Compounders & Long Shots
I focus on two primary camp of ideas and I split my portfolio 90-10 along the lines of 90% compounders, 10% barbell ideas.
Compounders are the companies you know. Google. Facebook. Amazon. Chipotle.
They tend to have several core characteristics:
Strong returns on invested capital (12% and above)
Are highly cash generative (6% fcf margins ideally)
An honest, competent, and frugal management team (as measured via compensation, cost to shareholders, stock option awards, skin in the game)
A proven ability to grow earnings and free cash flow (10 years of operational history required minimum)
Sensible capital allocation policies (opportunistic share buybacks, acquisitions)
Have developed/ is improving the core competencies required to succeed in their industry and maintain their competitive advantage
The willingness, ability, and means/tools/resources, financial or otherwise, to adapt.
And is selling at an attractive price with a large margin of safety
Even in the event that I do not find a business currently selling at an attractive valuation, I’m more then willing to publish it.
Great businesses do not often trade at depressed valuations for long. When they do, there is no time to do the ground work and then buy the stock.
The prospective investor has either done the work beforehand and know it is worth buying, or has not and is left empty handed.
Thus, we spend 99% of the time studying great businesses and teasing patterns of success apart and we spend 1% of the time pressing the “buy” button.
Long Shots
Barbells/Long Shots are companies where the odds of success are slim, but if they do succeed, can create astronomical amounts of wealth. These companies are often small, growing rapidly and not yet profitable. They screen poorly, have little interest, and are deemed too exotic or dangerous by a lot of veteran investors. Some of these have toxic management in place, poor secular tailwinds, etc cetera.
I do not care. I am an equal opportunity investor. Whatever makes money is something I’ll happily take a bite of. I care about the aggregate of gaining an outsized win from betting a small percentage of my portfolio.
Most often however, in these small companies, I’m looking for “multiple ways to win” or a very robust secular tailwind.
Megaport is a huge example of a company undergoing rapid growth, though loss making, but driven by a tailwind that is impossible to stop: the rapidly tech enabled world creating quintillion bytes of data that will need to be transported.
These companies are often speculative bets more than great investments. But like Sandridge, like Antero Resources, buying them cheap has proven to be pretty fantastic ways to change a person’s life.
Disclaimer
This is not investment advise. I am not a qualified “financial advisor”. -insert boilerplate-. You’re an adult. I trust you to be able to make your own decisions.
My investing pattern may not fit yours. My investment decisions may not be open at all times. I might buy or sell options or open and close positions with or without leverage without ever informing anybody - as is my right. This blog serves to simply educate.
