What lessons does the Twitter-Threads saga hold for equity investors?

Elon Musk and Mark Zuckerberg have reportedly agreed to duel against each other in a “cage fight”. It seems like they’re already in the midst of one with Threads (an Instagram app) encroaching on Twitter’s playing field. In other words, Meta wants to do for text what Instagram managed to achieve for photos and videos. In a space of 24 hours, Threads has skyrocketed to an extra-ordinary number of 50 million users. For context, the latest viral sensation, ChatGPT took 40 days to get to 10 million users and Twitter took more than a decade to build out a base of about 400 million users. Musk, for all you know, might already be nursing a broken ego in this “digital” cage fight.

Now, to be fair, we’re still probably in round 1 of what could be a prolonged battle between the two. Twitter may well survive this assault by Zuckerberg and both may end up coexisting as a duopoly. That said, Twitter in many ways is only a shadow of Meta in terms of its business model & monetization and could further lose mindshare among advertisers. This saga therefore does have some interesting implications and lessons for equity investors. One, Musk may be the greatest entrepreneur of our generation but running a social media company is hard, if not impossible. Running Tesla & SpaceX together is a remarkable feat and requires a solid combination of talent, persistence & good fortune. A social-media company, on the other hand, needs subtle design & engineering that promotes healthy conversation, constant moderation that seeks out bad actors, the ability to manage regulatory expectations and finally the foresight (and patience) to adapt to constant shifts in consumers tastes & demands.

The point is many may have overestimated Musk’s odds of success at Twitter by wrongly extrapolating from his success in other, unrelated industries. Over the past year, Musk may have angered far more people than what he may have attracted to Twitter. More importantly, a few of us have regularly underestimated Zuckerberg and his penchant for building and managing social networks. Meta’s stock may have been down by more than 75% last year but his company has successfully warded off existential competition from TikTok and no one else (Snapchat, Pinterest or even Twitter) has been able to compete at their scale. It is no wonder Meta owns the three most dominant social media companies: Facebook, Instagram and Whatsapp. In Threads, Zuckerberg may very well have found the final missing piece of the puzzle.

The second and the more serious implication for investors is this idea of constant change and disruption within companies/industries. Five years ago, it would have been hard to imagine troves of users shifting base away from Twitter to a new network. Granted, Meta benefits greatly from massive distribution via its pre-existing digital properties but (so far) it hadn’t been able to penetrate Twitter’s network. A question that investors’ must now grapple with is the malleability of social networks and if what happened to Twitter could eventually happen to other social networks like Instagram or Whatsapp.

Christopher Tsai of Tsai Capital dished out a more articulate and a profound take on disruption and what that means for businesses. In a speech last year, Tsai argued that investors often underestimate the probability of world’s greatest & best businesses being severely disrupted or permanently impaired by a new business model or a new technology. He further pointed out that the average life span of a listed company in S&P 500 has gone down from 58 years in 1958 to about 18 years now. That is a staggering statistic and one can’t help but feel that this number will only go down (possibly, far more quickly) over the next two-three decades.

Finally, the real lesson for investors out of this saga may really be around portfolio management. Now, most individuals are better off picking an index fund and staying invested for the long-term, digesting and ignoring the constant volatility in the stock market. For stock pickers, on the other hand, this means that a traditional “buy & hold” strategy will not necessarily work in the future. If a thesis around a company or a business has materially changed, investors must also have the courage to sell the stock (even at a loss). Twitter is not a publicly listed company anymore and one can’t technically sell the stock but if it were, it might have been a good time to let it go. On the flip side, Meta as a company may have been bolstered by the addition of Threads to its armory.

Warren Buffett has been quoted endlessly on the idea of owning stocks for the long-term. Statistically, he himself has held only about 20% of his stocks beyond two years. Being aligned for the long-term purely for the sake of long-term can be catastrophic for one’s sanity (and financial well-being). Businesses, in general, are not static in nature and are only getting better or worse with time. A more appropriate philosophy to adhere would be that of Peter Lynch’s (which Buffett has also sensibly embraced): water your flowers and pull the seeds. In other words, stick to your winners and let go of your losers. To put it mildly: “buy & hold” has long been an investment mantra for stocks. It now requires a tweak: “buy, verify and hold”.

THE VIEWS EXPRESSED BY THE AUTHOR ARE PERSONAL

Arihant Panagariya The writer is a Portfolio Manager at Hundred Ten Capital in London and a graduate of Columbia University