In active investing, the word “edge” is often used. For about four years, I worked as an institutional allocator, meeting and studying investment managers, evaluating their strategies and capabilities. “What is your edge?” That is a popular question that allocators are trained to ask, and investment managers are trained to answer.
To this popular question, I have heard many popular answers:
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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.]
Back in early 2022, I wrote and predicted that Instant Delivery companies “most likely will NOT work” (link). Today, most Instant Delivery companies have folded: Fridge No More (shut down); Buyk (bankruptcy); 1520 (shut down); Gorillas(acquired). Those still operating are facing significant challenges: JOKR (exited the U.S. market); Getir (reportedly in financial struggle); Flink (reportedly trying to sell itself); Gopuff (reportedly burned ~$400M in 2023).
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In recent days, probably from my learning to watch baseball games or from my reading of various books, I finally was able to crystallize into words some ideas that I long had about investing. These are qualitative ideas that are rooted in quantitative terms, such as “type I error,” “type II error,” “base rate,” and “hit rate.”
First, for the purpose of this article, let me define these terms:
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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 recently released its 2024 Q2 financial results. Its top line is growing at a clip of approximately 20% YoY with the bottom line rapidly approaching the point of GAAP profitability breakeven. User order frequency is at an all-time high and still growing; newer cohorts of users are ordering as frequently as the “pandemic” cohorts, if not more frequently. DoorDash’s strong operational results fly in the face of the general environment where consumer spending seems to have somewhat weakened.
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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 had a solid first quarter, growing its top line by over 20% year on year, gaining market share across all business lines, across almost all country markets. In terms of the company’s bottom line, “U.S. restaurant” has been the cash cow for a long while and “U.S. new verticals” and “international markets” are still in the red — and the unit economics of all these three business lines continue to improve.
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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 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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