Snowballs vs. Avalanches
(Compounding With Runways and Runaway Growth)
|Edward Rooster||Aug 25, 2018|
I had the privilege of meeting and being inspired by some remarkable individuals at a StockTwits Stocktoberfest gathering in San Diego. It was wonderful privilege to meet and learn from some remarkable people. 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.
I want to find the investment runway which could lead to RUNAWAY growth.
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, you need a large enough “book” if you wanted to support day-to-day expenses — you need a large enough bankroll to draw against to live.* Not everyone can live off their trading book.
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 produce 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.
What do all returns (and the big ones in particular) need?
They need a path to capture gains, which I call “runways” — like the kind planes need for take-offs and landings. Planes need runways to take advantage of Bernoulli’s law to go into the sky. Businesses use runways to help spark new commercial, fashion & customer trends and future demand. Businesses, like planes, need enough room and time to see if they can take-off, ascend and hit the right cruising altitudes to grow.
The right runways help create enough time and space for runaway success.
There are two kinds of runways: slow compounding and explosive growth
The first runway is “old school”, where the returns come from the compounding of modest wins. It can be visualized with the kinds of charts meant for long-term investors with multi-year time frames. Here, returns are captured via the relentless cumulative power of compounding of even single digit growth rates. It’s a snowball rolling down a gentle, imperceptible slope over a great distance for a long time.
Depending on one’s personality and circumstances, this runway requires good habits. 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 it can be significant.
Runway #1 is a golf-ball sized snowball picking up mass as it rolls down an invisible slope for perhaps decades, and when it settles at the base of this invisible slope it could be the size of a boulder. All thanks to the gravity of secular and speculative forces rolling it down slowly to gather mass and force.
The second runway is very different — it relies upon massive, revolutionary, and Schumpeter-style MMA match between monolithic grey-haired incumbents and young fierce newcomers eager to take out an aging champion. This is where runaway growth is discovered.
The “runway #2” trade is sometimes a startup or “story stock” is riding high at the moment. Usually charts of such “story stocks” are compared with long established competitors. One example is Amazon vs. Walmart over the past decade. Other examples could include 10 to 100X returns on private investments in new technology or new market start-ups.
Going back to snow and ice metaphors, “Runway #2” is not a snowball - this is 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. The narrative involves ground-breaking and ground-shaking events.
Runway #2 begins as a tiny crack in a pristine plane of white ice covering a mile-high mountain peak. The crack becomes an avalanche of tremendous change.
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 this 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 and lost very quickly for those caught in the middle of the avalanche.
Recap on our two paths to growth: snowballs and avalanches.
One looks like a long gentle plateau of snow with an almost flat slope running downhill for miles and miles.
The other is a steep-angled mile-high ice-diamond where even time seems frozen but it’s about to collapse and change everything in the valley below.
Two different paths with the same potential reward of massive gains.
What comes to 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 “snowballs” and “avalanches” are different paths to change and profits, we can use the same means to benefit from either “runway”: follow price.
During our search for either of these 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 win and then retired quickly.