Continuing my recent discussion on combining value and growth investing...
If you correctly identify great companies that grow strongly – and buy their stocks at anything but the most extreme valuation – you'll do well with your investing.
But if you really want to make a lot of money, you need to buy the stocks of such companies when they're out of favor and the valuations are reasonable (if not downright cheap).
The key is to find long-term growth companies whose earnings have temporarily flatlined or declined. This can lead to massive stock sell-offs as investors apply a low earnings multiple to depressed earnings.
Then, when earnings recover, those folks who were clever and courageous enough to have bought anywhere near the bottom benefit from both the rising earnings and a higher multiple. And that can often lead to multibagger returns.
The goal is to be patient enough to catch what I call an "inflection point"...
To be clear, I'm not talking about waiting for a market correction.
I'm talking about individual stock corrections. These are typically driven by changes in sentiment toward the company or sector... or the company experiencing a short-term hiccup.
An inflection point in a stock occurs when the consensus view is that the company will continue to stagnate or decline, but instead it grows.
They're difficult to identify. But you don't have to be exactly right. As the saying goes, "It's better to be roughly right than precisely wrong."
If you believe a company/stock is at an inflection point, then you have a "variant perception." This is a belief that a company will perform much better than most investors expect.
But having a variant perception is easy. You must also be right!
To have a correct variant perception, you must have a unique piece of data, insight, or analysis.
This is much more likely to happen if you're in your sweet spot – a country, market, or industry in which you have deep knowledge, experience, or relationships.
And this typically requires a lot of hard, focused work. Often, it takes multiple years or decades. And keep in mind that it's easy to be the sucker at the poker table – avoid this at all costs!
Here's an example of the first inflection point I caught in my career: the A-class shares of Berkshire Hathaway (BRK-A) at the peak of the Internet bubble in March 2000.
A few years earlier, I had started studying Warren Buffett, his late business partner Charlie Munger, and the company deeply. (And I never stopped – I regularly attend the annual Berkshire meetings.)
So back in March 2000, investors were dumping value stocks. They were dumping Berkshire in particular, despite its solid operating performance, because it was run by an investor perceived to be an out-of-touch dinosaur.
I was buying the stock all the way down and took the position up to 30% of my nascent $4 million hedge fund on the day it bottomed (and, not coincidentally, the day the Nasdaq Composite Index peaked) on March 10, 2000.
It was a big bet. But I was confident in three things:
- Buffett was (and is) a brilliant investor,
- Berkshire was (and is) a great company, and
- The stock was trading at its value of cash and investments – so you got all of Berkshire's operating businesses for free.
Of course, Buffett had the last laugh. Berkshire rallied more than 50% within a couple of months (and the Nasdaq ultimately fell by nearly 80% over the next two and a half years).
Take a look at the below slide from my 2018 presentation on my "make money" investing approach:
I'll be sharing another example of catching an inflection point in my next e-mail. So stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.