Valuentum Exclusive Analysis for the Discerning Investor

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Image: Shares of Meta Platforms have been on a wild ride the past few years. We didn’t do well with the stock, unfortunately.

By Brian Nelson, CFA

There’s an old story about Albert Einstein--nobody has ever confirmed it to be a real story, but the moral of the story is a good one, so it’s worth sharing. It is said that Einstein once wrote the following, or something like it, on the chalk board in front of a class of students:

10 x 10 = 100

9 x 9 = 81

8 x 8 = 64

7 x 7 = 49

6 x 6 = 36

5 x 5 = 25

4 x 4 = 18

3 x 3 = 9

2 x 2 = 4

1 x 1 = 1

The story goes that most of the class started to talk and laugh amongst themselves, “How could Einstein have made such a mistake?” Chaos soon broke out in the classroom and some students left the room. Other students actually started to ridicule him, “The correct answer for 4 x 4 is 16,” some exclaimed. Einstein was patient, and he waited for his students to quiet down, and then, according to some versions of the story, he said the following:

This is how we are seen by the entire world. I purposely wrote the incorrect answer to show you how the world behaves over an error. Nobody praised me for having 9 correct answers. Nobody said congratulations. All of you laughed and criticized me over one incorrect response (source: Facebook, Faith Stories).

In the business of finance, where being approximately right is better than being precisely wrong, and in the game of stock selection, where getting 6 out of 10 stock calls right (4 out of 10 wrong) can make one a legend, it’s a tough world. Many don’t understand the game we are playing. In finance as in stock selection, there will always be some “wrong” and there will always be some “right.” The goal in finance and stock selection is to get more “right” than one gets “wrong.” The “right” must come with the “wrong” because nobody can get everything “right” all of the time. Getting everything “right” in finance and stock selection is impossible.

The moral of the story, according to the referenced Facebook post, is that “We need to learn how to value people for their success. The world will not always appreciate you for the good that you do, but it will put you down for the one mistake you made. Always rise above the criticism and stay strong!” In finance, and especially with respect to stock selection, the world is simply not going to know that getting some “wrong” is part of the game, much like the best hitters in baseball make outs roughly 7 out of 10 times. Finance and stock selection is not a math test or a game of baseball, but it is a game that includes failure. Just read a few of the Berkshire Hathaway letters – Buffett is as candid about his mistakes as anyone.

However, you’re hardly ever going to find someone on the “Internet” admit when they didn’t get a stock call right, and frankly, we got Meta Platforms (META) wrong. We “bought” low and sold “low.” We didn’t want to get it “wrong,” but it happens. Sure, we can point to the 17 consecutive capital appreciation ideas that worked out in the Exclusive since February 2022 (the beginning of Meta’s decline) or how the Best Ideas Newsletter portfolio, which included Meta Platforms, actually outperformed the market and the 60/40 stock/bond portfolio during 2022 (thanks to all that we got “right” that year with energy exposure), or how both the Dividend Growth Newsletter portfolio and High Yield Dividend Newsletter portfolio did great last year, and so on--but it doesn’t matter.

The lessons of our experience with Meta are similar to our lessons with the Dividend Cushion ratio. Whenever management makes a huge structural or strategic shift, it introduces new risks to our process. Without question, however, Meta’s stock price and returns have been tied, in part, to changes in future expectations of free cash flow (see image below)—and for that, we’ve been “right.” Our process is sound, but our execution was poor with Meta. It happens sometimes. CEO Mark Zuckerberg was seemingly hell-bent on spending on the metaverse as recently as late 2022, and he has now done a complete about-face, where the metaverse has taken a backseat and the firm is now slashing costs left and right, while advertising revenue has bounced back. The volatility of Meta’s share price is easily explainable by (changes in future expectations of) free cash flow.

Source: Meta Platforms

Within the Best Ideas Newsletter portfolio, we already include many big cap tech and large cap growth names, including Apple (AAPL), Alphabet (GOOG) (GOOGL) and Microsoft (MSFT). That means we’re already pretty tech-heavy in the newsletter portfolios, so adding back Meta Platforms when we are already benefiting greatly from similar trends doesn’t make a lot of sense to us at this time. Apple is up more than 56% year-to-date. Alphabet is up more than 47% year-to-date, while Microsoft is up more than 40% year-to-date.

Whatever you may be doing in your life, remember the moral of the Einstein story and just keep going. Those that were hasty to walk out of the classroom last year left before the huge run in the areas of big cap tech and large cap growth. We’re not expecting to hear any praise for sticking to our guns in big cap tech and large cap growth during 2022 and so far in 2023 when it was extremely difficult to do so, but again, remember the Einstein story.

Let the good times roll in big cap tech and large cap growth! What a fantastic year 2023 is turning out to be and thank you for sticking with us. If Meta serves as any example for you, it should be that you shouldn’t expect us to get everything "right," but it should be very, very clear that we’ve gotten far more things “right” than we’ve gotten “wrong” over the years. Cheers!

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NOW READ -- ALERT: Going to “Fully Invested” in the Best Ideas Newsletter Portfolio 

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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies. 

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