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

Episode Summary

Executive Summary: Andrew Walker and Alex Morris explore the philosophy of “letting winners run,” contrasting long-term compounding in timeless businesses with the risks of hindsight bias, thesis drift, and changing management quality. They use examples from Buffett, Microsoft, Disney, banks, and historical portfolio studies to argue that success depends less on rigid valuation rules and more on business quality, management, and investor conviction.

Main Topics: Letting winners run as an investing style (Priority: 5/5): Alex explains that his post reflects a long-standing observation: great investors often allow a small number of positions to become very large over time, rather than constantly trimming winners. Hindsight bias and selection bias in success stories (Priority: 5/5): Andrew challenges the idea by pointing out that famous examples like Google or Stanford can be misleading, because we remember the winners and ignore the many positions that did not work out. Buffett, coffee can portfolios, and long-duration compounding (Priority: 5/5): The conversation uses Buffett, Berkshire, and the classic coffee-can portfolio example to show how holding exceptional businesses for decades can produce extraordinary outcomes, especially when there is external cash flow. Management quality and the evolution of business quality (Priority: 5/5): They discuss how management can materially change the trajectory of a business, using Microsoft, Meta, and Disney as examples of companies whose outlook changed dramatically as leadership and strategy evolved. Thesis drift, valuation discipline, and when to trim (Priority: 4/5): Andrew raises the danger of holding a stock beyond the original thesis, while Alex argues that investors should reassess based on business reality, not just price action or rigid rules. Industries with structural decline versus durable compounding (Priority: 4/5): They compare forever businesses like Coke and Microsoft with sunset industries like cable, tobacco, and coal, debating whether the same framework applies to both growth and decline stories. Financials, banks, and best-ideas funds (Priority: 4/5): The discussion closes with banks as a source of steady long-term compounding and skepticism about best-ideas funds, which may fail if the allocator lacks the original manager’s conviction.

Key Arguments: Great investing often comes from concentrating in a few exceptional ideas and letting them compound over many years rather than constantly rotating capital. Hindsight makes it easy to criticize past sales of winners like Google or decisions to hold losers like Enron; the real challenge is making decisions with incomplete information in real time. Buffett’s willingness to hold Coke, American Express, and similar businesses reflects a focus on durable businesses with long-run certainty, not just short-term IRR screens. External cash flow from Berkshire’s insurance and business ownership made it easier to hold concentrated winners without needing to sell for living expenses. Management quality can meaningfully alter a company’s trajectory; Microsoft under Nadella and Meta under Zuckerberg are examples of leadership reshaping outcomes. Some businesses, especially in media or technology, can look forever-durable until disruption changes the competitive landscape, so investors must continuously reassess the thesis. For declining industries, returns may come more from capital returns and valuation than from organic growth, which affects position sizing and expectations. Banks can still be attractive long-term holdings if an investor understands the balance sheet, management, and culture, but they require extra caution because mistakes can be fatal. Best-ideas funds often sound appealing in theory, but they may fail if the fund allocator does not have the same conviction or understanding as the original manager.

Data Points: Coca-Cola position size at peak (Berkshire equity book): 35% - Alex cites Buffett’s Coca-Cola stake as an example of letting a winner become very large. Berkshire Coca-Cola holding period: 1994 to present (no buys or sells for ~30 years) - Used to illustrate long-term holding and conviction. Coffee-can portfolio starting amount: $5,000 per stock - Historical example describing the investor who never sold winners. Coffee-can portfolio biggest winners: $50,000 to $100,000+ - Shows how a few holdings compounded dramatically over time. Coffee-can portfolio standout position: North of $500,000 - Largest winner in the anecdote, used to support letting winners run. ICO investment example: $5 million to more than $1 billion - An anecdote about a long-held investment in a financial/business services company. Current Microsoft share price cited: About $400 - Andrew contrasts the earlier valuation period with the later appreciation. Microsoft earlier share price cited: About $55 - Alex references a period when Microsoft looked expensive around 2015-2016. Microsoft earnings growth cited: From about $2.50 to the mid-teens - Illustrates that the stock’s gains were driven substantially by earnings growth, not just multiple expansion. Comcast paid-TV subscriber decline: 13% - Used to show the acceleration of cord-cutting and pressure on cable businesses. Earlier Comcast paid-TV decline pace: 2% to 3% - Compared with the more recent 13% decline to show deterioration over time. Fever-Tree annual sales volume: 700 million units - Compared against Coca-Cola to show scale differences between businesses. Coca-Cola daily unit volume: 2 billion units - Used to emphasize Coca-Cola’s massive scale and durability.

Pivotal Quotes: "the arc of the quality of the business bends over time to the quality of the management team" — Alex Morris: Alex’s framing of how management can reshape a business over time. "the portfolio has a way of kind of naturally solving for itself" — Warren Buffett (as paraphrased by Andrew): Used to describe how losers can shrink while winners grow in a diversified portfolio or holding company structure. "I think the biggest mistake Stanford ever did was selling Google in 2004, 2005" — Andrew Walker: A challenge to the common hindsight narrative around selling a huge winner too early.

Implications: For investors, the episode argues for patience, conviction, and continual reassessment of business quality and management rather than mechanical selling rules. The best compounding often comes from a few durable winners, but only when the underlying thesis remains intact.