Gavin Baker - Investing Through a Bear Market

Principles & Lessons:

• In environments of high uncertainty, the critical skill is to play in the present and abandon prior anchors. Gavin emphasizes that traditional investing heuristics break down in crises because information becomes stale and forward guidance meaningless: “Every company is going to miss. They’re all going to guide down.” In this context, he urges investors to “play in the present,” avoiding anchoring to past expectations or prior price levels. “You cannot anchor. Not on anything that you thought you knew... and more importantly, not letting the mistakes you are making... influence your thinking.” This reflects a deep epistemic stance: models built on old conditions become explanatory dead weight unless actively re-evaluated.
• In bear markets, the first phase rewards the obvious trade—but only temporarily. Gavin points out that early in bear markets, acting on "obvious" ideas—like rotating out of travel and into Amazon or Netflix—can yield alpha, even if it defies a value investor’s instinct. “It is very rare that doing really obvious things generates alpha. But at the beginning of almost every bear market, doing the most obvious things works.” The nuance is temporal: the obvious trade is contextually correct but ephemeral. His insight is not that these ideas are always good, but that in early panic, markets misprice even the obvious. Later phases require more nuanced risk-taking.
• The key liquidity test in extreme downturns is ‘days of solvency with zero revenue,’ not traditional debt ratios. Gavin offers a specific, decision-relevant liquidity metric that reflects the new reality: “The new liquidity test… is days of solvency with zero revenue.” He observes this isn’t just an academic exercise—it has become “the equation that is being run everywhere.” This reframes capital structure analysis by replacing abstract ratios like debt-to-EBITDA with a more direct question: how long can a company survive a revenue vacuum? It is a response to radically different boundary conditions, and it emphasizes the shift from probabilistic thinking to worst-case scenario survival.
• Alpha in the later phases of a bear market requires uncomfortable, non-obvious positioning—and often favors the formerly riskiest names. Gavin explains how he survived the 2009 crisis by rotating into names with weak balance sheets—but survivable liquidity profiles—precisely because they had already been oversold. “You now need to begin taking some risks that are not obvious… what’s going to lead great companies for the next 5 to 7 years aren’t actually those safe companies with great balance sheets.” This is not a call for recklessness, but for re-evaluating optionality: “The aggressive names start to outperform the defensive names… that happens before the market bottoms.”
• The narrative of software as “better than first lien debt” depends on context—and that context just changed. Gavin critically re-examines the widely accepted superiority of SaaS business models under stress. “There is no such thing as truly recurring revenue. Some revenue is just more recurring than others.” He questions whether software vendors will enforce contracts when clients are conserving cash: “Are they really going to say, ‘You have to pay us. We're going to bankrupt you’? I don’t think they will.” He uses direct anecdotes from dentists and SMBs slashing software costs overnight to demonstrate that power in software lies less in contractual terms than in actual customer leverage during crises.
• Crisis accelerates capability building for incumbents, especially in eCommerce and physical retail hybrids. Gavin argues that the shift to online doesn’t simply benefit eCommerce pure plays—it may disproportionately strengthen omni-channel incumbents like Walmart and Target. “They are building years of eCommerce experience, muscle, know-how in months… the debate about whether to invest more in eCommerce is over.” He suggests these firms are undergoing forced capability accumulation and brand reinforcement under pressure. The explanatory insight is that not all transformation benefits the disruptors—crises can also reallocate advantage toward fast-moving incumbents with scale and distribution.
• Metaverse platforms are being formed through emergent behavior in gaming and communication infrastructure—not top-down design. Gavin sees games like Fortnite and platforms like Discord as organic foundations of the Metaverse: “Video games are social networks… they are places.” He emphasizes behavioral data over hype: “Telecom Italia saw video game traffic up 75% and social media traffic up 0%.” He also identifies that strategic control will come not necessarily from VR headsets, but from identity and payments layers embedded in platforms like Roblox or Discord. His epistemic move is to observe user behavior and infer platform evolution—not from investor narratives, but from where attention and coordination already reside.
• Managing risk in chaotic environments requires dispassionate action and the humility to anticipate a wide range of outcomes. Gavin closes with the metaphor of “chaos as a ladder” but notes it is also a “slippery slope.” His framework is grounded in humility about unpredictability: “Randomness, path dependency, probability—they rule the world.” He warns against a false sense of control, drawing from history and fiction: “Be Augustus, not Julius Caesar... We are no longer in summer, we are in the winter now.” He reinforces that optimism—though counterintuitive—has historically paid off: “Optimism never sounds smart... but the history of the human race tells you that optimism has paid consistently.”

Transcript