The Primary Trends I’m Investing In Next Year

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In 2003, Enron, WorldCom, and Conseco underwent the three largest bankruptcy proceedings in business history. Enron and WorldCom were brought down by accounting fraud (like the entire crypto industry); Conseco also had accounting fraud but additionally, the business sucked (again, crypto). The consensus of the market was that these assets were dead in the water.

David Tepper disagreed. The hedge fund manager purchased distressed debt from all three companies. When the companies emerged from bankruptcy, like a phoenix that dabbled in white-collar crime, his fund was up 148%—making him a billionaire.

In celebration of this ballsy trade, a former employee gifted him a pair of brass testicles. New York magazine described them as “cartoonishly huge and grotesquely veiny.” Beneath the metallic cojones a plaque was inscribed with the words “THE MOST VALUABLE SET OF ALL TIME.”

To generate outsized returns, you have to be comfortable with most people thinking you are an idiot. Prices on the assets you’re investing in will be lower and, if you’re right, the returns will be that much higher. It does, however, require a strong sense of confidence to employ this strategy. You have to be willing to be wrong, publicly, and perhaps for many years.

In the spirit of Tepper’s burnished balls, I’m forecasting what I think matters for investing in 2023. (I did this last year, and it was a popular article.) Next week we’ll examine whether my forecasts from last year were accurate.

None of this is investing advice. There is a difference between trends that matter for stocks and whether a stock is a good buy. Issues like portfolio construction and pricing matters. I’ll discuss some examples, but please do not use me as your personal Wolf of Wall Street. This is a newsletter, not Warren Buffet’s advice column.

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The hardware paradigm shifts

Two forms of financial arbitrage have driven the last 20 years of the technology sector. The first was software’s superior cash flow and margin profile slowly taking over more and more economic activity. The second was outsourcing low-margin labor and hardware costs to China. Businesses like Flextronics, Selectron, Foxconn, and Pegasus built multi-billion-dollar enterprises around the idea of plucking low-skill labor from the U.S. and transporting it to China.