Modest Proposal - Value is Dead, Long Live Value

Principles & Lessons:

• Behavioral overreactions remain the primary source of market inefficiency. Modest emphasizes that while most anomalies have been arbitraged away, human behavior is persistent and exploitable: “Every other anomaly gets exposed and arbitraged away. I say, as long as humans are participating in markets, there will be roles for active management.” His focus is not on predicting the future, but on recognizing when market narratives—especially negative ones—have gone too far. For example, he notes how certain small-cap consumer internet stocks sell off by 25% on minor earnings misses, reflecting exaggerated linear extrapolations of short-term trends.
• Market narratives are often approximately right about the end state, but wrong about timing. Modest observes that technologists are generally correct about long-term outcomes, but their timelines are overly optimistic: “What I’ve learned is the technologists are almost always right about the end state, but the frictions between here and there are often way greater.” This insight underpins his strategy of investing where the market has prematurely priced in disruption (e.g., cord cutting or e-commerce domination), ignoring transitional frictions like distribution relationships, brand loyalty, or regulatory hurdles.
• Index-level efficiency has increased, but inefficiencies persist episodically and asymmetrically. Rather than assuming persistent alpha, Modest seeks to be opportunistic and episodic: “Sitting on your hands most of the time... because day to day, the market is just super efficient.” He emphasizes patience, preparation, and industry-specific knowledge as the only viable way to exploit mispricings. This mirrors his view that value investing has been commoditized since the early 2000s, and discretionary investors must now focus more on relative expectations and behavioral extremes than on static multiples.
• Attention aggregation is not a fad—investors underappreciated its power for too long. In discussing Ben Thompson’s Aggregation Theory, Modest notes: “Maybe the idea of eyeballs wasn’t wrong... maybe it’s not eyeballs, but it’s attention. And that was right.” He contrasts 1990s-era failed internet companies with today’s hyperscale platforms like Google, Facebook, and Netflix, which now monetize massive, low-CAC attention pools at scale. Critically, he notes that legacy players cannot match the economics of these new aggregators due to structural disadvantages and lack of operating leverage in customer acquisition.
• Customer acquisition costs often doom online-first businesses, despite product quality. Modest is skeptical of most DTC and e-commerce businesses due to the asymptotic nature of customer acquisition: “The law of diminishing returns in customer acquisition... your first cohort is your most profitable.” Once companies move beyond organic demand, CAC explodes and economics often collapse. The implication is that profitable online retail typically requires either dominant scale, multi-touchpoint distribution (as with Disney), or physical infrastructure (as with Warby Parker stores) that supports rather than burdens LTV/CAC ratios.
• Physical retail has been systematically mispriced due to overreaction to Amazon and cord cutting. In classic contrarian fashion, Modest built a thesis in 2016–17 around premium malls and broadband-first cable providers, which had been lumped in with dying satellite and weak B-malls: “A mall property didn’t suffer negative NOI in ‘09… yet Wall Street was pricing in perpetual decline.” He frames these as misunderstood assets penalized by thematic overreach. The key epistemological point: categorize entities not by label (e.g., “retail”) but by underlying cash flow drivers (e.g., anchor tenants, property location, broadband economics).
• Capital allocation—especially buybacks—is widely misunderstood and poorly practiced. Modest is adamant that buybacks must be assessed on valuation, not dilution optics: “If the stock’s cheap, buy it. If it’s not, don’t.” He criticizes management teams that claim to offset dilution without thinking about opportunity cost, and notes how bad capital allocation decisions often stem from management inexperience with reinvestment. He emphasizes per-share value creation rather than size of enterprise as the relevant metric for both managers and investors.
• Asset management is increasingly difficult, requiring structural alignment between capital, behavior, and opportunity. Modest is skeptical of traditional active strategies: “The idea you can go into the marketplace and beat people day to day is not for the traditional fundamental investor.” He argues that outperformance is now episodic, requiring the discipline to do nothing most of the time, and to act decisively when opportunity arises. Yet this runs counter to most fund structures, which assume time-smoothing of alpha. He admires managers who evolve their style without succumbing to trend-chasing, highlighting Bill Nygren’s pivot to growthier compounders (like Amazon in 2014) as a rare example of principled adaptability.

Transcript