Whitney Tilson’s email to investors discussing Stanley Druckenmiller interview; Warren Buffett on diversification.
Q1 2021 hedge fund letters, conferences and more
Interview With Stanley Druckenmiller
1) I really enjoyed this interview with investing legend Stanley Druckenmiller, who has never had a down year in more than four decades of investing and once compounded at more than 30% annually over 30 years. Here's an overview of the topics he covers:
- What makes a great investor
- How he makes an investment decision
- Whether we are in another tech bubble
- What career advice he has for 20-year-olds
- What he thinks of crypto (bitcoin, ethereum, and dogecoin)
- Which Big Tech firm will be the first to reach a $5 trillion valuation
Here's Druckenmiller on the implications of the "incredible wave of digital transformation":
From 1995 to 2000, you had an incredible wave while the Internet was being built. What you have now is this incredible wave of digital transformation, particularly moving onto the cloud.
I used to say two to three years ago in some interviews that we're in the bottom of the first or second inning in terms of digital transformation. And this is a 10-year runway.
Well, COVID sort of jumped you from the bottom half of the first inning to the sixth inning. I think [Shopify (SHOP) CEO Tobi Lütke] said we went from 2019 to 2030 [in terms of e-commerce sales] in one year.
I think the difference now is if you haven't moved to the cloud, you're dead because who you're competing against, they can just beat you because the technology is so important.
So, now, full disclosure, I didn't see what was coming in 2000. But I [have a difficult time coming up] with a scenario that this digital transformation thing is going to collapse and these SaaS [Software-as-a-Service] companies are going to go away.
The biggest problem you have now is the overall bubble and asset prices. The good news is if we had this conversation two months ago, the good [SaaS stocks] were like 45 times to 50 times sales. Not earnings but sales. They're down to – there's a range – I'd say now 10 times to 25 times sales for the good ones.
Warren Buffett On Diversification
2) Another investing legend, Berkshire Hathaway (BRK-B) CEO Warren Buffett, echoes Druckenmiller's view in this 1998 video clip that great investors should concentrate their investments – but advises everyone else to broadly diversify. Here's the transcript of Buffett's remarks:
The question is about diversification, and I've got a dual answer to that. If you're not a professional investor – if your goal is not to manage money in such a way as to get a significantly better return than the world – then I believe in extreme diversification.
So I believe 98% or 99% – maybe more than 99% of people who invest – should extensively diversify and not trade – so that leads them to an index fund type of decision with very low cost. Because all they are gonna do is own a part of America, and they made a decision that owning a part of America is worthwhile.
I don't quarrel with that at all, and that is the way they should approach it... unless they want to bring an intensity to the game to make a decision and start evaluating businesses. But once you're in the business of evaluating businesses and you decide that you are going to bring the effort and intensity and time involved to get that job done, then I think that diversification is a terrible mistake to any degree.
And I got asked that question when I was at SunTrust the other day and... if you really know business, you probably shouldn't own more than six of them. I mean, if you can identify six wonderful businesses, that is all the diversification you need and you're gonna make a lot of money, and I can guarantee you that going into a seventh one – rather than putting more money into your first one – has gotta be a terrible mistake. Very few people have gotten rich on their seventh-best idea, but a lot of people have gotten rich on their best idea.
So, I would say that for anybody working with normal capital who really knows the businesses they've gone into – six is plenty – and I'd probably have half of it in what I liked best.
Best regards,
Whitney
