Worm Capital 2021 Annual Letter: Optimism For 2022 And Beyond

We are getting in the 10th year of our long-only method, and the 5th year of our long/short method. Looking out over the next 20 years, we believe theres a good possibility there might be a little number of tremendously effective mega-stocks driving the indices – driven by power laws, scale, and network effects.
That froth needed to be flushed out, and over the previous year, prices across pockets of the equity markets consolidated and stabilized. Five years back, we composed about our basic view that we were on the cusp of huge industrial change and turmoil, which created a stock pickers market. While stock quotes can and will diverge from reality in the short-term, over the long-run – over multiple years – prices will show value.

Worm Capitals yearly letter for the year ended December 2021, entitled, “Optimism For 2022 And Beyond.”

Odeys Special Situations Fund Strives For Noncorrelated ReturnsOdeys Special Situations Fund was up 1.6% for December, bringing its full-year return for 2021 to 24.4%. The fund has actually delighted in a compound annual development rate of 35% given that its creation in October 2019. Q4 2021 hedge fund letters, conferences and more The Special Situation Funds benchmark, the MSCI World USD Index, returned 4.3% for Read MoreDear Partners,
We are entering the 10th year of our long-only technique, and the fifth year of our long/short strategy. A few of you have actually been with us for this entire journey; others may have signed up with more recently. Despite when youve joined, we remain in the really early days of this journey together, and we are exceedingly positive about 2022 and beyond.
Listed below, we provide some ideas about the future were headed into, and why we believe the rest of this decade – the 2020s – could show to be among the very best years for stock pickers.

In our view, Wall Street analysis tends to position too much emphasis on looking backwards – specifically in markets where the future looks basically different than the past. Utilizing shortcuts like P/E multiples makes sense in steady-state industries; the exact same cant be said for markets undergoing quick change, where worth tends to appear more plainly in the future.
In this environment, our financial investment analysis is driven by a focus on the customer-level value proposition. In the video game of company, we ask: Who is winning on the ground level? What are customers saying? Which companies have clients lined up around the block? How big is the marketplace? In a rip-and-replace economy, in industrial paradigm shifts, its the organizations that develop the finest worth proposals for clients today that stand an opportunity to reap the monetary rewards tomorrow.
These types of organizations are extremely unusual, and their supervisors hardly ever prioritize short-term revenues. On their surface area, these companies frequently look “pricey” to conventional worth investors. In our view, they need discounting money streams reasonably far into the future. They also need the incorporation of compounding non-linear development. As these numbers can get rather big, their validity is frequently dismissed by numerous investors. This offers tremendous chance for those vibrant adequate to do accurate forecasting of potentially explosive development.
Looking forward, this is where we will continue to look for value: The land-grabbers. The territory-seizers. The management teams who can look 5 years out and ask, “What are we doing today to develop a better value proposal in the future?” The leaders who can inspire and inspire their workers– and eventually execute their vision.
This previous year certainly had its challenges, but we increasingly like the setup heading into 2022.
At the end of 2020 and early 2021, there was a considerable quantity of froth in particular pockets of the market that appeared to drive up possession rates across the board, almost indiscriminately. That froth needed to be eliminated, and over the previous year, costs across pockets of the equity markets combined and stabilized. In our experience, this sort of debt consolidation is actually quite excellent: It bodes well for the next upper hand, however just for the deserving stocks – of which, we d argue, there are just really few.
This is why we believe 2022 and the years beyond might be a stock pickers market – compared to the last couple of years, we could see a considerable dispersion in the relative performance of particular companies.
Plainly, our design of investing – deep research, concentration in our best concepts – will not yield linear or “smooth” returns. As weve often counseled, this lumpiness is a function, not a bug, of our procedure. To try to provide outperformance over a multi-year amount of time, we should – need to – be placed in just our best ideas. Concentration in a hyper-elite selection of growing service models is danger management. Concentration leads to volatility – however this oscillation is perfectly healthy.
Over the in 2015, weve acquired more conviction in business that we own, based upon their execution, improving principles, margin expansion, and velocity of development. On several occasions throughout the year, weve raised our internal price targets on our portfolio companies, even as their stock prices stayed flat (or perhaps declined).
Historically, this sort of basic service growth coupled with a lagging stock price sets us up for what we call the “elastic band” impact, where a stock will snap back to the upside (often in a rush) when weak hands are eliminated, and the marketplace re-rates the company back to a greater numerous.
As some of you may remember, this dynamic has actually taken place multiple times throughout our strategys creation. For example, Amazons share price decreased precipitously in 2014, at one point being down over 28%. In 2019, Tesla went through a similar phase. Periodically, we choose to lean into these circumstances to help take full advantage of the possible benefits of our conviction and research process.
Specifically, in these situations – i.e., when we get conviction in a company while the stock rate decreases or lags for non-fundamental factors – we can periodically find appealing risk/reward chances in LEAPS. This year was no exception, and we continue to own a reasonable quantity of these choice contracts in the long/short method, which might provide a leveraged return for the Partnership throughout 2022 and 2023 if and when costs recover.
In Q4, we did not make any product changes to the portfolio. We are going full steam ahead. We visualize a few substantial catalysts heading into the new year that could reset expectations – and surprise to the advantage. As always, we value your perseverance and strength – its your trust that offers us the ability to let our investment theses play out.
Our company believe were in the extremely early innings here, and our firms partners are dedicated and invested right along with you.
Our core positions continue to be concentrated on the interruption of transportation, renewable resource, e-commerce, automation/AI, and home entertainment. Our view of the chance set is expanding: We are allocating research study efforts on areas like AR/VR, healthcare innovation, and brand-new innovations that might upend the traditional financial sector.
We are likewise growing our own organization to be well-positioned, from a research study viewpoint, to be early in these shifts. This month, we are welcoming Cam Tierney, a research study expert, to the Worm Capital team. Camera is a recent graduate of Bentley University, and he will deal with Eric Markowitz, Director of Research, on brand-new locations of disruptive innovation.
Five years ago, we discussed our basic view that we were on the cusp of enormous commercial change and upheaval, which developed a stock pickers market. “You need to approach the marketplace right now with a specific mantra in mind: Everything is up for grabs,” we wrote. “Repeat that to yourself if you must. Everything is up for grabs. [4]
We wish to double-down on this view. While stock quotes can and will diverge from truth in the short-term, over the long-run – over multiple years – costs will reflect value. Constantly.
And so all that matters, actually, is entering into position – and finding worth. As investors – as analysts – thats where we stay focused. The services that we own are flourishing, and, in numerous cases, innovating far much faster than we might have anticipated at the launch of our technique.
At a high level, we think were extremely early on our journey. Were excited and prepared to meet the difficulties ahead. As constantly, please contact us if you have any concerns, and we want you a pleased and healthy start to the brand-new year.
Sincerely,
Worm Capital
Arne Alsin– Founder, CIO + Portfolio Manager
Zak Lash, CFA– COO
Daniel Crowley, CFA– Director of Portfolio Management
Eric Markowitz– Director of Research
Philip Bland– Director of Investor Relations
Emily Bullock– Head of Compliance
Camera Tierney– Research Analyst
[1] https://finance.yahoo.com/news/5-giant-stocks-are-driving-the-sp-500-to-records-goldman-144836651.html
[2] https://wpcarey.asu.edu/department-finance/faculty-research/do-stocks-outperform-treasury-bills
[3] https://www.imd.org/research-knowledge/articles/why-you-will-probably-live-longer-than-most-big-companies/
[4] https://www.wormcapital.com/the-wormhole-source/great-time-to-be-stock-picker
Upgraded on Jan 13, 2022, 1:47 pm

As we see it, the 2020s will be specified by commercial disruption, business dislocation, and a few of the most extensive technological shifts of the last two centuries. We are hurtling towards a cleaner, more efficient, more automatic world– and only the healthy organizations will survive.
These changes will bring threat and mayhem – however also enormous chances.
Concentration in the outright top stocks in this environment is not only the secret for wealth production: its our best defense. New organization models and brand-new innovations are emerging, threatening the old guard.
All investing is a video game of method, and to win this video game, especially in this fast-changing environment, we require strong theory– together with a distinct research procedure. Internally, this is what we concentrate on, asking questions like: Whats next? How to position for tomorrow? What to own? What to avoid? How to approach appraisal? What are our challengers saying? These concerns are of important, even existential, importance. This is particularly real as performance attribution ends up being increasingly consolidated in just a handful of names.
1] This pattern is intensifying off of an existing dynamic: A handful of winners drive returns. 2]
Over the next couple of decades, we think this dynamic could really become even more severe. Looking out over the next 20 years, we think theres a great chance there may be a little number of tremendously successful mega-stocks driving the indices – driven by power laws, scale, and network effects.
In 1958, the average life-span of a business listed in the S&P 500 was 61 years. Today, its under 18 years.

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