THREE THINGS THAT SURPRISED ME

My reading and listening schedule is big, I listen and read a lot! No Netflix for me! Most of what I come across is entertaining but not of much worth, some is incremental knowledge, which is great, and a few things make me stop and think and potentially change the way I do things. The last category is rare but worth the overall effort. Three recent things that made me think.

Research Effort

In the book Richer Wiser Happier by Will Green, there is a chapter on Buffet/Munger clone, Mohnish Pabrai. In a throwaway line, it states that he picked up GM as an idea in various 13F’s and then spent 6 weeks researching the idea. That six weeks caught my attention. Sure, I have built up six weeks and maybe a lot more on stocks I have followed for decades but 6 weeks of effort on a new idea? No way. This made me think that I was undercooking my efforts and that I should be more persistent in uncovering facts and not give up too easily. It also made me wonder what that research effort entails. Certainly, all company released information like financial statements, presentations, and webcasts over the last several years but there must be much more.

The advent of the internet makes further research possible, but I've always been concerned about the cleanliness of this data in terms of timeliness and accuracy. Accessing of Phil Fisher-type info in terms of accessibility and cleanliness is a real challenge.

I would also add analysing the history of what has impacted the business and the share price over the last decade or so, but that is reliant on you accurately determining the factors.

It would include reading various analytical reports to determine what the KPI of the business are in other people’s opinions, essentially what makes this business valuable and whether is it sustainable.

I am amazed when I see the concentration in other people's portfolios and maybe that is an output of the work they have put into the investment thesis. Maybe I need to do more. That would be a few ideas a year and do well. (Sounds like Buffet doesn’t it).

Small caps

I listened to a Hyperion guy who said the small ords hadn’t increased its eps for 20 years to any reasonable extent. Taking that at face value, I haven’t the data to confirm that, but if anywhere near true, has huge implications. Firstly, it is a crap index. The better ideas graduate to the top100 and the small cap is left with wannabes and fallen angles. The only gain is great companies growing before they graduate. Secondly, then it means stock picking is essential and it is a stock picker paradise. I'm a fan of index funds for many but small-cap passive is clearly a poor option. Thirdly, makes me think about performance fees for small-cap managers as a huge free kick. Since the PF is against an index that structurally struggles it is a licence to print money. Many small-cap managers have a PF with the rationale that since the size of the fund is limited, due to liquidity reasons that should be made up through a PF. When I was a PM it was clear that the average small-cap manager outperformed their b/m by 5%pa while the large-cap guys were 1-2%pa. that is the average manager I point out, not the great ones.

Small caps--Be a stock picker, focus on companies with earnings growth and don’t pay too much. Watch the terms of the PF’s you may be making someone rich while you end up not that happy.

AI is Hot

Not too earth-shattering for anyone watching financial markets over the last year or so that AI is very hot. I listened to a Barrons podcast that said a senior AI engineer (whatever that is) can earn US$20m over a four-year contract in this market. That figure blew me away, I thought finance guys were overpaid.

The mad rush for LLM is the reason, I get the feeling that the GOOGL and META, AMZN et al probably know what they are doing, but I suspect others just have to get in there. The below from the market ear, sums up NVDA economics at the moment. The share prices do envisage this environment continue on for quite a while. Will it last is the call.

To be clear I'm bullish on AI over the LT, we all know its hot, but this is scorching. BTW the registered nurse in my retail group wants to get into AI.