Value Strategy Commentary

April 2023, First Quarter

“Anybody who doesn’t change their mind a lot is dramatically underestimating the complexity of the world we live in.”

~Jeff Bezos

In the summer of 2000, I used my Merrill Lynch internship money to purchase $5,000 worth of shares in Amazon (AMZN). By summer of the following year, I had lost 61% on my original investment. I sold the stock and called my father (yes, our present-day Chairman) to confess what I had done. I still remember his derisive response: “You have no idea what you are doing.”

The irony of his assertion is that it was both right and wrong, depending on one’s time horizon. While I certainly looked and felt unintelligent after losing over half my money in one year’s time, my original $5,000 investment would have been worth a whopping $230,116 at the end of 2022!1 The other day when I reminded my father of this story, he quipped, “Coulda, shoulda, woulda doesn’t get you anywhere in the investment business.” Touché.

The Paradox of Conviction vs. Mental Liquidity

I capitulated on Amazon in 2001 just as risks became fully priced into the stock. Every year, I recalculate the foregone gains on this investment to remind myself that being patient and opportunistic can pay off greatly over time, but it requires an ability to manage short-term emotional discomfort. For example, in order for me to have truly captured the hypothetical Amazon gains from 2000 to 2022, I would have needed to stomach three price declines of over 50% each plus three additional peak-to-trough declines in excess of 30%.2 Holding the position through turbulent periods such as 9/11, the Iraq War, Hurricane Katrina, the Great Financial Crisis, and the COVID pandemic would have required steadfast conviction. That’s not to mention the laundry list of other significant world events which have occurred over the past two decades, including negative global interest rates, a handful of U.S. presidential terms, and numerous Fed Chair appointments. If only I’d been as smart as Mary and Larry!

Holding Amazon from the time of my original purchase would have also required “mental liquidity,” a key investment concept highlighted by Morgan Housel. Mental liquidity is “the ability to quickly abandon previous beliefs when the world changes or when you come across new information.”

I initially bought AMZN for one specific reason: they were going to disrupt physical bookstores and eventually become the dominant channel through which customers browse and buy books. Leading the charge was Jeff Bezos, an ex-hedge fund manager who possessed almost zero retail experience. Fast forward 23 years, and the company has since morphed into selling home improvement goods, movies, music, software, video games, groceries, jewelry, and beauty products, while at the same time creating from scratch a global cloud computing titan known as Amazon Web Services (AWS) which generated $80.1 billion of revenue and $22.8 billion of operating income in 2022 alone.3

Each time in history when AMZN tweaked their model—by adding ancillary business lines such as Fulfillment by Amazon, Amazon Prime, Third-Party Sellers, etc.—many “experts” doubted the company’s strategy and argued that they would eventually crash and burn.4 Investment pundits and short sellers cited a lack of discipline or direction.

It would have been incredibly difficult to predict back in 2000 that Amazon would evolve into “The Everything Store,” or that the company’s cash flows would eventually reflect their dominance. Holding shares over the long term required constant analysis of new information and strategies, as well as a belief that management’s vision would ultimately prevail even as the external environment changed. The truth is that all businesses either evolve or die over time, and Jeff Bezos said from the very beginning, “It’s all about the long term.”

In our view, the single most difficult aspect of investing is sticking to one’s thesis when the whole world seems to disagree. The second hardest thing is changing one’s mind whenever new information disproves a thesis which took considerable time and effort to develop. Successful opportunistic investing requires balancing both of these abilities and adopting a mantra of “strong opinions weakly held.”

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Investing With Nixon Capital

Opportunistic Investing: Anticipate, Don’t React

Vladimir Lenin once stated, “There are decades where nothing happens; and there are weeks where decades happen.” Markets have digested the collapse of several large financial institutions such as Silvergate Bank, Silicon Valley Bank, Signature Bank, and Credit Suisse, all within the last month. The media feeding frenzy has created a doom loop of negative news, which bodes poorly for governmental authorities trying to instill market confidence. Extreme bank stock volatility of late is reminiscent of the Great Financial Crisis, and the collective appetite for public market investing is almost completely risk-off (bearish wagers in options reported by the CFTC are near decade highs).5,6

While we recognize that our investment success over time is dependent upon accurate assessments of risk—a large annual loss can quickly wipe out years of compounding—we also believe that attempting to become experts on the “risk topic du jour” is a futile endeavor. The market is forward looking. Playing whack-a-mole with the never-ending drumbeat of risk events or spending countless hours assessing situations that have already garnered public scrutiny will likely not contribute positively to our investment returns.

During these times we are searching for fundamentally strong companies whose prices may have overreacted to the events currently unfolding (creating a disconnect between perceived and actual business risk). We continue to believe that we will be rewarded over time for remaining focused on key items such as balance sheet strength, cash flow generation, and hyper-focused management. Investment styles built for a single cycle are not what we ascribe to. We believe now is a time to be balanced: avoid the emotional extremes, but thoughtfully and opportunistically deploy capital to take advantage of price/value dislocations.

Jeff Bezos created an enduring franchise by staying patient and focused on the long-term. His motto was gradatim ferociter: “step-by-step, ferociously.” We intend to follow a similar approach as we steward your capital and build generational wealth. Thank you for your confidence and support along the way.

Ryan Nixon and The Nixon Capital Team

1 Bloomberg data

2 Bloomberg data

3 S&P Capital IQ, 2022 10-K

4 One famous example of skepticism towards Amazon is the May 1999 Barron’s issue titled “Amazon.bomb.” Shared here via CNBC.

5 Financial Times, Options Trading Surges as Investors Brace Themselves for US Regional Bank Volatility

6 Bloomberg, Hedge Funds Boost S&P Shorts to Decade High Before CPI, Earnings

Any views expressed are subject to change at any time, and Nixon Capital disclaims any responsibility to update such views. Information contained herein has been obtained from various sources believed reliable but is not necessarily complete. Accuracy is not guaranteed. Any reliance placed on opinions and assumptions herein is done at your own risk. Nixon Capital has not reviewed any of the websites that may be linked to this letter and is not responsible for their content. Nixon Capital is not responsible for the privacy practices of such other websites.  Discussions of individual securities are intended to inform shareholders as to the basis (in whole or in part) for previously made decisions by the firm to buy, sell or hold a security in a portfolio. References to specific securities are not intended and should not be relied upon as the basis for anyone to buy, sell or hold any security. Portfolio holdings and asset allocations may not be representative of the portfolio manager’s current or future investment and are subject to change at any time. This information is not to be reproduced or redistributed to any other person without the prior consent of Nixon Capital LLC.