Today, I would like to discuss why staying with secular long-term trend is WAY more important than knowing financial theories. Also, I will discuss my view on mega secular trends in healthcare that have been and remain cornerstone in healthcare portion in my portfolio.
Importance of starting from the big picture
We all know Yogi Berra – who literally minted out great sports quotes and, by extension, stock investing quotes. One of his sayings that is relevant for today’s topic is as follows:
“In theory, there is no difference between practice and theory. In practice, there is”
He was essentially making fun of “theorists” who would always make comments based on theories.
Modern Yogi Berra in financial industry is Nassim Taleb – who does not pull punches when it comes to poking at many financial theorists who are eager to comment on the market movements in public broadcast, but do not take risk in the market with their capital. Nassim has been particularly critical on economics professors, including Nobel laureate Paul Krugman – going as far as indicating that many people would have lost a lot of money if they had taken advice from these professor / theorists.
I am mentioning this because I partly sympathize with Nassim’s view on the theorists. For example, there is not a very strong representation of people with deep theoretical finance education in the financial industry. You do see a lot of economics majors, but it is more of a function of economics being “easier” major than other hard science / engineering majors.
On the contrary, there are “Wall Street legends” who have very non-traditional background such as athlete or non-finance/economics major – such as John Mack (of Morgan Stanley) or Dr. Burry (of Big Short / Scion Capital). I believe there is no strong data that would support correlation or causation of financial education vs. outsized performance in the financial market. Caveat is that you will need to learn the basics of the finance.
SO WHAT IS THE MOST IMPORTANT?
In my view, it is important to understand and anticipate the mega secular trend in industries. Talking about relative valuation based on multiples based on ever-changing consensus estimates has generally underperformed the investing strategy that was actually based on taking sub-sector tilts – betting on secular trends and subsector level.
For example, Teladoc ($TDOC) has been a massive outperformer as it became positioned as the go-to and dominant company in remote healthcare. A lot of hedge funds have been shorting the stock on its way up starting from early 2020 while the stock price has massively outperformed. While the stock has had a big correction since mid-February, it remains a big winner and I remain bullish on the stock as the company’s story transitions from remote care / telemedicine, which is covid19 specific, to a dominant chronic disease care management platform in what will become a winner-take-most market – a new normal for therapeutic intervention in chronic care. While the stock moved up, $TDOC has become a tale of who is going to be covering earlier than others among hedge funds.
We saw similar take in IT industry – I will use Fastly ($FSLY) and Cloudflare ($NET) as an example. Both companies are in edge clouding segment and $NET trades at a premium to $FSLY and the premium of $NET over $FSLY has only expanded over time. Many hedge funds took the LONG $FSLY and SHORT $NET based on mean reversion theory (statistical arbitrage), but that trade simply has not worked. They may have been right on being bullish on the rise of edge cloud computing as beneficiary of not only covid19 but also 5G-enabled services, but ultimately lost money because they took the relatively value arbitrage track rather than making sub-sector bets in the name of theoretically hedging out the industry risk.
BEING LONG SECULAR TREND HAS WORKED FOR A LONG TIME AND SHOULD CONTINUE TO OUTPERFORM LONG-TERM
I have a day job, so I want to take an investment strategy that involves the least amount of day-to-day trading and has TIME on its side – this sets up for growth / disruptive investing to be the most ideal one for me. Most of the deep, concentrated investing firms also takes this approach as well. This means the focus and time should be spent more on whether I have correct view on SECULAR, DURABLE, AND IRREVERSIBLE INDUSTRY TREND.
Based on my experience, I see three mega trends for healthcare that are SECULAR, DURABLE, and IRREVERSIBLE.
- PRECISION MEDICINE
- EMERGERNCE OF MEGA DEVELOPMENT PLATFORM (FOR THERAPEUTICS)
- CONVERGENCE OF TECHNOLOGY AND HEALTHCARE FOR CHRONIC CARE
All three trends are based on big data and analytics capability to distill signal from the noise. I plan to discuss more in detail in upcoming articles.
What do you think are the big mega trends in healthcare? Please comment below!
*not investment advice
With the overlap of AI, computational medicine and chip development, form factors are shrinking, i.e. BFLY and CAPA. I can envision the day when an entire lab is contained in a suitcase. Or maybe your own med station in your home. We already wear monitors for glucose and PODDs for continuous administration of meds. In essence we already have most of the medical profession available at our fingertips – TDOC.