I’ve been fortunate enough to have 8 different positions that have become 10 baggers or better. These positions are the ProMedicus, Wisetech, Nvida, Mercadolibre, Trade Desk, Celsius, MasterCard and Atlassian.
Firstly, why shoot for stocks that can become 10 baggers or better? 10 bagger stocks represent tax free internal compounding. In their purest form, it’s allowing a business and its founders/management to plan out a strategy and ruthlessly execute against said strategy over a multi year period.
Finding high quality businesses and just holding them for an extended period of time also removes the challenge of what I think of as “reinvestment risk”. This is the notion of needing to find a new idea to replace an existing one, and the risk that this new idea is of lesser quality with a lower probability of success that it will work as well as the idea that was originally held.
However finding businesses that can ultimately become 10 baggers is fraught with numerous challenges along the way and events that serve to ‘shake one out of a position’.
“Market Volatility “- General market volatility, and wild stock swings tends to be the biggest thing that’s gets people out of a position that they may otherwise hold. Now general market volatility is unavoidable. Markets routinely sell off 10% or more every 18 months. Being able to track key business KPI’s and understand that these haven’t changed even though a stock may sell off is critical here.
“The Broken 1- Quarter Thesis” - Regular quarterly reporting is both helpful and a curse. Hearing from company management can be helpful to understand strategic direction and new initiatives. However this challenge with quarterly reporting is also regular earnings and revenue reporting, benchmarked against consensus earnings. Companies who invest in their business or take advantage of occasional opportunities may miss quarterly earnings during such a period of investment. This can lead to aggressive sell offs in stocks.
“Phantom Competition” - One of the challenges for a business in a protected space with favorable economics and market growth is that new entrants always want a piece. The threat of a new player moving into a space creates fear for investors in an existing business. However this competition, even if it is from a well resourced player isn’t necessarily guaranteed to succeed. It’s here where understanding those barriers that prevent new entrants displacing incumbents are important to success. With the businesses that I own, this can take the form of network effects that are difficult to displace, high switching costs etc.
Finding businesses that can become 10 baggers is a worthwhile endeavor. Still, there can be a variety of challenges that can get in the way of ultimately holding these businesses. Understanding these challenges for what they are and putting in some guardrails to safeguard against unnecessary panic can help give potential investments time to grow and achieve 10-bagger status.
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