What’s the Catalyst? Hope.
It’s amazing how many investment thesis fall apart with a simple question. What’s the catalyst? Why now? When you pull the answer back, it often comes back to hope. They hope the valuation will rise. They hope the valuation will come down.
Here are some examples I commonly see:
Situation: SoFi is trading at a relatively low valuation.
Thesis: SoFi trades at a discount to some of its peers and has had some positive trends in their profitability in the past few quarters.
The problem: What’s the catalyst for SoFi to close the valuation gap with its peers? What will drive continued profitability improvements or market recognition?
Situation: Nvidia trades at a relatively high valuation. Short Nvidia.
Thesis: Nvidia’s high valuation is justified by its dominance in the GPU market and its growth prospects in AI and other emerging technologies.
The problem: What’s the catalyst for Nvidia to maintain or further increase its high valuation? Are there upcoming product launches, strategic partnerships, or market expansions that will sustain its growth narrative?
Situation: Long Lowe’s and short Home Depot.
Thesis: Lowe’s will take market share from Home Depot due to similar offerings but vastly different market caps.
The problem: What’s the catalyst to cause a shift in market share? The gap in benefits has existed, so what’s going to change to drive this shift?
Hope is not a catalyst. Something needs to change to make the majority of the investment thesis work. Whenever you have a short to medium-term position, you rely on something happening in a certain amount of time, which adds a whole extra dynamic you need to account for. This is why I’m a big proponent of buy and hold… you turn time from a thing to worry about into an asset for you.
