Investing’s new normal 🕵🏽‍♂️

Witty’s approach uncovered

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Grateful. 

Over the past week, many of you have reached out, noting the last essay genuinely hit home. Hearing from you always makes my day. Thank you!

As a refresher, we discussed why we are curious beings, how we want to control our time, and why investing is an engine to get there.

Building on that, today we’re discussing why now is a great time to follow our interests, how the investing landscape is changing, and why I believe in a new investing approach.

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Outcasts

The investing engine goes like this:

1. Follow our curiosity and look into trends, businesses, and people that excite us

2. Bet on companies that we have high conviction in

3. If that bet works out, use those earnings to gain more control of our time

4. Rinse and repeat

As I internalized this, I have always felt outcasted when taking the second step: making bets we believe in.

We’ve been taught our entire lives to not control our investment decisions. It’s taboo! Throw it in a low cost index fund and forget about it! Whenever I transfer money to Robinhood instead of Wealthfront, I imagine a stern gaze from the legendary investor and passive investing prophet, Andy Rachleff.

If you only care about one dimension - pure return - it’s a good mentality. Over the long term, it’s hard to beat the market. 90+% of finance professionals couldn’t do it over a 15 year period from 2003-2018. 

But, well, that’s not who we are. If we don’t take control of at least *some* of our investing decisions, we learn nothing, don’t grow, and become unhappy. Life’s too short to feel that way.

Being passive is the enemy.

Investing’s new normal 

Witty just passed six months old. When looking through our posts (and my twitter feed), I see the world is changing more now than ever before. 

Here are themes we’ve seen rise in our time together:

• Trendy meme stocks (e.g. Peloton, Zoom)

• Credible SPACs and IPOs (e.g. Opendoor, Snowflake)

• Investing personalities (e.g. Chamath, Davey Day Trader Global, r/wallstreetbets)

This isn’t the spreadsheet driven, cut and dry, Warren Buffett style we grew up around. It’s a different world. I wonder, what is causing these changes?

It goes back to what we discussed in “It’s a ‘Meme Stock’ world 🌎.”

‘Meme Stocks’ have always existed in some form, but not at this scale, nor this revered.

The popularity of ‘Meme Stocks’ have been driven by three similar forces as r/wallstreetbets.

First, people are seeking out stocks instead of other places to put their money. Since 2009, we’ve been living in a ‘lower for longer’ American monetary era. Interest rates have been lower this decade than any since even our parents have been alive. 

The federal funds rate (rate at which banks borrow money) over time

Traditionally, public investors would put their money in a variety of asset classes - namely stocks, bonds and savings accounts. Near zero interest rates have killed off the bonds and savings accounts where we put half our money. Chamath agrees. 

Chamath Palihapitiya @chamath

The conventional approach to investing for retirement was 60% equities and 40% bonds. If your goal was 10% a year this mix got the job done in the 80s, 90s and 00s. Not anymore... Now, bonds return zero. So does 40 go to zero with it? What do we replace bonds with?

On top of that - these changes are going to be here for a while. The Federal Reserve recently announced rates will be near zero at least through 2023.

So what are we left with? Stocks. In particular, high growth stocks. 

Stocks and assets that people understand will be priced as efficiently as possible. It’s hard to make money there.

Opportunity lies in finding companies that are not well understood, yet will grow more than the market has priced in. This means high growth companies - trendy meme stocks and credible SPACs included. 

Amazingly, this change means opportunity for us! Following our interests can help us find and bet on undiscovered companies.

To me, this signals it’s a great time to take back at least *some* control of our investing decisions.

The new approach

As the world changes, we must adapt.

This means a new investing style. Not day trading. Not value investing. We must look further and further into a company’s future. 

Chamath Palihapitiya @chamath

Some people scratch their heads when they see valuations of stocks justified by 2024E or 2025E numbers. Their instinctive reaction is to be dismissive but that’s lazy thinking. Here’s a secret hiding in plain sight...

There’s a certain set of investors who specialize in this style: Venture Capitalists (VCs). Top VCs invest in private startups that they believe have the potential to grow 70x (!) the startups current value. They then hold these positions for 10+ years.  

This growth oriented VC state sounds a lot like the stock market situation we are in. Inspired by this craft, Witty firmly believes in a new approach: “VC in public markets.”

Given public companies are much bigger than private startups, our goal is to find public opportunities that can at least ‘10x within 10 years.’ 

So how can we do that? I wrote this guide two years ago after learning early stage investing from some of the best in Silicon Valley. Here’s an overview on the VC game:

• A small set of VCs are consistently better than the rest (the top ~3% of VC firms generate 95% of all venture returns)

• The ability to pick startups is what matters most (as claimed by top VCs)

  Josh Kopelman 🇺🇸 @joshk

  4/ While VC's probably spend less than 5% of their actual time on the picking, I believe the "pick" creates well over 80% of the return.

• Top VCs laser in on how massive the company can get if it succeeds, not the likelihood of success (all meaningful returns come from only one third of investments)

• They look for a set of characteristics (detailed in the guide) across the company’s market, product, team, and price

Thankfully, we can adopt this style, follow our curiosity, and try to pick the highest potential stocks. In fact, we used this ‘VC in public markets’ lens when we dug into Opendoor and Uber. 

What’s next

We now 1) have a better understanding of ourselves and 2) know where to focus our investing curiosity.

It’s time to find investments that fit our ‘VC in public markets’ thesis. 

As we saddle up, I’d love to hear from you. What public companies do you think could 10x over the next 10 years?

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Note: This content is for informational purposes only. It should not be relied upon as legal, business, investment, or tax advice. Your use of the information contained here is at your own risk. Witty and its authors are not financial advisors.