Taking Back the Wheel
The Battle of Stocks vs. ETFs.
When we think about the rationale for developing a platform for conviction-building in investments, it is important to understand the motivating factors driving why one might invest in individual stocks, or at least a mix of stocks in a larger fund of equities, funds, and maybe even bonds.
Some of the highest-performing (long-term) fund managers of all time include Warren Buffett of Berkshire Hathaway, Chuck Akre of Akre Capital Management, and Li Lu of Himalaya Capital, and they all have something in common. Each own fundamentally sound businesses that comprise carefully curated portfolios, not ETFs. What does this tell us? (Spoiler: It's not just about wanting to flex your stock picks at family dinner).
To answer, let's examine the inverse question: what does an ETF offer?
A fund offers diverse exposure to a variety of businesses, often through a weighted distribution of different stocks. Funds are attractive to many investors because they prevent severe losses experienced by single businesses yet cast a wide enough net to offer net gains from outperformers. The very nature of a fund requires this wide net. As a result, funds offer “averaged” market returns.
This type of exposure is often perfect for individuals who want exposure without the effort of research and careful selection of stocks. But such a wide net also offers some intrinsic disadvantages. Any structural changes to the constituents of the fund directly impacts the investor's holdings and returns.
Congratulations, You Just Bought an Oversubscribed Tech Stock!
In today's funds, we see a high concentration in large technology companies. This is accompanied by a very noisy IPO wave of AI-related businesses such as SpaceX, with OpenAI and Anthropic on the way. Some funds, such as the Nasdaq-100, have even changed eligibility rules, which allow new hot IPOs like SpaceX ($SPCX) to quickly be absorbed into the fund, meaning all shareholders of the Nasdaq-100 are forced to purchase equity in this business. At the time of this writing, $SPCX is not an insignificant holding of the fund and at a valuation of close to 30X higher by some metrics than the average S&P500 company. Even worse, the business is significantly unprofitable.
Let me get one thing clear: I am not going to spark a debate on the structural risk posed by AI companies. But what I will say is that maybe some investors are starting to think twice before blindly plowing money into an index fund, especially funds concentrated in the U.S. By choosing to invest in individual businesses, you remove yourself from the hyperactivities and manias of the market, which are often followed by periods of long-term decline. Think of the Roaring 20s, the Go-Go Years in the 1960s, the Tech Bubble of 2000, and the Housing Crisis of 2008. All of them were driven by speculative activities and followed by many, many years of lackluster performance.
Taking Back the Wheel.
What individual businesses offer that a fund never does is flexibility. It allows for true optionality and potential for stronger structural positioning than the broader market, on top of higher conviction in individual holdings. Investors in singular businesses have the luxury of ignoring the eternal debate of fund concentration, lost decades, and market valuations; they can simply focus on the individual businesses they believe in. As many of these famous investors proclaim, the path to greatness is buying great businesses at fair prices and doing nothing.
Why might this also benefit your portfolio? Knowing that you are immune to the “market-wide” fears, you drive higher confidence in the long-term performance of your portfolio. As a result, you may be less inclined to make emotional decisions over a fund you can't control. So rather than buying low and selling lower, holding durable businesses allows you to gain conviction and hold through these periods, maximizing your exposure to the upside. When you understand a business, a 20% price drop looks like a “sale” rather than a “sell”.
So this brings us back to Vassant. What does all of that have to do with our vision and purpose?
We believe that investing process should not be limited to fund managers. With an abundance of information and research available on businesses, becoming a successful investor in businesses is now possible, but it takes the right process and mindset to do so. These investors need structure, clarity, conviction, and organization. These are the core tenets of our product and how we aim to help you win.