Money is made at INFLECTIONS and the materialization of large EXPECTATIONS GAPS
What ultimately matters is a combination of a vision for the future and asymmetry in the odds embedded in the current price.
In my experience, steady, predictable end-markets paired with stable competitive dynamics and a long tail of bolt-on M&A have been the ingredients for a long run of compounding.
The "valuation doesn't matter" era in 2020-2021 captured this reality. When fundamentals are accelerating, WATCH OUT. The P/E can often overshoot any sense of reality.
Where there is a large cash balance, cash flow generation, high FCF yields, and a owner-oriented management team, good things tend to happen.
There is a dark side to chasing innovation, however. For every TSLA there is a Rivian, Lucid, and Nikola. I don't know how many "next Amazon" pitches I've heard. Innovation investing is not for the faint of heart, and many retail traders in particular get very excited about some bullshit EV charging thesis without having the requisite industry expertise.
The earnings release is the discrete event where we discover new information that shifts the collective view on forward EPS. Hence, the outsized volatility.
Very much discovered that positioning or common investor risk (CIR) is often overwhelmingly deterministic during earnings season.
So success is dependent on finding big, chunky ideas (my winners were usually: reasonable starting valuation, some negative overhang, business momentum acceleration catalyzed by some positive change, so paid on +revision & +re-rate).
Your P&L is the delayed output of the research you are doing now. Don't let the tail wag the dog. Yes if you are in drawdown management, keep an eye on P&L, but do your best to focus on the input and the output will take care of itself.
“How you make money is not the quality of the business you buy but the price you pay for the quality of the business.”
Value is derived from collective perception of the future. Forecasting the future, but ALSO, forecasting the shifting perceptions of the crowd, is important
