Investment Mistakes Worth $300K+
And correcting the course.
Edited by Brian Birnbaum.
TD;DR: I sold GoPro and Blackberry at a loss and bought Hims. I will be therefore discontinuing my coverage of GoPro and Blackberry and will cover Hims quarterly.
No time to read the update? Watch for free on Spotify or Youtube:
1.0 Sometimes You Earn and Sometimes You Learn
Sticking to the framework that I lay out in my 2 Hour Deep Diver course would have saved me more than $300,000. Below follows an analysis of these mistakes and how I am correcting the course.
As I sat down in November to produce my 2 Hour Deep Diver course, I started feeling uncomfortable about two investments of mine: GoPro and Blackberry (two turnaround stories). In looking back, I realized the same mistakes applied to the now defunct Amyris.
The framework that I lay out in the course elegantly encapsulates the essence of my earlier (AMD, Tesla) and newer winners (Palantir, Spotify). Once I synthesized the framework, I saw with clarity that GoPro and Blackberry fell firmly outside it and were thus unlikely to fundamentally evolve well going forward.
Although my wins far outweigh my losses–one of the many wonders of positive compounding–I could’ve saved over $300K (buy now for just $199) by taking my 2 Hour Deep Dive course 3 years ago. In fact, I could’ve also earned even more by instead investing that money in the companies that did actually fit the framework.
The main takeaway from my framework is that the almost unreasonably consumer-centric, experimenting, and iterative companies tend to outpace the destructive forces of the market and thrive. As a result, their earning power tends to improve over time.
These companies also tend to achieve economies of scale, share them with customers, then proliferate the strength of their moats. Ultimately, every dollar a company makes is an added incentive for disruption, and, by sharing economies of scale, companies greatly increase their odds of market dominance over time.
With increasing share of the market comes more time to compound.
A 50X investment like my AMD holding is in essence the result of a company taking the above three pillars (customer centricity, experimentation and pace of iteration) to the extreme, over a long period of time. No one inside or outside the company can predict the future, but the company’s extraordinary organizational properties broadly equate to more problems solved for customers over time at a lower cost.
In turn, this tends to lead to higher levels of free cash flow per share over time, with the share price then following along, loosely in the short term then increasingly tightly over the long term.
Further, when a company of this sort taps into humanity’s core wealth creation process, the upside is exponential. All humanity does to create wealth is process more information and unlock more energy. Companies that meaningfully advance our civilization’s ability to do any of the two tend to be handsomely rewarded by the market.
The above relationship is actually recursive. Advancing humanity’s ability is a very hard thing to do, which means that companies that do so are more likely to be highly defensible operations. Yet, they are only able to do so in the first place because of their extraordinary organizational properties, which over time translate to important work, at a civilizational level.
There’s no limit to the value these companies can add, because there’s no practical limit to information and/or energy. So long as their organizational properties remain strong, the possibility of exponential upside is very much on the table.
If you zoom in, any curve is the result of many straight lines put together. Similarly, exponential increases in free cash flow per share are simply the result of constantly solving more problems for customers, decreasing the cost of doing so, and making it harder for others to imitate the operation.
Human kind is not conceived to think exponentially, but we can understand the drivers of non-linear evolution.
Over longer time horizons, these companies also tend to evolve into platforms. They bring to the world a step change in the price/quality ratio of some fundamental component of the economy. For instance, by heavily investing in its electronic inventory system, Walmart instantiated a new dimension of retail, which in fact still has a lot of room to grow by expanding internationally.
With its organizational properties very much persisting over time, since inception Walmart has compounded its platform to bring more to customers for less over time. The returns to shareholders have been magnificent since the IPO on August 25, 1972 to date, coming in at 17,685.29%.
You may think that Walmart is just a supermarket chain, but it’s actually a hyper-efficient retail information processing machine. All it does is connect suppliers and customers, but it does so in a way that is incredibly difficult to imitate.
A company that does not fit in the above blueprint is, for me, uninvestable. Of course, not all companies must fit in this framework to do well, but with our ability to process information increasing exponentially across the board, this framework rides on the back of the more prominent tail-winds of our time.
Although GoPro is quite customer-centric, the business does not tap into humanity’s core wealth creation mechanism. Although it does sell an essential tool for content creators, there is really no need to buy a new camera yearly.
GoPro therefore does not solve any acute customer pain, which has made the turnaround choppy.
Over the past year and a half, the initially successful turnaround has run into severe headwinds. These have impacted other businesses too, but the payoff for waiting around is much lower than in a business like Hims, for example.
Without the potential for exponential growth, GoPro is a waste of time.
Blackberry’s real-time operating system, QNX, is embedded in over 200M cars on the road. Blackberry is currently working on Blackberry IVY, which promises to connect these cars and create a single network, in which they can share information. Blackberry therefore could meaningfully fit the aforementioned framework.
But its culture is awful. The company is highly political, with seemingly low levels of customer centricity and a slow pace of iteration. The odds that it can therefore create value from its QNX installed base are much lower than I originally predicted.
These two businesses could very well succeed to a certain degree going forward. But I’d rather deploy my capital with a company that perfectly fits the framework I’ve so meticulously built over the years.
Additionally, in August 2023, Amyris filed for bankruptcy. The company’s biomanufacturing platform had great potential, but it wasn’t being directed towards solving customer pain points or developing a heretofore unknown solution. Amyris was trying to monetize the platform by growing its proprietary beauty brands, but customers had plenty of alternatives.
In theory, Amyris’s products were appealing to customers because they were more sustainably produced and had a superior performance to alternatives. I actually still am a consumer of one of their products (Terasana) and I can confirm that the performance is fantastic.
But, the products’ differentiation was not enough to keep the company afloat. Customers didn’t actually need them, so the operation failed.
2.0 Correcting the Course
A condensation of the lessons learnt and why I bought Hims.
The above mistakes can be avoided by only contemplating companies with:
An evident and obsessive customer-centricity.
A strong track record of high iteration and experimentation.
An ability to identify and solve increasingly over time acute customer pain, at an increasingly lower cost, while increasing cash production.
Further, oftentimes the market disregards companies with a net loss and positive cash from operations. Such companies do not actually lose money, which sometimes leaves excellent organizations ripe for the picking.
Amyris had negative cash from operations because it wasn’t solving any acute customer pain. This is what ultimately led the company to bankruptcy incurred a total loss of capital.
Going forward I will thus be additionally wary of investing in companies with negative cash from operations. However, I’ll note that I was always vocal–here or otherwise–about Amyris’s risk of bankruptcy. Although I did lose 100% of the money invested, the position was therefore sufficiently small for the loss to be immaterial.
On the other hand, the GoPro and Blackberry investments have not led to a total loss of capital, although the two investments are down considerably. I have simultaneously found a company that checks all the requisites (per the current state of the framework).
I have moved my money from GoPro and Blackberry into $HIMS. I have invested in the company primarily because of its seemingly extraordinary organizational properties, together with the fact that it is solving a growing volume of acute customer needs at a gradually lower cost, in a way that is increasingly harder to imitate.
Hims is a deflationary force in the otherwise highly inflationary US healthcare sector and has managed to print positive cash from operations without participating in the incumbent system–all of which is extraordinary.
Hims has also created its own healthcare infrastructure, which it iterates at a high pace, to ultimately bring more convenience, savings, and better outcomes to patients.
If you want to learn more about Hims, watch my deep dive for free:
Until next time!
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