I went to check out Napa with my wife today – with my new life in the San Francisco bay area in a new career that gives a lot more free time than my prior roles, I began to officially venture what is out there.
I only heard great things about Napa and knew it was near San Francisco bay area – I expected it would be at least 2 hour away, but I realized it is a 50 mile drive from East Bay (which is where I live). It took approximately ~50 mins to get to parks in Napa, including Alston State Park from my home. Not only that it was an amazing drive on my Tesla. Model 3 is truly an amazingly fun vehicle to drive.
At Napa, you can’t go anywhere without looking at vineyards and picking up some wine. Today was January 18th 2021 and the weather in Napa, CA was amazing – picture is worth a thousand words – I took this picture today at noon.
As a stock junkie, I couldn’t obviously help thinking about the market opening tomorrow after long weekend (all these tweets about $GME are hilarious) and also a great analogy between investing in stocks of great companies and production process of great wine. It centers around the theme that “great things take a long time” – my thoughts are below:
#1: building process is subtle on the outside, but the activities are very robust inside and invisible from outside = we must pick strong management teams because they are busy creating value behind the scenes
Wine: As shown above, grape vines look bare, but that does not mean there is nothing going on – inside the vines are very very busy getting ready for another prolific harvest.
Companies: you might think there is not much going on, but there are SO MANY THINGS going on – what is publicized is really the tip of iceberg in terms of all the exciting activities that are happening. Management team is always (hopefully) looking for high ROIC projects to fund the next wave of growth 5-10 years from now that is not in public yet – this is why investing in companies with strong management teams are so important. They are focused on creating value that is tangible now and will be 5-10 years from now but SUSTAINABLE COMPOUNDING.
#2: geography is so important for great outcome = you must be in a good subsector / theme
Wine: there are certain geographies that produce good wines with Napa being one of them or certain regions in France or Oregon. They produce great wines primarily because of great location that creates a great natural environment. If you take those first-class teams and plant them in some random area with unfavorable weather, they won’t be able to deliver the same level of products.
Companies: it is so important for a company to be in a growing subsector – this primarily drives most of the returns. Warren Buffet famously said:
“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
If a company is in a bad subsector that is experiencing secular decline (like internal combustion engine powered cars), a top-rated management team won’t be able to do anything and will likely just sink with the company – obviously, top-rated management teams are smart, so they will jump ship before it sinks.
#3: scarcity drives so much value= companies that produce scarce products or provide scarce services deserve much higher multiples
Wine: some wines carry massively high prices (over $1,000 per bottle.. I don’t get it) while others are priced below $10. Why would that be? It is primarily driven by scarcity. If the product quality is 20-30% better, the product should be priced 20-30%, but the imbalance in demand pushes prices higher because there are limited number of bottles that are produced on well-known wineries that are also known for consistency in high quality. You pay higher price because of 1) higher quality, 2) limited availability that skews demand favorably, and 3) consistency of high quality that gives you assurance – they all compound to a price that seems very high to me, but completely acceptable to those that appreciate it.
Companies: some companies trade on multiples that appear rich, but these companies always carry rich multiple unless there is a catastrophic event that breaks the equity story. High stock prices or multiples are driven by the same factors that drive higher wine prices – 1) higher quality, 2) limited availability for those stocks, and 3) consistency of high quality earnings. These great companies deliver high quality earnings with very high predictability – many great management teams consistently deliver good earnings beats that have a lot of money for many investors. Knowing this, many investors flock to own these stocks because 1) they know they won’t get blown up because they know there is always strong demand for the stock that limits downside (dry powder that is waiting to “buy the dip”) and 2) they know they will likely make money owning the stock without having to monitor the position too closely.
INVESTING IS A FUN AND EXCITING GAME, BUT YOU MUST PLAY THE LONG GAME TOO
Identification of great companies with great management teams and going in for a ride with them is my primary investment strategy now – this gives me confidence to “buy the dip” to take advantage of opportunities.
For this strategy, portfolio construction to withstand short-term drawdowns is absolutely critical – leaving dry powder is important, but putting on leverage to go long in a big way in the midst of severe drawdown is even important – and above approach has consistently been profitable for me as a hedge fund analyst and an individual investor.
George Soros said “it is not your batting average, but slugging average” and above approach is how I try to increase my slugging average.
What are key elements that you look at that triggers you to slug for the fence?
“not investment advice
