phone screen of Amazon's stock rising

Being 100% Right on the Trend and 100% Wrong on the Execution

Capital
May 26, 2020

Let us assume we know that the price of sanitizer will go up. Our initial reaction might be to visit the closest store to buy what we can because we are an avid user of sanitizer, constrained only by our ability to store it. Imagine instead if we purchased sanitizer in hopes of selling it in the future at a profit. These two actions were triggered by the same demand but driven by different motives. If utility is increased by using sanitizer our best option may be a direct purchase today because it is relatively cheap. However, if we derive utility from profits associated with the sale of sanitizer in the future, making a bulk purchase of sanitizer from Walmart may not be the best way to maximize profit from future price increases. Perhaps a better approach involves partnering with a wholesaler or buying stock in a sanitizer producer.

To properly exploit an opportunity, the strategy through which the investment thesis is expressed needs to be fitting and appropriate. Depending on the goal, investors have a variety of vehicles available through which they can gain exposure to a good or service, some of which include:

  • A direct purchase
  • Equity or debt of a company that produces, transforms, etc. the asset/service
  • An ETF or mutual fund of companies that focus on that asset/service in some capacity
  • A hedge fund, private equity partnership or CTA (Commodity Trading Advisor) that has exposure to the asset/service
  • A derivative based on the asset/service

While the myriad of choices may be overwhelming, we can systematically narrow the options by carefully examining our objectives and constraints. We can further distill the method of implementation by asking:

  • What is my risk capacity and tolerance?
  • Do I have any cash flow needs?
  • What is my time horizon?
  • Do I understand my vehicle of choice and am I comfortable?
  • What additional limitations (e.g. liquidity, leverage, storage) does this method introduce?

There is no one correct method of getting exposure. The choice of vehicle is dependent on the goals and the constraints. So, ultimately, personal circumstance dictates why and how we respond to opportunities in any industry or asset class. Though, one must remember that to be right about an investment it requires being right on the opportunity, the timing and the execution. Failing on timing and/or execution may be indistinguishable from being 100% wrong on the opportunity.

References

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