Good Stories Get Better

If you wanna grow your money for retirement, it’s pretty easy. The 401K strategy works fine – buy an S&P 500 index fund, max out your monthly contribution, and 30 years down the line, you’ll be sitting pretty. That’s the power of compounding 7% or 8% a year.

But if you wanna beat the market, that’s pretty easy, too. The key is understanding this: good stories get better, and bad stories get worse.

Yes, this observation has to do with momentum. But I’m not talking about the kind of momentum you see with day-trading meme stocks or swing-trading or that kind of thing.

The kind of momentum I’m talking about can be applied to individual businesses and to the macro trends that drive business and investment.

On the business level, a company with a good product, a good process for fulfilling the product, and good ideas on how to market and sell the product will do well. Revenue grows, costs get cut and earnings improve.

It’s execution for sure. But it’s also vision – the ability to anticipate customers and whatever niche you are in. That kind of momentum becomes part of a company’s culture…

There are any number of companies we could point to as prime examples of good stories getting better. Nvidia is certainly one – its story has done nothing but get better and better. Nvidia’s ability to manage its stupendous growth is stunning.

Personally, I like the AMD story better. Because AMD was an also-ran in the semiconductor space for years. A couple of times, there was speculation that the company would fail. Then in 2014, Lucy Su took over as CEO. It took her a couple of years to turn things around, the stock traded below $5 in 2016. The stock tripled in 2017, doubled in 2018, doubled again in 2019, again in 2020, and again in 2021…you get the picture. AMD’s story has done nothing but get better under Su’s leadership.

At Microsoft, the change from CEO Steve Ballmer to Satya Nadella – also in 2014 – was night and day. The Microsoft story has done nothing but get better for 10 years.

Just last night, the company that makes chips for Nvidia and Apple, Taiwan Semi said its June revenue was up 40% over last year. Analysts were expecting 35% growth.

I don’t mean to solely focus on the AI trades, but again, that’s a revenue and earnings story that keeps getting better. It’s also a pretty good segue to talk about macro investment trends…

The Obvious Macro Trends

At Outsider Club, we are big fans of the following quote:

Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.

It’s from George Soros and it provides a template for how to make money from big macro trends. This is the key to beating the market consistently.

It is not hard to recognize a macro investment trend. You don’t need any special training or expertise. When these trends start, they get advertised everywhere…

Of course, I have to mention AI. Because it’s the current investment trend that has been underway for nearly 2 years. But I could just as easily use the “work from home” stocks during the pandemic. Or EV stocks from 2018-2020. Or commodity stocks after the Great Financial Crisis. Or Chinese stocks. Or e-commerce stocks in 1998-1999. Or housing and mortgage stocks in 2005-2006, cryptocurrencies in 2017-2018…

Every single macro investment trend shares a few characteristics:

They are telegraphed by every news outlet under the sun.
They last at least a couple of years.
They become business trends too.

# 3 is the key aspect to understanding why good stories get better. It is also the key to understanding the “falsehoods and lies” from the Soros quote.

Businesses will always jump on macro trends. When shale oil was booming, companies wanted in so there was a massive wave of acquisitions.

When Chinese stocks were booming, foreign investment flooded into China to take advantage.

Venture capital poured money into EV startups, GM got scammed for some investment dollars by Nikola who simply lied about its tech.

This is where it gets tricky for individual investors. Because when businesses start jumping in and investing in big macro trends, yes, that is what makes the good stories get better…

It’s also what legitimizes the lies and falsehoods.

Because all the analysts, venture capitalists, businesses and investment banks will project the current growth rates out years into the future. And stock prices will adjust higher on these projections and become bubbly…

You start to hear things like:

“With oil at $100 for the next several years…”

“With China’s economy growing 10% a year…”

“With Nvidia revenue growing 50% a year…”

Each of these sentences will end with some kind of wild projection that has just enough internal logic to seem realistic.

This is happening with AI stocks right now.

Trees Don’t Grow to the Sky

Nvidia is wildly successful. Revenue is expected to grow 50% next year, from around $80 billion to $120 billion. The company itself is valued at $3.3 trillion. That’s 40 times the current revenue.

If Nvidia could keep 50% a year, you could make the case that it will be fairly valued in 3 or 4 years. That’s the lie. That’s the falsehood that drives the current AI boom. Because it’s not possible to keep growing like this. I’m not a fan of the expression, but this is what “trees don’t grow to the sky” means.

At some point, all the servers in all the data centers will be upgraded. Nvidia won’t sell as many chips. This is why they say semiconductors are a cyclical business. Every time there’s a new tech innovation, chip stocks boom. They build out capacity to meet this new, never-ending source of demand, and then demand falters…

Now I can’t tell you when the current AI story turns bad. I definitely wouldn’t sell it just yet. Trends like these tend to take longer to play out than people think.

And the thing is, you’ll know when it’s over. It’ll be pretty obvious when Nvidia misses a growth metric.

That’s when the story turns bad. And bad stories get worse. Just like during every correction and bear market, sentiment will turn to the polar opposite. “Chips stocks will never make money again…they have years of capacity and inventory to work off…”

As they say, when it’s time to buy stocks after a correction/bear market, you won’t want to…

Godspeed,

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

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