At the beginning of 2021, you would easily notice that investors had lost the ability to think about risk. This was evident in the runup of SPACs that traded far above $10/share. This behavior usually occurs after a long bull market when the emphasis is only on returns.

An emphasis on pricing discipline, being careful not to overpay, and being humble about one's ability to forecast the future seems excessively cautious during boom times. Investors often forecast linear growth, but companies rarely grow that way, especially after demand has been pulled forward. And when shit hits the fan, as it always does, it can lead to considerable losses. It is at that time, investors are reminded of the need to look at risk. This often leads to the resurgence of conservative portfolio management known as value investing.

The spectacular performance of growth companies from 2010 to 2021 has led many people down the wrong path. Many think they are being rewarded for identifying and owning growth companies, but instead, it was for identifying and exploiting mispricings that just happened to be primarily in growth companies. Growth stocks were trading at a discount between 2010 and 2015. By November of 2021, that discount was gone.

What is the market mispricing nowadays?

Another lesson to be learned from past cycles was not to underestimate markets' ability to overprice (and underprice) companies for a long enough period of time to make you think it's the new normal.

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This is part of my investor letter going out as soon.