Post #51: New Year’s resolution

Our resolution (which, admittedly, is not specifically ‘new’ but remains highly valid) is simple: tread carefully when you hear new ideas. Your author learned the hard way. In the relative impetuosity of his youth, he penned many pieces the peak of the late-90s TMT bubble making the case for the Internet taking over the world. The industry then went through a severe correction in the early 2000s and for every Amazon or Google that survived, countless others fell by the wayside.

Consider also the fate of many businesses that listed during 2019: Uber and Lyft are both currently trading over 20% below their IPO prices, while many cannabis stocks also saw their values decline significantly. The We Company (formerly We Work) was forced to pull its listing. While Beyond Meat did see its share price climb to a peak of $235 relative to its IPO price of $25, the shares did retreat notably from this level to end the year at $75.

What to conclude from the above? It is crucial to separate hype from reality. We regularly question the validity of total addressable market (or ‘TAM’) figures provided by corporates, consultants and investment banks. As Bill Gates famously noted,most tend to over-estimate the near-term impact of future trends, even if they do under-estimate the longer-term potential. Next, barriers to entry matter. In both the case of alternative meat or cannabis, the range of existing protein/ tobacco alternatives is broad, and it is hard to see at this stage why these newer market categories should be any different. Even if it seems likely that these industries will consolidate, picking clear winners at an early stage is often difficult, while few deals have tended to create shareholder value for acquirers.

Other things can also complicate the investing environment. Regulation can change very quickly. Fully autonomous self-driving cars may sound very exciting but remain subject to the considered opinions of regulators as well as legal experts (in areas such as liability in the event of a crash). Cannabis, by way of another example, may not go mainstream until there is consistent global standardisation, perhaps along the lines of alcohol volume levels in the drinks industry. Finally, don’t forget that scaling to a meaningful size requires cash and the appropriate deployment of capital by management teams with aligned interests (and preferably not dual share class structures). Caveat emptor!

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