Buying What You Know

My college roommate loved NVDA and MSTR. Lets use 2007 as the start point for those two. 17 years.

MNST 2024: 61b $59 2007: 3.1b $3 CAGR 19.2% for 19.67x In 2009, it had 133mm in FCF that has grown to a billion a year in 2020s.

NVDA 2024: 1.34t $543 2007: 13.7b $5.61 CAGR: 30.9% for 96x In 2010, it had 408mm in FCF that has grown to 8b in 2022 and 3.8b in 2023.

Hard to beat. I am the idiot who at the time said they barely make money and skyhigh PE. Value is Probability multiplied by Payout. Business is making money and growing the empire. MNST and NVDA did both of those things and the making the money as simplified by the PE lags. 

Visa

Visa is an interesting study case of what is a good business and what would one should pay. Below are the market cap, free cash flows, yields and returns since its IPO. After all, all a company is worth is its free cash flow and what you should pay for an adequate return.

IPO 2008 Market Cap:17.9b FCF(2009):252mm FCF/MC yield: 1.4% CAGR to 2024: 23.60% (30x in 16yrs)

2010 Market Cap: 44.25b FCF: 2.543b FCF/MC yield: 5.75% CAGR to 2024: 19.42% (10x in 13yrs)

2015 Market Cap: 132.75b FCF: 6.18b FCF/MC yield: 4.66% CAGR to 2024: 16.67% (5x in 9yrs)

2019 Market Cap: 249b FCF: 12b FCF/MC yield: 4.81% CAGR to 2024: 16.35% (2.13x in 5 yrs)

2023 Market Cap: 531b  FCF: 19.69b FCF/MC yield: 3.71% 

The gross margins of 98% and net income margin at 50% is insane. There can't be a better business from that standpoint although Bezo's quote of "your margin is my opportunity" comes into play. Why can't fin-tech "disrupt" the networks of Visa and Mastercard. The price now does seem rich, but it has still managed to compound like crazy since its IPO. I am not sure I am smart enough to recognize how dominant of a buiness it is before its price has exploded. I am not sure I can justify my stupidity without the margin of safety as implied by the fcf yields of the past. Maybe in 2010, that 5.75% FCF/MC yield was on the fringe as it was probably growing like crazy, but the Treasurys were also higher back then a decade ago. Buiness, free cash flow, and pricing are three things I should focus on and the returns will come. 

Consistent Compounding

 I am going to strive to post random thoughts more often to refine them. Every Saturday. Consistently. Compounding only works because it is consistent.

In 2023, the Magnificent 7 were a rehash of the FANG of the past. The point is the concentration at top is now stronger than ever and if you were not in one of them, it was very hard to keep pace. Here lies the performance of the top 7 market caps.

AAPL 2.99T 48.2%

MSFT 2.79T 56.8%

GOOGL 1.75T 58.3%

AMZN 1.57T 80.9%

NVDA 1.22T 238.9%

META 910B 194.1%

TSLA 790B 101.7%

SPX 24.2%

In the last 35 years, the top 10 companies have averaged 25% of the weighting of SPX. During the dot-com, it peaked at 25%. It is now in the 30% range. This time is different. I keep thinking not, but I keep getting proved wrong. WEB and CM touted how SPX is the best investment for the know-nothing investors as the theory is that you own the entire pie without paying high fees. When the top companies fade to time, the new ones replacing them will replace their performance is the theory. I just find it hard to fathom this working as it has in the past, but the list looks completely different is the point. Maybe things are different this time as the performance of these top stocks have the indexes weighted so heavily, but isn't the theory that even when they get replaced, that value will be captured still.

These companies are so massive it really is difficult to imagine how they outperform as they are the economy. Those numbers are astounding. It's just a reflection of our economy today as if you are not first, you are last.

As someone who had a short in TSLA for the year, I am very lucky I have not blown up. How much longer am I tempting fate. 

Consistency compounds. Compounding is consistency.