Three Lessons From One of the Greatest Management Teams on the Planet

My recent trip to Indonesia... An unexpected conversation in Medan... How Naspers continues to find winning investments – and how you can put those same tools to work... Three lessons from one of the greatest management teams on the planet...

We waited for the plane that would take us to a remote island in Indonesia...

A grinding 30-plus hours of travel were already behind us. One final 90-minute flight was all that stood between me (Chris Igou), the rest of my traveling party, and 10 days of great food, great people, and incredible surfing.

We were excited to reach our destination. But the charter plane only flew twice a day... once to take new guests to the island and a later flight to take them back to the Medan airport. That's when I met Kennett. We were both waiting to head to the island.

Kennett has more than 20 years of experience in the financial industry... He's both a chartered financial analyst and a certified public accountant.

It didn't take long for our discussion to dive into finance...

My friend and colleague Steve Sjuggerud quickly chimed in. He was surprised to have another finance guy on the trip with us.

Steve shared the story of how he discovered South African company Naspers (NPSNY)... and how it's a great way to own shares of Chinese tech giant Tencent (TCEHY) at a massive discount.

Kennett's face lit up... "I never expected to be in Indonesia talking to Americans about South Africa's largest company," he said, while chuckling to himself.

During our chat, we covered everything from Naspers' incredible investment in Tencent to its brilliant management team and its amazing ability to find great companies.

Naspers actually owns the "Amazon of South Africa" – a company called Takealot. It's everywhere... Kennett showed us the Takealot app on his phone and explained how huge it is in South Africa.

Folks, this is exactly the story I want to share with you today. The team at Naspers has been able to identify opportunities just like Takealot over and over again. These guys follow a strict plan to spot these potentially fantastic investments.

In today's Digest, I'll share three themes Naspers looks for to find top-quality businesses with huge growth potential... and more important, limit any losses that inevitably occur.

But before I get to all of that, I can't skip over the fun parts of our time in Indonesia...

It ended up being the trip of a lifetime.

I made bonds with people that I hope will last forever. We spent 10 days surfing on an island with world-class waves. And I mean it when I say they were the best waves of my entire life.

I've been to Costa Rica, Nicaragua, and California for surfing trips... But this was by far the best. The place we stayed at looked like it came straight out of a magazine. Here's a picture of a few of us heading out for one of our great surfing sessions...

That's me on the right, with the long sleeve rash guard. You can see Steve in the middle, wearing the dark blue shirt. Kennett is sitting between us.

However, I'm not writing today just to tell you about the surfing. I wanted to give you a glimpse into what happened after our talk with Kennett in the airport, but let's get back to the specifics of that conversation...

As Naspers CEO, Koos Bekker made one of the best investments in history...

The South African businessman put $32 million into Tencent back in 2001. It represented a 46.5% stake in the company at the time.

Today, Naspers still owns a 31% stake in Tencent. And it's worth roughly $130 billion as I write.

That's right! Bekker's company turned $32 million into $130 billion through its investment in Tencent. That's a gain of more than 400,000% in less than two decades.

OK, I get it... People can get lucky. Maybe Bekker just took a stab in the dark, and it paid off.

But here's the thing... Tencent wasn't a one-off investment that turned into an incredible success. Naspers has recreated this success over and over again through the years.

Another recent example was Naspers' investment in India-based e-commerce company Flipkart...

Flipkart is the "Amazon of India." It is Amazon's (AMZN) main competitor in the country. In fact, Flipkart is leading Amazon in sales in India as of 2018.

Naspers put a total of $616 million into Flipkart after its initial investment in August 2012. The company more than tripled its money, selling its 11% stake to retail giant Walmart (WMT) for $2.2 billion in May 2018.

So what's the secret? We can see Naspers' recipe for success through three themes...

Naspers' continued success isn't a fluke...

You can see this through the companies it invests in. They all share a common theme that Naspers looks for... It's what we like to call an "ecosystem."

Take Tencent, for example...

As regular readers know, the company developed a super app called WeChat that launched in 2011. It has more than 1 billion users today.

It's popular because it can do it all... If you want to watch sports, order food, hire a cleaning service, and even pay for these services, you never have to leave WeChat. It's your Facebook, PayPal, and entertainment all in one place.

That's an ecosystem. You can do multiple things all on the same platform.

The product's convenience and quality keep consumers using WeChat. And it's one of the main reasons Tencent is so successful.

Flipkart has a similar stickiness about it...

As I said, it's the Amazon of India. Its users in the country can buy nearly any product they want without leaving their couches. And these products will arrive at their doors in as little as a single day.

No more going to several stores to find what they need. They can do it all through one website. And Flipkart offers one-day delivery in roughly 50 cities already.

One of Naspers' latest investments is in Takealot. As Kennett pointed out during our chat, it's the Amazon of South Africa. And with this investment, Naspers is replicating the same strategy it used with both Tencent and Flipkart.

Takealot dominates Amazon in South Africa when it comes to total website traffic. It is the 17th-most-trafficked website in the country... Amazon is No. 31 on that list.

Takealot isn't done growing yet, either... The company's gross merchandise volume ("GMV") increased 58% in a six-month period from April to September 2018. GMV is simply the total value of all the merchandise sold on the platform.

It doesn't stop there, though. On top of building an ecosystem, there's another theme in all of Naspers' investments...

Naspers finds early movers in untapped markets...

Investing in China was tough for foreign companies back in 2001.

China's government put regulations in place that made it hard for outside companies like Google to operate within the country. In fact, Google pulled out of the Chinese market in 2010 because it didn't want to obey the government's strict rules.

These rules gave local Chinese companies shelter from outside competition. And in turn, it allowed companies like Tencent to prosper in China.

Flipkart had a similar head start in India before Amazon entered the market. The company launched in 2007... And Amazon didn't come into the region until several years later.

The company was able to gain significant market share with its online sales. Without that head start, it's easy to wonder if Flipkart would be the same powerhouse it is today.

Finding companies with a strong ecosystem and a long history or head start in the local market helped Naspers continue to grow its footprint. But there's one more thing Naspers does incredibly well. And it's likely why the company has grown into a $100 billion giant...

It never lets a poor performer turn into a catastrophic loss...

Of course, not every investment turned out to be a big winner for Naspers. But there's a simple strategy that the management team follows to cut off its bad investments early...

Naspers always has an exit plan.

Steve had lunch with current Naspers CEO Bob van Dijk in New York in December 2017. He was able to get a deeper view into how the company moves on from investments that don't work out as planned. Here's what Steve wrote about this meeting in the January 2018 issue of his True Wealth newsletter...

Steve: Bob, you said earlier today "we quickly weed out what's not working." The thing is, many CEOs have a hard time letting go of failing businesses. They have an emotional attachment. What makes you think you can cut your losses when others can't?

Bob: We recently shut down a business in Turkey. The local guy in charge really wanted to keep it going. But we'd set a business plan, and the numbers were nowhere near the plan. So we cut our losses and shut it down.

As for the emotional side, I'm a data scientist by background. I'm comfortable cutting what's not going according to plan, without emotion.

By finding businesses with strong ecosystems and a first-mover advantage, Naspers has been successful in many of its investments. And if an investment goes bad, it isn't afraid to cut its losses short. In other words... Naspers doesn't let emotions get in the way.

That's the sign of a great investor...

And you can follow this same simple concept with your own investments.

You never know when you'll stumble across the next great opportunity, like Naspers had when it bought into Tencent in 2001. It might be in an airport talking to a new friend... or it might just be while you're sitting at the computer in your living room doing research.

No matter where it happens, if you find a company that fits Naspers' themes of a strong ecosystem and a first-mover advantage, you likely have a tremendous investment on your hands. But even if things don't go your way, remember to always protect your downside...

You can do this by using a simple trailing stop. A common trailing stop is 25%. That means if your investment falls 25%, cut your losses immediately... no matter how much you think you are right and the market move is wrong. Don't let your emotions get in the way.

A trailing stop allows you to methodically cut your losses and let your winners ride. If you can follow this simple rule, you'll have a great chance of outperforming the markets... It'll reduce the damage and keep you out of positions where a stock plunges by 50% or more.

No one – not even the most successful investors in the world – can predict the future. That's why you must always be like Naspers and have an exit plan before investing.

Remember, taking small losses is much better than taking big ones. And by using a trailing stop, you'll be able to let your winners keep running without cutting them off early.

New 52-week highs (as of 7/8/19): Essex Property Trust (ESS), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Hershey (HSY), Nuveen Preferred Securities Income Fund (JPS), Nestlé (NSRGY), Polymetal (LSE: POLY), and Royal Gold (RGLD).

In today's mailbag, a Stansberry Alliance member has a question about our recommended gold allocation. What's on your mind? Let us know at feedback@stansberryresearch.com.

"I am an Alliance member and have a question related to various notes that have come out on recommended gold and silver portfolio exposures. I'd appreciate it if you could clarify what is included in the 5% to 10% of a given portfolio's exposure to gold and silver as insurance.

"My question is does this 5% to 10% range include gold stocks and funds? Or, does it imply readers should have actual physical gold and silver in their possession in a range of 5% to 10% of a total portfolio, and then separately determine what percentage exposure to gold or silver stocks and funds a portfolio should be exposed? Just want to be sure I understand your perspective on this, hope question is clear." – Paid-up Stansberry Alliance member Bob M.

Brill comment: Thanks for the question, Bob. As always, we're prohibited from providing individual investment advice. But generally speaking, the answer to your question will depend on your financial situation and risk tolerance.

This is because even the best gold and silver stocks and funds are far more volatile than the metals themselves. When prices rise, these stocks can rise multiples more. But when prices fall, they can also fall much, much more.

In other words, conservative investors who are primarily concerned with protecting the wealth they have – or folks who simply can't afford to take big risks – may choose to allocate all or most of their "gold portfolio" to physical gold and silver bullion (ideally, held in their possession). On the other hand, folks who are willing to take more risk to potentially make bigger gains may choose to allocate a significant percentage to more speculative gold and silver stocks.

If you're looking for more guidance, the model portfolio allocation laid out in Stansberry Gold & Silver Investor is a good place to start. This includes roughly one-third in physical gold and silver, one-third in the highest-quality producers and royalty companies, and one-third in smaller, more speculative producers and explorers.

For a limited time, you can get instant access to all of our gold and silver research FOR LIFE – including Stansberry Gold & Silver Investor, Commodity Supercycles, John Doody's excellent Gold Stock Analyst, and any and all new gold research we publish in the future – for less than what you'd usually pay for a single year. Click here to get started with the Stansberry Gold Alliance now.

Good investing,

Chris Igou
Jacksonville, Florida
July 9, 2019