The Man who Abandoned Value
With the rate at which growth stocks are falling, this article might be past its expiry date. But this is a story of an investor – Arne Alsin, who pursued ‘value investing’ in the traditional sense of the term, even successfully at that during the dotcom bubble, then saw value investing bleed post the Lehman crisis and pivoted to growth stocks, returning a staggering 274% in 2020. No prizes for guessing his top position – Tesla, much like his more celebrated exponent of investing in disruptive companies – Cathie Wood of ARK Investment Management.
“Classic value plays had won Alsin notice after the tech bubble burst in 2000, thanks in large part to his column. But by 2008 his stock picks were struggling — and even when markets bounced back after the financial crisis, his value stocks weren’t turning around.
Eventually, he says, “I just totally gave up and said, ‘I’m going to do the exact opposite.’”
Alsin, now 63, threw away almost every investment principle he had once held. A forensic accountant by training who had formerly worked for Peat Marwick (just before it became part of KPMG), Alsin switched from being a classic Warren Buffett–style value investor who scoured balance sheets to being one who obsessively embraced the disruptive promises of Silicon Valley and the new economy.
He took big, and early, stakes in both Amazon and Tesla — in 2012 and 2016, respectively. At the same time, Alsin shorted auto companies like General Motors and railed against buybacks that had crippled companies like Sears and American Airlines, which he also shorted.
At last, in 2020, Alsin’s insights bore exceptional fruit: The small hedge fund with the quirky name, which launched in 2017, and the long-only fund, which got off the ground in 2012, turned in what appear to be the best performances in the industry for the year, according to Institutional Investor calculations.
To be sure, a few famous hedge fund managers made a fortune in 2020. But in terms of percentage gains, Worm Capital outdid them all: Its long/short equity fund gained an astounding 274 percent, thanks in large part to a 700 percent surge in the price of Tesla’s stock, which accounted for 37 percent of Worm’s publicly traded equities portfolio at the end of the third quarter. The long-only fund was up 205 percent. And by year-end, Worm Capital had amassed some $374 million in capital.”
….A voracious reader, Alsin found his new playbook in Harvard professor Clayton Christensen’s best-selling tome The Innovator’s Dilemma.
Christensen, says Alsin, “talked about the challenger that comes from below.” The philosophy explains why Alsin’s value stocks weren’t coming back — and perhaps never would.
“I remember writing about Office Depot, another classic one where their numbers are down,” Alsin says. “You can buy them cheap, and when they rebound you make a good return. But the problem is, what if they never rebound?”
He continues, “It just hit me like a ton of bricks: Oh, my God, turnarounds are the worst place to be. This is going to be horrible when we replace physical stores with online stores. There’s going to be a hundred turnarounds. And none of them are going to come back because the world’s changed, and that’s going to be true in energy and transportation and on and on and on.”
When Alsin started his new firm in 2012, Amazon became its first holding. Today the online juggernaut is the most conventional — and most popular — hedge fund stock in the world, but when Alsin first invested in it the smart money was skeptical. After all, the company wasn’t profitable.
But Amazon was already upending the world of retail and had embarked on a new venture that caught Alsin’s imagination: cloud computing. Although he has no background in technology or science, Alsin says “I just dove into it, 100-hour weeks, I think, five weeks in a row.”
He explains: “You can figure everything out if you just spend enough time and break it down into its simplest component parts. Everything is just an on-and-off switch. Everything is just a pixel of information. Just keep digging, keep taking notes and figuring things out, and see how things work like an engineer. And that’s kind of the way I went at cloud computing.””