Asymmetric Investing Frameworks

Think In Decades

There’s a story that Fidelity studied their top retail investors between 2003 and 2013 and found that the best investors were either dead or forgot they had an account with Fidelity.

Whether the story is true or not, the data backs up the idea that less trading will lead to better returns. And time in the market beats timing the market.

Time is our biggest edge over the market.

Wall Street is structurally incapable of thinking out 10-20 years because earnings estimates, bonuses, and even investment funds are judged based on weeks, months, quarters, or at best a year or two. Very few investors think in decades

That’s our fundamental advantage.

Increase your timeframe to 10-20 years and you can see opportunities traders can’t.

Engrain this attitude in everything you do. Ask questions like:

• Does this quarterly beat/miss change what this company will be 10 years from now?

• Does today’s rise/fall in value impact the business long-term?

• What huge opportunity over the next decade is being overlooked by the market?

This long-term mindset goes for trading too. Don’t stress about the short-term if your cloak is to make money long-term.

In 20 years, you won’t remember if you paid $50 or $51 per share for the stock you’re looking at. What matters much more is buying in case that company becomes a 100x investment.

I should know. In 2012, I wrote Now Is the Time to Buy Tesla Motors and ended with, “I'm making an outperform call on MyCAPS page and will be buying shares when our trading rules allow it.“

The stock popped before our trading rules allowed me to buy the stock and I thought I would buy the pullback. It never pulled back. And I missed a 100x stock.

Don’t let short-term stock volatility block you from long-term gains.

…And Stay Invested

Do you want to be a day trader?

You better not miss the 2 best days of the year or your returns go to almost zero!

Miss the best 20 days and you’ll get crushed.

TIME IN THE MARKET > TIMING THE MARKET

Take More Risk (Within Reason)

Investors get paid to take risks. The higher the risk, the higher the return.

At least, that’s the theory.

The chart below shows an illustration of different asset types and their returns relative to one another. The further you move to the right, the more risk you are taking, and the higher the return. At Asymmetric Investing, I’m researching and building a portfolio of venture capital-style stocks in public markets, which should lead to better returns long term.

The price we pay for these returns is volatility. Stocks are more volatile than bonds and venture capital-style stocks take that to another level.

Be willing to accept volatility to beat the market.

Buy Compounders

Invest in companies that can generate compounding gains long-term.

This is a simple idea, but finding compounding stocks is more challenging.

Here are five constructs you will see repeatedly in Asymmetric Investing.

Winner-Take-All Markets

Some industries naturally lead to one or two winners taking all of the available profits.

This happened again and again in newspapers across the world, but the same happens on a global basis in ride sharing (Uber), social networks (Facebook), smartphones (Apple), productivity software (Microsoft), and streaming TV (Netflix).

Owning the winners in a winner-take-all market increases the chances of finding a 10x stock. How do you find winner-take-all markets? 👇️ 

The Smiling Curve

If you plot the excess value (profits) generated by companies in an industry it often looks like a smiling curve. Companies with scale generate the most money and there are niche companies that can succeed.

Where you don’t want to be is no man’s land in the middle.

Social media is a perfect example of this dynamic. Not only does Meta Platforms have far more users than Reddit, Twitter, or Snap, they also generate more revenue per user. On the other end of the scale is Match, which has built a profitable niche business in dating.

As companies move up and to the right on the smiling curve their market power starts to compound. They have more money to invest in new/better products and talent, which attracts more users and drives higher prices, which leads to more investment, and so on.

Investing in the companies that are moving to the top right of the smiling curve is where 10x returns can be generated.

Network Effects

Adjacent to the smiling curve is network effects.

A network effect is the idea that when more people use a product or service, its value increases.

Social networks have network effects.

Computing platforms have network effects as users attract developers, who attract users, etc.

A network effect is like a reinforcing feedback loop that drives value for companies like Microsoft, Uber, and Amazon.

Internet Economics

How much does the next customer cost a business?

On the internet, the answer can be nearly zero. This can create tremendous operating leverage for companies exploiting Internet economics.

Understanding and leveraging Internet economics is key to finding the next great tech stock.

Optionality

Most businesses have a core business that drives revenue and valuation for investors. The best companies have optionality.

Optionality is simply the options available to grow the business into new or adjacent markets.

NVIDIA is a gaming chip company but optionality led it to crypto mining and then artificial intelligence.

Tesla is an automaker with optionality in AI, robotics, and autonomous driving.

Axon was a taser company that started making body cameras and ultimately became a cloud and data company.

These are just a few successful companies that had optionality and used it to their advantage to increase their addressable market.

+ Over-Index on Founders

Founders simply look at their businesses differently. They’ve built the company from nothing to where it is, demonstrating the vision needed to build a business that can 10x in value. And they have the entrepreneurial capital to pivot when it’s necessary.

This is why historically founder-run companies outperformed the market.

Never buy a stock just because the founder is involved, but I want to over-index on founders because they’re more likely to unlock long-term value than their non-founder counterparts.

Embrace Uncertainty

Investing is uncertain.

Life is uncertain.

Anyone who says with certainty they know what’s going to happen with a company or stock is LYING.

We need to accept and embrace uncertainty as investors. Once we do that, it opens us up to opportunities that come with risk and uncertain outcomes.

I can’t predict what growth rates for any company will be 3 years from now or what will happen with AI, autonomous driving, the blockchain, the cloud, spatial computing, or any number of new disruptive technologies. However, I know the next wave of great companies will leverage new technologies and business models to generate outsized returns.

I want to own companies that use the inherent uncertainty in life and business to their advantage.

Do Nothing

For a stock to 10x, it first needs to double, then triple, quadruple, and so on.

An Asymmetric Investor’s default position should be to hold a stock forever.

Ask any long-time investor and their greatest regrets aren’t the stocks they missed, it’s the ones they owned and sold. Selling for a stock for a 100% gain and watching a stock become a 1,000% gain is excruciating.

Let compounding work for you!

Winners Keep Winning