The Science of Hitting's Alex Morris dissects "Letting Winners Run" philosophy and strategy

Episode Summary

Executive Summary: Andrew Walker and Alex Morris dissect the philosophy of "letting winners run," arguing that long-term compounding often comes from concentrating in high-quality businesses and tolerating large position sizes over time. They weigh this against hindsight bias, management changes, thesis drift, and the risks of applying the idea to cyclical or declining industries.

Main Topics: Letting winners run as an investing philosophy (Priority: 5/5): Alex explains that his post was driven by observing how exceptional long-term outcomes often come from holding a few huge winners instead of trading frequently. Hindsight bias and selection bias in winner examples (Priority: 5/5): Andrew challenges whether famous examples like Google, Stanford, or fund studies are cherry-picked, and Alex responds that the broader lesson is about process and mindset rather than one universal rule. Coffee can portfolios and portfolio construction (Priority: 4/5): The discussion centers on the classic coffee-can example and Buffett’s Coca-Cola holding, with both speakers noting that outside cash flow and portfolio design affect how feasible it is to let positions compound. Management quality and the arc of the business (Priority: 5/5): They argue that management quality matters enormously over long holding periods, citing Microsoft under Satya Nadella, Meta under Zuckerberg, and Disney/Walmart as examples where leadership reshaped outcomes. Thesis drift, valuation, and when to trim or sell (Priority: 5/5): Andrew describes how his worst losses came from drifting theses, while Alex says investors should not reflexively buy more just because a stock gets cheaper and should reassess when the original thesis changes materially. Applying the framework to declining or sunset industries (Priority: 4/5): They examine whether the same logic can work in tobacco, coal, cable, and banks, concluding that it can, but position sizing should reflect capital returns, secular decline, and higher fragility. Best ideas funds and conviction mismatch (Priority: 3/5): The conversation closes on why best-ideas funds often fail: the allocator may not share the original manager’s conviction or ongoing understanding of the thesis, making after-fee results questionable.

Key Arguments: Great long-term returns often come from allowing a few strong positions to become very large rather than constantly rotating capital. The point of the coffee-can portfolio is not that every stock works forever, but that a small number of extreme winners can dominate results. Hindsight bias distorts famous examples: a stock that looks obvious to hold today may have been dangerous to own at the time. Buffett’s ability to hold Coca-Cola, and Berkshire’s insurance cash flow, made it easier to let winners run without forcing sales for liquidity. Portfolio decisions should be tied to what the investor is optimizing for, not to a generic notion of maximum return. Management quality can change the long-run path of a business, especially in tech where strategic pivots and capital allocation matter enormously. A business can remain strong while the original investment thesis changes; investors need to distinguish between temporary noise and true thesis breakage. Reflexively averaging down or buying more as a stock falls can be a mistake when the underlying thesis has materially changed. Declining industries can still be good investments, but expected returns should be framed more around capital returns and shrinking cash flows than growth. Best-ideas funds may be weak because the selector lacks the conviction and context of the original manager who generated the idea.

Data Points: Coca-Cola position size at Berkshire peak: 35% of equity book - Buffett’s Coca-Cola stake at its high point during the holding period discussed. Buffett’s Coca-Cola holding period since last trade: No buys or sells since 1994 - Alex highlights that Buffett has not traded the position for roughly 30 years. Coffee can portfolio initial investment: $5,000 per stock - Historical example of a client who bought recommendations and never sold. Coffee can portfolio value of largest winners: $50,000 to $100,000 - Several positions appreciated 5-10x or more over time. Coffee can portfolio largest position value: North of $500,000 - One or two positions became enormous relative to the original investment. Microsoft valuation at earlier stage: ~10x earnings for many years - Alex describes his original value-oriented thesis on Microsoft. Microsoft valuation later in holding period: ~20x earnings - By 2015-2016, the stock appeared more expensive on a traditional value basis. Microsoft share price reference: $55/share to about $400/share - Used to illustrate the scale of the stock’s subsequent rise. Microsoft earnings reference: $2.50 to about $15/share - Shows earnings growth driving part of the long-term compounding. Netflix reassessment period: 2022 - Alex mentions buying more around the time of the selloff because the long-term opportunity still looked intact. COVID-era paid TV sub decline at Comcast: 13% - Used to show the acceleration of linear TV deterioration more recently. Earlier paid TV sub loss pace: 2% to 3% - Comcast’s decline rate a few years earlier, before acceleration. Alltria holding period reference: 50 years - Andrew cites tobacco as a top long-term performer over a multi-decade horizon. ICO investment example: $5 million to more than $1 billion - A dentist/optometrist portfolio example used to show the power of one long-term winner. Fever Tree sales volume: 700 million units - Andrew compares Fever Tree’s scale to Coca-Cola. Coca-Cola daily unit volume: 2 billion units - Illustrates Coca-Cola’s enormous and durable scale advantage. Ally return framework: 12% ROE / mid-teens potential return - Andrew outlines a simple bank compounding model using ROE, dividends, and retained earnings. Potential bank valuation: ~1.2x book - Andrew’s illustrative assumption for multiple expansion over time. Ally-related recent stressors: Used-car volatility, interest-rate moves, regional banking issues - Alex cites multiple tests the business has already endured. Best-ideas fund structure: Top idea from 20 managers at ~5% weight each - Andrew defines the model he believes often fails.

Pivotal Quotes: "the arc of the quality of the business bends over time to the quality of the management team" — Alex Morris: Alex explains why management matters increasingly over long holding periods. "the portfolio has a way of kind of naturally solving for itself" — Warren Buffett (as cited by Andrew): Used to describe Berkshire’s tendency to let winners grow while weaker positions fade. "I need hard and fast rules here, Alex." — Andrew Walker: Andrew pushes back on the idea that selling/holding decisions are always subjective and context-dependent.

Implications: For investors, the episode argues for patience, conviction, and business quality over constant trading—but only with disciplined reassessment of thesis, management, and valuation. The same framework can work in cyclical or declining sectors, but sizing and expectations must adjust.