3 Key Takeaways
Twin Engine Theory: The most powerful stocks tended to be extended periods of growing earnings accompanied by expansion of P/E ratio. This can be true from turnaround stories in beaten down and forgotten stocks or; This can be from mass adoption of a new secular growth trend (EV - Tesla, Video Streaming - Netflix)
Holding it through: If you buy a stock that returns 20% annually for 25 years it is a 100 bagger. But if you sell in year 20, you will only get 40x. The last 5 year (Y21 - Y25) will get you 100x - so waiting last 5 year will more than double your overall return - This emphasizes the importance on buying in early and waiting for an extended period of time
Good quality business - 2 key filters
Extended periods of consistently strong ROE (>15%) that is not earnt from high leverage, but from smart reinvestment of capital.
Strong sales growth, but remember it must be quality growth - How much is the company burning to achieve high sales growth - is it doubling its sales through doubling its shares outstanding, is it increasing sales through eroding its margins and cutting prices? Quality growth is achieved through improving profit margins which can only be achieved through a strong moat and value it brings to consumer.
Start
Filtering for companies <1b, <10b, <30b in 3 groups and identify which part of the corporate life cycle it is: What do you think this company EPS will be in 10 or 20 years time??? If you think the company will make 1b in net earnings, then you should be willing to pay 20b discounted at a rate (eg. 15%) you are happy to achieve
Focusing on FCF/share growth each Q to see the effect of dilution - especially for high growth companies
Stop
Stop looking at companies that keep appearing in the media that does not fit your criteria and wasting time following its price - especially if valuations are way too far away
Continue
Adding interesting companies to your watchlist and track its business performance - it is an accumulative journey