Beyond just saying – ‘ I want stocks that go up’, here’s an attempt at a succinct summary of what I’m trying to focus on investing in:
– Multi-year Secular Growth: Growth investing means putting capital to work in businesses where end-market demand, market forces, or competitive opportunities signal that a small company is on a path to become much bigger. Obvious certainly, but sometimes lost in a world of ‘short term-ism’ and fixation on EPS growth. (Share buybacks, while nice, are not growth.)
– Modest or Moderated Expectations: The best risk/reward opportunities are usually undervalued quality companies. No matter how great the business, if that greatness is already recognized or reflected in forward operating projections, the risk/reward is necessarily compromised to some degree.
– Under-followed or Neglected by the Street: Taking a step back from investment theory – in the end stock price fluctuations are driven by supply and demand for a particular security. By focusing more time on looking at under-followed companies, you skew the balance of probabilities towards lower-demand securities. If those companies subsequently execute on a growth opportunity, they’ll no longer be neglected by the Street – allowing a repricing of the security as a result of rising demand. This is a way of getting at being contrarian without accepting as much volatility or headline risk.
– Unique Business: More difficult to spell out precisely, but unique businesses often benefit from more relaxed competitive pressures, often have longer growth trajectories (if perhaps less steep), and benefit from a compelling investment narrative – as a result of standing out from the crowd. If nobody else is doing what you do, and you happen to do it well – all the investor attention comes to you (clearly this can be a double-edged sword). This also ties into Blue Ocean strategy – go where others aren’t. Unique businesses are often those that are forging new industries and new end-market demand and, because fewer competitors are there, they are often more innovative and focused on the creative process – than just trying to make the quarter. (Unique alone won’t cut it though – must maintain quality and valuation discipline to preserver risk/reward.)