Investing as a Game of Chicken: Valuation vs. Patience in Market Cycles

During their recent episode, Taylor, Carlisle, and Joshua Young discussed Investing as a Game of Chicken: Valuation vs. Patience in Market Cycles. Here’s an excerpt from the episode:

Jake: Yeah. So, that’s still north of here as well. One thing I have been thinking about that is kind of, I don’t know what to make of it, but I find like when I’m out on my walks, this is what comes into my head. I think about like the investment game as being sometimes like a game of chicken, especially the professional version. So, who has more courage in their conviction? The investment manager and their backing LP base, their customer base, who hold onto something like Costco, let’s say it’s 60 times earnings. They have to worry about that going to 20 times earnings while they’re earning the underlying ROE of Costco, okay?

Or, is it the more value conscious manager and their LP base who have to wait around forever for Costco to eventually come back to that maybe more reasonable price of 20 times earnings. They stay patient long enough for that to happen. So, if you try to boil that down into something a little more pithy, it’s like either you’re brave enough to hold your nose on valuation or patient enough to hold your breath on the timing. Sometimes it’s like this tug of war of like who has more conviction in their beliefs, which I don’t know, I’m not sure what to make of that, but that’s what I think about while I’m out walking around. [chuckles]

Tobias: I like that frame. Yeah, so, it’s courage on both sides.

Jake: It takes courage on both sides. Both will be right over I think various time periods, but who capitulates first. The guy who’s worried about it going and he punches out, or is it the guy that had to wait around and all the LPs left, because you weren’t doing anything and it’s swing you bum.

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