Remember That We Win in the End
I couldn't be more delighted that I was able to recruit my long-time friend from the hedge-fund business, Enrique Abeyta, to join me shortly after I launched Empire Financial Research last year.
In addition to contributing to our first newsletters, Empire Investment Report and Empire Stock Investor, he's now launched three of his own: Empire Elite Trader, Empire Elite Growth, and – just a couple of weeks ago – Empire SPAC Investor. He's absolutely crushing it with all of them.
But just as important, he's provided a wonderful, healthy balance within our company. You see, I'm more of an old-school, buy-and-hold value investor, whereas Enrique brings a significantly different approach.
What he wrote yesterday to his Empire Elite Trader subscribers (shared below with his permission – if you're not a subscriber, you can find out how to get access to the whole trading portfolio right here) especially resonated with me because it captures the single-biggest mistake I made in my investing career: being focused more on the valuation of a stock rather than the quality and long-term growth prospects of the underlying business.
As a result, I failed to buy some of the greatest growth stocks of all time that were in my wheelhouse – like Costco Wholesale (COST), Visa (V), Nike (NKE), and AutoZone (AZO).
And when I did buy them – over the years, I owned Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Microsoft (MSFT), Ross Stores (ROST), Home Depot (HD), and McDonald's (MCD), to name a few – in every case I sold much too soon... not because I'd lost confidence in the businesses, but rather because their stocks no longer appeared cheap.
Enrique and I are sharing these painful memories in the hopes that you can learn from our hard experience, stand on our shoulders, and achieve even greater long-term investment success than we did.
So without further ado, here's Enrique's essay, entitled "Remember That We Win in the End"...
Last week, a friend asked me to present to a group of Arizona State University students – mostly in their late teens and early 20s – taking a class on investing and money management.
Throughout my career, I've always enjoyed doing events like these. One of the reasons is that it gives me the opportunity to share what I have learned – good and bad – across my 25-plus years of investing.
The other reason is more selfish, though... It often leads me to crystallize some of my thinking about investing.
The single most interesting question that my friend asked me to address in the presentation was: "What advice would you give to 21-year-old you about investing?"
Regular Empire Elite Trader readers shouldn't be surprised at my one-word answer: "growth" – meaning invest in growth companies and stocks.
He laughed and said, "We know that one! You've said it 50 times in the last hour... But besides growth, what would be your second-best piece of advice?"
At this point, I was a bit flummoxed. Those of you who have seen me on video know that I'm seldom without a response, but I sat there and really thought... and thought... and thought. Finally, I said...
Honestly, I don't have a second piece of advice. A focus on growth investing is so much more powerful than anything else you can do that it would be all of the top 10 pieces of advice that I would have. Maybe No. 10 would be to take some time to also enjoy investing... but No. 1 through No. 9 would be to invest in growth companies and stocks.
This is the honest truth. Had someone really emphasized this to me when I was 21 years old, not only would I be a lot wealthier than I am right now, but I also would have been a lot less stressed.
But despite my belief in the superiority of growth investing, there's still volatility. You can lose a lot of money in the short term... and if you're wrong, you can lose a lot.
And yet, if I look back at my career and the amount of mental energy versus return that I spent on growth stocks compared to other types of investing – such as value or distressed – it's not even close. The "stress to return" ratio of growth is 50 times better!
The events of this past week had me thinking even deeper about this advice...
We've seen considerable angst about political events, a surge in COVID-19 cases in both the U.S. and Europe, and a correspondingly difficult stock market.
As I considered my advice to myself in this context, I began to think about it in a new light... maybe instead of "growth," I would say "optimism."
I remember when I began my professional investing career and was working for a 40-plus-year market veteran named Martin Sosnoff – the founder of Atalanta Sosnoff Capital.
I was in my mid-20s at the time, and I would have to give Martin presentations on stocks right after the market opened. (I still remember those meetings so clearly... He was always smoking a big, fat Churchill cigar as I sat down with him.)
What sticks out are the times that I brought him some idea that I had spent a hundred hours on, had built an extensive model for, and had done tons of boots-on-the-ground research on. I would excitedly go through the idea and my model in great detail.
Martin would sit back and say, after my hour-long presentation, "This all sounds very interesting... but remember, all you really need to do is find some really great companies. Buy those and forget about it."
In retrospect, I wish he would have been more forceful and said instead, "You idiot! You're wasting your time and energy with all of this minutiae. Buy the damn great companies and focus all your energy on just finding those."
Like I said, I would be a lot wealthier and a lot less stressed.
But thinking back to the concept of optimism, Martin's advice could be applied to the economy and society overall.
Across the past few centuries, if you had taken the bet that mankind improves – less poverty, less death and war, less disease and hunger, etc. – you would be right... Especially across the past 50-plus years.
Of course, there are geographies and specific times where this isn't the case... but overall – and especially in the developed world – it has been overwhelmingly true.
This brings me back to today...
I've previously published my thoughts on COVID-19 and continue to hold those views: mostly that the virus is in the process of burning its way out and we may arrive at low death counts soon... perhaps even soon enough to render a vaccine unnecessary.
However, even if I'm wrong about this, we do know that eventually the virus situation will be solved. There's zero doubt about that... It's just a matter of time before we win.
In terms of the economy, the situation is the same. The recent third-quarter gross domestic product ("GDP") numbers in the U.S. were strong – the 33.1% annualized sequential growth number is the figure we hear the most.
But what I find most interesting is the fact that the U.S. economy was only 3.5% smaller in terms of GDP than it was in the fourth quarter of 2019. Think about that for a second... Despite everything that has happened since then, the economy was only 3.5% smaller. That's amazing.
Again, my views have been constructive. I believe that we've now entered into four to six quarters of global synchronized GDP growth unlike anything seen since World War II.
It's literally physics. Businesses that were closed – by government mandate – will open. Not all of them will survive, but a large percentage that do will go from closed to open. That's big growth.
Throw on the most massive fiscal and monetary stimulus we've ever seen, and that's a good thing for economic growth. Economic growth is net-net good for stocks... and there's zero doubt about this growth. Again, it's just physics... and again, we win.
The last of the big issues weighing on us all is politics. It's also a topic that I haven't expressed an opinion on.
The only thing I'll say is that there have been many times when the U.S. (and the world) has been fractured and violent... Even much more so than today.
Despite all those times, we've found our way through and pushed forward to even greater success for mankind – less hunger, less poverty, less war, etc.
There's nothing that has happened to lead me to believe that isn't still the case... and that means the best advice I really would have for 21-year-old me is: "Bet on optimism, and you will ultimately win."
Best regards,