In his recent interview with The Market NZZ, Gavin Baker, founder and Chief Investment Officer of Atreides Management discussed how investors can navigate today’s challenging environment, the changing landscape for high ROIC companies, and why investors have to be able to deal in paradoxes. Here’s an excerpt from the interview:
How can investors navigate today’s challenging environment?
To succeed as an investor, you have to be able to deal in paradoxes. You have to find the right balance between conviction and flexibility, between arrogance and humility: The arrogance to believe you can have a differentiated view on a stock in such a competitive market, and the humility to recognize that you could be wrong. As a technology investor in particular, you have to balance imagination with reality.
You have to find the right balance between enthusiasm and dispassion. You also have to be very knowledgeable. What’s more, tech and consumer have kind of merged as a sector. For example, how can you look at Amazon and not study Walmart? How can you look at Airbnb and not be intimately familiar with Marriott and Hilton? All these businesses are merging in profound and important ways, and the lines between tech and consumer are blurring.
What does this mean for future investment returns in tech stocks?
It is a very interesting time in technology. Truth, valuation, interest rates and probability are gravitational forces for stocks. But trends in Free Cash Flow and Return on Invested Capital are quantum forces. One of the most fascinating things is that in the past, ROICs were highly mean reverting: Companies with high returns would generally see those returns mean revert over time. That stopped being true roughly fifteen years ago. Since then, high ROIC companies are maintaining those returns and they are showing no sign of falling.
You can read the entire interview here:
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