The hardest part of achieving 10-20+ baggers is having the patience and conviction to hold through multi-year periods of underperformance. Patience is your biggest asset when investing in a great business. Time always pushes out the weakly convicted and creates opportunities for those with a long-term perspective. The greatest flaw in the short-term investor is they think great business performance is always linear. The truth is that even great businesses suffer growing pains, and so do their stocks.
The investor that always worries about “next quarter” will sell at any sign of imperfection. Since no company is perfect, this means they will always sell too soon. Short-term investors will accept a 20% gain because they didn’t spend the time to develop the conviction and foresight to see the next 500%.
The second hardest part of achieving 10-20+ baggers is holding stocks that sometimes look expensive by traditional metrics. If your aim is to hold a great business for a long time, you are going to have to get used to holding a business that isn’t always “cheap”. This is a topic that David Gardner talks about in this Invest Like the Best podcast.
Whether it’s holding a great business whose stock doesn’t move for months or years, or holding one that doesn’t look “statistically cheap”, there is an art to holding. The simple answer is you focus on the business, not the stock.
A successful long-term investor today needs to be incredibly focused on knowing what they own better than others. This means they cannot depend on others for their due diligence. You need to do the work. You can borrow someone else’s stock ideas but you can’t borrow their conviction. A multi-baggers journey is filled with the corpses of highly intelligent-articulate naysayers. There isn’t one great stock or company that wasn’t credibly doubted all the way up (H/T @EdBorgato). Put on your armor of diligence and conviction so you can hold a great company when you find one.
Thirty years ago the best investors had the biggest funnels of information. Today the best investors have the best filters of information. They know what is important and knowable, and they don’t become distracted by the noise around them. Sometimes important information comes from sources that aren’t obvious.
I recently dug into a CEO’s past so deep that I ended up networking my way back twenty years to his college roommate. The key takeaway from the college roommate was that the now CEO was always incredibly honest and had high integrity. This is from a roommate that likely saw him in many different forms (studying, dating, sports, drunk, etc). The college roommate told me a story from twenty years prior about how he and the now CEO broke a chair at a college party. The following morning the now CEO walked a mile to the person’s house and paid them for the damage. He didn’t have to. No one knew he broke the chair. Now this type of conversation might seem insane to most investors. But is it insane to do a background check on the integrity of the leader you’ve invested 5-10-20% of your net worth? I don’t think so. Do you think that uncovering such a nugget or differential insight, albeit from 20 years prior, gives me an edge? Yes, I believe so.
If you want above average returns, you need to do what average investors aren’t willing to do. You need to gain perspectives that average investors aren’t willing to gain because it’s just too hard, too uncomfortable, and takes too much time. It’s easier to sit in an office and crunch numbers than it is to get on a phone or plane and talk to people. If you aren’t willing to do so, then don’t complain about being average.
In Ron Baron’s Q2 Letter at Baron Funds, he talks about going the extra mile for research:
As part of our ongoing effort to gain further insight into Tesla’s prospects, we recently met with Dr. Ion Yadigaroglu, a venture capitalist. Ion is an engineer with a doctorate in physics from Stanford. Ion has been programming since he was eight years old! Ion’s dad is a prominent nuclear scientist. So much for Ion’s creds. When Ion studied at Stanford graduate school, his roommate founded eBay. Ion’s $1,300 investment in the eBay startup became worth millions. In 1992, at the dawn of the Internet, Ion met Elon Musk. Elon had come to Palo Alto to research battery technologies in Stanford’s labs. Elon dropped out after only six days! Further, while at Stanford, Ion was the teaching instructor for JB Straubel, Tesla’s CTO and chief engineer. Ion believes JB and his team are better at battery technology than anyone else. It was lucky for Ion that he met both Elon and JB. Ion invested in Tesla when it was just beginning, and so far has made a lot more than he did in eBay. After meeting Ion, we concluded it was lucky for Elon and JB they met Ion as well.
Our meeting with Dr. Yadigaroglu is one example of Baron Funds’ differentiated primary research approach. Few institutional investors have met with Elon and JB. Fewer still, we’re guessing, have met with the co-founder’s teaching instructor at Stanford. We believe fewer and fewer in the investment industry are performing even the most basic research on businesses. There is a reason for this. During the past 15 years, boosted by virtually instantaneous communications, computer algorithms, and the increasing popularity of ETFs, securities trading volumes have multiplied exponentially. As computers and software have replaced traders and marketplaces, brokerage commission revenues have fallen dramatically. Brokerage commissions historically have been used to pay for investment research. Ergo, investment research budgets have been cut significantly; there are now far fewer financial analysts; and “price discovery” and markets have become less efficient.
We believe the fewer people who do research, the more valuable the fundamental research we conduct and the more likely it is that we will continue to outperform. This is although we cannot guarantee that we will. One Tesla executive with whom I speak regularly recently remarked to me, “It is amazing to me how little most people know about Tesla.”
One of my golf friends recently remarked, “I love to play poker with people who think the game is all about luck.” My friend wins so often and so much, he thought he was going to be asked to leave his game. One of our mutual friends who plays in that game marvels how this individual “knows” what cards are in his hand without seeing them. “It’s about mathematics and ‘reading the table,’ studying how your opponents bet their hands,” my friend explained to me. Which is just like world championship bridge. Teams that compete in bridge study books several inches thick on “conventions” and practice diligently. Based on my observation, people who earn lots of “masters points” don’t earn them because they are lucky.
Just like anything else, the harder you “work,” the “luckier” you get. We think the same goes for investors who earn returns significantly greater than those of the market over the long term.