Gavin Baker+ Your Authors @GavinSBaker Husband, Becky Painter. CIO, Atreides Management. Former PM, Fidelity OTC fund. No investment advice, views all my own. Nov. 11, 2019 5 min read + Your Authors

1) Lots of pushback to my earlier statement that “Masa is brilliant and have to respect the track record.” But numbers are numbers. In investing, brilliant is as brilliant does to quote the surprisingly Aristotelian Forrest Gump. A brief history of Masa and what might be next

2) My own experience with Masa consists of having a handshake deal with a CEO for a $Xm premoney valuation only to have the Vision Fund offer a 6x higher valuation less than 10 days later. So I understand the skepticism, but still respect the track record.

3) Fair to point out that ex BABA, Masa’s track record is much less impressive. But this is true for most great investing track records – take out the top 2-5 lifetime contributors from most superstar track records and they fall apart vs. the mkt. Numbers are numbers.

4) Said another way, slugging percentage is generally more important than batting average in investing. Very few great investors got to the top with lots of singles.

5) This makes sense. Hendrik Bessembinder’s excellent 2017 paper showed that only 4% of equities accounted for all of the markets outperformance vs. T-bill’s since 1926 (0.3% of equities accounted for 50% of this). This return skew is one reason it’s so hard to beat the market

6) And important to realize that Masa didn’t just “get lucky” with BABA. Choosing to hold a position IS a decision in the same way that buying is. You’re buying the position every day when you hold it. That is a long series of good decisions to get a 100x return.

7) Anyone who has had a 10 bagger knows how hard it was to hold on. So many reasons to sell along the way. A 100 bagger is much harder. I’ve never had a 100 bagger despite investing for 20 years. How many other investors held on to have a 100 bagger in BABA?

8) How many investors have 100 baggers in their portfolios period? There have been 100x opportunities in public markets over the same time frame – AMZN, NFLX off the top of my head – both fit the Peter Lynch “if you love the product/store, you’ll love the stock” paradigm.

9) So Masa didn’t just get lucky with one decision. He bought BABA well and then held it. That is *many* decisions, but I will call it two decisions for the sake of simplicity.

10) And BABA isn’t Masa’s only winner. SoftBank and Yahoo started Yahoo Japan as a JV in 1996 when the internet was barely understood. Masa held on for decades. That takes us to four good decisions.

11) Finally, Masa also turned Softbank’s telecom operations around with a prescient bet on the iPhone. Five good decisions, even if this one wasn’t an investment.

12) At the time of the iPhone’s introduction, the Japanese market was dominated by phones made by Japanese OEMs for the Japanese mkt to Docomo/KDDI specs. Western phones had not succeeded there. And more broadly, lots of telecom co’s passed on the iPhone.

13) Difficult as it is to believe now, many people laughed at the iPhone at the time. I vividly remember the RIMM and Nokia CFOs saying what a bad “phone” it was. “Our engineers took the RF module apart and laughed…the speakerphone is terrible.”

14) Betting on the internet in 1996 (Yahoo Japan), Chinese e-commerce in the year 2000 (Baba) and the success of the iPhone in 2007(8 in Japan) all seem obvious now – but they were not at the time. Objectively impressive.

15) Great investment decisions are obvious only in retrospect. If they were obvious at the time, valuation would’ve been different. The internet wasn’t obvious in 1996, Chinese e-commerce wasn’t obvious in 2000, the iPhone wasn’t obvious in 2007/2008.

16) Five great decisions – starting Yahoo Japan, holding Yahoo Japan, buying BABA, holding BABA and betting on the iPhone – are the foundation of Masa’s track record. Most great investment track records are built on a similar number of decisions.

17) However, investing isn’t like sports. Once you’ve won a championship, it is yours forever. Superb investment track records are different – they can be lost/irrevocably damaged. And Masa may – or may not - be in the process of losing his. Time will tell.

18) On that note, it doesn’t look like the VF marked Didi and its other ridesharing/delivery portfolio co’s where mutual funds required to accurately price their holdings based upon public comps marked them. Unclear who is right, btw - just an observation. Marks are hard.

19) Marked in line with mutual fund marks, the Vision Fund is likely running a mid to high single digit overall IRR. Up 10% to 15%ish vs. the Nasdaq up more than 35% over the same time. And serious risk to the ARM franchise/valuation from RISC-V. License sales down 30% this q

20) A mid to high single digit overall IRR would imply that the Vision Fund common equity is likely running a negative IRR given the 7% preferred return.

21) All of this will be ok for the investors in the preferred stock of the Vision Fund. They will get at least a 7% return and stakes in lots of great co’s even in a bear case. The common equity in the VF fund will feel the pain if there is any.

22) X factor is Sprint/T-Mobile - if it isn’t approved, unclear that Masa and SoftBank will be able to invest in VF2 given all the layers of leverage. Masa/SoftBank being able to invest in VF2 is critical – it’s not happening without a significant contribution from them.

23) So doesn’t look great right now for Masa. But he has been resilient before – lots of people focusing on the fact that he lost everything once. I’m more impressed that he made it all back and more. Fascinated to watch it all play out.

24) That’s all!

You can follow @GavinSBaker.


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