Podcast Summary
Lessons from a Disastrous Investment: Managing risk in uncertain markets is crucial for successful investing. Disastrous results can occur from taking on excessive risk.
Maximizing expected return is not always the best investment strategy, especially in uncertain markets. As Robert Armstrong and Ethan Wu from The Unhedged newsletter learned the hard way in 2023, taking on excessive risk can lead to disastrous results. Their portfolio, which included short positions on Netflix and Coinbase, suffered significant losses when the opposite of their predictions occurred. Instead of a consumer recession and a crypto market downturn, consumers had plenty of money to spend, and the crypto market saw a surge in interest. The lesson learned is that managing risk in the face of uncertainty is crucial for successful investing. To hear more about risk management strategies, listen to PGIM's The Outthinking Investor podcast.
Misjudging industry tailwinds can cause significant losses: Failing to understand industry dynamics can lead to betting against companies with persistent growth drivers, resulting in substantial losses.
Underestimating the strength of structural tailwinds for certain industries can lead to significant losses in an investment portfolio. This lesson was learned the hard way during the events of 2023, when the team bet against three home builder companies, including PulteGroup, that experienced unexpected success due to low mortgage rates leading to increased demand for new homes. This mistake resulted in substantial losses that outweighed the gains from their long positions in safe, defensive companies like Domino's and Hershey's. The team acknowledged that taking risks is inherent in stock picking, but emphasized the importance of understanding industry dynamics and avoiding bets against companies with persistent growth drivers. Another key takeaway is the importance of adaptability and learning from mistakes, as the team expressed no regrets about the overall risk-taking approach but did acknowledge the need to improve their understanding of industry trends and avoid making similar mistakes in the future.
Investing in GARP style stocks in uncertain economy: Focus on companies with growth potential and reasonable valuations to weather economic uncertainty, like Dollar General and General Dynamics
In an uncertain and volatile macroeconomic environment, investing in stocks with growth potential at reasonable valuations, known as the GARP (Growth at a Reasonable Price) style, can be a wise choice. The speakers acknowledge that predicting macroeconomic trends is a long-term bet and uncertain for the current year. Instead, they suggest focusing on companies with growth potential that may be undervalued due to temporary issues. Examples given were Dollar General, a discount retailer undergoing restructuring and new management, and General Dynamics, a defense and aerospace firm that is extremely cheap relative to its earnings. By buying such stocks, investors hope to benefit from the potential upside that the market may not be fully recognizing.
Investing in defensive stocks with growth potential: Consider Expedia, Cigna, and Everest Group for a balance of growth and stability in uncertain times. Expedia cuts costs and grows in a large market, Cigna is cheap in its group, and Everest Group benefits from industry pricing firmness and fewer competitors.
The speaker recommends investing in defensive stocks with good growth potential, such as Expedia and Cigna. Expedia, a consumer travel company, has a strong cost-cutting strategy and a growing market, while Cigna, a commercial health insurer, is the cheapest in its group due to its minimal involvement in government health insurance. Another pick, Everest Group, a reinsurer, is seen as a good investment due to the industry's current pricing firmness and less competition, as well as the speaker's personal prediction of a hurricane-free year. These stocks offer a balance of growth and stability in the current economic climate.
Considering both growth and value stocks in a balanced portfolio: Stay informed of company developments and market trends, and consider a balanced portfolio with both growth and value stocks for potential success in a volatile market.
While some companies, like Everest Group and Cigna, may not be performing as well as expected this year, their more stable business models could make them strong contenders in a potentially volatile market. Meanwhile, stocks like Expedia and Dollar Tree could thrive in the right economic conditions. However, it's important to note that this portfolio may not be a winner in all market scenarios and may lack enough risk compared to last year's aggressive picks. Disney, on the other hand, is a long-term pick due to its recent earnings call and new announcements, which indicate efforts to reduce streaming losses and increase revenue streams. Overall, the key takeaway is to consider a balanced portfolio with both growth and value stocks, and to stay informed of company developments and market trends. Remember, this is not investment advice. Past performance is not predictive of future performance.
The Power of Network Effects and User Engagement: Companies like Disney and Twitter remain profitable despite challenges due to strong network effects and user engagement, a concept known as 'infinite monetization' or 'infinite shitification'.
Despite the challenges faced by companies like Disney in managing streaming losses and adapting to changing business models, they continue to hold value due to strong network effects and the inevitability of user engagement. Meanwhile, social networks, such as Twitter, may continue to deteriorate in user experience but still remain profitable businesses due to their immense user base. This concept of "infinite monetization" or "infinite shitification" was discussed in a piece by tech critic Corey Doctorow, who outlined the three stages of a platform's evolution from user-friendly to business-friendly, and eventually back to self-serving. Despite the potential downsides, the strong network effects and user engagement ensure the longevity of these platforms as profitable businesses.
