Letter from the Value Investing Mental Asylum or How I Embraced Stoics

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The following is an excerpt from Vitaliy’s recent client letter.

A year ago, I called the stock market mood, “partying like it’s 1999.” I was off by a year. Last year was missing the necessary euphoric speculation, which ironically arrived in the middle of a pandemic that engulfed the world.

Just as history doesn’t repeat itself but rhymes, so does stock market behavior. Though there are a lot of similarities between 1999 and 2020, there are differences, too.

In 1999 the market was flooded with dotcoms, “new economy” companies that traded at astronomical valuations, were losing money, and had unproven business models. Today we have a lot of “new economy” companies, too, which either offer software as a service or do something in the cloud. Unlike in 1999, these companies generate cash flows. Just like the dotcoms of 1999, they are growing fast.

Most appear to be real businesses, but it is not always clear how sustainable their competitive advantages are. This is paramount when the market expects super-high growth rates to continue decades into the future.

Here is one example: Zoom – a clear beneficiary of the pandemic. It is a real company. The pandemic turned its name into a verb. But there are zero switching costs from Zoom. Could Google, Facebook, or some startup displace it? Too early to tell. In the meantime, Zoom is trading at half the market capitalization of AT&T or Verizon.