Frame Store

A lot hangs on a picture frame. An intricate one can draw attention to detail and subtlety in a Golden Age portrait. A modern straight-edge floating wood frame would look weird or maybe ironic. Different frames can change whether people see a work as "good" or "bad." It's important to choose one that works.

Same goes for investing. Looking at a company's shares from the standpoint of a high-frequency trader, a multi-strategy hedge fund, a short-fund or a long-term investor means using different frameworks. Within those camps are still more ways to look at things.

A lot of the time this boils down to stale and mostly useless categories like "value" or "growth" or "tech investors" or "healthcare investors." Those are nice because they're easy. Did the company grow topline 50% last year? Yes: growth. Does the company design silicon? Yes: technology. Those categories describe an identity rather than having anything to do with why an investment might be good or bad. There are good and bad investments in each of those categories.

Journalist Derek Thompson interviewed VC Josh Wolfe in early 2022. Wolfe took Thompson on a tour of the Lux Capital "frame store, " to cover what works for them. Lamplighter's borrowing that shtick and going on a quick tour of the frames hanging in the Lamplighter gallery — some of the frameworks that it's found useful in describing why investments end up in the portfolio.

Spill the beans

Lots of different users need financial statements. Management uses them to figure out if the business is doing good or bad. Regulators use them to make sure certain businesses stay in line and in their lane. Tax collectors use them to figure out how much they're owed. Customers use them to make sure the business can deliver the goods or service they're due. Investors use them to figure out how much a business might be worth. Accountants have to come up with something that serves all these people. That's impossible. So, they compromise. Practical limits and the different interests weighing on preparers of financial statements mean that sometimes what's useful to one user gets sacrificed for what's useful to someone else.

Sometimes this means that financial statements tell a different story than the one that's most important to investors. Lamplighter showed how this can sway investors' view of companies like Rambus and Planet Labs.

Sharing is caring

Tension exists between a company and its customers. A company might want to capture all the value it possibly can from its customers — charging as much as possible for as little as possible. Customers want the opposite — the most value for the least money. Some companies, though, focus on creating value for their customers. In Josh Wolfe's world, they look for "what sucks" in the business and fix that. Either they help their customers earn more money or they lower their costs or both.

Sometimes companies can create value from scale — its cheaper for them to produce something or provide a service because they can spread each additional thing over the same amount of costs). The bigger they get, the more value they can share with customers. Companies can set themselves up to get as big as possible so even if they pass on a lot of value to customers, there's still loads to spread among shareholders — more than there would be if management focused only on grabbing every penny from the customers.

This was a favorite tool for investor Nick Sleep. Lamplighter's talked about how Adyen is doing this in payments and Marex is working this technique in financial markets.

Ships passing in the night

Businesses die all the time — RIP Blockbuster. Sometimes they just fade from glory — IBM. Sometimes, though, they get a second act — Microsoft/Office 365.  Occasionally, this next act ends up better than the first — Heyo, Oracle, an AI company.

For the companies that are dying, that can take a while. Did you know the Yellow Pages were still printing in 2019? When a company's in the middle of dying, investors sometimes struggle to give credit for any good ideas management has. That's not why those investors are there.

Dying businesses attract investors that invest in dying businesses, not investors that invest in whizzy startups. Dying investors do not, as a rule, pay top dollar for those things. Sometimes, though, you can find a business with promising prospects attached to one facing decline and where the whole business is priced for death.

Lamplighter's made that case — where newer growing businesses will pass dying ones inside the same company — with IDT and Garret Motion.

A better mousetrap

Imagine you have a mouse problem. You find two companies that offer to get rid of your mice. One charges for each trap. They're good traps. They'll get the job done. The other company doesn't charge anything. In fact, in some cases they'll even pay you for your mice. They make money by selling these mice on to folks who want them like people who want them as pets.

Investors might think of these companies as similar — they both catch mice. The economics behind them are different, though. Different business models. Different risks. Different customers. Different incentives They should also bear different values. Sometimes they don't.

Google works like this. People search for things using Google. No one pays Google to search. It sells attention (that it mostly gets through search and through YouTube) to advertisers. It more closely resembles a media company. Others have made this point. Investors still seem to think of it as getting paid for solving the problem of search.

Other investments in the Lamplighter portfolio fit this model too — Marex, Cheniere Energy.

Never tell me the odds

The last stop on this gallery tour holds a grab bag of "special situations." The most common "situation" that crops up is when a company agrees to be bought and the price of that company's shares imply odds for the deal going through that are way out of line with what other similar transactions suggest. Lamplighter wants to figure out those odds and take them when they’re out of line.

These investments are smaller and usually shorter — maybe only a few months. Lamplighter doesn't often publish on them. The last one it wrote up was Spirit. Which turned out badly for investors, the company, fliers, pretty much everyone.

The most successful ones usually come along with some "free money," like when EMC bought Dell for cash plus VMWare stock and you could buy shares of Dell for less than the cash value of the deal. The idea is to build this part of the portfolio so that if Lamplighter’s right most of the time, investors win.

Exit

That’s five frames. There are others, but those are the ones Lamplighter takes out most often. Which of these lenses works best will change over time as the market changes. Most of the investment world revolves around what an investment is — a healthcare stock, a bond, crypto. Rather than organizing the portfolio around an investments’ identity, Lamplighter builds the portfolio around "what are investors missing?".

For the vast majority of companies, the answer to "what investors get wrong?" is nothing. Investors get it close enough to right. But, by viewing opportunities through those frames, we can figure out when investors do miss what's important and jump on the chances when we find them.

Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.