{"id":63,"date":"2012-07-28T17:35:00","date_gmt":"2012-07-28T17:35:00","guid":{"rendered":"http:\/\/www.guythomas.org.uk\/blog\/?p=63"},"modified":"2022-08-23T10:36:15","modified_gmt":"2022-08-23T10:36:15","slug":"are-moonshots-too-rare-to-look-for","status":"publish","type":"post","link":"https:\/\/www.guythomas.org.uk\/blog\/are-moonshots-too-rare-to-look-for\/","title":{"rendered":"Are moonshots too rare to look for?"},"content":{"rendered":"\n

My last post<\/a> drew a distinction between two classes of shares: potential \u201cmoonshots\u201d (those with fat-tailed and\/or right-skew returns), and \u201cmundanes\u201d (those with symmetrical returns).  I argued that when selecting potential moonshots for a portfolio, one should be more tolerant of false positives than when selecting mundanes.<\/p>\n\n\n\n

However, I can also see a good case that it may not be worth spending time looking actively for moonshots.<\/strong> This is for the following reasons.<\/p>\n\n\n\n

The incidence (frequency) of true moonshots in the entire investment universe may be too low.<\/strong>  It may be high enough in an exceptional period like 1998-2000 (my formative investment experience), when there were many technology moonshots. But in more normal times, the incidence may be too low.<\/p>\n\n\n\n

The losses on false positives are often high.<\/strong>  Potential moonshots which fail often fail disastrously, with loss of most or even all of your investment. A smaller investor might be able to use a stop-loss, but this is not practical for a larger liquidity-constrained investor (and for a fundamental investor, I\u2019m doubtful it is ever a good idea anyway \u2013 see p60 of Free Capital<\/em><\/strong>). <\/p>\n\n\n\n

The large gains on the few true positives are hard to realise.<\/strong>  It is hard to hang on to quoted company moonshots.  Even when the moonshot takes off, you may not recognise the scale of the company\u2019s potential; and the daily temptation to prudently realise part of your gains is hard to resist. <\/p>\n\n\n\n

Incidence and classification accuracy are unknown parameters. <\/strong>You have no way of knowing<\/em> the true parameters for the population incidence of moonshots, or your accuracy in classifying them correctly.  Therefore when you have a long stream of costly failures, you cannot tell whether this is because of (a) bad luck (in which case you can reasonably expect a success soon), or (b) the true parameters are too low (in which case you may go bust before you have a success).<\/p>\n\n\n\n

Moonshots give big deviations from index returns.<\/strong> If the deviations were modestly positive in most periods, this would not be a problem. But the more likely scenario is that a moonshots portfolio will produce mediocre returns in most periods, and (we hope) a few big hits to compensate in other periods.  This irregular pattern of returns gives little reassurance of your ability, and so is psychologically difficult for most investors.<\/p>\n\n\n\n

Moonshots are hard to recognise ex-ante<\/em>. <\/strong>I held potential moonshots QXL and ASOS in reasonable size in 2004, but sold them far too early.  Even with hindsight,<\/strong> I don\u2019t see that either of these had features which made them easy to recognise as moonshots in 2004.   For ASOS, one comparable was the privately-owned Figleaves<\/a>, which was founded as long ago as 1998, and sold for slightly over \u00a310m to N Brown<\/a> in 2010.  Considering the information which was available in 2004 with hindsight<\/em>, I still see no way of telling in 2004<\/em> that ASOS was going to grow into a \u00a31.5bn business, and Figleaves only into a \u00a310m business.<\/p>\n\n\n\n

 For all these reasons, I don\u2019t screen actively for potential moonshots. I just remember that anything can happen, including good things. Or in the words of poet Alice <\/a>Walker<\/a>:  “Expect nothing. Live frugally on surprise.\u201d<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

My last post drew a distinction between two classes of shares: potential \u201cmoonshots\u201d (those with fat-tailed and\/or right-skew returns), and \u201cmundanes\u201d (those with symmetrical returns).  I argued that when selecting potential moonshots for a portfolio, one should be more tolerant of false positives than when selecting mundanes. However, I can also see a good case that it may … Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-63","post","type-post","status-publish","format-standard","hentry","category-investment"],"_links":{"self":[{"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/posts\/63","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/comments?post=63"}],"version-history":[{"count":2,"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/posts\/63\/revisions"}],"predecessor-version":[{"id":310,"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/posts\/63\/revisions\/310"}],"wp:attachment":[{"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/media?parent=63"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/categories?post=63"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.guythomas.org.uk\/blog\/wp-json\/wp\/v2\/tags?post=63"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}