In his latest shareholder letter, Jake Taylor asks the question in a quick quiz – Which Type Of Investor Are You? Here’s an excerpt from the letter:
Would you rather be associated with Stock Chart A that went up more than 500% in 15 months?
Or Stock Chart B that went down more than -90% in less than a year?
As expected, this is a trick question. These are the same company, Carvana, who experienced a wild round trip over the last few years.
It’s possible the world can be divided into two types of investors. Those who cheer the rising prices of Chart A, and those who celebrate prices going down like in Chart B. (My guess is there are more in the Chart A camp.)
Different market regimes reward each group. The last ten years of bull market were decidedly for people who preferred rising prices. Yet-to-profitable technology companies with promising stories soared. The future gleamed; growth investors rejoiced. Recall that the increase in P/E multiple added +6.4% per year to the S&P’s returns. That’s a cumulative +86% return just based on an increase in excitement.
Momentum can be self-sustaining… for a while.
Yet everything is cyclical. It’s likely the next ten years will reward people who like to see retreating prices. But if we’re supposed to buy low and sell high, how does one still profit in a world of falling prices? It won’t be from huge topline growth and multiple expansion. Those are glittering bull market spoils.
You can read the entire letter here:
Farnam Street July 2022 Letter
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