🟪 Take the elevator

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“That’s the advantage of ignorance. You don’t know how hard it’s going to be.”

— Jensen Huang

Wednesday investing advice: Take the elevator

As a child of the 1980s, I have always been keenly aware of the mortal risk posed by quicksand. 

People in the TV shows and movies I grew up with always seemed to be falling into it — and, yet, they never knew what to do when they did. (Did these people not watch TV???)

Connoisseurs of bad TV like myself have been prepared: If I ever fell into quicksand, I would resist the urge to fight it, calmly spread my weight, and let myself just float to the top.

I’ll confess it’s been kind of a disappointment that I’ve never gotten to employ that knowledge — where is all this quicksand I was warned about in the 1980s???

But the thousands of hours of bad TV I consumed has not been entirely for naught because the don’t-fight-it strategy it taught me can be employed beyond quicksand.

In bed, for example: The harder you try to fall asleep, the more likely it is you’ll be staring at the ceiling at 3 am.

In investing, too: The harder you try to make money, the more likely it is that you’ll lose it.

That, at least, is the counterintuitive advice from the investing guru Morgan Housel: “Investing is one of the very few fields in life where the harder you try… the worse you will [probably] do.”

Personal experience supports that claim — my biggest winners have been the things that required the least amount of thought (Berkshire, SPY) that I held for the longest amount of time (do-nothing, like in quicksand).

If that’s too anecdotal for you, consider the below table from a study of the best-performing stocks in US history:

None of those all-time-great stock picks required any special insight into a complex investment thesis or new-fangled technology. 

In most cases, you’ll know the business model and understand the product as soon as you see the name of the company — everyone knows how Boeing, Coca-Cola, Deere, and Hershey make money.

Nor is any great macro foresight required.

The top two names on the list sell cigarettes (Altria) and rocks (Vulcan Materials) and the third moves things by railcar (Kansas City Southern) — activities that have been persistently profitable over dozens of economic cycles. 

Note also the power of compounding: 16% per year over 98 years adds up to a total return of 2.6 billion percent (Altria) whereas 14% per year over the same time frame adds up to “only” 393 million percent (Vulcan Materials).

Doing nothing is a powerful thing to, well, do.

You can’t do nothing at all, of course — you still have to make that first decision to invest.

But even there, the above list suggests that putting too much work into that initial decision will be counterproductive — the investments with the easiest-to-understand elevator pitches (cigarettes, rocks, trains) have historically done the best.

So why take the stairs when you can take the elevator?  

You might argue that things are more complicated these days, but, for investing purposes, I’m not sure they are.

Apple sells phones, Microsoft sells software, Nvidia sells semiconductors, Google sells ads — it’s not complicated. 

I owned all of those at some point and, with every one, I got off the elevator far too soon.

Every time it was because 1) the investment case felt too obvious and 2) I’m terrible at doing nothing (despite my quicksand training).

This applies to macro investing, too. 

You can spend all day, every day trying to figure out exactly what is going to happen in the economy and when — and that might occasionally pay off.

Or you can spend all day, every day doing something else as you let your no-frills investments slowly ride the elevator higher.

The track records of even the best macro investors suggest the latter course of (non-)action is not only easier, but more profitable.

This applies perhaps most of all to crypto investing.

I suspect, for example, that the best explanation for why bitcoin has so relentlessly outperformed Ethereum’s ether token is that the investment case for bitcoin is simple (digital gold!) and the investment case for ether is complex (ultrasound money? The world computer? Data availability?).

It might also explain why crypto hasn’t had any breakout investing success stories as of yet.

The leading crypto/AI token, TAO, has the most complicated investment thesis I’ve ever encountered; crypto’s myriad infrastructure tokens are incomprehensible to many crypto investors, let alone normal investors; and even MakerDAO, which has the world’s most basic business (borrow at 0%, lend at >0%) somehow has the world’s most complicated business model (“The Endgame”).

That might all work out, I don’t know — but why take the stairs when you can take the elevator?

We do not, however, want everyone taking the elevator.

Per the Jensen Huang quote above, if entrepreneurs were fully aware of how hard it is to start a successful company, few would ever try — and if their investors were fully aware of how hard it is, few would ever fund them.

But we all want new, interesting, and productive things, so I hope entrepreneurs keep starting new companies and I hope investors keep funding them.

I might be watching TV while you do that, though.

— Byron Gilliam

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