market folly

Pat Dorsey was recently interviewed by Young Investors Society.  He's the founder of Dorsey Asset Management and prior to that worked as the Director of Equity Research for Morningstar. 

He's also the author of two books:  The Little Book That Builds Wealth and then The Five Rules for Successful Stock Investing.  Here's some takeaways from his talk:


- His book talks about moats and competitive advantage.  He wished he put more in his book about the business that is building the moat, versus one that already has one.  A younger biz with a longer runaway and each dollar of incremental cashflow is being invested at an increment ROIC.

- If you've got long-term time horizon, smaller pool of capital, and investors ok with volatility, your returns are probably gonna be superior. 

- For companies, the ability to reinvest is where you really maximize things

- On short selling:  Highlighted the not-so-great risk/reward of only being able to make 100% on your position but the potential to lose an infinite amount (if the short just keeps going up and up).  "Shorting is tough because time is not on your side."

- Short selling is very hard and the few good short sellers he's met never ever ever short because of valuation.  They short because a business is fraudulent or fundamentally flawed.  For shorting candidates, look for businesses that both raises equity and pays a dividend.

- On Snapchat (SNAP): Thinks it could be a smoking hole in the ground after a while.  Mentioned to look at the company's growth rate once Facebook (FB) rolled out its 'stories' copycat feature on its Instagram platform.  Said SNAP needs to find a monetization model over time.

- Said investing in DryShips (DRYS) is kind of like playing poker with Kim Jung Il.

- Make sure it's a business you can understand, don't ignore management.

- On Facebook (FB), which Dorsey owns: seems almost too obvious; has huge topline but still growing at over 50%.  Global advertising market is huge (opportunity).  Advertising grows a little bit more than global GDP but digital ads have grown even faster.  Advertisers follow attention.  2 companies get 80% of incremental ad spend: FB and Alphabet (GOOGL).  But if you had to take the stock and lock it up and not touch it for 10 years, you probably can't do that with FB because the landscape changes too much.  FB is hyper-aware of the risk of declining user engagement.  The current valuation does not assume dominance 10 years from now.  Close to 17-18x EBIT now, growing over 50%.

- "We worry about all our positions.  If you ever have a position you're not worried about, you're probably in trouble."

- Single biggest lesson is to avoid endowment bias.  Just because he owns it doesn't mean he should trust management more.  "My biggest mistakes have definitely come when I've not kept the bar as high as it should be with management quality or business quality."

- You can never have too high of a hurdle rate for businesses you evaluate.  You don't need to own 100 stocks, you're not running a Fidelity mutual fund.  Maybe 10 in your personal account, or 30 if you're running a fund

- Sticky note on his computer: "No FOMO"  or No Fear Of Missing Out.

- Ask yourself: Does it fit your personality?  Does it fit what you're trying to do as an investor?

The publisher disabled the ability to embed the video but you can view it here at the Young Investors Society YouTube channel.

We also recently posted up Mark Cuban's interview with Young Investors Society as well.