I was recently listening to What Alex Danco Thinks About Basically Everything , a long, rambling but incredibly insightful podcast with Alex Danco, a member of the Social Capital Discover team and author of the fantastic Snippets weekly newsletter.
Somewhere in the middle of the podcast Alex inadvertently articulated my exact investing philosophy in a way that I had never quite been able to phrase correctly.
When asked what he thinks about Bitcoin, he asked us to envision an axis that looks something like this:
It is brilliant in its simplicity, and the examples of securities in each bucket were both referenced by Alex in the podcast and also happen to be the exact companies I am invested in.
This range might typically be characterized by someone as “low risk to high risk”, but that’s not how I see it, and Alex has done well to frame it in terms of perspective on the future. Let me explain:
For me, investing in Tesla carries about the same risk as investing in Berkshire Hathaway. Yes, the standard deviation around that risk might be bigger for Tesla, Softbank, or Bitcoin, as small changes in opinion today result in huge differences to the discounted lifetime value of the asset when extrapolated into the future. But I think Tesla has about the same probability as Berkshire Hathaway to exist in 100 years – if progress in the future is more of an incremental rather than exponential nature then Berkshire will continue to reap the rewards of allocating capital to companies with strong existing competitive moats; if the future looks very different than today’s world then I’d imagine that Tesla, who has an incredible track record of product innovation, is more likely to thrive and Berkshire will be left owning capital intensive assets like railroads that are no longer of any value.
People like to talk about diversifying their investments to reduce risk, and how it is super hard to beat the market overall. I believe that philosophy is correct for the average Joe who doesn’t live to research individual companies. But I am 100% convinced that I know more about Tesla than the average investor, and don’t consider it “risky” to concentrate my investments into a company in which I am incredibly bullish.
As a result of my conviction in certain companies my portfolio is heavily concentrated (currently about 85% of my stock portfolio is in just 4 companies). But I have never felt that my portfolio is overly concentrated, precisely because of the framework above – each of BRK, AMZN, TSLA, and SFTBY are diversified from each other in terms of where the bulk of their cashflows will be generated over their lifetimes. There’s a chance (and I hope) that all of them will thrive as they are all incredibly well-ran operations, but clearly their visions for the future differ dramatically.
Bitcoin and other Cryptoassets represent a future in which networks, not corporations, generate economic value. Valuing cryptoassets other than Bitcoin today is nearly impossible because the form of value these networks will create could be radically different to the world in which we live today. I’ve written about why Cryptoassets are important before and I am incredibly optimistic about the entire space, but it’s clear that if you are investing in Ether you are essentially betting against all the big companies that exist today, because it is only in a radically different future that Cryptoassets achieve their true potential.
This framework helps me to think about Risk in a different way than most people tend to think about it, and I’m so happy Alex articulated it the way he did. The way banks and financial advisors talk about risk today feels very antiquated and not suited to anyone other than retirees who dislike volatility in their pension portfolio.
Thanks for reading!
Until next time,