Forget the Hockey Stick, Our Success Lies in Identifying La-Z-Boy Growth Patterns
Candidly, I am a bit nervous to disclose this, in part because Thaddius is going to kick my ass for sharing Mud Mtn investment secrets, but I’ve been locked up too long in our quantitative analysis war-room watching Wayne Gretzky-wannabe analysts skating around where they think metaphorical puck is going and talking about their latest portfolio company that is showing signs of “hockey stick” growth. If you are running in the same circles as us, you’ve no doubt been at a cocktail party and had an investor pull out his Lenovo netbook to show you a graph that looks something like this…
… and then immediately roll up his right shirt sleeve to reveal a tattoo of Jim Jubak’s first rule “Look for the hockey stick” on his forearm. And my God could these so-called experts be more wrong. Do not be deceived by their smooth talking and flashy exponential charts. These jocks and playboys didn’t learn a lick of linear algebra at Harvard Business School. Sure you can make some money by chasing hockey sticks, but real success lies in what we at Mud Mtn call La-Z-Boy growth patterns.
Allow me to explain. Linear algebra is the branch of mathematics that studies vector spaces as well as functions that input and output vectors. If you think about a start up’s current growth as V and future growth as W over a field F, a linear transformation (or “linear map”) is a map
that is compatible with addition and scalar multiplication:
for any vectors u,v ∈ V and a scalar r ∈ F.
And taking this further, given a vector space V over a field F, an expression of the form
where v1, v2, …, vk are vectors and r1, r2, …, rk are scalars, is called the linear combination of the vectors v1,v2, …, vk with coefficients r1, r2, …, rk. The set of all linear combinations of vectors v1, v2, …, vk is called their span. And, if you solve for this system set of these spans, as any intelligent investor would, you get a La-Z-Boy pattern, NOT A HOCKEY STICK.
That is what we look for at Mud Mtn. This is the kind of thinking that finds winners in a sea of losers. Ditch Excel, fire your finance partners, learn some R, and become a fund that can actually analyze.