Forget Sleep – The Nerve Wracking Portfolio Generates Alpha

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During their latest episode of the VALUE: After Hours Podcast, Dickson, Taylor, and Carlisle discuss Forget Sleep – The Nerve Wracking Portfolio Generates Alpha. Here’s an excerpt from the episode:

Jake: Drew, can I ask–? I know that you own a car maker, for instance. So, in that instance, something that is perceived to be very economically sensitive, how do you wrap your mind then around the macro part, that you’re not accidentally making a macro bet sometimes, especially if something is very tied to macroeconomics often?

Drew: No. Yeah, it’s a great question, Jake. And also, sometimes, you don’t think you’re making a macro bet even within a sector or across sectors. But in certain environments, they all start looking like each other, because they’re cyclical- [crosstalk]

Jake: Yeah. Interest rates. That’s how a lot of times–

Drew: -whatever. What I would do even if it’s not a maker that I’m just working on and don’t own or any of these exposed types of sectors is look at what it is the market is already assuming. And it becomes that. And so, if everyone’s optimistic about the prospects for unit sales growth and taking over share of EV as the industry migrates from ICEs, and not paying attention to what’s going on in the world, then you’re nervous. But if it’s the opposite and everyone’s scared to death about how bad the economy is–

This is public market stock. This is not private equity. What is it that the market doesn’t know? What is it that is baked into this share price? Then, it becomes, “Okay, can I just pick the very best of these ideas across the half a dozen investable automakers in Europe? Can I pick the one that has the best risk reward of these?” Long-short guys might then take the best option on the other side and create a relatively market-neutral long-short bet, pair trade kind of style. That’s not my style.

Yeah, trying to estimate what everyone else is estimating. It’s that game when you go and want to own something. To the extent that either we’re nervous now that markets are about to turn down or that they have started, the question becomes, are you more likely to find things which are interesting on the long side in this kind of environment or a 2019, 2020 kind of environment, when everything’s great and everyone’s talking about how money is flowing. In my view, it’s more exciting than nastier and uglier it is. This is going to sound terrible, but I’ve written this to our investors before. Actually, one of our internal blog posts, I’m not sure if I made this one of my Drew’s Views posts, but I think I called it, “I’d rather not sleep.” If I’m sleeping well at night, I own– [crosstalk]

Jake: Forward returns are low. [laughs]

Drew: I own stuff that everyone knows. I’m not nervous about it because it’s smart and it’s not scary. But if I’m up nervous about what this company is going to report this quarter or how the market is going to react to it, well, I’m not the only person in this game. And everyone else, if I’m nervous and I own the company inside out, how is the rest of the market, feeling about this stock and what it wants to pay for it? So, as long as we have things which are nerve wracking in the portfolio, we generate more alpha. Don’t sleep very well, but that’s a good thing.

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