Read The Entropy Trap to discover what physics knows the economics doesn’t.
“Although it might seem hard to believe, patient inactivity is hard, demanding, and exhausting work.”
—Murray Stahl
Truer words were never spoken.
Especially in this day and age and as a research writer where the public has become addicted to news and activity. I’ve noticed a loop: A news story breaks. Market participants trade based on the news. This causes price movements in a given stock or sector (up or down) which in turn leads to questions asked about the original investment thesis or valuation (especially in price declines). I am forced to evaluate the news and determine whether it is or isn’t meaningful to the original investment thesis and therefore whether my valuation models should/shouldn’t be updated and finally whether to add/trim/exit or do nothing with my affected holdings. And, most of the time, the correct decision is to do nothing.
Phew.. just writing that was exhausting.
A pertinent and recent example was the price action surrounding major exchanges which dropped significantly (20% in the case of ICE) on the news that prediction markets had received permission to trade perpetual contracts (don’t call them futures because they’re not). The fear was that this would take trading volume away from the exchanges, who enjoy an oligopoly on regulated derivative products and thus would suffer lower revenues.
Such fear, to anyone with a cursory understanding of exchanges, their product offerings and who their major clients are, was ridiculous as I stated unequivocally in this chat with Hugo Navarro.
Ironically, in contrast to the price decline, every single one of my major holdings reported earnings that were either in-line with or beat my estimates.
I took the opportunity to add to my exchange holdings and the major exchanges now make up 26% of the Crassus Investment portfolio, which is up 25% YTD. The Croupier Collection, which is a portfolio I opened this year specifically to buy and hold ‘croupiers’ is almost 100% in exchanges and is up 6.7% YTD.
Premium members will have access to my update models and valuation targets for all the names shown in the above chart.
But first, a different take on perpetuals — in this case on perpetual assets or businesses. Land and water are two perpetual assets. They exist naturally and lend themselves to ever higher use purposes over time, a concept I think of as a terminal value of infinity.
Exchanges are businesses, hence man-made ergo not naturally occurring. Yet as far as business models go, they’re about as perpetual as it gets. Thinking about it, their perpetuity is tied to regulated, publicly traded commerce. So if one believes that the world continues to spin and people or institutions want/need to engage in any of the myriad activities that occur on publicly traded exchanges such as: buying, selling, hedging, insuring, rebalancing, market making & arbitraging etc etc. then exchanges seem like a good candidate in which to compound wealth over time.
The trick will be to avoid interrupting said compounding.
Valuation Updates & Price Targets
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Paid subscribers just got the full valuations and updated price targets on the names above. Below I break down the same valuation process that’s kept us ahead of consensus on the exchanges and allowed me to buy more while the uninformed sold them off.
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