Random Ramblings September 2024: heavy selection bias, probabilities & terminal 0's, returns on fame

Episode Summary

Executive Summary: Andrew Walker’s monthly ramble explores three investing themes: the potential outperformance of highly concentrated investors, the mispricing of probabilities and terminal-zero risks, and how fame and strong businesses create expanding monetization options. He argues that great businesses and “famous” people/brands can keep unlocking new cash-flow streams, while investors may underappreciate the optionality embedded in quality assets and overreact to low-probability outcomes.

Main Topics: Concentration, obsession, and investing returns (Priority: 5/5): Walker wonders whether investors who become deeply focused on one stock or industry outperform because of conviction and information edge, despite obvious survivorship bias. Probabilities, weighting, and terminal zeros (Priority: 5/5): He discusses how investors misread probabilities—treating sub-50% outcomes as worthless and near-certainty outcomes as guaranteed—and asks whether the market misprices long-shot and terminal-zero risks. Terminal decline versus remote zero risk (Priority: 4/5): Walker contrasts obvious sunset sectors like tobacco, coal, and legacy TV with businesses facing remote but real zero-risk scenarios, such as Uber in a self-driving world. The rising returns to fame (Priority: 5/5): He argues that fame is increasingly monetizable through media, advertising, streaming, sponsorships, podcasts, and direct-to-consumer businesses, with sports and entertainment as prime examples. Optionality in great businesses (Priority: 5/5): He suggests that high-quality companies repeatedly create new growth avenues over time, making them more valuable than simple undervalued assets because management, brand, and ecosystem optionality keep compounding. Capital allocation and hidden upside in durable assets (Priority: 4/5): Examples like Apple, Meta, Google, real estate, and resource royalties illustrate how strong underlying positions can generate unexpected future businesses or reuse value in changing environments.

Key Arguments: Investors who go all-in on one stock or sector may outperform because obsession can create superior diligence and conviction, but there is strong survivorship bias in the visible examples. The market often treats probabilities as binary: sub-50% outcomes get priced like zero while >50% outcomes get priced like certainty, creating possible mispricings. Businesses with obvious terminal decline can still be cheap enough to outperform because investors may over-discount long-lived cash flows before the terminal event. Remote terminal-zero risks may be underpriced because investors mentally dismiss low percentages, even though a 1% chance of zero still matters materially. Fame now has more monetization channels than in the past, so top athletes, musicians, reporters, and analysts can generate far more income than prior generations. Great businesses tend to surface new optionality over time, especially when backed by strong management or founder-led execution, making them more attractive than low-quality cheap assets. Assets with prime location or scarce rights can keep finding new uses, similar to how durable platforms keep discovering adjacent revenue streams.

Data Points: NBA top-player compensation: $100 million per year - Walker predicts elite NBA players could reach this annual pay level soon due to growing league monetization. NBA lower-tier player compensation: $10 million per year - Used to illustrate how lucrative even the bottom end of elite sports talent has become. Probability example: 60% / 40% / 51% / 49% - He uses these thresholds to describe how investors assign value differently to outcomes depending on framing. Lower-probability example: 25% - Used as a hypothetical basket of long-shot outcomes that may be undervalued. Position sizing example: 5% - Walker references talking to investors with a 5% position who treat the same idea as a 100% conviction bet. Concentrated portfolio example: 80% of net worth - He cites investors who hold Berkshire or similar names at this level of concentration. Potential model values: $5, $10, $20 - Used in a thought experiment about how a company’s value can scale further if management keeps creating upside. Podcast recording date: September 15 - Walker notes when this rambly episode was recorded.

Pivotal Quotes: "I wonder what the returns would be, right?" — Andrew Walker: He asks whether obsessive focus on one company or sector actually improves investor performance. "If something's 51% versus 49%, they're effectively priced at the same thing. But I find if I say 51%, people will give that credit because it's more likely than not to happen." — Andrew Walker: This illustrates his point that investors respond to probability framing in a biased, binary way. "The returns to fame continue to escalate." — Andrew Walker: He summarizes his view that modern monetization channels have made fame more valuable than in previous eras.

Implications: Listeners should think more carefully about concentration, probability framing, and hidden optionality. The episode suggests durable businesses and strong brands may be more undervalued than they appear, while low-probability or declining sectors can still offer opportunity if priced correctly.