Saucy
A classic way to spice up a bland dish is to make a pan sauce. Say you sauteed some meh chicken. You take the chicken out of the pan, you throw in some stock or wine or vinegar or even just water, salt pepper.
Then, you reduce. You boil-off the things that don't matter to the flavor. Voila: intensely flavorful sauce. You know when your sauce is done by dipping a spoon in then running your finger across the back. If the line your finger makes stays, you're finished. The flavors leftover in the pan from cooking the chicken shine and you can serve a tastier dish.
Stew on it
There's a parallel in investing. Reduce the investment problem as much as you can. Boil away the things that matter less to the outcome and you can make better decisions. Just don't reduce it any more than that.
This isn’t easy. Oaktree founder Howard Marks took this on in his book "The Most Important Thing," where his shtick was every chapter was "the most important thing" in investing. He's right, there’s no single "most important thing."
Lamplighter spends a lot of writing energy reducing its investments to the simplest important terms. Most of the writing here tries to get at that challenge.
This exercise really helps when there are a million things changing in the world all at once and you — the investor — need to ask "does this matter?" Once you figure out the few things that do matter, it also helps to know how important those things are.
Todd Simkin at Susquehanna describes this as fluency in investing "grammar."
If I told you to "head towards the Hollywood steel white giant sign," you'd know that sounds off. The adjectives are all out of order.
But, could you explain why?
Probably not. Most English speakers know the rules of ordering adjectives through cultivated intuition, not because they run through a checklist they learned in school.
If I said "head towards the giant white steel Hollywood sign," you'd just know that sounds right.
A la carte
Brett Caughran, who runs investment education service Fundamental Edge, framed the challenge of "what matters" using two stocks from 2011. One made 32% profit margins and printed return on capital of 62%. The other had mediocre margins of 5.2% and return on capital of just 7.6%. Which of these do you think returned nearly 2000% over the next 10 years and which went nearly to zero?
The first stock was Weight Watchers. It's the zero. The other stock was Amazon. This is the opposite of what the figures might have supported. It's not that profit margin and return on capital aren't important, there were just other more important things to each of these investments.
The same goes for holdings in Lamplighter's portfolio.
Lamplighter talked about the relative unimportance of accounting profits for picture-taker Planet here. What matters more for Planet are the unit economics of its data and solutions, that it can sell its data an infinite number of times, that it can create new uses for it constantly and improve customer results over time.
Payments company Adyen faces a knives-out price environment. Competitors slash prices to gain any slice of market share. Rather than join the melee, Adyen focuses on delivering value to its customers. It's not the cheapest option, but it generally offers the best return. Most of Adyen's growth comes from existing customers. It's not that the price environment doesn't matter, just that other factors matter more.
Prehistoric gas company Cheniere Energy faces a world dead-set on renewable energy. Its stuck selling liquid natural gas, a disliked solution with a volatile price. What matters more to Cheniere the investment, though, are its long-term customer contracts with high-quality customers, fixed fee-based income and still burgeoning demand for reliable, boring liquid natural gas.
It boils down to this
If we can reduce the investment problem as simply as possible and figure out the importance of the features leftover, we can better evaluate big things like the Fed raising interest rates or little things like government contracts not yet coming up for renewal, or competitors offering lower prices and less service, or the peaks and valleys of liquid natural gas prices. Are these things important to investments? Yes. Are they the most important thing? Nope.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.