How not to pick stocks

Episode Summary

Executive Summary: Ethan Wu and Robert Armstrong dissect their disastrous 2023 stock picks, which landed them in the bottom quintile and dead last among FT journalists. They shorted Netflix, Coinbase, and Pulte Group—all major winners—while buying defensive names like Domino's and Nestlé that failed to offset losses. For 2024, they adopt a 'Growth At a Reasonable Price' (GARP) strategy, selecting Dollar General, General Dynamics, Expedia, Everest Group, and Cigna, aiming for balanced risk and value.

Main Topics: 2023 Stock Picking Critique (Priority: 5/5): Detailed post-mortem of three failed short positions (Netflix, Coinbase, Pulte Group) and ineffective long picks (Domino's, Nestlé), leading to dead-last performance among FT journalists. Key Lessons from 2023 Mistakes (Priority: 4/5): Discussion of why betting against secular tailwinds (e.g., housing shortage) is dangerous and why defensive stocks underperform in expansionary markets. Introduction of GARP Strategy for 2024 (Priority: 5/5): Adoption of 'Growth at a Reasonable Price' as the core investment style, selecting five stocks that combine moderate growth with low valuations. Analysis of 2024 Stock Picks (Priority: 4/5): Rationale behind five GARP picks: Dollar General, General Dynamics, Expedia, Everest Group, Cigna, focusing on catalysts like restructuring, defense spending, travel trends, reinsurance pricing, and health insurance dynamics. Risk Appetite and Contest Strategy (Priority: 3/5): Worry that 2024 portfolio may be too conservative compared to the high-risk approach that failed in 2023, with specific winning conditions identified. Long/Short Segment (Priority: 2/5): Ethan goes long Disney based on Bob Iger's turnaround; Rob shorts 'inshittification' of social networks, arguing platforms remain profitable despite quality decline.

Key Arguments: Shorting Netflix was wrong because the predicted 2023 consumer recession didn't materialize; instead, consumers had excess cash and added subscriptions. Shorting Coinbase failed as crypto liquidity/interest rebounded despite Fed tightening, leading to a 3x stock price increase. Shorting Pulte Group was a mistake because higher mortgage rates locked homeowners into low-rate loans, creating artificial demand for new homes. Defensive longs (Domino's, Nestlé) couldn't offset short losses because growth/risky stocks outperform in expansions. For 2024, GARP stocks (growth at reasonable price) are optimal for an uncertain macro environment, offering both downside protection and upside potential. Dollar General's restructuring and new management could resolve past acquisition issues; General Dynamics benefits from rising defense spending; Expedia's cost-cutting boosts margins; Everest Group benefits from firm reinsurance pricing after catastrophes; Cigna's lack of Medicare Advantage exposure is a plus during that segment's struggles.

Data Points: Portfolio Performance Ranking: Bottom quintile among hundreds of FT stock pickers; dead last among FT journalists - 2023 stock picking contest results Inverse Unhedged ETF Return: +40% - Return if taking opposite bets of Unhedged portfolio in 2023, more than double S&P 500 Netflix Stock Return: +60% - Increase after Armstrong's short position in 2023 Coinbase Stock Return: 3x (300%) - Increase after short position in 2023 S&P 500 Return: ~20% - Implied by statement that inverse ETF more than doubled S&P performance

Pivotal Quotes: "We did not crash the car. We loaded the car with dynamite, drove it off a ski ramp, and landed it in an active volcano." — Robert Armstrong: Describing the magnitude of failure in 2023 stock picks "I don't regret packing the portfolio with risk. What I do regret is betting against companies with secular tailwinds...and not understanding what should have been an obvious dynamic in the home building industry." — Robert Armstrong: Reflecting on lessons learned from 2023 "Past performance, as I often tell my wife, is not predictive of future performance. In this case, a good thing." — Robert Armstrong: Warning listeners against relying on their track record, noting that poor past performance may not repeat

Implications: The episode underscores the danger of macro-driven short bets against secular trends, and highlights GARP as a pragmatic approach for uncertain markets. Listeners should recognize that even professional analysts can dramatically underperform, and that past failures can inform but not guarantee future strategy.