Opportunity Is Everything
And Most Investors Never Understand It
This article is for general information only and is not personal financial advice.
By Izaac Ronay
Last weekend I caught up with a mate who has a strong passion for investing. Let’s call him Craig. Our discussion bounced from snorkeling to Spanish zinc mines to psilocybin for treating gut health.
It was wide-ranging and just like every chat with Craig, it was fun, insightful and thought provoking. He’s a great investor, who excels at spotting fantastic opportunities.
There were two elements of the chat in particular that I wanted to share with our readers.
The first was about Electric Vehicles (EVs). I’m bullish on the EV story. It’s not a secret. Just ask my friends, my family, my dog – Daisy, my dentist, the mailman or the guy who lives two streets away and sometimes jogs past my house with headphones on.
I relayed a story to Craig about a previous encounter I’d had, relating to EVs.
‘That Guy’
I once had an unsolicited ‘discussion’ with an ex-colleague at a prior job. I had only met this guy a couple of hours prior. But he was immediately vocal about every politically incorrect subject he could lay his hands on. The kind of guy who shows up to every aspect of his life hoping he’s going to offend someone.
We’ve all met THAT GUY.
It’s like they’re trying to get fired on a daily basis for being inappropriate. The kind of guy who’d make jokes to another colleague’s face about them being a ‘terrorist’ based solely on the shade of their complexion. But, that’s another story.
Yeah. That kind of guy.
So, I’d recently published an article on EVs. Well, this colleague starts asking me what I think about EVs. I think they’re the future. I think they’re a far superior technology, and the shift to them is just a matter of time.
He couldn’t wait to interject.
To let me know that I’d been brainwashed by Bill Gates, George Soros and a cabal of greedy villainous puppet masters. That climate change isn’t real.
It doesn’t matter if climate change is real, I told him. EVs are just superior technology.
His response was that we’re still burning coal and oil to power the electricity that goes into EVs.
It still doesn’t matter, I replied. EVs are so much more energy efficient than Internal Combustion Engines (ICE), that you can run a powerplant on petroleum, convert that energy to electricity to charge the batteries in EVs, and that whole process will still consume less energy than a petrol powered car.
My colleague quickly changed the topic. His idealogical sensitivities had been infringed and he didn’t have a comeback. He was clearly used to arguing with people who hadn’t done much research.
Most people can’t wrap their heads around this simple concept. EVs are massively more energy efficient than ICE vehicles. Whether climate change is real or not is completely irrelevant to their adoption. It’s just better tech. So why make it a political issue?
The Thought Experiment
Craig had an even better way of putting it. He recommended a simple thought experiment. Rather than asking do we want to move from ICE vehicles to EVs, simply reverse the question.
Imagine we all drive around in silent, pollution free EVs. Then someone comes along as says, hey we can improve these things if we just stick a petrol motor in them.
We’ll add another 200 moving parts that wear out. Maintenance costs will increase substantially. The number of things that can go wrong will increase dramatically. Running costs will increase. We’ll be constrained to buying fuel from a handful of countries that sometimes want to destroy us because of our religion or the colour of our skin. The price of that fuel can fluctuate wildly.
We’ll also get to breathe in poisonous fumes from these vehicles which will lead to the early deaths of millions of people each year. Plus, they’ll be really noisy, contributing to hearing damage and just general ‘annoyingness’.
Who’s even going to invest a dollar into that value proposition? When put into those terms, EVs become an obvious and inevitable next step in the evolution of our transport system.
Craig’s thought experiment is a powerful tool. And one we can take way beyond this EV story.
For instance, let’s think about the most recent Explosive Growth portfolio pick with Stakk (ASX:SKK). It’s a company that quietly embeds sophisticated and automated decision making into existing workflows.
They’re making it easier for other companies to onboard new clients seamlessly and make decisions as on credit worthiness and detect fraud. Better integration means faster turnarounds, seamless workflows, less manual processing, fewer mistakes, and better outcomes.
Let’s run Craig’s thought experiment.
Imagine a world where you open a bank account using an app by simply tapping ‘open account’. The app you’re using accesses your camera to take a quick photo of you. It sends that photo to an API, where it’s processed, your identity is confirmed and the bank account is opened within seconds.
Now, just to be clear, this is not currently happening. At least, not that I’m aware of. But, this is the kind of possibility we’re looking at somewhere down the track with embedded finance.
Let’s assume this isn’t the dystopian version of a high tech world. And that social credit scores and digital identities are used to make our lives better and not to control the masses and crush political dissent.
Would you trade in the ability to open a bank account in a few seconds by clicking a button for a world where you have to make an appointment, physically go into the bank with three forms of identification and spend an hour filling out and signing forms, just so your account can be opened sometime in the next two weeks?
I’m sure some of our readers would say ‘Yes, I want that world back.’ And I get it. I know plenty of you. But, most people want the ease of use. They want the integration. They want seamless. And when you think about it in these terms – what if we went backwards – then it becomes a no brainer that SKK is positioned at a place in the tech world that has to see massive growth.
There are still risks with SKK as an investment, don’t get me wrong. And just because they’re positioned in a place of growth, doesn’t mean they’ll necessarily be the winner in that space.
The Opportunity
But one of the most critical aspects of picking a high growth winner is understanding how opportunity works. Now, here’s a controversial point that might ruffle a few feathers. The vast majority of fund managers don’t understand opportunity. That’s why so many of them struggle to beat the index.
They only understand processes.
And this is another point Craig and I discussed in our catch-up. I relayed a story to him about attending an investor conference for a well-respected Australian fund manager. It’s a company I’ve personally followed and admired for a long time.
Well, I was disappointed.
Their fund managers were simply unimpressive. Out of six presenters, there were two who had real knowledge and insight. The others came across as simply process operators.
People who show up to move their widgets from one compartment to the next. And what I realised was this fund manager’s success was built on solid processes. They had built up great rules and procedures for managing risk and spotting opportunities.
Its processes could use average people to get slightly above average returns over a very long period of time. Because a good process with average people will beat an average process with average people (the market).
Just in the same way that Ford became the best car maker in the world, not because it had the smartest, fastest, tallest, widest or strongest people in it’s factory. It became the best because it had the best processes. It had an assembly line.
Most fund managers don’t understand opportunity. They just don’t. Because a Discounted Cash-Flow (DCF) model can’t magically spot opportunity. But opportunity is THE SINGLE MOST IMPORTANT FACTOR in finding an Explosive Opportunity.
There are many important steps, don’t get me wrong. Valuations, cashflow, people, hurdles and catalysts are important. But there’s nothing without the compelling opportunity itself.
The Edge
I’ll go into more detail on identifying great opportunities another time. For now, I urge you to reflect on opportunity. This idea is at the core of successful investing. It all starts with the opportunity.
It’s a word that sits in the future. Not the present. Because the present is fully priced by definition. It certainly doesn’t belong to the past.
There is no greatness, no breakthroughs and no riches without reflection. And today I invite you to reflect on the word ‘Opportunity’.
Spotting mispriced growth opportunities is what we're all about at The Markets IQ. If you want to stay ahead of the curve, subscribe to our newsletter and follow Vitti Capital on LinkedIn.
Until next time, happy investing.
Izaac Ronay
Izaac is a broker and trader with Vitti Capital. He brings over 10 years of trading experience with top tier global trading houses and 20 years of experience analysing and investing in ASX listed equities.
This publication has been prepared by The Markets IQ, a division of Vitti Capital Pty Ltd (ABN 13 670 030 145), which is a Corporate Authorised Representative (001306367) of Point Capital Group Pty Ltd (ABN 41 625 931 900), the holder of Australian Financial Services Licence 518031. This report is for general information only and does not take into account your objectives, financial situation, or needs. It is not personal financial advice or a recommendation to buy, hold, or sell any security. You should consider whether the information is appropriate in light of your circumstances and obtain professional advice before making any investment decision. This report is intended solely for wholesale, sophisticated, or professional investors within the meaning of the Corporations Act 2001 (Cth).
Any views, probabilities, valuations, technical levels, or forecasts expressed are strictly the opinions of the authors as at the date of publication, based on publicly available information and assumptions which may change without notice. They are illustrative only and not predictive of future outcomes. Past performance is not a reliable indicator of future performance.
