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Patrick O’Shaughnessy on Momentum vs. Glamour

A paper and Twitter thread on factor investing. The first half of the paper talks about value investing. Returns are primarily based on the market’s recognition of stabilizing fundamentals and thus multiples expand.

An offshoot is that outperformance for a given security tends to continue for years. This is also consistent with a strategy of buying what’s hated.

Momentum vs. Glamour is also well explicated. In fact, the most successful momentum strategy suffers from multiples *decreasing* every time the portfolio is rebalanced, but earnings growth outweighs that.

The lesson for investors is that if you want to find companies that are going to experience strong upcoming growth, you should look for companies with strong recent returns [Momentum], not companies trading at high valuations [Glamour]. Empirically, strong recent returns are a much better predictor of future growth than simple expensiveness.

An interesting offshoot is that for the momentum strategy, outperformance of a given holding ends after a year.

http://osam.com/Commentary/factors-from-scratch

The Danger of Chasing Margins (Clayton Christensen)

I’ve always been leery of focusing on margins. I think because I would look at other successful companies and see they did not necessarily chase the high margin business. The ticket size matters. The CAC matters. The long term market stability matters.

I was just reminded of this by this anecdote about large enterprises leaving the low margin segment. The competing companies in that segment eventually moved into the high margin segments as well. Point being that based on profit analysis, it was rational.

Clayton Christensen: Disruptive innovation

Or maybe there are just too many factors to generalize.

Another main point of the article is that Innovation/Disruption takes the complex and replaces it with Simple and Affordable. Mainframe > PC > Laptop > Cell Phone.

As an aside, what will replace the cell phone? Pencil and Paper? Worked well for me.

Here, Prof. Christensen makes a clearer statement of his theory (around 12 min mark).

Creative Disruption & The Innovator’s Dilemma | Clayton Christensen (HBS & Author) @ Startup Grind

If you try to make a better product than incumbents, they will kill you. The successful disruptors always enter at “the bottom” of the market. I believe he means the least expensive end of the market.

Also includes the milkshake story; the customer is not the right unit of analysis, it’s the job that needs to be done. In the case of the milkshake, it works as something to eat on a commute. The characteristics of the person matter little.

Adventur.es on acquiring, Search Fund whitepaper

If you wrongly assess the situation, and have a team that needs constant direction, makes unwise decisions, or creates a bad culture, you’re screwed. After a crash, it’s nearly impossible to get the train back on the tracks.

Someone has a way with words, lol.

https://www.adventur.es/how-to-acquire-your-first-smaller-company

I think my favorite Brent insight, which he did not include here, is that a business needs a mix of Messy and Un-messy people to work. He probably prefaced that with, we’re all messy, but I’m not sure. I’ll try to dig up the exact quote.

 

And the interesting link about search funds, including some typical metrics,

THE EVOLUTION OF ENTREPRENEURSHIP THROUGH ACQUISITION

 

Beshore on the Lower Middle Market

Brent Beshore with some comments on smaller PE deals.

“My advice to someone interested in buying a company for the first time is to have at least three years of runway available. The first year will be spent generating opportunity costs. The second year will be spent negotiating, re-negotiating, diligencing, and likely failing to close a deal. The third year is when something from the first year comes back around and can get done.”

https://www.adventur.es/the-micro-pe-reality-check

Tren Griffin on Modelling Subscription Businesses

“Spending money on a growth hypothesis before a value hypothesis is a classic way to suffer horrific churn.”

And how to model lifetime value of a subscriber:

https://25iq.com/2017/07/15/amazon-prime-and-other-subscription-businesses-how-do-you-value-a-subscriber/

And further on the same topic as regards MoviePass:

https://25iq.com/2017/12/30/moviepass-premature-scaling/

h/t Patrick O’Shaughnessy

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