Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Each month, our team offers our seven top stock market opportunities across a variety of investing types, industries, and risk levels. We embrace providing a diversity of opinions, to give our members a full buffet of market-beating options to choose from for their own investment portfolios. But there are also certain principles that we follow, which tie all of our recommendations together. In this episode of our 7investing podcast, each advisor on the time describes one of our seven investing principles in their own words, and how it is helping them to be a better investor.
December 31, 2020 – By Samantha Bailey
Each month, our team offers our seven top stock market opportunities across a variety of investing types, industries, and risk levels. We embrace providing a diversity of opinions, to give our members a full buffet of market-beating options to choose from for their own investment portfolios.
But there are also certain principles that we follow, which tie all of our recommendations together. In this episode of our 7investing podcast, each advisor on the time describes one of our seven investing principles in their own words, and how it is helping them to be a better investor.
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Simon Erickson 00:00
Hello everyone and welcome to this edition of our 7investing podcast. I’m 7investing founder and CEO Simon Erickson.
There’s a million different strategies on how to invest in the stock market, and hundreds of different approaches within each of those. We embrace taking different strategies within our 7investing team as well as. Some of our advisors focused primarily on higher risk biotechnology stocks. Others are focused more on lower risk retail companies. We’ve even recommended REITs and utilities, which are dividend paying stocks that are much lower risk than anything.
But even with this diversity of opinions, there are a few things that we always share in common. We’re investing real money to each of our recommendations every month and we’re holding on to them for the long term. As such, we’ve developed seven principles that we believe will improve the returns of the long term investor. We’re dedicating this podcast to explaining what each of those principles means to each of us on our team.
So sit back as we review our seven investing principles on today’s podcast. We hope that use them to invest in your future
So our first investing principle is that investing is personal. We believe it is a great service working with financial advisors who are managing your money, or even investing in low cost index funds that track a fundamental index. But we also believe that no one truly understands your financial goals better than you do. No one understands your risk tolerance or knows how well you’re sleeping at night better than you. And no one understands what types of companies you truly want to be investing in better than you.
Our mission at 7investing is for our entire team to choose our best ideas in the stock market every month. But then let you decide which of those companies is truly best for your portfolio. individual investors don’t have the same constraints as fund managers. They aren’t restricted to buying only companies that match up funds criteria or companies that have a certain size market capitalization. Instead, we have the ability to look everywhere. We can look at high risk biotechnology companies that have huge potential upside if they bring something commercial. We can look at international opportunities that have a ton of uncertainties, but also a very large and untapped addressable market. We can look at mature companies that are much safer, because they’ve formed massive moats and advantages to keep out their competitors. And we can look at government regulated utilities, who pay out a reliable and stable dividend that you can count on every quarter.
Now which of those companies is right or best? Well, we think that’s up to you. The sky’s the limit in terms of possibilities for investment opportunities. But at the end of the day, investing is personal
Hey there 7investors. I am Dan Kline, one of the lead advisors here at 7investing. And as you know, we’re talking today about our seven investing principles. These guide everything we do. And I really want to talk about number two.
Number two is to remember that you’re buying companies, not tickers. A lot of people look at the stock market, and it’s all transactional. Those people tend to be traders. Is this going to go up? Is it going to go down? And they don’t understand any of the fundamentals of the company.
When we buy a company, we look at it as this is a long term thing. This is we’re going to own a piece of this company, maybe forever. And that’s really important to remember to focus on. So why does that matter? Well, if you’re buying something for the short term, what do you care if the CEO is a good guy? What do you care if they treat workers? Well, it doesn’t matter that much. It’s just a transaction.
When you’re buying something for the long term, the thesis is bound to play out in really different ways. And it’s going to depend on the people and the decisions those companies make. So what do we do? I know the first thing I do is I start with, “Hey, is there a company in my life that I’m using a lot that I didn’t used to?” And maybe that’s an investment. So, many years ago, when I first started going to Starbucks, I looked at, I said, “Wow, this is a good company. I wonder what the margins look like? I wonder what they have to invest in a new store? Are they franchised? Are they company owned? What’s the management look like?” And then you dig in, and you start to go, “Oh wow. I like this leader. He cares about people and they have a really strong growth plan. They have their eye on China.” And I start to fill in, “Okay, this is ticking off the boxes.”
And that’s because it’s a company. It’s not just a ticker symbol. I’m not saying, “Will short term sentiment send this higher?” I’m saying, “Will the long term vision of this company play out?”
Well, why does that matter? How does that play out? So look at Starbucks, they’ve invested for decades…not decades, but for many years in technology. So mobile order and pay and that was first about convenience. Well, during the pandemic, it became a lot more than convenience. It became absolutely crucial to their operation. They pivoted to a drive thru model. Great that they had drive throughs. But that’s pretty typical for restaurants. But mobile and order and pay allowed them to go to curbside pickup, having delivery already going allowed them to move to delivery quickly. So they made investments, not for those purposes. But when the rainy day came, they were ready to handle it. And that’s something we look at with management. So it’s not about how things are going when they’re going well. It’s really easy, you know, to be the the coach of the football team that has all the best talent. It’s when the quarterback breaks his leg and you have to put the backup in.
So again, let’s stick with Starbucks. Here, we’ll go with this analogy. The pandemic hits, people can’t leave their house, their normal patterns are disrupted. Nobody’s going to work in the same fashion. What does Starbucks do? Well, they shift to drive thru and curbside. They closed their dining rooms. They leaned heavily on delivery. And all of those things were in place. So what happened during the worst of the pandemic? They kept about 70% of their sales. You saw similar stories play out at Best Buy. Where they physically had to close, but they were still selling things that were essential. If your refrigerator broke, you still needed one. If your stove wasn’t working, it was still important to buy a stove. Well, they had delivery in place, they had curbside pickup up and running, they were ready to go.
So you want to look at management and go, “How do they handle when things go wrong?” It’s really important. You also want to look at their long term vision. There are some companies that are just a good company. It’s a good business. It makes money. It’s not necessarily investable. So, you know, you might look at say like a Five Below and say, “Okay, they’re going to add hundreds and 1000s of stores over the next few years. Here’s how they get their merchandise. Here’s the profit margin. Here’s why it works. Here’s how it spreads word of mouth.” And you might like that story. And what you do is as you buy it, you watch to see how that story plays out. And of course, if it doesn’t play out the way you expected it too, you want to look and see how its management pivots. Just because you decide on day one as a CEO, this is where I want to be five years from now, doesn’t mean you don’t you can’t change. Sometimes companies see, “Hey, the market has changed.”
Costco is a great example. For many years, they didn’t do delivery. They didn’t have an online presence. And at some point their customers wanted some delivery and wanted some online presence. So they went very carefully and added those things. So you got to watch the vision. And you got to see how they course correct.
You also have to remember that good companies aren’t afraid to do things differently. I’ll bring up some of the ones we’ve already talked about. Starbucks paying for college. Costco going on $15 minimum wage way before anyone else did. Even Walmart, a company I’m not that big a fan of, has college programs and training and all sorts of advancement and their salaries have advanced.
So you want to look at a company doing something proactively getting ahead of the game, and sometimes willing to be unpopular. Amazon, putting all of its profits many quarters into expanding. That seemed like a bad idea for short term investors. For long term investors, that paid off dramatically. Especially in the pandemic. They had the infrastructure ready to be able to pivot and be ready to serve the masses things.
Good companies are good on so many different levels. And as an owner, you kind of want to be proud of that. Now just some people buy companies that they think are going to do really well that maybe do something, you know, that they don’t like or personally support. Some people do that. And if you believe in the company, that’s a personal choice. But I know that I personally tend to start with things that I believe in. That I want to proudly say I’m an owner of. If somebody asked me, “Do you own shares in this?” I don’t want to go “I guess I do. I made some money. I want to go “Yeah! I like their business. I like their leadership.
So remember, you’re buying companies and not tickers. That is 7investing principle number two.
Hey everyone, I’m 7investing lead advisor, Austin Lieberman. I’m here to talk to you today about our third principle, which is “don’t stress yourself out.”
We hear often that the stock market is too stressful. But it doesn’t need to be that way. By following a few simple rules, we can avoid many common investment traps and the unwanted stress that goes along with them.
The first rule is only invest money in the stock market that you don’t need for at least three years. It’s difficult to predict what stocks will do in the next few months, or even in the next year, because headlines tend to infect investors’ emotions. But the impact of those short term news stories rarely lasts. Whereas great business execution can endure for decades. Extending your timeframe will maximize your likelihood of generating better returns.
We also avoid using margin debt at all costs. Borrowing money to invest in stocks might be tempting to juice returns. But it can turn very badly very quickly if the market unexpectedly falls. And the potential upside, at least in my opinion, isn’t worth the risk. I tell myself, if I’m a good investor, I don’t need to use margin. If I’m not a good investor, then I shouldn’t be using margin. Because I could end up owing more money than I have in my portfolio and have to draw from savings or something like that. If something unpredicted happens, which happens quite often in the stock market. Investing is meant to be a long term wealth creating process. Not something similar to a day trip to a Las Vegas casino. Setting our expectations upfront of saving for long term goals will greatly improve our chances of success.
I try to check in with my emotions on a monthly basis by assessing a few things. First, I ask myself, or analyze, if I’m losing sleep at night worrying about my portfolio. Next question I ask is, “am I focused on the stock market or daily movements in my portfolio and distracted from my other daily responsibilities like my full time job?” And then finally, and most importantly for me, ask myself, “am I distracted, by stressing about my portfolio when I’m spending time with my family?” If the answer is yes to any of those questions, and sometimes for me, it is. None of us are perfect. We all get out of whack. That I know that I need to course correct and fix some bad habits that I’ve formed.
At the end of the day, I try to remember that I invest to improve my life. I don’t live my life to improve my investments. Thanks for checking in with us today. We appreciate your support.
I’m 7investing lead advisor Steve Symington. And our fourth investing principle is recognizing that “time is on your side.”
Warren Buffett is generally considered one of the greatest investors in modern history. And when asked why more investors don’t simply copy his strategy that led to enormous success in the stock market, he famously replied, “because nobody wants to get rich, slow.” And that might not be as exciting as a short term oriented focus. It also doesn’t mean, however, that you should invest exactly like Warren Buffett does. In fact, given the enormous amount of capital that he’s working with today, even he admits that it’s very difficult for him to generate market beating returns like smaller investors like you and I can.
But we agree with Warren Buffett in that we know while investing can make you rich, it takes time to realize truly jaw dropping results. And stocks are tied to businesses and businesses need time to grow. And to paraphrase and other famous quote by Albert Einstein, we believe compound interest is one of the world’s true wonders. It’s capable of building incredible wealth given sufficient time to do its work. Now use this time wisely. Save as much as you can. Invest that money. Reinvest dividends to buy more stock.
You’ll find that this principle also overlaps with some of our other principles, like not stressing yourself out and not putting money to work that you need for at least three years in the stock market. And really, when buying and holding individual stock positions, we need to recognize that time is our greatest advantage as individual investors. There’s a lot of money chasing after those short term results. And many investors are obsessively focused on even daily results, weekly results, and even just the next quarter’s results. But we take a much longer term view. And it might be exciting. Of course, you know, you’ve seen several of our stock recommendations, subscribers can tell you, that several have doubled, tripled, even quadrupled in value since we launched 7investing. And that’s great.
But we are not content stopping there. We’re looking for businesses that will generate truly life changing results over the course of years. And it takes time, those years, for those gains to materialize. And as individual investors, that requires embracing your single greatest advantage.
Again, the time is on your side. So to be clear, we will be continuing to provide a regular stream of updates on the stocks we recommend to subscribers so you can be confident that our thesis remains intact along the way.
But again, our fourth investing principle is recognizing that time is on your side and investing accordingly. It is crucial to generating outsized returns over long the long term.
Hello, everyone, Simon Erickson here again. Filling in for my esteemed colleague, Matt Cochrane. I will do my best Matt Cochrane impression for going through principle number five, which is “valuation matters.”
As we wrote in our description, we believe that the best businesses truly deserve premiums. But valuations always do matter. A lot of growth stocks might seem to look expensive when you’re using valuation metrics that are more traditional. But that often times is completely justified and rational. Because a lot of those companies are either growing into new markets, and their cash flows or their revenues will come in the future rather than the present. Or they deserve a premium valuation at the current time because they have strong competitive advantages that are protecting their profits against their competitors. That’s something that’s very interesting to us, to see the reliability of earnings, the predictability of future profits. It is very important for a company and a lot of times we’re willing to give more premium valuations to those types of companies.
But in addition to that, we have stated that Warren Buffett has famously said, “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” We think that valuation is important, at the end of the day, even for the best companies out there. Because it’s predictive of the company’s future potential returns for investors.
There’s generally three ways that investors can make money off of the stock market. One is fundamental growth. Two is the multiple of those fundamentals that is given by the market. And three is dividends. And so valuation matters is really addressing the second of those three things. Which is what multiple that the market is giving to a current company’s fundamentals.
And so we like to pay premiums for great companies. We’d like to pay premiums for companies that have plenty of growth potential ahead of them. But at the end of the day, we don’t want to overpay for anything because valuation does truly still matter.
Hi. I’m one of the lead advisors with 7investing. And I’ll be going over our sixth principle, “choosing and finding one of a kind companies.”
Now, part of the reason in investing you don’t want to invest in another “me too” company is there’s no competitive advantage. When investing in these companies, you are not just buying equity. You’re representing ownership of that company in that business.
So what is management doing? Whether it’s strategy-wise or product-wise, that’s building up something called an economic moat. So you can think of an economic moat as how do they protect themselves against the invaders, or people try to disintermediate their technology?
So there are a number of ways you can assess that depending on the type of company the sector it’s in. But there are some very common ways. So for example, do they have a robust intellectual property portfolio? If they have IP, then they’re protecting their products. And going beyond that, then there’s “are they innovating?” No, past performance doesn’t guarantee future performance. So how are they constantly innovating on their products strategy or technologies, to make sure that they stay relevant as society changes? Are they adapting? Are they forward thinking and looking at where’s the world going to go? And how do we adapt our current strategy to make sure that there’s not someone coming from behind them to make the company obsolete, so to speak.
So, you know, in some ways it could be brand recognition. You know, definitely in retail, making sure that customers stay because they’re finding a very unique product. Maybe they have the best fried chicken. And healthcare, it’s making sure that they have IP and that they are developing a strong and deep pipeline. And then there’s also how are they incorporating other technologies that are up and coming and building kind of their customer loyalty?
So there are a lot of ways to look at building their economic moat. But it’s very important to make sure that they have that. They are forward looking, and making sure that they are looking at competition and not just being laser focused on just one product, because that is often how you sink into a hole. And over time, the company becomes obsolete. And as a shareholder, you lose your investment dollars.
So I think it is quite simple. Just making sure that they have product leadership, good management, and just a good strategy that ties in with the rest of the business. So when picking stocks, look at the business. Because you’re buying ownership into the business. Thank you.
Hey everyone, I’m 7investing lead advisor Maxx Chatsko. I am a nerd. I have a background in bioprocess engineering, which is the scaling up of fermentation systems. So, industrial chemicals for industrial biotech, or biologic drugs and bio pharmaceuticals, or even beer. My second engineering degree is in material science and engineering. And I focused on nanotech and electrochemistry. Or as most people call it, energy storage. So here at 7investing, I cover both biotechnology with my peer Manisha Samy and also renewable energy.
As we close out this podcast talking about our seven principles, I am talking about principle number seven, which is “develop a thesis.”
It’s very important to understand why you own a company. And you don’t own a stock, you own a company. It’s important to remember, you don’t want to buy a company or a stock because you heard about it on Twitter. You don’t want to buy your company or stock because you heard about it on a podcast or a live show for three minutes (including our own podcasts and live shows). You want to do your own research. And you want to have a strong thesis for why you own that business.
Your thesis will protect you from your own emotions. We’re talking about our own money. Principle number one is “it’s personal.” But we’re also going to be emotional about our own money sometimes. So for example, let’s say a company you own reports quarterly results and revenue misses Wall Street estimates by 1% “Oh, no. The sky is falling.” And the stock falls 25% that day. Well, if you don’t have a thesis, you might panic sell with the crowd. And that’s often a terrible idea. But if you do have a thesis, then you can look at it, you can read the quarterly results, maybe read the transcript from what the company reported. And maybe nothing’s changed in the thesis. Oftentimes, it hasn’t. Maybe your thesis is even stronger. Now, maybe the company is a better company than it was at the time of the last report. And you might see that correctly as a buying opportunity to further your long term position.
Similarly, if you don’t have a thesis and you just buy a company, maybe you’re just swinging for the fences and you think it’s the next big thing. But the company is just a terrible business. It never matures. It never commercializes its technology platform. You might stubbornly hold on to a really big loser, where you could be investing that money somewhere else.
So it’s very important to know why you own a company. So my approach, personally I am a bottoms up investor. I start off very technical. I try to understand the basic level, the most fundamental levels, “What does this technology do? What are the advantages? What are the disadvantages? How can it be used?” And this is also coming from drug development. So I read through scientific literature. I read through company presentations. And oftentimes, those are just a small part of your overall research. I think too many investors focus there solely. You know, when a company is always going to tout and talk about itself in the best light. So you do need to have a good diversity of information when you’re doing your research. So I look at scientific literature, what a company says about itself, industry publications, independent publications on the internet. And that helped me to develop and put this package together for my research framework.
And then I look for companies that check three boxes. So one, I want them to have durable advantages. I want them to have strong intellectual property positions. I look for companies that aren’t going to wither like a piece of paper. And, you know, they get challenged with a new technology or a competitor. I want them to withstand competitive landscapes. I want them to have a technology platform. If you’re a drug developer with one or two assets in the pipeline, that’s pretty risky, right? You don’t want to invest in one trick ponies. I want companies that have multiple assets, ideally targeting multiple indications, and maybe even with multiple mechanisms of action. Because that gives you more insulation against risk, right? If one or two or three assets fail, but the pipeline has 10 different assets? Well, that’s maybe not a big deal.
I also look for companies that are addressing pain points within their industry. Those are a little more challenging sometimes to understand. But they’re also often overlooked. But those can lead to some of the biggest winners for your portfolio. So from there, from that base foundation of research, then develop a thesis based on does this company have durable advantages and does it have a technology platform and how can that be used and what pain points is this company targeting within its industry?
And then I sit back. There’s a lot of sitting back when you develop a thesis. And you buy a company. Because a lot of things are noise, not the signal. And especially in drug development. You know, a company takes maybe five to 10 years to develop an asset and in clinical trials and get it to market. And most of the time, it comes down to a handful of days when they report data at conferences or in press releases or from clinical trials. Everything else is noise. So there’s a lot of patience required when you develop a thesis. And oftentimes not not much changes. So there can be a lot of volatility in the stock price. But really, the thesis doesn’t change oftentimes. Unless, of course, the pipeline blows up and it doesn’t work.
So definitely understand why you own a business. You’re not just buying tickers. Develop a thesis. Write it down. Be as company-specific as possible. And then you can reference that when your stock is volatile. When it goes down 10% in a day, you’re not going to panic sell. And if your thesis blows up, it was totally wrong. I’ve had that happen. We all have, “Okay, I need to sell. I need to cut my losses here.” Hopefully it doesn’t happen very often, but it does happen.
So, 7investing’s seventh principle, “develop a thesis”, is very important.
So there you have it. Those are our 7investing principles.
One: Investing is personal.
Two: Buy companies, not tickers.
Three: Don’t stress yourself out.
Four: Time is on your side.
Five: Valuation matters.
Six: Find one of a kind companies.
And seven: Develop a thesis.
We’ve laid out and described each of the seven investing principles, but also put our own unique perspective on each of them from every one of our seven lead advisors on the team. We hope that they are helpful to you and that you continue to use them in your own investing as well.
So thank you very much for a wonderful 2020, and we look forward to empowering you to invest in your future in 2021. We are 7investing!
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