‘My Bet Against NVIDIA Failed, But I’m Not Making Excuses’

“My
job
is
to
beat
the
market,
and
I’m
not
going
to
beat
the
market
by
taking
a
directional
bet
on
growth
or
value.
I’m
going
to
maintain
balance
and
let
my
stock
picking
drive
my
value,”
he
says.

Instead
of
thinking
about
whether
a
value
rotation
could
finally
materialise,
his
style
is
to
find
and
own
the
best
company
in
a
segment,
and
then
stick
to
his
discipline
of
balancing
risk
and
returns.
He
runs
the
T.
Rowe
Price
Global
Select
Equity
Fund,
a
concentrated,
style-agnostic
core
portfolio
with
35
stock
holdings.
The
fund’s
cheapest
share
class
is
awarded
a
Morningstar
Medalist
Rating
of
Silver.

Bates,
based
in
Baltimore,
told
Morningstar
on
his
recent
trip
to
Hong
Kong:
“if
you’re
a
growth
manager
and
value
is
winning
in
2022,
you’re
like:
‘oh,
it’s
just
a
terrible,
terrible
market
for
growth.
I
can’t
do
anything
about
it.’
To
me,
that’s
an
excuse.”

Two
Mistakes
for
Stock
Pickers
to
Avoid

Outside
of
style,
Bates
has
seen
two
mistakes
in
his
20-year
career
that
“aren’t
something
he
wants
to
be
guilty
of”:

1.
Ignoring
cyclical
risks,
and;
2.
Being
overly
concentrated.

“When
you
have
a
bad
cyclical
event,
you
cannot
throw
your
hands
in
the
air
saying,
‘who
could
have
predicted
that
would
happen?’
I
saw
that
all
around
me
during
the
Global
Financial
Crisis.
I
think,
as
investors,
we
have
a
responsibility
to
think
about
risk-return
and
not
just
always
think
positively”.

His
job
is
no
different
from
other
stock
pickers
–
to
identify
the
future
in
a
repeatable
process.
That’s
why,
in
the
meantime,
he
thinks
managing
risk
plays
a
big
role
in
his
fund.

“To
be
overly
concentrated,
I
think,
is
reckless,”
says
Bates.

“I
know
some
of
the
concentrated
strategies
that
are
out
there
that
I’m
competing
against.
Frankly,
I
think
they’re
reckless
because
they’ll
have
two
or
three
positions
that
might
be
30%
of
the
fund
and
then
the
other
25
positions
are
the
rest.

“And
if
they’re
wrong
on
one
of
those
two
or
three
positions,
it’s
going
to
overwhelm
everything
that’s
happening
with
the
rest.”

Instead,
he
chooses
to
express
preferences
by
ranging
each
stock’s
weight
between
2
and
4%.
Thus,
in
his
portfolio,
a
typical
holding
reflects
a
weight
of
3%.
According
to
Morningstar,
the
portfolio
has
an
active
share
score
of
90
at
the
end
of
Oct
2023.

‘No
Excuses
Doesn’t
Mean
No
Mistakes’

Having
no
excuses
for
not
beating
the
market
doesn’t
equate
to
being
free
of
mistakes.
Bates
candidly
admits
some
recent
lessons.

“I
still
make
mistakes.
I’m
still
trying
to
learn.
I’m
certain
to
make
stock
mistakes
and
I’m
certain
to
have
periods
where
I
underperformed.
But
it
will
be
because
of
stock
mistakes,
not
because
I’m
making
reckless
macro
bets.”

“With
35
stocks,
I
need
to
be
right
20
to
25
times.
But
I
also
need
to
make
sure
if
I
am
following
my
process,
that
when
I’m
wrong,
it’s
not
going
to
cost
me
a
bunch
of
money.

“Because
that’s
part
of
risk-return.
And
I
very
much
think
about
risk-return.
And
I
want
to
buy
stocks
when
you’re
paid
to
take
the
risk
for
owning
the
stock.
If
you’re
not
paid
to
take
the
risk
for
owning
the
stock,
don’t
own
the
stock.”

He
says,
for
every
name
of
the
35
stocks
he
owns,
“I
am
almost
comparing
it
to
five
or
more
similar
type
companies
to
decide
which
one
offers
the
best
risk-return
and
then
that’s
the
one
I’m
trying
to
own.”

The
Bet
Against
Nvidia
Shares
Failed 

Recent
perspectives
and
experiences
that
have
been
distilled
into
his
investing
philosophy.
He
highlights
the
struggle
between
quality
and
valuation,
and
this
played
out
with
investor
darling
stock
Nvidia.

Back
in
January,
Bates
was
deciding
his
bets
around
a
semiconductor
cycle.
“There’s
been
a
lot
of
headwinds,
and
to
me,
it
felt
like
a
good
place
to
take
cyclical
risk.
And
at
the
time,
I
owned
AMD,
the
B
asset
–
and
Nvidia
was
the
A
asset.
Nvidia
was
more
expensive
than
AMD
in
our
estimates,”
he
recalls.

“I
felt
like
I
had
better
downside
support
in
AMD
and
ultimately
better
risk-return.
Now
as
the
year
progressed,
we
massively
underestimated
the
upside
in
NVIDIA.
I
don’t
think
our
downside
math
was
wrong
on
NVIDIA
and
our
upside
math
was
wrong.”

Into
the
summer,
Bates
realised
AMD
was
further
behind
on
GPUs
than
he
thought
and
that
the
knowledge
gap
or
the
time
to
catch
up
with
Nvidia
was
wider
than
initially
anticipated.

“Part
of
the
AMD
thesis
was
AMD’s
really
good
in
CPUs
and
taking
share
and
they
are
working
hard
to
develop
a
GPU.
Obviously,
NVIDIA
dominates
GPUs.
The
market
wants
more
than
one
player.
We
felt
that
the
second
player
would
be
AMD.
Even
if
it’s
10
or
15%
of
the
market,
it’s
material
for
AMD.”
But
Bates
says
the
investment
thesis
“kind
of
failed”.

Even
though
NVIDIA’s
year-to-date
return
is
more
than
that
of
AMD,
Bates
felt
it
was
right
to
make
the
switch
because
there’s
less
opportunity
and
more
risk
in
AMD.

“My
lesson
was
I
am
concentrated
and
often
I
want
to
own
the
best
company
even
if
it’s
a
little
more
expensive.
I
made
a
mistake
that
cost
me
150
basis
points
because
I
didn’t
do
that
this
year,”
he
says.

In
September,
he
decided
to
liquidate
the
fund
position
in
computer
processor
maker
AMD
[AMD]
and
Netherlands’
ASML
Holding
[AMS],
which
makes
machines
that
are
an
essential
component
in
chip
manufacturing.
The
weightings
were
used
to
buy
Nvidia
[NVDA].

Another
Liquidated
Position:
Yum
China

While
semiconductor
stocks
are
one
example
where
he
owns
for
a
structural
trend,
there
are
trades
he
made
for
some
shorter-term
trends.
China
reopening
is
one,
where
he
played
with
Yum
China
[YUMC],
the
operator
of
KFC
and
Pizza
Hut
stores
on
the
mainland.

Bates
says:
“Yum
China
was
definitely
a
China
reopening
story.
The
company
really
pivoted
to
make
the
stores
more
cost-efficient
with
things
like
online
or
digital
kiosk
ordering
to
reduce
labour.”

As
China
was
reopening,
the
investment
thesis
was
that
sales
per
store
at
Yum
China
would
recover
to
previous
levels
and
the
margins
would
be
higher
because
of
the
reduced
cost.

“The
thesis
played
out
and
as
soon
as
there
was
evidence
that
the
sales
had
recovered
to
the
level
they
were
going
to
recover
to,
I
didn’t
want
to
own
it
for
the
next
leg
of
the
thesis,
which
is
just
opening
more
and
more
stores,”
he
adds.

The
fund
owned
1.5%
of
Yum
China
before
the
position
liquidation.
“We
only
made
like
10%.
It
wasn’t
a
bad
investment;
it
wasn’t
a
great
investment.
But
it
was
time
to
move
on.
Because
once
the
organic
story
had
become
more
mature,
I
felt
like
the
thesis,
I
didn’t
want
to
play
the
next
leg
of
the
thesis.”

Yum
China,
down
21.6%,
is
a
4-star
stock
rated
by
Morningstar
equity
research
analysts. 

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