What Buffett & Sequoia Have in Common

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Warren Buffett lives in Nebraska and invests in established companies. Sequoia Capital is based in Silicon Valley and invests in fast-growing startups.

Despite being worlds apart, one of the ways they've earned their legendary statuses is held in common: slugging percentage. 

Rather than achieving a 100% hit rate, their outperformance has come from their winners not just winning, but winning big. 

Let's start with Sequoia. Their $60M investment in WhatsApp turned into $3B (a 50x return). Their $12.5M investment in Google grew to $4.3B (a 300x return). You can Google (no pun intended) the rest of their home runs. 

Sequoia is OK with losing money on 90%+ of its investments, because they understand that the winners will more than make up for it.

Meanwhile over in Nebraska...Buffett doesn't buy a stock at Berkshire Hathaway expecting a 90% chance of capital loss. His #1 investing rule is quite literally "don't lose money." His #2 rule is "see rule #1." But despite his divergent outlook on process, the outcomes follow a similar Pareto distribution as Sequoia's: a few big winners have driven the majority of his returns. 

Take Apple, for instance. Berkshire's original $36B investment has grown to $90B+ today. That's a ~3x return in about 4 years. Many of Berkshire's other bets have actually underperformed the S&P 500 in recent years -- Apple has single-handedly carried his team.

So what we can learn from Buffett and Sequoia Capital, two seemingly opposite investors? 

While singles and doubles are nice, the few home runs are what will really drive long-term returns.

Bet accordingly.

Onto our top stories from this past week:

1. Robinhood has brought many inexperienced traders into the market, sometimes with devastating results. Are these the hidden costs of commission-free trading?

Robinhood’s promise of free, simple trading to consumers has revolutionized stock market access for the masses, but has also left novice traders wading in uncharted waters. “Its users buy and sell the riskiest financial products and do so more frequently than customers at other retail brokerage firms, but their inexperience can lead to staggering losses” (NYT). Commission-free trading has reduced upfront trading costs, but gamification without education can still have serious downsides. There’s a big difference between gambling and investing.

2. Apple is partnering with Foxconn technology to develop semi-transparent lenses for AR devices. Tim Cook sees the writing on the glass.

“The technology could give people a new way to view everything from map directions to videoconference calls, and allow them to play games with characters and objects that hide around the corners of real buildings.” (The Information) Apple has a huge incentive to establish itself as a leader in AR. If the technology does eventually go mainstream, it could accelerate the slowing sales of iPhones, Apple’s crown jewel that made it the most valuable company in the world. This AR partnership is about defense (owning the IP) first, and potentially offense (Apple Glasses?) later.

3. Google will invest $10 billion to accelerate digitization in India in a land grab for potentially the most valuable growth market on the planet.

India might just be the last frontier of untapped digital markets. Of the country's 1.3 billion people, roughly half are still offline. In the next decade, India is expected to see the largest increase in new internet users of any country on the planet. Rather than waiting, Google is hoping to “get 500 million people online” by investing heavily in their digital economy. The upside for GOOG? First mover advantage in the world’s largest emerging market, familiarizing its brands with billions, and winning the good graces of India’s protective government.

4. Comcast launched its Peacock service on Wednesday, betting that viewers will watch ads for free streaming.

Peacock will feature hits like “The Office,” “30 Rock,” and many others, with three tiers: a free ad-supported version, $4.99/month with limited ads, and $9.99/month ad-free. It’s a contrarian move in a field crowded with ad-free rivals like Netflix and Disney+, but it could be exactly the “wedge” Comcast needs. The cable company has historically relied on ad revenues and affiliate fees from cable TV, but cord-cutting is a growing headwind. Comcast needs a streaming presence, and it needs to differentiate beyond hit shows (which are aplenty these days). With Peacock, it hopes to gain scale by being cheaper than rivals and monetizing via ads -- a game it’s quite good at.

5. TikTok agreed to buy $800 million in cloud services from Google, and is shifting future business to them.

Amazon Web Services (AWS) still remains the social video app’s largest cloud provider. However, TikTok is planning to stop purchasing additional capacity from Amazon, instead directing its new cloud business to Google, citing lower prices and better networking performance. Google has long been overshadowed in cloud computing by Amazon Web Services (AWS) and Microsoft, but those dynamics could finally be changing.

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