This is the tenth piece in our Broyhill Letter Highlight series, highlighting our thoughts on disruption over the years. You can access other posts in the series here.
For those who would like to revisit our letters in full, we will also be gradually sharing them to our Research Studio throughout the series.
Disruption is not new to capitalism. There's always a new, new thing. The capital cycle has always ensured that high returns are competed away. But this is happening at a much faster pace today than at any time in history.
Disruption may be accelerating. But human nature and investor psychology have not changed in centuries. No one questions the assumptions underlying today’s “new economy.” Old dogs rarely get credit for learning new tricks. But young dogs rarely believe that they may even stumble. It is precisely this consensus sentiment that creates opportunities for brave, contrarian investors.
Competition is not new. It may be fiercer today than ever. It may happen faster. It may seem like it's more unpredictable. But it has never been predictable. We will never know with certainty how incumbents may be disrupted. Where the threats will come from. Or how fast those threats will emerge. But we can attempt to tilt the odds in our favor when valuations already imply these businesses are dead. In doing this, we can minimize the pain of being wrong and maximize our profits if things turn out a little less badly than everyone expects.
As narratives become increasingly delusional, prices disconnect from reality. But ultimately, facts win out over fiction. And there is always something to do. New-era thinking is ultimately replaced by less extreme and more conservative investing when profitability and cash flow matter more than empty promises.
There’s no law of investing that prevents expensive assets from getting ridiculously expensive. At the same time, just because you are willing to take risk buying overpriced stocks, doesn’t mean that you’ll be compensated for that risk.
High equity valuations don’t signal a bear market. But they do signal poor asymmetry. At the same time, hunkering down with a “guns and ammo approach” would mean passing on opportunities.
We will never own expensive assets in the hope of selling in the future to someone willing to pay an even more expensive price. We will not rely on greater fools.
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