Motley Fool Hidden Gems Investing - What's Your Investing Thesis?

Episode Date: March 6, 2023

It's always a good idea to know why you're about to invest in a business. (0:21) Jason Moser discusses: - Short-term catalysts, long-term trends, and why it's ok to invest in both - The importance of understanding how a business makes money - Reasons to sell a stock (10:17) Deidre Woollard looks back at the bear market of 2020 with Liz Hoffman, author of the new book "Crash Landing: The Inside Story Of How The World's Biggest Companies Survived An Economy On The Brink". Companies discussed: ABND GS, HLT Host: Chris Hill Guests: Jason Moser, Deidre Woollard, Liz Hoffman Producer: Ricky Mulvey Engineers: Dan Boyd, Heather Horton, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news! The Federal EV Rebate is back! Eligible customers get up to $5,000 with the Federal EVAP Rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. A look back at the crash of 2020 and a closer look at when to sell. Motley Fool Money starts now. Chris Hill. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst, Jason Moser. Happy Monday. Jason Moser. Jason Moser. Hey, happy Monday.

We got an email from longtime listener, Will Martin. It was a very nice note that included a shout out to you. I'm quoting here, special thanks to Alison Southwick and Robert Brokamp for years of great personal finance advice. I'm not going to read the whole thing that Will wrote because it's pretty lengthy, but the investing questions from him boil down to a couple of key things that I think apply to all investors. It has to do with investing thesis and sell signals. Let's start with the first one there. He asks as much, what guidance do you have for an investing thesis? We're investors who focus on businesses, so feel free to use any business as an example. But when you're looking at a business, Jason, how do you come up with your investing

thesis? Jason Moser. Yeah, this is a good question. Ultimately, the investing thesis, that's more or less your case, the reason for investing. For me, it always is kind of broken down to two different scenarios. I know that we here at The Fool are very long-term buy-to-hold focused. I don't say buy and hold, I like to say buy-to-hold because you got to keep up with the story, Chris. It's just not like buy it and forget it. You got to keep up with the story. But there is that buy-to-hold mentality versus something else. Maybe some people will call that value investing. Maybe some people will call it trading. Obviously, we're not going to call it trading because we're not traders here. But when it comes to looking at the actual thesis,

I break it down to either being the short-term catalyst or the long-term trend. They are two very different concepts. You're looking for something that is going to drive this business forward. Then you're trying to further figure out what is going to drive this business forward. is it some type of short-term catalyst, some headline, or decision, or policy, or is it a long-term trend that the company is playing into that makes more sense? Now, a short-term catalyst, no surprise, that's going to be something that is a bit more short-term in nature. Perhaps some people would be able to relate to this if we just pose it as a value investment. I think of energy oftentimes as something that fits into this box pretty well,

because energy being so volatile changes along with economic conditions. You could see a short-term catalyst that might drive energy prices higher over the course of the coming year or two years, and then you might make an investment in an energy-related company based on that concept, based on that notion. That's something that's a bit more short-term catalyst in nature, versus something like a long-term trend, where we talk a lot about 5G and connectivity, I think, on this show, and the services that I run are focused on those concepts. 5G, for example, is something a bit more long-term in nature. We're talking about essentially a decade where this idea is going to play out and present a number of different types of opportunities.

For me, really figuring out the thesis first and foremost depends on, are you looking at this the lens of a short-term catalyst versus a long-term trend. Both are acceptable. I will say, I think that the long-term trend is easier because you're taking that longer-term view, you're letting time work to your advantage. The short-term catalyst is a bit more specific in nature. You're depending on one thing or maybe two things to happen, and if they don't, that could certainly alter the shape of that investment idea, so it's worth keeping that in mind. I invest with both strategies. I'm not a value investor per se, but I definitely take maybe a shorter-term timeline with certain investments based on that short-term catalyst

idea. Underlying that, when I think about this question, I go to an even more basic place, and I love the comparison you made between short-term catalysts and long-term trends. I think a key part of having an investment thesis is, do you understand the business? And do you understand the path that this business needs to take either to growth or profitability, ideally both? But those, I think, are almost table stakes for any investing thesis. I would agree. For me personally, I don't like investing in businesses that I just don't understand. If I don't understand what they do, it's really difficult to make a case that you understand how they make money, and then further, what's going to drive growth

or drive this business to new heights in the future. A very good example, I think, is if you invest with your kids. I've got my kids started many years ago when they were much younger than they are now. But that was essentially the first question that I would always ask them. I'd say, what does this business do? It was just as simple as saying, well, Starbucks was one of their first investments. I think their first investment was Disney, they certainly understood that one pretty clearly. But Starbucks, a very good example, just, hey, what does this company do? How do they make money? It was as simple as them just looking at me saying, you know what, they sell coffee to people for money. As simplistic as that is, that really

is it. That's the crux of it. It's not like you have to go into some real deep dive as to explaining the drivers of revenue and what's going to change the margin picture in the coming years or whatnot. Just understand what the business does, understand how it makes money, and then think about that in the context of the future and the opportunities that might afford that business down the road. The second part of Will's questions when it comes to investing, what are your sell signals. Do macroeconomic factors ever play a role in them? I'll just answer that second one real quickly. I don't think they ever have. I'm just trying to think about my own. I try not to sell stocks. It does happen. But the times that I've sold a stock, I don't think macroeconomic

factors have ever played a role in that. Yeah. I don't think macro really comes into I sell decisions very often. I absolutely have sold more often based on the reason that I don't really fully understand this business maybe as well as I thought I did. Maybe I understood the core concept of the business, but seeing the future and the drivers of the business, it wasn't as clear in hindsight. When it comes to macro, I try to sell as little as possible. That's my underlying philosophy. I really don't want to sell unless I have to. Ultimately, I have to sell for really a couple of reasons. Either number one, I need the money. I need the money to do something else, whether it's pay for college or we have a home improvement project that

I need to undertake. Or if I just come to realize that the thesis is either broken or my thesis was misguided from the start. Sometimes we just get it wrong. I think it's really important for investors to remember that. You need to embrace the mistakes. You need to embrace getting things wrong because that's what makes you better. That's what you learn from. I think once you hit that point as an investor where you actually enjoy the mistakes from the perspective that it made you smarter, that can be very powerful as an investor. I don't let the macro really guide sell decisions very often. I will let it guide my buy decisions sometimes. We've seen over the past year, year-and-a-half. It's obviously been a very volatile market. It seems to be very

driven by headlines in whatever Jay Powell is going to say at any given meeting at any given time. We clearly have zero control over any of that. We ultimately don't really have much control over any of the stuff at all. But when I run into a stretch of time like we've witnessed over the past year, year-and-a-half, I personally, and I've done this with my services as well, is I'd like to take a step back and make sure that I understand where the portfolio stands, how diversified are we, where could we enjoy a little bit of additional exposure. Oftentimes, in situations, positions like this that we're in now, with rates going up, we're seeing growth obviously in question, it's been a good time to invest in some of those more

stable businesses. Businesses with steady and reliable profitability and cash flows and paths forward. Even if those businesses aren't screaming values today, I tell you what, they're a heck of a lot better value today than they were three years ago when everything was going up. I do think it helps gotten my sell decisions less, but my buy decisions more. Jason Moser, Always great talking to you. Thanks for being here. Thank you. In the spring of 2020, at the start of the pandemic, we had what turned out to be the shortest bear market in history. But at the time, many companies didn't know if they were going to

make it through. Peter Woollard caught up with Liz Hoffman, author of the new book, Crash Landing, the inside story of how the world's biggest companies survived an economy on the brink. One of the things I liked about the book was how you set up those sort of the moments of people in their daily lives and the way things shifted. I want to talk a little bit about Airbnb because that was one of your through lines through the book. We got earnings from them recently and they were incredibly strong. What leadership tips can we learn from Brian Chesky's kind of early actions to cut costs and where Airbnb is now? You have to remember, coming into 2020, this was going to be their IPO year, the most consequential thing. They were going to take

their place in the pantheon of Silicon Valley unicorns who'd gone public. And Brian Chesky, I think I opened his part of the book with, he'd spent the holidays in 2019 kind of with a stack of S1s, kind of thinking about what he wanted the story to be as they sort of prepared to debut. And he'd written a note to himself that 2020 would be the year of connection. And that's something that just stuck with me as I was following that story. And then, you know, they started to see very early on what we all kind of instinctively came to understand, which is that nobody wanted to go anywhere. And just the fear, the idea that you would go to a stranger's house sounded insane, you know, very quickly by March of 2020.

And so they have revenues that are falling off a cliff. They have refund requests, right? They're looking at a negative cash flow and actually had a little more cash than most startups had a couple of billion dollars in the balance sheet, but knew it wouldn't be enough. So they raised $2 billion from a bunch of investment funds and a deal that I remember at the time thinking, man, are they crazy? Like I couldn't fathom that anyone would, this company seemed so clearly left for dead to me. And I have a story in the book and one of those investors, Alan Waxman at Sixth Street had gotten a call from an M&A in Silicon Valley. He said, basically, are you insane? What are you doing here? And he said, listen, to Jeff Wiener, he said, listen, the way we structured the deal,

Airbnb only has to be worth about $2 billion. And I remember at the time, it had been worth more than $30 billion. He said, if this company isn't worth $2 billion, we all have bigger problems, which is to say the economy will have collapsed. And then fast forward to spring and summer of 2020 when Airbnb started to notice that people actually were traveling, but they didn't want to go to a hotel in New York City or Las Vegas for a weekend. They wanted to go, I'm in New York, they wanted to go to the Catskills for a month. And so they very quickly pivoted to these long-term stays. They rode that wave of remote work, continuing to ride that wave, and then decided in the summer of 2020 to actually go public after all, and public at more than $100

billion valuation. So, I mean, just a fabulous, interesting pandemic story just bookended by the utter despair on the front end and then this weird, frothy market euphoria on the back end. Bold moves are sort of a theme I've noticed in the book, too, and people making sort of moves when everyone else is going the opposite direction, which kind of brings me to Bill Ackman. You talk about his story in the book, and that's sort of fascinating. You know, he ends up buying these credit default swaps on corporate bonds before anybody knew how serious things were getting. Huge risk. What made him so confident on that? The thing about Bill Ackman that's fascinating here is he called the pandemic coming and going.

He basically, he's, you know, your audience will know Bill well, but he's an activist investor. He holds these incredibly concentrated stock positions. He researches these single name companies and then makes a big bet. That's not what he did here. He had these two macro trades on. The first of which, you're right, he notices in February of 2020, actually Bill is also like a little bit of a hypochondriac. You can tell through the book that he's very early, very nervous about this very early and actually opened the book with him kind of freaking out at this student group in London in February of 2020. But he notices very early on something that in retrospect was incredibly obvious, which is that the market was massively mispricing

risk of all kinds. You remember that decade coming into 2020, interest rates are zero, money is free, and it pushes everyone further and further out the risk curve. And what he really noticed was that basically people were not, investors were not assigning any more risk to corporate bonds than to treasury bonds, the most credit-worthy counterparty on the planet. And these spreads had gotten incredibly tight. And he said, listen, I don't know how bad this is going to get, but there is risk that is being ignored here. And he bought the equivalent of an insurance policy. And within a couple of weeks, the risk that he was insuring against had really gripped the entire market. And he was sitting on a piece of paper for which he had paid

$27 million in upfront costs that was worth $2 billion. On the back end, he also was quite quick to realize something that now sort of seems insane that we all, and I include the Federal Reserve in that, missed, which was the massive inflation that we've seen as demand rebounded, supply chains had been cut. You had this huge fiscal stimulus. People were sitting on mountains of savings, and they wanted to spend it. And so, he put on an interest rate position. It was a little early, in early 2021, that ended up being incredibly lucrative. So, called it coming and going in a way that I don't think anybody else did, including the central bank. One of the things you talk about in the book is individual companies having to think about

the way they use capital and make those decisions all of a sudden. You had companies cutting dividends, stopping buybacks, trying to issue corporate bonds, getting money wherever they could. Now we're sort of on the other end of that. Most companies have reinstated their dividend. Buybacks last year soared. What do you think companies learned or maybe missed about how to use cash from going through the pandemic? I think we learn this lesson every five, 10, 15 years, which is that you can never be too liquid. In good times, there's not a lot of value to having a ton of liquidity. You don't earn anything on it, especially in the 2010s when interest rates were zero. You literally were not earning anything on cash that you kept.

And you would see these activist investors come in and really push companies to pay dividends, to do buybacks, to do something with their cash and not keep it there. And so early on, people thought they had more liquidity than they did. And I mean, there's two good examples of that in the book. One is Hilton, which basically became the first blue chip company to pull its credit lines with banks. They did it in early March. CEO Chris Nassetta had called his general counsel and said, do I need board permission for this? General counsel said, no, you don't. And so his CFO called the banks and said, I want the money now and had some very tough conversations because these loans are kind of designed to be problematic. Banks give them out basically for

free in, you know, trying to get other business. And then when everyone wants them all at the same time, it becomes incredibly stretched. And, you know, it was so newsworthy at the time that Bloomberg had written a story when they did it. And someone forwarded the story to the CEO of Hilton. And he said, this isn't going to be worth writing about in a week. Everyone's going to be doing this. And he's right. And then on the other side of that equation, you know, the banks, I dug into Goldman Sachs' balance sheet. And it's a trillion-dollar balance sheet, couple hundred billion dollars of things that ought to be liquid, things like treasury bonds. But you have to remember how topsy-turvy that market was. Usually, in times of crisis,

people flock to things like treasuries. They sell stuff like stocks and real estate, and they move into liquid-safe things. But the market was so seized by panic that you sold the only things you could sell. So, actually, the selling started on the safer end of people's portfolios. And so, there were times where you couldn't get a bid on treasuries. And so, it became incredibly hard inside these financial institutions to say, well, wait, do we have enough money? And they ended up spending a weekend effectively looking through the couch cushions, you can think of it that way, trying to move trades around and free up any liquidity in the right currencies and make sure that they had enough to get through. But it was incredibly

fraught there for a while. I think that was something that I didn't really appreciate until I sat down with the totality of my reporting to realize just how close it came to really falling apart. One of the other things that we saw during the pandemic is companies in the same vertical that were competitors, they had to look to each other for guidance. You saw it in airlines, you talk about it also in the automotive industry. Now we're back to business as usual, but what do you think those companies kind of learned from working with what are usually their closest competitors? I was fascinated by that tension and I'm not really sure I came out on one side of it or another, but you'd see these, these small situations where the competitive kind

of angst, it sort of overpowered things. Like I'll give you one that I, you know, I was really struck by, which was, you know, March 17th at weekend, 15th, 16th of 2020, uh, the airline the automotive CEOs, I'll hop on a call that was organized by the UAW, the union, about whether they should close their factories. I mean, they were just obvious health hazards. And the call itself almost didn't happen because they were so concerned about either sharing competitive secrets or running afoul of anti-collusion rules, which is to say these three CEOs are not really allowed to talk about production and they certainly don't want to. And simply organizing that call. And I was seeing with the head of the union who is just beside himself, like, you know, his employees are

getting sick. I think the first had died by then or very soon thereafter. And he can't get the CEOs on the phone because they don't want to talk to competitors. I mean, that was a really interesting one. And then, you know, the airlines, I think you started to see that evolve early on everyone very clearly in the same boat. And I spent a lot of time on this two or three day war room where all the CEOs go to Washington and trying to hammer out this aid and sharing information with each other that they never would about flight schedules and things like that. By the time the second CARES Act negotiations were happening that summer, that trust had really started to fray. You had started to see the stronger airlines, notably JetBlue and Delta, which frankly didn't

really need government help at that point and weren't super interested in helping their competitors, like American in particular, which did need it, get that help, you started to see some mistrust get sown there. And ultimately, the politicians took care of that decision for them and just extended the aid. But yeah, you start to see those competitive hackles come and go. And I think more or less, we're back to where we started, which is it's an incredibly tight labor market. Every nickel and dime counts in the inflationary environment that we're in. So, I think those competitive hackles are right back up. As always, people on the program may have interest in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. you