Last year, I highlighted my brief experience with Matterport:

In one instance, I bought a business at ~20x revenue and watched it rise to over 50x revenue. I even bought some more on the way up because I felt my thesis was vindicated — the market had recognized I was right. The trouble is my thesis was supposed to play out over 10 years, not 10 months.

Over time, I watched it fall to a (still rosy) ~7-8x sales. I sold out and lost ~70% of the total investment…

The events took place over less than a year from 2021 to 2022. Nothing went wrong with the business. I simply overpaid for the stock and sold when the mistake became a mental tax.

After selling, I didn’t think about the company for a while. It was the first time an investment ended in a substantial permanent loss, and I wanted to escape the pain of such a mistake.

What hurt most was a recognition that I knew I overpaid. Writing around the time of my purchase (on an old Seeking Alpha account), I directly acknowledged the lack of a ‘margin of safety’, before casting it aside as irrelevant in this case:

There is no denial that Matterport is a richly valued company… Such an expensive valuation certainly decreases the margin of safety for any investment, yet I do not believe it impairs the multi-year investment thesis for investors willing to hold through years of a volatile stock price.

Being willing to ignore volatility doesn’t excuse overpaying for the business. Overpaying for the business is a dangerous practice, and this is a lesson learned. In hindsight, the valuation did impair the thesis.

My excitement about the long-term prospects of the business tricked me into thinking otherwise. The problem with my assessment is that any prospects for return were dampened by the years, if ever, it would take for the valuation to be justified by the cash flows of the business.

Put simply, my fear of missing a winner impaired my judgment. Emotional extremes are a danger to good investing. The challenge, and advantage, is in remaining emotionally detached from decisions and results. An even keel is best.

A winning bet

Over time, I accepted the experience for what it was — a mistake. With a few more years investing behind me, I decided to take another look at Matterport. Revisiting the same company with a fresh perspective can offer unique insights.

I did not uncover any unique insights, but I reached largely the same conclusion as a few years prior. The thesis, which centered on the unique compounding value of the dataset, wasn’t wrong. In fact, it had progressed rather smoothly. The mistake was purely in execution — in overpaying.

Most importantly, the circumstances had changed. The stock price now reflected significantly reduced expectations, and with half the market cap in cash, the prospects for return had changed dramatically. I had reason for argument.

I invested again around six weeks ago. Shortly after, CoStar announced it would acquire Matterport. The transaction caught many by surprise, including me, and while the timing was pure luck, true to the thesis, CoStar wanted the data:

Over the years, Matterport has curated what is considered the largest and most precise collection of spatial property data worldwide… Hundreds of thousands of new 3D digital twins for properties around the world are being added to this impressive database each month.

…

We intend to go all in on 3D digital twins, adding more digital twins to Apartments.com, LoopNet, Homes.com, CoStar, Land.com, BizBuySell, Real Estate Manager, STR, Belbex, OnTheMarket and others. We intend to add Matterports as one of the benefits of Homes.com membership. We believe adding 3D digital twins for Homes.com members will increase the leads we deliver, increase customer satisfaction, increase renewal rates, increase sales, and increase site traffic further.

We have thoroughly researched the many 3D digital twin solutions out there and have concluded that Matterport is the best solution for our clients' needs. Given the fact that we intend to make a much greater commitment to capturing 3D digital twins, we decided to capture the value of our increased volumes by acquiring Matterport.

As we make Matterports more ubiquitous, we believe others will buy more Matterports, making the company more valuable. We believe that we can accelerate Matterport sales to non-CoStar Group advertisers by increasing Matterport's investments in sales and marketing.

- Andy Florance, CoStar Q1 2024 earnings call

In the end, the idea played out, though much earlier than I would have guessed, and at a price that would have still resulted in a loss on my original investment.

I won’t explore the acquisition in depth here, but in short, I think it’s a good deal. Matterport shareholders get taken out at a reasonable price (though significantly less than the juicy SPAC price), and CoStar can use its dominant market position to accelerate investment behind a good asset with huge potential.

I sold my stake soon after the announcement. The stock is now on a timer, which runs counter to my strategy of putting time on my side. Plus, I’m happy to deploy that money elsewhere given what I view as an attractive opportunity set today.

A lesson learned

The experience leaves an important lesson. On one end, a bad decision produced a bad result. On the other end, a good decision produced a good result. The difference? Valuation. And a bit of luck.

Valuation is the difference between good and bad returns. Luck plays a role in every investment outcome. These are two rules to the game.

In my process, I look at valuation as a catalyst for action — mostly to buy, less so to sell — but nothing more. I don’t believe much in ‘intrinsic value’. I believe in market efficiency over the long run, and better businesses outperforming worse businesses over time, given a reasonable entry price.

But, disregard valuation, and you rely a whole lot more on luck.

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What I intend to accomplish governs how I invest. I could index my money and guarantee an attractive compound return. So why spend the time? (And it’s quite a lot of time.)

1. The opportunity exists to do better. Markets aren’t efficient. Enough evidence proves individuals can earn superior returns if they repeatedly demonstrate good judgment and patience. Not easy, but doable.

2. I own the risk of participation. I’m 23 years old. I invest my own money. I can afford to take a risk, and I want to play the game. To my mind, the prospect of long-term outperformance outweighs the possibility of underperformance. A slightly better return, compounded over many years, can produce an order of magnitude difference in results.

3. I believe I’ll succeed. An old saying goes something along the lines of, “if you don’t think you can win, you’ve already lost.” The stock market is a competitive marketplace, but the quality of my judgment will ultimately determine the level of my success. I have faith in my ability to do well.

4. I enjoy the game. Some play the game professionally. I don’t — so I’m free to walk away at any point if my reasoning changes. But it likely won’t. I enjoy the competition, the challenge, the psychology, the research, and the real-life stakes.

Away from the index

The last few years have seen a drastic change in my approach to investing. I went from indexing around 70% of my money, dabbling in individual stocks, to 100% concentration in six companies (two representing >60% of my portfolio).

Two factors influenced this change: greater confidence (having had a few years in the game) and an improved opportunity set (or at least what I perceived as one). Said differently, I learned how to handle my emotions in the context of the market, and I discovered compelling arguments where I was (am) comfortable parking money for an extended period of time (call it 7-10+ years).

Some of you might think this concentration comes with excessive risk. Fair. But diversification naturally drives towards an average outcome — exactly what I’m trying to avoid. Concentration heightens the range of possible outcomes, which I’m fully comfortable with. Real risk can only be known with hindsight. I expect the concentration and duration of my investments to be the difference-maker in my returns over time.

Confidence

Throughout this shift, I’ve continually wrestled with the fine line between conviction and foolishness. The wisdom of my decision is impossible to know in advance, but it requires a steady commitment nonetheless.

To be a great investor, you have to be confident; disagreements are inevitable. But you can’t be too confident. You have to be acutely aware of the limits to what is knowable and willing to change your mind when the facts change.

But what are the “facts”? When do they change? How do you determine if it’s time to double down or throw in the towel?

These are challenging questions — every investor can answer differently. The “facts” are whatever you believe them to be; the story is what keeps you at the table. This is the inherent difficulty of investing (felt most acutely by those, like me, who lack experience): you have to make decisions under uncertainty.

Remember Bill Ackman’s experience with Netflix. He bought over $1 billion worth of shares in January 2022 for what was intended to be a long-term investment. Less than three months later, he sold the entire stake at a $400 million loss. His opinion was the facts had changed, the story didn’t hold up, and the answer was to sell.

But the facts didn’t change, despite appearing to at the time, and the story remained intact. Today, his investment would be worth ~$1.5 billion. This isn’t to pick on Ackman — his track record speaks for itself — but it’s one demonstration of the difficulty and uncertainty involved in every investment decision. Even the greats make the wrong decisions.

What I’m getting at is simple: There’s no science to the game, and answers are rarely found from an examination of the most recent quarterly report. Investing is a game of judgment, and you’ll undoubtedly be wrong from time to time.

Embracing this fallibility is important, at least to me. Recognizing mistakes are inevitable means I’m more comfortable standing by my judgment when others question its wisdom. Why would they know the future any better than me? At least this way, when I’m inevitably wrong, I’ll be wrong on my own account — not because I took someone else’s ideas for my own or caved in to the pressure of the market.

Besides, if you’ve done the work, it pays to be confident. Trusting your judgment is a prerequisite to long-term investing success, though it’s equally important to recognize it’s all part of a maybe-futile exercise in predicting the future.

Ultimately, there is no solution to our dilemma. We have to tread that fine line between conviction and foolishness and simply do our best to accept and integrate valid counterpoints to our arguments.

This is what I consider doing the work: after developing an argument, we have to continuously seek new information to disprove that thesis. Only doing the work provides a reasonable basis for confidence in our judgment.

Long duration arguments

Long duration arguments with the market differ from short-term arguments. Long duration arguments involve a core misunderstanding around the durability of a business. Short-term arguments involve a disagreement over what will be reported vs. what is expected by the market in the near-term.

Short-term arguments can be lucrative and a source of rapid returns. But they add complexity. And frankly, who cares about next quarter or next year? For those of us who are more fundamentally-minded and investing truly patient capital, we’re talking about impacts to 1-5% of the intrinsic value of a business. The terminal value is the ultimate arbiter of value.

If a significant adverse development occurs that’s likely to impact the long-term viability of the business, that changes the story. But if the company misses consensus for the quarter, who cares? How many times has Apple missed estimates in its life as a public company?

Short-term arguments are not my game. My game attempts to minimize the number of inputs to a decision and focus on the few that matter. Long-dated arguments take years to manifest in the market’s opinion of a company and require a certain commitment to what may be a controversial take at the time.

Long duration arguments are simple at heart. My thesis in Planet Labs is predicated on a basic idea: the market fails to appreciate the compounding value in a daily scan of the Earth and the advantage conferred on the only (first) player to operationalize the capability. It’s an argument for the undervaluation of long duration growth. Only time will reveal the validity, but I’ll be along for the ride.

Costco is a more concrete example of a successful long duration argument. For a long time, it was a low-margin retailer with a limited SKU count. But what was commonly interpreted as the bug turned out to be the defining feature of the business model. The case with Amazon is similar. For years, it was an unprofitable online retailer with no competitive advantage. Only later did the market discover its source of durability came from a confounding level of investment in its fulfillment network.

The market often makes these mistakes with unique companies. Its viewpoint is bound to the expectations embedded in consensus analyst forecasts. If those forecasts are not met, the impact is extrapolated to a longer period of time. But one quarter or one year rarely impacts the long-term durability of free cash flow.

Operating from a different perspective

To develop an argument, I take the exact opposite view of the market. Rather than ask the same questions, I come up with my own and pursue them to an end. I build a unique viewpoint based on those questions and compare that to what is commonly accepted by the market. If they’re the same, it’s onto the next idea. Playing someone else’s game is not a recipe for making money. But thinking from a different perspective, and a longer-term one, just might be.

Instead of applying a magnifying glass to the quarterly report, I zoom out. I recognize its (in)significance in the broader context of the company’s lifecycle. Where is the market’s attention focused right now? What might be missing from that lens? What’s unique and/or misunderstood about the opportunity?

This philosophy comes after several years of experimenting with short-term arguments and plain old guesses. It suits my unique circumstances, given a multi-decade investment horizon, and I’m confident this approach will produce acceptable results over time. But not too confident. Things can change. It’s a probability game after all — everyone’s just playing the odds.

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Conventional ‘value’ philosophy bets against change. It seeks out companies that benefit from an indefinite continuation of the present circumstance.

Our approach is very much profiting from a lack of change rather than from change.
- Warren Buffett

Unconventional ‘value’ philosophy bets for change. It seeks out companies that either create the future or benefit from the future becoming the present.

From first principles, a bet for or against change is the same exercise in probability:

This is an oversimplification, of course, but the idea is important. There are two sides to the value coin, which brings up tradeoffs. Betting against change is a more defensive strategy while betting for change is an offensive strategy.

I favor the side of change because I’m aggressively optimistic, and how much you win matters more than how often you win. Radical change creates the potential for radical upside. There’s no free lunch, of course—you pay with uncertainty—but I’m willing to shoulder some heightened risk while I have few financial obligations and a lifetime of future earnings to cushion any errors in judgment.

You may notice I put quotes around ‘value’ philosophy. I share Warren Buffett’s distaste for the term. It’s redundant! All investing is a ‘value’ judgment on the future. Only hindsight reveals the true definition of ‘value’.

You may also notice I didn’t mention the ‘long term’ horizon. It’s also redundant! By definition, investing is a long term activity; trading is its short term counterpart. If our goal is to compound money, taking the long view is a necessity; it maximizes the exponent in the compounding equation.

The following criteria and questions guide my assessment of a business.

A compounding competitive advantage

A business gets better or worse every day. The direction of the moat is my primary concern: is the moat under construction or under maintenance? I prefer the former: companies with ample room for reinvestment.

If this level of reinvestment defers profits, the situation can become more interesting. I’ve found the market to be excellent at pricing profits; not so much at pricing a competitive advantage that has yet to produce profits.

Business strategy is an essential component of this analysis. How does management plan to build the brand, differentiate the product, create network effects, achieve scale economics, or otherwise cement its leadership position over time?

An important emerging industry

What problem does the company address? What process does it improve? Are existing customers increasing spend? What is the potential customer universe? How profitable are the industries served? How would customers be impacted if the product disappeared? Is the market opportunity regional, national, or global?

Gauging the importance of an emerging industry is far from an exact science, but the activity and characteristics of early customers can hint at the value of the opportunity.

People who prioritize execution in pursuit of a simple vision

A mission statement can be a marketing ploy, but it can also evidence ambition. How large does management envision their impact? Is it realistic?

New markets are created by leaders who are unusually passionate about a simple idea whose value most people fail to grasp. But change isn’t driven by passion; it’s driven by monotonous daily execution. Management’s priority should be taking small steps in the same direction every day. If not, I’m skeptical of the probability of success.

Execution drowns words. What has management achieved in the past? How does it compare to their words? Have they previously executed a difficult ambition? Do they clearly articulate near-term priorities while emphasizing the long-term context?

The level of confidence in the people behind the business is one of the most important considerations when betting on change.

Optionality and speed of innovation

Category creators experiment with a sense of urgency: they are proactive, not reactive. A rapid pace of innovation often foreshadows lasting change.

How quickly do products improve? How often does the company release new products? Does it rely on in-house innovation, or does it benefit from a platform ecosystem? Does it benefit from secular improvements to a core technology?

The direction of innovation is just as important as the pace. Where can the business extend its reach? What solutions can be integrated into a packaged offering?

Optionality is a difficult component of the ‘value’ equation. Therein lies the opportunity.

Proven business model

How does a company make money? Does it get paid upfront? Does it require ongoing investment in inventory? Does the business naturally make more money as it grows?

What are the unit economics? What are profit margins? Why are margins that way? What is an expectation of steady-state capital intensity? How cyclical is the industry?

Financial statements are relatively useless when considered in isolation. An early-stage category creator can be identified only by considering the economic characteristics in the context of strategy. A fundamental reality misunderstood by the market is more indicative of value than a high growth rate or any other numerate factor.

Clean balance sheet

The search for category creators requires entry into the arena of cash-burning / unprofitable entities. I supplement this risk by running a concentrated portfolio.

Stock price volatility is a feature—not a bug—of this approach (provided you have the emotional constitution), but it’s a different equation when the company’s future is in genuine question. For a cash burning entity, I typically require a large net cash balance (able to fund 2+ years of operations) and a clear path to self-sustenance. Strangers are only kind for so long.

Though I eschew the conventional concept of ‘value’ employed at Berkshire, the ‘business owner’ principles are the foundation of my philosophy and pose a series of essential questions.

Would I be comfortable owning the business if the stock market were to close for five years? Do I share management’s vision of the future? Do I understand the plan of execution? Do I agree with the assessment of the market opportunity? Do I see a clear path to a larger, more profitable business over time? Is management properly incentivized to act in the interest of owners over a multi-year period?

Yes is the only acceptable response to these questions.

In closing, I’ll echo the words of Jeff Bezos in his inaugural shareholder letter:

We aren't so bold as to claim that the above is the "right" investment philosophy, but it's ours, and we would be remiss if we weren't clear in the approach we have taken and will continue to take.

Valuation is too nuanced an issue to explore in this essay. I may explore my thoughts in a future dedicated post.

I made my first investment in September 2017. I bought Amazon because I’d just read Peter Lynch’s One Up on Wall Street, and the book speaks to the value of using your personal observations and experiences in finding a great investment. Amazon was a service I knew well and used often, and I watched as more people I knew bought more, and more varied, goods from Amazon. I thought it was an amazing business.

I didn’t know the valuation. I didn’t know of a fast-growing, highly profitable division called Amazon Web Services. I did know I liked the product and wanted some skin in the game.

By 2019 — thanks to a stroke of luck — I had doubled my money and was hooked. I thought investing was easy. Thankfully, I didn’t think it was easy enough to continue my blind buying. I’d gained enough sense to realize that research was a general prerequisite to a purchase, so instead of letting my personal experience dictate my decisions, I let it inform my research.

A natural starting point was Sonos. I admired the aesthetic appeal and sound quality of the speakers and found the company went public the prior year. I learned the company had a consistent record of growth, a loyal customer base (that consistently purchased more speakers over time), a healthy balance sheet, and a valuation of ~10x free cash flow.

I bought the stock throughout 2019 at ~$10-11 and waited patiently. I experimented with other names during this time but only held most for a month or two, and the gains and losses largely netted out — I quickly learned the trading game wasn’t for me. In Buffett’s words, I realized I wanted to “buy on the assumption that they could close the market the next day and not reopen it for five years." The stock market is a way to buy and sell, but I wanted to own.

This period also produced frustration with what I perceived to be a lack of compelling opportunities. The market wasn’t exactly “cheap” in 2019, and at that point, I was a firm believer in the practice of trying to buy a dollar for fifty cents. With a little cash and nowhere to put it, I once again borrowed some advice from the Oracle — this time on the other side of the spectrum — and began to index a set amount each month.

In 2020, the pandemic sent the world, the market, and my approach to investing into a tailspin. In 2019, I had largely kept to my “circle of competence” (despite some forays into trading) and assessed the valuation first and foremost. In the crash of March 2020, I threw it all out the window and bought anything and everything. I reverted to buying blindly — on a significantly larger scale.

I bought a business that sold engineered parts to water desalination plants (I still don’t fully understand the process of water desalination). I bought a paper packaging business (I still know nothing about the industry). I bought a waste management business (one I regret selling), a semiconductor firm, a renewable energy developer, an industrial REIT, an office REIT, a storage REIT, a tower REIT, an oil and gas major, a construction firm, a consumer robotics company, a digital advertising firm, a media and entertainment conglomerate, a surgical robotics manufacturer, and more than a few others.

I didn’t know much about the companies individually, but collectively, I knew I was buying them at prices ranging from 20-50% below all-time highs. If the market just bounced back, I could make a lot of money.

The market did bounce back, and I made a fair amount of money (one of the purest examples of a poor decision-making process leading to a lucky outcome), but the money didn’t stick around for long.

I came to my senses eventually (realized I didn’t understand what I owned and owned so many companies it was impossible to keep track of them) and sold the vast majority, though I still hold a few purchased in that period. By late 2020, I was rolling the proceeds into other ideas.

In 2021, I was the guy adding fuel to the fire. I bought high-growth, unprofitable tech companies at valuations ranging from expensive to downright obscene. I understood the business models and held a general grasp of the (possible) competitive advantages, but at the end of the day, the valuations were prohibitive (particularly as someone whose interest in investing stemmed from the value discipline of Graham and Buffett).

In one instance, I bought a business at ~20x revenue and watched it rise to over 50x revenue. I even bought some more on the way up because I felt my thesis was vindicated — the market had recognized I was right. The trouble is my thesis was supposed to play out over 10 years, not 10 months.

Over time, I watched it fall to a (still rosy) ~7-8x sales. I sold out and lost ~70% of the total investment (if you could call it that). While the thesis technically wasn’t broken, Buffett reminds us: “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

In another case, I bought a business at ~50x earnings with earnings growing north of 100%. At the time, it looked and felt like a steal. Today, the business trades on negative earnings, and the share price has receded ~75%. The product and the opportunity haven’t changed much, but the conditions under which it operates have changed drastically.

I still own this one (for reasons I’ll explore in a later write-up), but it’s a rude reminder that the surrounding reality can change rapidly, and your idea of the future can be shockingly wrong. Further, it reinforces the value of building a position over time, especially when the thesis is supposed to play out on a time frame closer to a decade than a year. If you’re right, you’ll still make a lot of money. If you’re wrong, you may lose a bit less money.

Reflection

Since my first investment, I made some money, I lost some money, I had a few winners, and I had a few big losers. I underperformed the S&P 500, but I couldn’t care less. The lessons I’ve learned over the past five years are worth multiples of what I paid. These lessons have driven an evolution in my thought process that would have been delayed years had I not experienced the market of 2022.

• Valuation matters. I wouldn’t pay 20x revenue to own any business on Earth.

• Don’t base your thinking on the movement of the stock price.

• Your thinking can be wrong (both in the short-term and long-term).

• Look at the facts as objectively as possible (acknowledge your biases).

• Understand your argument with the market before you buy.

• Never own a business you couldn’t explain to someone else in simple terms.

• Know the reason you own it (have a thesis). Sell if it’s not true anymore.

• Don’t buy the entire intended position size at once.

• Keep a long-term view (zoom out).

• Understand it’s a game of probabilities. Uncertainty will never disappear.

• “The cure for low oil prices is low oil prices.” Sometimes, you just have to let it play out.

• Know your capacity for taking academic risk (volatility).

• Make decisions based on true risk (permanent loss of capital).

• A stock can always get cheaper.

• Most importantly, enjoy the game.

Investing is difficult, and 2022 was a reminder — if you don’t love the game, don’t play the game. The stock market is the only place where the amateur has an option to beat 90% of professionals with no effort by just buying an index.

I love the game because the pain of losing money (both on paper and in reality) doesn’t change my obsession with the challenge. Everybody makes losing bets. The trick is to have just a few more winners than losers over the long haul. I (perhaps foolishly) think I can still do so, and my strategy has now evolved to align with who I am and my intention of staying in the game for a long time.