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What are the best investments*?

Great companies, innovative sectors, or fast-growing businesses? Could it really be that easy? These are all possibilities (among others). Maybe unloved companies, complicated stories, or the esoteric? The answer, of course, is that it depends. It depends on the price you pay. Otherwise, it would be easy.

…no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.
– Howard Marks

A lot of investment approaches I’ve heard boil down to – although few actually describe them this way: we invest in what’s done well lately because others will do the same and, as a result, we expect it to continue to do well.** Over the short-term (which can be years), anything goes and no one knows. And yet so much time is spent on explaining recent gyrations as well as predicting what the market will do in the year ahead.

Price matters. Eventually. Yet we seem to need to relearn this lesson again and again. Because, for long periods, price may not matter. Geographies, sectors, or companies that are expensive can become even more so. And vice versa. But, over the long-term, the price you pay does matter. Even the best businesses, the most innovative sectors, etc. can be terrible investments if you pay too much for them. For example, Cisco ca. 2000.

If someone describes their investment approach without discussing price, they may have a good narrative. But that’s not an investment philosophy. So, ask them: well, how much should you pay for that?

1) How will that fast-growing business translate its growth into cash flow? Strong returns on capital? What are the odds of that happening? How much do you pay for that today?***

2) How will that innovative sector turn its innovation into cash flow? How much investment is necessary to get there? How many years will it take? What are the odds of that happening?***

I like to think that most investors tell simple stories because simple stories are easy to understand. And that their actual investment processes are much more nuanced. But sometimes I’m not so sure.


*for most, a global, well-diversified, low-cost portfolio (as always, this is not investment advice).

**plus, it reduces career risk since everyone is doing it. If we are wrong, we’ll all be wrong together.

***follow up: how does your assessment – e.g., odds of success – differ from what’s already priced in?

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