from our podcast (emphasis mine):

“As an early investor it’s easy to get caught up in the ‘here’s why I’m right, here’s how much money I can make.’ But looking ahead of time to say ‘if I’m wrong, here’s why.’ This really forces you to look for those factors ahead of time. If you can define it in a period when you’re not emotionally invested. It’s much easier to make that decision to sell at a loss when that decision comes to pass.”

Step 1: Use The Answers As Your Hurdle

Asking the question “why is this stock being sold at this price?” places you in the proper mindset before investing your capital. The answers to this question become the metrics you track to confirm or deny your original thesis.

Let’s use an example. Say I find a stock trading at 3x P/E with a decent balance sheet and small (but positive) cash flows. Before I place a single dollar in the stock, I ask myself, “why is this stock being sold at this price?

My answers may include:

    • Management dilutes shareholders
    • It’s a low margin business
    • The industry has little runway over the next 5-10 years
    • SG&A is growing over time while GM shrinks

Each of those answers now becomes a barometer to judge our bull thesis. If we see shrinking EBIT margins our bullish thesis might include a reversal of that trend and higher EBIT margins. Or if the industry has little growth, our thesis might depend on the company expanding into other verticals.

The answers become the hurdle.

The higher the hurdle, the less attractive the idea. The less attractive the idea, the higher the odds you shouldn’t invest.

Step 2: Use The Occam’s Razor Rating 

One of the best mental models out there for analyzing an investment thesis is Occam’s Razor. In short, when given two opposing hypotheses, theories, or explanations the simpler one always prevails.

The keyword is simpler. When we ask “why is this stock being sold at this price” we want reasons that are simple, easy to understand and easy to fix. The harder the solutions, the harder the turnaround. The more likely that stock will stay cheap.

We can actually codify this with every turnaround investment we analyze via our Occam’s Razor Rating.

Occam’s Razor Rating allows you to hard-code your confidence in an investment thesis. It works for turnarounds, fast-growers and special situations.

Here’s how it works. Each hurdle we assign to a thesis gets a rating between -3 and +3. A -3 rating means you have zero confidence in the company’s ability to overcome that hurdle. A +3 rating means you think the company will easily clear that obstacle.

Then you add up the total scores from each hurdle to get your Occam’s Razor Rating. The higher the number, the higher your confidence in the bull case.

Avoid Value Traps Example 

Let’s return to our above example. We’ve already identified four hurdles:

    • Management dilutes shareholders
    • It’s a low margin business
    • The industry has little runway over the next 5-10 years
    • SG&A is growing over time while GM shrinks

We can run those through our ORR system to get an exact score of what we’re thinking in that moment.

Here’s what it looks like:

Downsides of ORR Scoring

Yes, there’s a lot of subjectivity to this scoring system. But that’s a feature, not a bug! The whole point of the ORR system is to see how you think about specific company hurdles in the moment. This allows you to track and compare your initial thoughts to what actually happened.

The more companies you score using ORR, the more data you’ll have on what hurdles companies struggle with the most. If you score 10 companies and notice all scoring +3 on reducing SG&A spend, that should increase your confidence the next time you see that hurdle.

Try it out for yourself! Let me know what you think. Keep a repository of all ORR scoring. You’ll never know the insight that data might provide.

Unity Software ($U) Deep Dive w/ Aaron Bush, The Motley Fool

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Today I picked Aaron’s brain on all things Unity Software. Aaron Bush is an investor and writer for The Motley Fool. When’s he’s not researching stocks for The Fool, he’s busy working on his other project, Master The Meta, a SubStack dedicated to all things esports and gaming. I’ve followed Aaron on Twitter and read his work regularly.
I wanted him on the show after reading his 5,000 word essay on Unity Software (U). Aaron’s post came days after I published my long Twitter Thread on the company, and I wanted to chat about what he found.

This episode is for those that love deep dives on singular names. We spend nearly the entire podcast discussing Unity’s competitive advantages, potential TAM, future growth opportunities, and potential risks to their bull thesis.

We also discuss the Gartner Hype Cycle and where Unity stands on its graph.

Unity Software Deep Dive Time-Stamp:

  • [1:00] Intro Questions
  • [7:04] What It’s Like To Work at The Motley Fool
  • [10:21] Average Day For Aaron
  • [16:01] Unity Software Breakdown
  • [24:05] Unity Take Rate Analysis
  • [28:19] Gaming First Company
  • [38:02] Measuring Success at Unity
  • [41:24] Unity Operating Results & Metrics
  • [51:43] The Gartner Hype Cycle
  • [59:01] The Verdict on Unity

If you liked this conversation and want to learn more about Aaron and The Motley Fool, check out these links:

Disclaimers

This episode is brought to you by TIKR. Join the free beta today at TIKR.com/hive. They’re constantly releasing new updates that make the platform better including a new Business Owner Mode that hides share count, market cap and enterprise value. I couldn’t be more excited to partner with TIKR.

***Disclaimer: Nothing you hear on this podcast is in any way, shape or form to be construed as investment advice. The guest on this podcast may hold positions in any/all names mentioned during the podcast. This is not investment advice and investors should always conduct personal due diligence before investing in any security. Past performance of any funds mentioned are not indicative of future returns.***

featured photo for podcast post

Will Hershey: The Future of eSports, Gaming and Sports Betting

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Will Hershey is the co-founder and President of Roundhill Investments. He started in the energy space, but luckily moved into eSports and gaming before the energy crash of 2020. Roundhill is an RIA creating thematic ETFs on market-altering trends. Will and I spend an hour discussing what it’s like to start an ETF, why Roundhill chose esports and sports betting as thematics and the power of being a thematic expert.

Specifically we dive into the the shift in the indexing business and why weighting by theme (not market cap) is important.

At Macro Ops, we’re extremely interested in eSports and gaming. In fact, its one of our core thematics over the next 5-10 years. We’re always searching for new investment ideas in this space, and Will’s ETF offers the perfect springboard.

Time-Stamp:

  • [0:30] Intro Questions
  • [9:15] From Energy To eSports
  • [15:05] Unity, Metaverses and The Gaming Industry
  • [22:12] The Shift in the Index Industry
  • [27:09] What Does eSports Mean?
  • [34:45] How To Become an Industry Expert
  • [38:04] CDProjekt (CDR) — *disclosure: podcast host owns shares in CDR*
  • [42:02] Developing The Sports Betting ETF (BETZ)
  • [50:22] The Guise of Bad Businesses
  • [55:00] Closing Questions

If you want to learn more about Will and Roundhill Investments, check out the links below:

Disclaimers

This episode is brought to you by TIKR. Join the free beta today at TIKR.com/hive. They’re constantly releasing new updates that make the platform better including a new Business Owner Mode that hides share count, market cap and enterprise value. I couldn’t be more excited to partner with TIKR.

***Disclaimer: Nothing you hear on this podcast is in any way, shape or form to be construed as investment advice. The guest on this podcast may hold positions in any/all names mentioned during the podcast. This is not investment advice and investors should always conduct personal due diligence before investing in any security. Past performance of any funds mentioned are not indicative of future returns.***

Five Ways To Grow Your Twitter Audience

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Isn’t it great when you spend all day crafting the perfect Twitter thread only to get a few likes and a couple retweets? Yeah, it feels fantastic. Hours spent for nothing.4e

It wasn’t until my conversation with Brian Feroldi that I realized the simple, yet powerful way to grow your Twitter following.

Are you ready for the secret? Grab a pen and paper because here it is: Be worth following

This isn’t an essay on how to “hack” the FinTwit algorithm. Even saying that makes me cringe. Instead we’re highlighting five proven ways (tactics) to increase your FinTwit engagement and following. Five ways to “be worth following”.

It’s not rocket science. But it is hard work. Also, take everything you read with a grain of salt. These are the five tactics that work for me. Things might look different for you.

You ready to learn? Let’s get after it.

Twitter Tactic #1: Develop A Barbell Tweet Strategy

Twitter loves the barbell distribution and you should too. This idea comes from Nassim Taleb’s work on investment portfolio construction. In that aspect, Taleb argued an optimal approach to a portfolio is a collection of risky assets and not-risky assets. Two polar opposites form each side of the barbell.

That same strategy works on Twitter with the length of your tweets.

Users love short, simple tweets that pack a punch. Like a succinct sentence, a short tweet has high virality potential.

That said, tweeters crave longer-form tweet threads. These threads usually explain complex topics or investment ideas in detail. One read-through of the thread and the user has a solid understanding of a topic or company.

Let’s see some examples of each end of the barbell.

Short End: Nintendo (NTDOY)

Long End: Unity Software S-1 Analysis

Takeaway: Mix up the length of your tweets. There’s value in a short blurb with a chart. There’s also value in a long-form breakdown of a company’s business model or valuation. Send a healthy dose of both.

Twitter Tactic #2: Tweet About Specific Companies

One of the most powerful aspects of Financial Twitter (FinTwit) is the ability to track a ticker with the “$” symbol. Use this to your advantage.

Tweet about a company you’re researching or buying. This does a few things. First, it lets you become an expert in that particular company. Using the “$” symbol lets people see how often you’re tweeting and covering that one stock. People then associate you as an expert on that stock.

Second, not only can you carve out a niche for yourself with that company. But you carve out a space for yourself in a given industry. Let’s say you tweet about various cloud computing companies. You use long threads and short blurbs showing different chart set-ups. After a while you become an expert in that area.

Third, it makes people excited when you cover a new name. Remember, tweeting about specific companies and industries makes you the expert (if your work is good). Now when a new company enters your industry, who will people look for analysis? That’s right, you.

Check out this example on Red Violet (RDVT):

Takeaway: Tweet about companies you own and companies you research. Carve your own industry-specific niche.

Twitter Tactic #3: Explain Things Like We’re Fifth Graders

This was something I had to learn the hard way. For the longest time I thought that finding my investing “voice” meant sounding smart. Long and complicated words that nobody uses. Complex analogies and formulas that confuse MIT grad students. I thought these were table stakes in the finance world.

That’s the opposite of how things actually work in this game.

Peter Lynch said it best when he quipped:

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”

The same principle applies to FinTwit. Explain complex subjects and business models in easy-to-understand frameworks. People love that.

It also shows others that you know what you’re talking about. Explaining concepts like unit economics or lifetime value in a democratized way.

This fifth grader concept also acts as a filter for your content production. Learn about something until you can tell a fifth grader about it. When you can do that, make that long thread.

Twitter Tactic #4: Engage With Influencers

Like I said, nothing here is rocket science. Nor is this the first time you’re hearing about them. Our fourth tactic is a perfect example. Engaging with influencers in your niche is a great way to grow your audience. There’s a few ways to do this:

1. Quote retweet an influencers tweet with interesting feedback or thoughts

If you’re trying to grow your audience, never let a retweet go without adding commentary. This shows a deeper level of engagement with the influencer’s content than a mindless retweet. If you can, find a way to mention that user in the quoted retweet. It’ll increase the chances that said influencer will respond.

This also works on influencers you want to troll. Not that you would. But hey! Some people want to watch the world burn. Funny, tongue-in-cheek humor goes a long way if you do it right.

2. Be one of the first to reply to a new tweet

Think of Twitter like a Reddit thread. There’s first-mover advantages. Fire the perfect tweet before anyone else and watch the likes pour in. The earlier you tweet, the sooner people will see your response in the timeline.

Take the shotgun approach to this strategy. You’re not going to nail every response. But like a college freshman looking for a date, it’s a numbers game. Eventually one will work.

3. Curate influencer tweets into a long topical thread

I’ve seen this with David Perrell’s tweets and it’s excellent. You find a collection of tweets from an influencer on a specific topic (i.e., niche). Then you compile those tweets into a long thread with insights along the way.

This creates tremendous value for those that love an influencer’s content. You’ve created a one-stop-shop for someone to learn about a specific topic from that influencer.

And that’s the goal. Be worth following!

Twitter Tactic #5: Aggregate Content & Information

Aggregating content and information is one of the best ways to increase your audience. A perfect example of this tactic in action is Clark Square Capital’s Twitter account.

Clark Square tweets great articles, videos and whitepapers about investing. It’s not “original” content per se, but that doesn’t matter. It’s the curation that matters. I don’t have to search for the content that I would enjoy reading. Clark Square provides it.

Check out some of these examples:

Here’s a few ideas to get you started on the content aggregation train:

    • Popular investing YouTube videos
    • Valuation methods thread (DCF, EBITDA multiple, asset-based, etc.)
    • Interviews from single investor
    • Single chart pattern analysis

Conclusion

You’re now equipped with five ways to attack Financial Twitter and grow your audience. These ideas aren’t new. They’re not even that original. But they’re effective. They work.

Try these tactics consistently for a month and check the results. Commit to producing great content. Soon you’ll be what Brian Feroldi calls, “worth following.”