Comparing the Dotcom Crash to Today (with Tom Cowan from TDM)

Tom Cowan, co-founder of TDM Growth Partners, shares insights on their investment approach, emphasizing their long-term, concentrated portfolio strategy with no fundraising—relying instead on an evergreen capital base from a stable set of families. The conversation begins highlighting TDM’s impressive 26% annualized returns over 18 years. A significant focus is on their recent memo analyzing the 2021 tech bubble burst, comparing it to past crashes like the dot-com bust and the GFC, providing a macro perspective on market cycles and high-growth tech stocks.

Tom Cowan discusses how the highest growth companies tend to peak early and fall the hardest in market resets, using historical data and their own constructed indexes to compare past downturns. They observe that these high-growth tech stocks generally outperform during bull markets but are subject to sharp declines, especially when multiples become overextended. The conversation emphasizes the importance of valuation and patience, illustrating that investing in quality high-growth businesses is advantageous over the cycle, despite increased volatility.

Cowan elaborates on how TDM recreated indexes for the dot-com bubble and GFC periods when specific high-growth indexes weren’t available. They used strict criteria focusing on software and tech companies with revenues over $50 million, creating equal-weighted indexes that closely mirror those periods’ dynamics. The data revealed that these high-growth companies grew faster in prior bubbles than the broader market, with recovery periods being notably swift—up to four times in two years during the dot-com recovery—highlighting resilience and rapid rebound potential.

The discussion turns to how the current market resembles the dot-com bust more than the GFC—declines are concentrated mainly in high-growth tech, with broader indices falling less. Cowan emphasizes a barbell approach of holding significant cash and being selective, deploying capital gradually during downturns. He advocates for a long-term horizon of 5-10 years, encouraging emotional stability amidst volatility and criticizes the 'buy everything' mentality during frothy markets.

A core theme of TDM’s philosophy is their deep focus on people and company culture, believing this is crucial for sustainable success. Cowan shares insights from their annual 'People and Culture Conference' and examples like the engagement scores' correlation with superior stock performance. They deliberately avoid investing in businesses that are highly profitable but treat stakeholders poorly, emphasizing that long-term, quality companies should uphold strong culture and values.

Cowan recounts a historical mistake involving Salesforce during the 2008 financial crisis, where they hesitated to invest despite solid fundamentals, ultimately missing a decades-long growth opportunity. This reflection reinforces the importance of conviction, patience, and not reacting excessively to short-term market fluctuations. It underpins their disciplined approach of focusing on their existing portfolio and waiting for the right entry points.

Tom Cowan advises a disciplined approach for current investors, emphasizing patience, emotional resilience, and a long-term view. He advocates for deploying capital slowly in times of volatility, capitalizing on the opportunity to buy quality businesses at attractive prices. The conversation ends with a reiteration of the importance of culture and long-term ownership, encouraging investors to stay grounded and thoughtful.