Runways & Runaway Growth, Snowballs & Avalanches

I had the privilege of meeting and being inspired by some remarkable individuals at the recent StockTwits Stocktoberfest gathering in San Diego. I learned about investment and technology trends which will help to shape life in the future as well as very relevant investment ideas and themes for the present day. Best of all the people who made time for me all had several wonderful qualities in common, including a sense of humor, sharp minds, generosity and civility.

One of the connecting labels in my mind for all of these folks, because of their ideas, and who they are as human beings, could be captured in one word for me: Growth. There was plenty of media in attendance, so there may be little point in rehashing similar coverage but I wanted to include some thoughts about the meaning of growth and its relevance to the weekly “Winners & Losers” update.

I am captivated by the idea of finding the right investment runways leading to run-AWAY growth.

On Runaway Growth:

I have been thinking about developing frameworks to understand the nature of success in the markets and life. In the past, I have thought and written about how the best returns in life and markets are pretty “lumpy”. By “lumpy” I mean the kind of uneven returns that do not have annuity, ATM-cash machine like consistency. For the reality of daily life, I believe you need a large “book” if you wanted to support day-to-day expenses — you need a large enough bankroll to draw against to live.*

All “trading books”, large and small, however, can be managed in a way to produce successes if not necessarily all of one’s income.

Experienced traders and risk-takers are accustomed to lots of systemic testing and risk-taking which produces losers but also enough winners to subsidize, sustain and expand their efforts. Some of these winning trades or decisions, studied in isolation and on their own merits, are incredible runaway successes. They’re launched for what might have been a brief ride into the air but don’t seem to want to return to Earth. These wins are accompanied with a lot of failure, ennui, bottlenecks and reversals of other trades. There is one thing necessary for such returns, however, to emerge.

(*At the end of this post, I have just one last thought about “books” a/k/a bankrolls, for expenses.)

What do all returns (and the big ones in particular) need?

Our trading books/bankrolls/capital needs a path to capture gains.

I call these paths “runways” — much like the kind planes need for take-offs and landings but also the kind used in events needed for display, demonstration, and competition. Planes need runways to take advantage of Bernoulli’s law to go into the sky and design companies use runways to help spark new commercial, fashion & customer trends and future demand. The right runways help create enough time and space for runaway success.

There are two kinds of runways:

The first runway is “old school”, the returns from the compounding of modest rates of wins in earnings. It can be visualized with the kinds of charts meant for long-term investors with multi-year time frames. Here, returns can be captured via the relentless cumulative power of compounding of even single digit growth rates.

Compounding can be like a snowball being rolled down a gentle, imperceptible slope. Depending on one’s personality and circumstances, this could require a new lifestyle habit. It’s the equivalent of having a good diet and exercise routine everyday. It’s practiced without much fanfare and success is visible only after a considerable amount of travel on this path. On this runway, success is cumulative over time but can be significant.

Runway #1 is a hand-packed golf-ball sized snow-ball starting off small and picking up mass as it rolls down the invisible slope, and when it settles hundreds of feet/meters at the base of this invisible slope it could be the size of an ice-boulder. All thanks to the gravity of secular and speculative forces rolling it down to gather more and more mass and force.

The second runway is very different — it relies upon massive, revolutionary, and Schumpeter-style title fights between incumbents, monolithic grey-haired intermediaries, and bright, young new new things. This is where the old champ is knocked into retirement and/or oblivion. An investment type of a “runway #2” trade is whatever “story stock” is riding high at the moment, perhaps of some company whose IPO in the last few years. Usually a chart of such “story stocks” are compared with a long established competitor’s stock price. One example is Amazon vs. just about every business focused on retail consumers. Other “runway #2” examples go beyond equities — they could include some 10 to 100X returns on a private company investment, “One Belt, One Road” real-estate related developments or crypto-currencies. This runway can involve both ground breaking and ground shaking events . Runway #2 investors are watching a Schumpeter-style gales of creative destruction boxing match. Going back to the snow and ice metaphors, this scenario feels more like an avalanche, like in the films “XXX” or “Inception”. Often these avalanches begin with a catalyst — what looks like a minor disturbance or even some accident.

Runway #2 is a tiny incidental crack in a pristine plane of white ice which sheaths a mile-high mountain peak. The air is thin, very cold and all seems frozen — even time itself. Change seems nonexistent in such a place. Here, long-time incumbent businesses, ice giants who seem to rule the mountain, seem set for eternity. Then some crack, some small change happens but nothing happens — yet. Then a serene snow-cap collapses into an avalanche, into a ice and snow juggernaut scraping away every obstacle in its path. It remakes a landscape. Fortunes are made in messy and sometimes short order.

Recap: There are two runways for us to look out for. One looks like a long gentle plateau of snow with an almost flat slope running downhill for miles and miles and the other looks like a steep-angled mile-high ice-diamond where even time seems frozen but is about to collapse and change everything in the valleys below.

These are two different paths with the same outcome: Big Wins.

What comes to my mind is the equation of “Force = Mass x Acceleration”.

Force equals mass times acceleration. Mass is your capital to date. Acceleration is your growth rate and the compounding of that rate. Force is the profit, income, cash flow from your capital working at some rate that is compounding. Even though both runways might have different paths to profits, we can use the same means to benefit from either runways in the world of exchange traded investments like equities: we can follow price.

During our search for either types of runways, however, we will have losses. In fact, most experienced traders will have losses as well as wins in their trading records. That’s part of the process. It’s only in the short lived trading books of the overeager and overoptimistic excessive risk-taker, or in the super lucky once in a lifetime fluke winner (who then hopefully rides off into the sunset), that we see a trading book with very few trades and not many “losers”. Such folks just weren’t around long enough to systematically acquire the trading scar-tissue and either blew out or got a miracle and then ran quickly away with their winnings from the gaming house.

Let’s apply these metaphors to recent equity trading ideas from Rooster360’s Master Ideas Universe.

Recently, two ideas which were among the bigger winners in Rooster360’s leaderboard, $SHOP and $LL, have finally hit their suggested stop loss prices and averaged a simple return of about 60 to 70 percent. They both have done well and have had long enough runways to provide both great narratives and gains. One stopped idea, PCG, was expected due to the tragic fires in California. It was also a reminder of how even “boring” and “safe” ideas, such as utility stocks, can be just as vulnerable as any other speculation. Here, investors were hit with the wrong kind of avalanche.

Another stopped “sell” idea of MYL is an interesting potential end to a downtrend but it may prove to be an “oversold bounce”. It will take time. Again, I fall back onto my runway metaphor. Time and room is needed for a theme or trend to play out and prove itself.

I want to move on to the next list, a recent new report labeled as the “Laggards List”. This is a report of the ideas from the Rooster360 Master Ideas Universe which have a negative simple return. This is calculated from the difference of weekly closing price of the most recent week from the week an idea was added to the Master Ideas Universe. This report covers all active ideas up to August 2017. Some of these ideas may just need more time to prove themselves or be inevitably be removed when their weekly closing price “hits” the suggested stop loss price. Again, there are very few profit price targets but there are always stop loss price targets. This week, the most interesting potential runway in the making is the possible turn in energies-related ideas. ($CLR is an example.)

Lastly, we finish with this week’s Top 20 Leader-board. These ideas represent the best examples of having a long enough runway combined with enough patience to allow for winners to emerge — for a trend to go from strength to strength. Some of these respectable returns, in excess of 100 percent would constitute (at least for plain vanilla equities) examples of my “long runway” to “runaway growth” framework. The snowballs and avalanches I alluded to as part of my double-runway metaphor are exemplified by the charts presented in this week’s Top 20 weekly update.

For trend followers, the runway is about having enough time to allow a trend to run and — as demonstrated recently by current market leaders like $TTWO $SGMS and many “semi” companies including $NVDA — explode into runaway success stories. For investors, another runway for chip companies, beyond having a longer time frame, includes the narrative of the application of GPU chips far beyond graphics rendering. Runaways can start as either a modest snowball falling from a snow covered mountain-peak or as an insignificant crack in an ice-shelf ready to become much more. This was both a snow-boulder and an snow-avalanche sized win.

(*I’m don’t wish to sound or be dismissive of drawing a daily income from Mr. Market. There are trading bankrolls that are large enough to do that, in particular retirement accounts which have benefited from a long runway of time, low expenses and draws that become large enough to produce cash flows from dividends, interest and some liquidation. There are also accounts supporting draws from well-executed discretionary AND disciplined trading - created by traders adept enough to BOTH grow capital and taxable events - with enough profits to support living and avoid an erosion of capital. Both types of account require either the snowball or the avalanche “runways”.)

Originally published at www.rooster360.com on October 16, 2017.