Fine-tuning investment strategy is an iterative process. I find that I'm always learning throughout my journey.
I feel like I've come to a good place with my investments. I'm generally pretty happy with the strategy I've chosen and how I've looked to execute on that strategy. However, I find that I'm always learning and taking steps to becoming a better investor.
Here are my latest thoughts on investment strategies for growth.
Pick businesses that will last the test of time
This is a tried and tested rule for me in terms of looking for investments that have some strong barriers to entry that can stand the test of time. This will result in compounding machines with barriers to entry that protect long-time compounding of capital and will produce exceptional wealth creation and value over the long run.
It's all about returns on capital
In my results, I've observed good correlation with long-term investment success and sustained high returns on invested capital from those businesses that are able to generate good returns on each incremental dollar invested and that have long runways of growth to invest incremental dollars. My focus is on high returns on invested capital, combined with businesses that have tailwinds which allow them to deploy incremental investment dollars.
Don't be afraid of early-stage businesses
Companies that are early in their journey can generate huge wealth, if picked correctly. Investors who were at the ground floor for Amazon's (NASDAQ:AMZN) IPO, Microsoft's (NASDAQ:MSFT) IPO or Wal-Mart's (NYSE:WMT) IPO can attest to the huge sums of wealth generation from being aboard these once-in-a-lifetime investments. Of course, for every Amazon Microsoft or Wal-Mart is a litter of carcasses that have not seen the journey to completion. Early-stage businesses can be great investments, but they need to be picked using the right criteria, which is evidence of an early-stage moat or good returns on invested capital.
Let the market be the judge of long-term success
I'll make an initial investment and only look to increase that investment upon the market deciding the business is a winner. What I mean by this is that I only incrementally add to my initial stake in an investment upon the market recognizing and rewarding the business for execution. If a small company I've picked doubles in value, then I'll look to add incremental investment at that point in time. Of course, if it never reaches that level, then that business won't see any additional incremental investment from me.
This is somewhat counterintuitive to the traditional value-based investment framework, however my theory on this is that if you've picked the right business and it has a long runway for growth, paying up a little bit in the early stages for demonstrated success is a good hedge for investing too much in a business that goes nowhere. My investments in Celsius and MercadoLibre followed exactly this kind of investment approach. Both businesses surpassed my expectations in terms of market performance, and I was willing to pay up to top up my initial holdings based on the market recognizing their potential.
Don't be afraid to acknowledge mistakes
Mistakes can be difficult things for all investors to acknowledge, but failing to recognize when you made a mistake can be to your detriment. In my case, those mistakes have come from selling high-quality businesses far too soon. I look at my early exits from quality businesses like MasterCard (NYSE:MA), Google (GOOG, GOOGL) and even Facebook (NASDAQ:FB) as examples of where I'd underestimated these businesses' long-term earning power.
I was satisfied with doubling over, in some instances tripling my money, when in fact, staying in for the long-term ride would have meant 10X or 20X return on my capital in some cases. However, I recognized some mistakes that I made with respect to MasterCard and Google and eventually repurchased those businesses. Sure, I missed out on significant gains in the interim, but I still managed to doubled or triple my capital in some instances upon re entering those businesses.
Size doesn't matter if the market is large. I used to look at businesses such as Amazon and Google and think to myself that given these businesses are enterprises worth hundreds of billions of dollars, my likely return from investment at this point in time is likely to be marginal, or market returns at best.
However, I've since realized that's flawed thinking. In both Google and Amazon's case, the rate of sales growth of both of these businesses is still above 20%, which suggests that provided their long-term tailwinds continue to propel growth, even large- or mega-cap businesses can continue to provide robust returns. A large-cap business with suitable tailwinds at its back can still become a heck of a lot larger.