‘You can bet small, win big’: A top stock picker who returned an explosive 140% in the last year lays out the ‘paranoid’ investing strategy that resulted in him betting on bitcoin – and his most…

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Dennis Lynch
Dennis Lynch managed a slew of the highest-returning mutual funds of 2020, and also runs Morgan Stanley’s Counterpoint Global business.

  • Dennis Lynch is a top performing fund manager who oversees over $130 billion in assets at Counterpoint Global.
  • At the Morningstar Investment Conference, he lays out why he made a bet on bitcoin.
  • And he shares how’s he playing the current market environment with insight into recent stock picks.
  • See more stories on Insider’s business page.

Dennis Lynch is a titan in the world of active investing. As the head of Morgan Stanley’s Counterpoint Global subsidiary, Lynch oversees more than $130 billion in assets across a range of equity funds.

However, these aren’t your typical funds. Over the years, they’ve been stellar outperformers. In 2020, Lynch’s Institutional Inception fund returned 150% to investors in a year when the S&P 500 gained a mere 16%.

His Institutional Discovery fund also posted a gain of 142% last year. Lynch continually features on Insider’s list of star stock pickers and looks set to join 2021’s, with one-year returns of 140% in his Inception fund through June 30.

At this week’s Morningstar Investment Conference, Lynch spoke about his approach to disruptive investing.

This is an area of expertise for Lynch, who focuses on long-term growth companies, and he laid out two key ingredients that have been part of his secret to identifying disruption.

1) Persistence

His strategy is not constrained in the same way as many of his competitors.

Most of the time, he’s focused on analyzing and investing in companies, rather than being restricted to specific themes or categories. So he is constantly on the look-out for emerging trends that could disrupt his holdings, in particular, persistence.

“Often trends start and people get excited about them,” Lynch said. “And I think you want to wait some period of time before you get some conviction that there’s something to it. I think persistence of a trend is something that we think about when we when we analyze any situation, or any emerging trend.”

2) Paranoia

Lynch’s team’s investment horizon features a 10-year outlook and a “mid-game” five-year outlook. During this time his team will make assumptions where a company should be within that timeframe and frequently analyze if those assumptions hold true.

“It’s really a constant iterative process and engagement with companies and research and making sure your signposts and the key assumptions you’ve made over those longer term periods are still intact,” Lynch said. “And that’s really how we spend our day to day.”

Part of effectively testing those assumptions, is being paranoid about competitors and dedicating time and resources to monitor and learn about industry changes, he said.

Betting on bitcoin

Lynch’s self-confessed paranoia is partly what drove him to invest in bitcoin earlier this year. He started to think deeply about how most of his life has been spent generating wealth for clients. He questioned what happens if the goalposts suddenly changed? What if dollars no longer become the way to measure success in 10 years’ time?

While that may have seemed a crazy thought years ago, bitcoin’s continued dominance and persistence prompted Lynch to take a small position to hedge against potential disruption.

“I like to say that bitcoin is like Kenny from South Park, he dies every episode and comes back again,” Lynch said. “And so … you see in the newspaper, the media, that bitcoin’s dead, it’s over this time, and it just continues to persist.”

In addition to bitcoin’s persistence, Lynch was drawn to viral mechanics of the asset and its “anti-fragile” qualities, which led to it succeeding from disorder.

“It’s highly speculative,” Lynch said. “Having said that, there’s some interesting qualities to it that I think that can add to a portfolio. And I think you don’t get in trouble making investments if you size them properly … so I like the idea here that you can bet small, win big.”

A stock-picker at heart

Lynch is a stock-picker at heart, but even he’s finding it tricky to invest in the current environment.

“We don’t see any great opportunity here in equities,” Lynch said. “Part of the issue is: what are you gonna do with your money? … We’re trying to figure out what we would do and there just aren’t a lot of great alternatives.”

Overall, Lynch is leaning more towards smaller companies because they have room to grow.

“I think when you start having trillion and $2 trillion valuations, a lot can go wrong,” Lynch said. “If anything goes wrong, it’s a lot of market cap to be able to support through your fundamentals … And as you get that big, we’re already seeing the other issue there, which is regulation.”

One company Lynch is still bullish on despite significant growth is Zoom. His team invested in Zoom at the IPO stage and he still holds it because of how widely it’s been adopted and how its competitors are still lagging.

Alternatively, Tesla was one of the team’s early bets that it no longer holds. Like bitcoin, Tesla was a small speculative position based on initial consumer reports. However, after holding for three years, Lynch became uncomfortable with the capital intensity of the business.

“It does put you in a position of potentially, during times of uncertainty, ‘relying on the kindness of strangers’ and to continue the business model,” Lynch said.

Electric vehicle bull and top performing fund manager Cathie Wood views Tesla as more than a car company, but Lynch struggles to get past this.

“Elon Musk is very controversial, he’s done a lot of really amazing things and I think he should get credit for that,” Lynch said. “Having said that, when you’re when you rely on capital markets and, you’re dreaming big, there’s a fine line between inspiring and making promises maybe you can’t keep and that can go badly, from the ability to have access to capital required to sustain what Tesla’s doing.”

More broadly Lynch says the EV market is a tricky space to play in terms of picking a winner at today’s prices.