Value After Hours S06 E16: Zeke Ashton on value investing in the early 2000s and his return
Value After Hours S06 E16: Zeke Ashton on Value Investing
Short Summary:
This episode of Value After Hours features Zeke Ashton, a value investor with a long and successful track record. The episode explores the evolution of his investment approach, particularly his shift towards a more risk-aware style after the 2008 financial crisis. Ashton discusses the importance of understanding and managing risk, emphasizing that even the smartest investors can make mistakes when they become overconfident. He also touches upon the concept of fractals and how they apply to capital allocation, highlighting how the same principles of intelligence, trustworthiness, and dependability are sought after at different levels of the investment process. Ashton shares his current investment outlook, emphasizing the potential for value opportunities in small-cap companies and undervalued growth stocks that have fallen out of favor with the market. He also provides insights into his approach to short selling, emphasizing the importance of identifying vulnerabilities and understanding the market's perception of risk.
Detailed Summary:
Section 1: Zeke Ashton's Journey into Value Investing
- Ashton describes his early exposure to investing through Peter Lynch's book and his subsequent interest in value investing.
- He shares his experience with the dot-com bubble and how it led him to embrace a more cautious approach, emphasizing the importance of valuation and risk management.
- Ashton highlights the impact of the 2008 financial crisis on his investment philosophy, emphasizing the importance of avoiding overconfidence and managing risk effectively.
- He credits his experience in risk management consulting for shaping his investment approach and helping him navigate the crisis.
Section 2: The Kelly Formula and its Shortcomings
- Ashton discusses the Kelly formula, a popular tool for determining optimal bet sizing, and its limitations in the context of investing.
- He argues that the formula is not suitable for the stock market due to the correlated nature of investments and the lack of control over investor redemptions.
- Ashton emphasizes the importance of considering investor pain tolerance and liquidity constraints when managing other people's money.
Section 3: Ashton's Return to Investing and his New Fund
- Ashton explains his decision to step away from active investing for a few years and his reasons for returning.
- He highlights the benefits of taking a break, pursuing personal goals, and gaining new perspectives.
- Ashton describes his new fund, Ashton Total Return Fund, which focuses on risk-adjusted returns and employs a value-oriented approach.
- He emphasizes the importance of having a diversified portfolio with a wide range of investment ideas, including long and short positions, options, and even bonds.
Section 4: Current Market Opportunities and Ashton's Investment Outlook
- Ashton believes the market is poised for volatility and potential dislocations due to factors like suppressed interest rates, misallocated capital, and geopolitical tensions.
- He sees opportunities in small-cap companies and undervalued growth stocks that have fallen out of favor with the market.
- Ashton uses examples like PayPal to illustrate how good businesses can become undervalued due to short-term market sentiment.
- He emphasizes the importance of finding companies with a strong reason to exist and a long-term track record, even if they are not considered "high quality" by traditional metrics.
Section 5: Fractals and Capital Allocation
- Ashton introduces the concept of fractals and how they apply to capital allocation.
- He explains how the same principles of intelligence, trustworthiness, and dependability are sought after at different levels of the investment process, from fund managers to company CEOs to employees.
- He argues that the capital structure of a business ultimately shapes the culture and the experience of employees.
Section 6: Identifying Long-Term Oriented Management
- Ashton discusses the importance of evaluating management teams and their incentives.
- He looks for compensation structures that are tied to tangible results and align with shareholder interests.
- He emphasizes the importance of avoiding companies that prioritize short-term growth over long-term value creation.
- He also expresses concerns about the impact of excessive stock-based compensation on corporate behavior and financial reporting.
Section 7: Ashton's Approach to Portfolio Sizing and Short Selling
- Ashton describes his portfolio sizing approach, emphasizing the importance of diversification and a focus on quality ideas.
- He explains his preference for smaller positions in new investments to allow for greater familiarity and learning.
- Ashton discusses the challenges of short selling in today's market, highlighting the increased risk of short squeezes.
- He emphasizes the importance of identifying vulnerabilities and understanding the market's perception of risk when shorting.
- Ashton shares his belief that short selling should be approached as a separate game from long investing, requiring a different mindset and approach.
Notable Quotes:
- "I think it's never the dumb person that makes the mistake. It's always the smartest people in the organization that lead them to ruin."
- "The market of the next 15 years is going to be a lot of adjustments that have to happen."
- "I think there's a lot of misallocated capital over the last 10 years. There was certainly a lot of money printing."
- "I'm happy to own a mediocre business if I'm getting a really good value on it."
- "I think the growth trap is even worse than the value trap."
- "I think having so much stock-based comp has really warped a little bit the incentive structures at a lot of tech companies."
- "Shorting is really a very different game than the long side."
- "Vulnerability is the name of the game."