Investing with a catalystHF
I came across a blog post about Bill Gates calling Kodak "toast" back in 1991 that serves as a good reminder on why you really need to have a catalyst when investing.
Gates was right of course – and since 1991 Kodak has been a terrible stock – and I would have counted Bill Gate’s comments as “knowledge” in as much as a statement about markets and technology could be knowledge. But it would be an awful long time before that “knowledge” would be reflected in stock prices...
If you had taken Gates to heart in 1991 and shorted the stock then for almost ten years you looked like toast. If you sold the stock because of something Bill Gates said then you looked silly for six or more years unless you purchased something better.
Indeed if you had the “knowledge” probably the best thing to do with it was to use it just to avoid the photography sector altogether. That would mean you might outperform the market – but that outperformance was slight.
It has been brought up several times on this forum, but always remember that you can lose a lot of money even when your thesis is correct (in the long-run). On the flip side, you can make a lot of money and be completely wrong in your thinking. So what are the main takeaways?
1. Always ask yourself "What's the catalyst? And what's the timeline?" when investing (or pitching) anything. An asset's price can stagnate for months/years without a catalyst, but prices move very quickly once a catalyst is a achieved/reached.
2. Even if you have a long investment horizon, you still have to deal with annual "checkpoints" where investors evaluate your progress. You might have all the tools to win the marathon, but your investors might pull you off the course early in the race if your pace is too slow.
3. If you don't know the timing of your catalyst (i.e. shorting a bubble), but still believe in the thesis, try to find "cheap options" and hope you can buy them. Google: Paulson, CDS, Subprime