[I own DoorDash stocks and I may change my opinion anytime. This is not investment advice and please do your own due diligence.]
DoorDash reported its 2023 Q4 earnings in mid-February. The company grew its Total Orders by 23% YoY and its Gross Order Value (GOV) by 22% YoY. Its adjusted EBITDA has more than tripled versus a year ago. Its Free Cash Flow (FCF) continues to grow; after deducting stock-based compensation expenses, the “adjusted” FCF is positive and growing.
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Today’s education system is largely a system that rewards students for following the “right answer” and punishes them for following the “wrong answer.” People spend their most formative years living in such a system and this system shapes these people into who they are. The best-performing students (at least, academically) are the ones who are best at remembering and following the “right answer” and best at not touching the “wrong answer.” This way of doing things becomes instinct. That’s how they succeed. That’s how they build up their own social identity. Whether they know it or not, it is part of them.
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I have written frequently on the topic that most active investment managers are unable to outperform the general stock market. To explain the collective underperformance of active managers, some answers have been found and discussed, such as the increasing level of efficiency on the market level (blame the market) or the increasing level of concentration to a few large stocks on the index level (blame the benchmark). In this article, I want to expand on this topic by laying out two factors that represent, on a more fundamental level, I think, the source of investment manager underperformance.
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Financial pundits like to make predictions like “when XYZ happens, the stock market will go up 80% of the time.” Those predictions are particularly common around the start of a new year, when people are eager to know how the year could possibly unfold for them. Seeing so many predictions, I become curious about their validity. So, I did some digging into the historical patterns of stock markets. The following is what I found.
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[I own DoorDash stocks and I may change my opinion anytime. This is not investment advice and please do your own due diligence.]
DoorDash announced its 2023 Q3 results a few weeks ago. Growth is solid and profitability is rising. Management team said on the earnings call that “every line of business has accelerated in growth and improved in its unit economics.”
In GAAP terms, net loss has shrunken to ($75M) for the quarter. In cash terms, annualizing this quarter’s number, DoorDash is now generating well over $1B of Free Cash Flow a year.
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The Serenity Prayer:
God, give me grace to accept with serenity the things that cannot be changed,
Courage to change the things which should be changed,
and the Wisdom to distinguish the one from the other.
Looking back at 2023, I want to borrow the spirit of the Serenity Prayer and make a version of my own to summarize what I learned from the year:
Be tranquil and accept reality.
Be courageous and seek truth.
Have the fortitude to do both at the same time.
Studying human psychology, market history, and my own investment mistakes, I have increasingly come to believe that “Apparent Coherence” is a source of large investment mistakes. Stories that are so apparently coherent that they lead us to nod instinctively in agreement — that is often how large investment mistakes are born. It is not that coherent investment ideas are necessarily bad, but in fact, the logic goes the other way around. It appears to me that apparent coherence usually drives large investment mistakes. Below is a diagram I drew to illustrate what I mean.
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I observe myself and my investment activities and outcomes. I also observe other active investors and their investment activities and outcomes (this was actually my full-time job before). Something I noticed perplexes me: Despite almost all active investment managers being highly educated, well trained, and extraordinarily hardworking, almost all of them (at least in the U.S.) end up underperforming stock indexes.
For example, for the past 20 years, over 97% of “Large-Cap Growth Funds” in the U.S. underperformed the S&P 500 Growth Index; and the longer the measurement time window, the higher the percentage of underperformance (source: link). According to another source, losing funds’ underperformance is about 2x the size of winning funds’ outperformance (source: Figuring It Out, Ellis). To put it differently: Most investors end up underperforming, and when they underperform, they underperform by a wide margin. Clearly, investors’ hard work has largely failed to translate into good results. Why?
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