Today's Great Investors

Investment Analyst in AM - Equities

Very insightful, the idea that the star stockpicker model might’ve just been a phase. Thanks for working through my muddy question. Yeah, in hindsight, it was only possible because of a specific mix of inefficiencies: slower info, low competition, unsophisticated flows. I’d argue it wasn’t a blip in history, instead a form/model of what a great investor looks like in that particular market setup. That model peaked e.g. Buffett, Klarman, etc. and over time got squeezed out by passive flows, quant factors and tighter competition. If I understand you correctly, the end result wasn’t a better stockpicker, it was the rise of ETFs, systematic styles and pod structures. What used to rely on individual discretion became codified, repeatable and finally embedded into infrastructure. 

The pod model is interesting because it blurs the line. At its core, it still relies on discretionary stockpickers making judgment calls, but wraps them inside tight risk frameworks and system-level architecture. The firm becomes the allocator, the rail, while the stockpicker becomes a modular, risk-budgeted node within a larger machine. You could argue it's the final iteration of the stockpicker model before it’s fully absorbed into infrastructure — I am not saying we’ll get there though. 

Which brings it back to your line of thinking, today the focus isn’t on someone picking the next 100-bagger. It’s on those building the rails that capital flows through, as the stockpicker era winds down — at least in the form we’ve known it today. Could be the team that industrialised ETF market-making, maybe the architect who re-engineered alpha at Citadel. So yeah, maybe Satoshi didn’t invest in the traditional sense, but he built something that pulled trillions of value into a new system, perhaps ushering a new model. Time will tell. Either way I agree, it is arguably the most powerful investment move of the last two decades.

You zoom out and a hazy pattern emerges: individual brilliance surfaces, is distilled into a process, scales through capital, ossifies into structure, and the cycle restarts. Patron-merchants into modern banking. Carnegie and Rockefeller into the corporate conglomerate. Stockpickers into index platforms. Each form emerges to exploit inefficiencies, scales through capital, and eventually ossifies into structure — until the next one appears. If so, that would mean I have to focus on the biggest inefficiencies of today’s market and what’s been created to address them, which in a way ties back to your marginal dollar point. Thanks again for responding, honestly helpful.

Yep you get my perspective 100% (and it is just a perspective). 

If you’re broadly more interested, I’d argue look at the history of the things we invest in (beyond just the cliche tulip mania for stocks). For example, Europe is far more banking centric, which then influences how much M0/M1/M2 vs. how the United States has always been securities centric (look at development of Bankruptcy code which is unique to the states, look at how Money Multiples are much larger than in banking, and then look at what actually IS a money multiple and how that relates to the real economy); 

For example, if a bank in Europe says something is “worth” 10x cashflow and lends 60% LTV, and needs to have 10% equity capital against that, it has just “created”; 5.4x of that cashflow into the real economy by injecting that cash. The whole point is whether the nexus to the real economy is actually there and it gets paid back (or it defaults). The difference between this and securities is that the bank absorbs the volatility through not marking this nexus everyday (so value is sticky, defaults slower). 

Compare this with equity securities (which have a level of success that is really a unique thing to the US(again happy to argue this point)); you would need to look at dividend multiples for a similar result; current yield is like 1%, so you’re paying a 100x cashflow multiple (or put another way you’re creating “99x”), except this can rapidly change based on “market” view (and indeed if you look at history of dividends vs. price, dividends in an absolute sense are very sticky, while price is obviously not). If you look at it this way; you understand a “market cap” is really the gross accumulation of willing “lenders” at various levels of money creation to the potential of the going concern. 

Some have deeper pockets than others, and so the marginal money then dictates much of the “value” that is marked against that security, which can be subject to market pressures (temporary supply/demand imbalance), or genuine view on fundamentals (which is in my view just a longer term supply/demand imbalance in the real economy).  

With the rise in passive, you end up with far more passive lenders in this stack, which by definition are not responsive to fundamentals of the real economy and even to the market, this capital only reacts specifically to specific rules (like the market cap weighting, index inclusion etc). 

The final part of my ramble is that, to then make money in such an environment reliably and scalably you need to return to the actual nexus of the real economy (which barring technology regime shifts (total factor productivity), discovery of mass new resources (capital), or demographic / education change (labor), tends to be much slower), I think this is why you end up with such large players (Apollo, Buffett) in the insurance business because there is a physical law governing this lending relationship (vs. banks which is hypothetical) that is reliable and scalable (grows as a derivative of the real economy, but serves the real economy via risk management), ans it is not subject to mark-to-market (unlike equities). They then plough this float / earnings back into other productive parts of the economy.