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Circle of Competence Issue #93


"Of all the liars in the world, sometimes the worst are our own fears." - Rudyard Kipling


Revisiting the "huge market" delusion (Aswath Damodaran)

The investment philosophy of every venture capitalist in part revolves around the TAM - the Total Addressable Market - of a business's product or service. Aswath Damodaran illustrates how when taken too its extreme, reliance on TAM as a proxy for how big a company could get creates bubbles. I've explored a couple industry and company bubbles including WeWork in November 2019 and the cannabis industry back in October 2018:

"Mini bubbles can occur in sectors that exhibit hype far beyond economic reality and the legalized cannabis industry is no different this time. Capital is always looking for the next best use, the next best investment opportunity, and pent up demand for a piece of the nascent cannabis industry has caused stocks such as Tilray to become valued at an astonishing market cap that is 392 times book value and an enterprise value that is 494 times current sales. Given the current industry dynamics that include robust tax and regulatory hurdles that many companies will face, the mere 10-15% growth of the industry, and the commodity like product being sold, the initial conditions are not ripe for any sort of competitive advantage to emerge until someone achieves massive scale"

In the short run, psychological biases can persist in market, industry, and company valuations. But over the medium to long term, valuations will reflect the actual economic profits generated.


Private equity is starting 2020 with more money than ever (Bloomberg)

51 ideas from 2019 (Safal Niveshek)

10 Lessons from the 2010's (Mark Manson)

Amazon's free cash flow (Behind the Balance Sheet)

Ulta is the best retail stock of the decade, up 1200+% (Chicago Business, h/t Beth F.)

Why China's debt defaults look set to pick up again (Bloomberg)

David Rubenstein on raising funds, the future of private equity, and career advice (Investors Archive)

Steve Schwarzman on building Blackstone (Investors Archive)

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