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Are you Willing to Look Stupid?

4 min read. Lemonade follow-up.

Caleb Dismuke

Solve this riddle...

Suppose I hire you as a portfolio manager, and we agree you will get no compensation next year if your return is in the bottom nine deciles of the investor universe but $10 million if you're in the top decile.

What's the first thing you have to do — the absolute prerequisite — to have a chance at the big money? No one has ever answered it right.

The answer may not be obvious, but it's imperative: you have to assemble a portfolio that's different from those held by most other investors.

If your portfolio looks like everyone else's, you may do well, or you may do poorly, but you can't be different.

And being different is essential if you want a chance at being superior.

To get to the top of the performance distribution, you have to escape from the crowd.

And in the course of trying to be different, you have to bear the risk of being different and worse.

The riddle was from Howard Mark's memo — "Dare to be Great II."

But here's the real kicker.

It's not whether you dare to be different or wrong, but whether you dare to look wong.

There's a chance Lemonade doesn't work. Most people on FinTwit were skeptical and pointed out all the risks with the business. Many were the same ones I laid out in Tuesday's article.

But I'm willing to bet that Lemonade might work. And the potential upside justifies the obvious risks with their business.

I could be wrong. And while I hate being wrong, it's part of the business. No one bats a thousand.


How I'm executing my investment in Lemonade

I'm writing this on Thursday, July 2, 2020. Lemonade went public this morning, and as of 1:15 p.m. CST, it's trading ~118% above its offering price.

👉The offering price is the price investment bankers pay before the stock starts trading (usually the day before the IPO). The opening price is the price we see on our charts and quote screens.

Lemonade’s price action has left investors puzzled.

Like the Spotify investment, I'm averaging into this position by purchasing a small amount on the first Tuesday of every month for the next six months.

I've had people ask: "why not wait for the price to come down before you buy?"

It's a fair question. By any standard valuation measure, Lemonade's value doesn't make sense.

Here's why I'm averaging in, instead of waiting for a better price — I've been burned by waiting for the price to come down to what I thought was a reasonable valuation.

The price went up, up, and up. And when it did come down, it was still above what I thought was a fair price.

This statement took me a while to learn: The market doesn't care what I think about a company's valuation.

I hope Lemonade trends down over the next six months, and I get a chance to buy shares at better prices.

My way of entering a position probably isn't the best, but it works for me. Every investor has to find a strategy that works for them and stick with it.