To The Moon

Failure to Frameworks

I’m going to break this down into a few simple frameworks that inform my view on investing.

Think In Decades — Like a Founder Does

On Thursday, I told a story of how we explained REM5’s business model to prospective employees in an empty warehouse with nothing more than tape on the floor to signify where walls would go.

This was foundational to my understanding of how founders and CEOs must look at their businesses and why founders are often behind 10x returns. It’s not enough to understand the financials, you have to think 5-10 years out about where the business is going.

Vision and strategy is what makes the best founders and CEOs.

Maybe a better way to put it is that financial metrics like return on invested capital (ROIC), revenue growth, margins, and free cash flow are outputs of business decisions and a business model. I use these financial metrics as evidence that a business model is working or not, but I think the best investors and founders understand the business model and vision that ultimately drives financial outputs.

Let me give some examples:

• $Airbnb, Inc.(ABNB)$ had an impressive return on invested capital of 33.9% in 2023, helped by the company’s capital-light business model. But the future of the company isn’t just repeating what it’s doing now for the next 20 years.

  • On Airbnb’s Q4 2024 conference call, co-founder and CEO Brian Chesky said the company aims to use artificial intelligence to become the go-to travel concierge. This could allow Airbnb to enter more verticals, which Chesky thinks creates a much bigger opportunity.

  • Chesky is thinking about how new technology can drive both a better user experience and a larger business for Airbnb.

  • Past financial metrics aren’t driving Chesky’s view of the world and as investors, it’s our role to understand his vision and then use financial statements as evidence that it’s working or not.

• Brian Armstrong, founder and CEO o $Coinbase Global, Inc.(COIN)$ , said repeatedly during the crypto winter of 2022 and 2023 that bear markets are for builders and Coinbase would emerge stronger. The stock still dropped over 90% in that time. Today, we see Armstrong’s vision and work play out positively for the company:

  • Coinbase is partnering with institutions like $BlackRock(BLK)$ to launch bonds on the blockchain.

  • Bitcoin ETFs are now available and Coinbase is the most trusted custodian in the industry.

  • Coinbase launched its own blockchain called Base that’s now one of the most popular for developers and users.

  • In early 2023, Coinbase’s stock and financial metrics were in the toilet, but the founder was articulating the vision very clearly.

• RJ Pittman isn’t the founder of $Matterport, Inc.(MTTR)$ , but if you listen to my interview with him you can hear the vision for the company.

  • Use the spatial data in the Matterport library to use valuable tools for a variety of industries.

  • Layer in AI-powered features that are low cost (to Matterport) and high value to customers to be “no-brainer” add-ons.

  • Steadily stack these features and capabilities to build a moat around the business.

Companies need a larger vision of where they’re going and a path to get there. These examples may or may not work out, but if you’re thinking like a founder you’re more likely to find 10x opportunities. And that’s what asymmetric investing is all about.

We can often look back on great companies like $Netflix(NFLX)$ or $Amazon.com(AMZN)$ and say, “The CEO told you exactly what they were going to do years before they did it.”

Our job is to decipher which CEOs are explaining a vision they’re able to execute and which ones are full of it.

Over-Index to NOT Selling

My biggest mistakes in investing weren’t the stocks I got wrong, it was picking the right stocks and not holding them long enough. $Chipotle Mexican Grill(CMG)$ in 2007, $Las Vegas Sands(LVS)$ and $Apple(AAPL)$ in 2009, and $Microsoft(MSFT)$ in 2012 were the examples I used.

It’s hard to see a stock rise and not want to take profits. But the right thing to do is often nothing.

A stock can’t 10x in value before 2x, 3x, 4x…you get the point.

Trust the analysis and over-index to NOT sell. This may be my most important framework/guardrail for asymmetric investing.

Take More Risk

You’ve probably heard of paralysis by analysis or missing the forest for the trees.

The way I’ve internalized this is to take more risks while trying not to be stupid. Maybe that's easier said than done.

Going back to thinking like a CEO, if I believe in a company’s vision it’s worth taking a risk that the execution will be right.

This philosophy can lead to losses — but those are limited by the capital deployed. It can also lead to gains — and those are unlimited because I’m investing in stocks. This is the asymmetry of stock investing at its finest.

I’m going to give three examples of big risks I took in the Asymmetric Portfolio and how they’ve played out.

• On April 25, 2023, I published the $Peloton Interactive, Inc.(PTON)$ spotlight on the thesis that transitioning to an app-based business model could lead to a winning position in a winner-take-all market of streaming fitness. The stock was down somewhere around 95% from its pandemic peak.

• On June 1, 2023, I published the Coinbase spotlight on the thesis that if the blockchain ever became a thing, Coinbase would win. The stock was also down a massive amount from its pandemic peak.

• On June 27, 2023, I published the $Virgin Galactic(SPCE)$ spotlight on the thesis that if the company got commercial operations off the ground this could be a 100x stock. It could also easily be a 0x.

So far, two of those three picks have been terrible investments. Peloton is down 65.6% and Virgin Galactic is down 80.2%.

But Coinbase is up 231.9%!

If you invested an equal amount in all three stocks, you would generate a 28.4% return and beat the market!

And Peloton and Virgin Galactic are now almost irrelevant in the portfolio while Coinbase is the 5th largest position despite investing a small amount of capital.

Taking more risk can lead to bigger losses on any individual investment. But in aggregate, it can lead to better outcomes for your portfolio.

The challenge is taking risks without making poor decisions, which is a natural tension in investing.

Over-Index to Winners in “Winner Take All” Markets

The companies and stocks that I’ve seen perform best over the past two decades often operate in a winner-take-all market. Think about Microsoft in PC operating systems, $Uber(UBER)$ in ride-sharing, or Netflix in streaming.

I keep coming back to a concept like the smiling curve because it explains why winners keep winning. There’s a feedback loop that makes the leader’s product better and more attractive to users, extending their lead in the market.

Stocks like Peloton, $Spotify Technology S.A.(SPOT)$ , Airbnb, Cruise ( $General Motors(GM)$ ), and $Zillow(Z)$ all have some kind of potential to build 10x businesses in what should be a winner-take-all market.

Not all of them will succeed, but history tells us that 10x stocks come from markets dominated by one company and each of those companies are leaders in what could be a huge market.

Price Matters

Risk is often the most misunderstood aspect of investing for retail investors. But it’s critical to understand and I’ve made mistakes by taking too much risk and been saved by controlling risk.

As an investor, you’re paying a price for a company and the goal is to get more upside in the future than you pay for today.

So, the price today matters.

This is the reason I often seem contrarian to the market. I want upside, but I don’t want to pay for it.

An Example of Risk in Investing

Let’s take GM (which I own) and Tesla (which I don’t own) as examples. And this is contrarian, but hear me out…

GM owns ~80% of the autonomous driving company Cruise which had a license to operate an autonomous fleet of vehicles in multiple states. The system is geofenced, but it’s proven technology that could scale to an Uber-like service.

The upside is that Cruise is eventually successful and scales the business, which could be worth hundreds of billions of dollars. In the meantime, GM as a whole is worth $49 billion and has a price-to-earnings multiple of 5.8. So, I’m paying very little for what could be a very big upside.

$Tesla Motors(TSLA)$ is developing “full self driving” which it intends to license to vehicle owners in order to launch a capital-light robotaxi business. FSD’s technology is impressive, but it’s not currently licensed to operate anywhere without a driver.

Meanwhile, Tesla’s core automotive operations are seeing lower deliveries, lower margins, and the stock is still trading for 54× 2024 estimates with a $461 billion market cap.

With GM, I may not be getting a sexy business, but Cruise is 100% upside. With Tesla, investors are paying for upside (FSD, robots, robotaxi) that doesn’t yet exist.

My best investments came when there was an upside I didn’t have to pay for. My worst investments came from paying for an upside that ultimately didn’t exist.

Price shouldn’t be the main reason to invest in a stock, but it matters.

Embrace Uncertainty

We don’t know what the future is going to look like. But ascribing certainty to the inherently uncertain is foolish.

If we keep that in mind, it opens us up to the possibilities created by new business models, innovation, disruption, and the crazy whims of great founders and CEOs.

A lot of investors try to avoid uncertainty but I think our advantage over the market is embracing uncertainty and allowing it to give up upside.

https://asymmetric-investing.beehiiv.com/p/failure-to-frameworks