Simple is Beautiful
A way to simplify Investing
Yesterday, I was listening to the Invest Like the Best Podcast, where Gavin Baker, an investor and the guest, said something that really resonated with me: “Simple Is Beautiful.”
He spoke about a time several years ago, around 2007-2008, when he was debating with colleagues about Apple’s upcoming quarterly results. He recalled arguing about whether Apple would sell 850,000 iPods or 900,000 iPods. Everyone had very nuanced views… based on Asian supply chain data points, the product cycle, market trends and other factors. But then, one of his colleagues said, “none of that matters”. He said that Sony sold 400 million Walkmen in the past, and he believed that Apple would sell significantly more iPods in aggregate.
This was a light bulb moment. It no longer mattered whether 850,000 or 900,000 iPods had been sold that quarter.
By looking at Apple in this new way, by focusing on the big picture and a longer timeframe, investing in Apple seemed like a no-brainer. Gavin was able to simplify his investment process and thesis, and significantly increase his chances of success. Apple went on to increase 7-10 fold from there...
This is exactly how I try to think about Investing in Dependables. That is, I ask myself, can I think of 1 or 2 relatively straightforward drivers that virtually guarantees the company will be much bigger in 5 years?
For the 3 Dependables I have written about, here is what those are. In order to invest in these stocks, one really needs to believe the following:
The Alternative Asset Management industry will keep growing and KKR will continue taking market share. In fact, even if KKR simply grows at the market rate, with the low valuation we bought in at, the company seems well positioned for success.
The Wells Fargo account scandal from a few years ago barely made a dent (Deposits stood at $1.3 trillion during the climax of the scandal, similar to where they are today). As a result, Wells Fargo is a very durable business, and will remain a major US bank for many years to come. Negative sentiment, which is currently weighing down the stock, is temporary and should subside.
Like Apple of old, Nintendo is going through a multiyear business model transformation. Nintendo’s console gaming business is now a sticky, high-margin, and backwards compatible platform, and no longer a cyclical one. Sales of the Nintendo Switch will reach 100 Million Units a few years from now. All this will permanently improve the company’s operations, and the quality of its revenue streams.
The above is simple, and pretty much sums up each of the three investment theses.
Of course, having a simple thesis doesn’t guarantee success. The thesis could turn out to be wrong. To be successful at investing, you must have the flexibility and humility to change your mind, if it becomes clear you’re wrong. But, if that’s not the case, you also need to have strong conviction in the face of adversity.
Let’s see how these investments play out. You can always track their performance via the Scorecard here.
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