Invest Like the Best with Patrick O'Shaughnessy
00:22:15 · Alex Sacerdote
Range anxiety was there. He got the range to 300 miles. The supply chain was finally in place so he could churn out millions of these things. That triggers the inflection. Now the other nuance it's not just, oh, it's taken off now. It's how big is this s curve, how tall it is. So you know when to sell, how long to hold on, because we're underwriting out two or three years. We have to know what the growth looks like thereafter. And these s curves can be dynamic. So when Amazon had AWS and it was a hidden line item inside of Amazon covered by retail Internet analysts, we realized the TAM for this, it was the largest TAM in enterprise IT ever. Because previously the TAM was routers, memory, storage, Dell, EMC, but they were doing it all. You wanna know how tall the s curve is. So we figured out they were addressing 600,000,000,000 of IT systems directly addressing that. And then we said, it's probably gonna be 50% deflationary. And then therefore, we're one or 2% penetrated. But then over time we realized it actually wasn't deflationary if you talk to anybody now. Let's say if you build it yourself, it's about the same price. So that means the TAM was so much bigger. There's mega s curves and there's sub s curves. We've been lucky that we've had Internet one point o, mobile, cloud, e commerce, and now AI, which we can confidently say is the biggest. And all these things build upon one another. With the electric vehicle s curve, you have to pay attention too because we thought probably maybe 40 to 50% of the cars will go electric, but it did hit a big wall at at 10 or 15%. Usually, the s curves go kind of all the way, but in this case for a variety of reasons, it didn't. So you have to adjust and you have to stay on top of it. And generally when something gets to sort of 40% penetrated then you stop having exponential growth which means the sell side catches up and there's no longer big beats.
00:24:24 · Patrick O'Shaughnessy, Alex Sacerdote
[00:24:24] S0: And is that when you sell? [00:24:25] S2: Generally, we like the high growth and it was a mistake with Apple because in the first five or six years of Apple, it was awesome. I mean, was our largest position and we'd go up 70% a year except for o eight. And then we sold in 2012 when it got to sort of 50% of The US had a smartphone. And with Apple, they maintain their leadership position. It had a couple years of underperformance and then the multiple got low and they added several ancillary things and then they also got to play in the application because they get 30% of the app. So they were able to compound very nicely say 20%, but the big years were in zero to 50% part of the curve. [00:25:07] S0: I'm so fascinated by this sometimes decade plus long flat line at the beginning of one of these curves, which makes me wonder what you've learned about the right moment to buy or even start paying attention before you buy. How do you measure that? Is it always different? What are the pitfalls that you've fallen into? How do you know when to start thinking about buying one of these things?
00:25:28 · Alex Sacerdote
[00:25:28] S2: Andy Grove says, when you have strategic inflection points, you can't trust the data And strategic inflection points are about intuition, anecdotal evidence. I love this book called the Tau Jones Averages, a guide to whole brain investing, which is right brain and left brain. And the best investors have the right the creative side where it's visual. It's connecting the dots. We invested in the mobile video game s curve for so long. The screens were small and the phones and the processing power wasn't good. So you had all these casual games. But then I was in China and I saw this little 12 year old boy with a huge phone and he was like playing a awesome video game. I'm like, oh my god, it's now coming to the phone. So it's visual. Enterprise is hard because you can't see it. Smartphone, you can see, oh my god, I got it. It's amazing. With AI, there's some intuition there. But enterprise, you don't really get to do that. We go to the Gartner IT symposium, 30,000 American CIOs go there. We saw this happen with Splunk where that used to be an amazing database company and their room where they were explaining was like standing room only. And we saw that with VMware thirty years ago where they virtualized a server. There was standing room only and you could just see the corporate demand just beginning. And with AWS, we went there and their Grand Ballroom was completely packed. And that was a 09:00. And at 10:00, the Grand Ballroom was completely packed. 11:00. So you could see the demand exploding before it happened. We look for all kinds of clues and there's a whole pattern recognition that happens. And by the way, it's okay to be late. It's okay to miss the first one, two, three years in a lot of cases because if the top of the s curve is half 1,000,000,000,000, the growth can go on for a long time. So you don't always have to be right there. It's okay to miss the first 100%. Peter Lynch, I started at Fidelity and he loved to mentor the kids. So I got some time with him. He said, white out the chart. It's all about the future. So it's okay to miss, but what helps about the s curve is sort of how long it goes for. Then there's the slope of the s curve, which is important. And a lot of people think because we're in a modern world, everything's so fast. But there's a lot of factors that determine the pace of the adoption.
00:28:04 · Alex Sacerdote, Patrick O'Shaughnessy
And we commissioned this gentleman Horace Dedue used to work with Clayton Christensen to go look in history and we have the big s curves on our wall over the last hundred years. And the radio s curve is one of the fastest ever. It took seven years to reach like a 100% penetration. But the dishwasher s curve is like that because it needs to be plugged into the back end. B to B stuff can take a long time because it needs to be plugged into the existing systems. Consumers generally tend to go a lot faster. [00:28:37] S0: I love that. The radio and the dishwasher, the two models for adoption.
00:28:41 · Alex Sacerdote
[00:28:41] S2: I covered internet at Fidelity. My first stock was Amazon. That's a whole other story which is a lot of fun. But I also did b to b internet and there was a whole huge bull case on that. The underlying infrastructure wasn't in place for b to b to happen. Ultimately happened twenty years later with SaaS. That is a risk with AI in that these big companies are very security conscious, can be slow to move. There's a lot of cultural issues with AI where you really need a few evangelists to push it through. The top management needs to push it through, but then the IT is saying this is risky. And that happened with cloud too. That was one of the big things with cloud where everybody was afraid. It's unsecured to have your data in the cloud. And then we saw the CIA do it, and we saw Capital One, and we talked to the Capital One CIO, he said it's more secure in the cloud. And then it really started to take off. Those take offs maybe because SaaS is like the dishwasher and because cloud it's gotta be plugged in, it meant that yeah, it was growing, but it was sort of a 30 to 40, maybe a 50% growth rate. But what's amazing about AI is you just at least with consumers or even this you just open up the browser and it's there. And so that's why we're getting this straight up. And I think there's enough runway in the near term going from 10 bips of people really using it to two to five or whatever, which is gonna cause it to keep on going straight up. This one called a backwards l curve. So it's really pretty exciting.
00:30:19 · Patrick O'Shaughnessy, Alex Sacerdote
[00:30:19] S0: What have you learned about when the group that ends up being the leader separates itself from one of these competitive packs? So you're talking there mostly about overall growth of the s curve and demand. There's always multiple players fighting for it. It seems like you kind of invest after someone has separated themselves from the pack, not try to pick the winners from the pack. [00:30:41] S2: You look for the s curve, then we do an exhaustive study of everybody with exposure in that area and try and find the one with a very powerful competitive advantage. And a lot of people didn't like tech. Warren Buffett didn't like tech because he couldn't predict the future. [00:30:59] S0: Changed too fast.