An investing lesson from baseball; Three examples of monster stocks that have followed their earnings; YouTube's possible massive valuation; Big growth at Waymo
1) Wall Street Journal investing columnist Spencer Jakab recently underscored an investment lesson I've been preaching for years, although I frame it differently...
In any portfolio, whether a concentrated 10-stock one or even an entire index or market, a small number of big winners will drive nearly all of the long-term returns. As such, you need to let your winners run.
In his column, An Investing Lesson From Baseball: Don't Be Too Scared of Striking Out, Jakab references the "Babe Ruth Effect." While the Yankee legend put up an incredible home-run record, he struck out a lot (and folks don't seem to focus on that latter part so much). Here's an excerpt from Jakab's column:
How many times have you heard someone say that, when picking stocks, "all you need to do is be right 51% of the time?" First of all, good luck with that. Second, it's whether you can hit for power that really matters. Morgan Stanley Investment Management strategist Michael Mauboussin is credited with the effect's name, using Babe's record to explain an important concept.
In any pursuit with big payoffs, getting it right most of the time is hard. Card counters grasp this, boosting their bets only during those rare hands the odds aren't with the house. Venture capitalists and book publishers do, too: One big winner makes up for lots of losers.
In his column, Jakab also cited this great quote from the legendary Warren Buffett at one of Berkshire Hathaway's (BRK-B) annual meetings:
Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect, but that's what it's all about.
And as Jakab continued:
Many active investors are overly fearful of being wrong so they're late to buy stocks that have great potential. Even when they find winners, they're often afraid to let those bets ride and become a big part of their portfolio.
Shocking stats by Arizona State business professor Hendrik Bessembinder show why it matters. He tracked thousands of U.S. stocks from 1925 to the present day. Just 86 accounted for half of the wealth created. A whopping 96% did no better than investing in Treasury bills.
To overcome this math, Jakab notes that one option is to own index funds:
None of us are Warren Buffett. Luckily, there's a cheap and easy way to own all of those rare winners and to do so for long enough with a large enough stake. It's called an index fund. Indexes don't know any better than to buy longshots and then hang on when they get uncomfortably large and frothy.
The downside of that approach is settling for average because you own all the losers too. But being average still beats 90% of active funds over time.
I agree that index funds are a perfectly good option for most people.
But if you're going to be an active manager, it means that you have to find some companies that grow and grow and grow... and then have the wisdom and patience to hold their stocks for a long time!
2) As the late great Charlie Munger once noted: "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns."
Put another way, stocks can trade anywhere in the short term... but over years – or even decades, which is the ideal holding period for big winners – almost all stocks end up growing roughly in line with the business.
This recent post on social platform X gives 10 examples of monster stocks over the past couple decades – including energy-drink maker Monster Beverage (MNST) – showing how the price has closely tracked the growth in free cash flow per share.
Here are the charts from the post for the first three examples – tech titan Apple (AAPL), credit-card giant Visa (V), and online travel-services company Booking Holdings (BKNG):
3) Though it's not one of the 10 examples in the X post above, I've consistently maintained that Alphabet (GOOGL) is one of those insanely great, long-term, buy-and-hold stocks since I launched my former Empire Investment Report newsletter at my previous firm Empire Financial Research on April 17, 2019.
Since then, the stock is up 153% versus 94% for the S&P 500 Index.
One of the reasons I like it so much is that, beyond its core, dominant search business, it has many other great businesses that could drive future business.
As such, I read this Hollywood Reporter article from earlier this week about one of them with great interest – it covers YouTube and is based on a recent analyst report: YouTube May Now Be Worth $550B And Its Revenue Could Soon Surpass Disney. Excerpt:
MoffettNathanson's Michael Nathanson writes in a March 31 note that YouTube should be officially crowned the "new king of all media," with engagement topping all other media companies in February's Nielsen Gauge report, and with 2024 revenue of $54.2 billion, second only to Disney. And he predicts that YouTube will surpass Disney this year.
If YouTube was a standalone business, public comps suggest the business would be worth $475 billion to $550 billion, or about 30 percent of Alphabet's current valuation, Nathanson wrote. "YouTube has the potential to become the central aggregator for all things professional video, positioning itself to capture a share of the $85 billion consumer Pay TV market and the ~$30 billion streaming ex. Netflix market in the U.S."
And as the article continues:
At a moment when many media companies are struggling to pivot their streaming services to profitability, YouTube is firing on all cylinders in three buckets of revenue: Advertising, where 2024 revenue alone topped $36 billion; Subscriptions, where YouTube Premium and YouTube Music join products like YouTube Primetime Channels and NFL Sunday Ticket in driving direct subscriber growth; and YouTube TV, where the company is pacing to become one of the largest pay-TV providers in the U.S. (it currently has over 8 million subscribers).
4) Here's another reason I'm bullish on Alphabet: its ownership of autonomous-driving business Waymo.
In his latest Prof G Markets newsletter, my friend and NYU marketing professor Scott Galloway discussed Waymo and its plans to launch services in Washington, D.C.:
The Alphabet-owned autonomous driving company plans to launch in Washington, D.C., by 2026, expanding a footprint that already includes Phoenix, San Francisco, Los Angeles, and Austin. Employee-only rides have quietly kicked off in Atlanta.
It's gaining real traction. In San Francisco, Waymo grabbed 22% of the ride-hailing market (excluding freeways and the airport) in just 15 months – despite being slower and pricier than Uber or Lyft.
As Galloway also notes, Waymo currently serves more than 200,000 paid rides per week across all of its markets – which is about the output of 1,500 human drivers for Uber or Lyft. But as he continues:
However, operational momentum hasn't translated into financial results... yet. According to Bank of America, Waymo made just $50-$75 million in revenue last year while racking up $1.5 billion in losses.
Still, investors are buying the long-term vision: The company raised $5.6 billion in 2024 at more than a $45 billion valuation, backed by Silver Lake, Tiger Global, and Andreessen Horowitz.
As Galloway concludes:
This is a case study on brand perception. Ask most Americans to name a self-driving-car company, and they'll say Tesla. But the reality? Waymo is miles ahead. If it can maintain this momentum, Waymo could be a huge 2027 IPO.
And as his colleague Ed Elson adds:
Waymo completed over 4 million paid rides last year – that's more than 11,000 autonomous trips every single day. How many did Tesla manage? Zero. Amazon's Zoox? Zero. GM's Cruise? Also zero and shut down. Waymo is the only autonomous vehicle company in America that's actually delivering.
It's wildly underrated in the tech community – and it's one of the reasons I'm so bullish on Google.
Well said... I'm bullish, too!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.