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...
The 7investing team shares how they search for the elusive companies that can eventually become worth 10 times their initial investment.
June 22, 2021 – By Simon Erickson
“10-Baggers” are prime examples of the amazing power of compounding in investing.
The term was originally coined by legendary investor Peter Lynch in his book One Up on Wall Street. It refers to a company that goes on to return 10 times your initial investment, turning $1,000 into $10,000 or $100,000 into $1 million.
Lynch went on to become one of the greatest money managers of all time. He ran Fidelity’s Magellan Fund for 13 years and achieved an incredible compound average growth rate of 29.2%. During his time at the helm, Lynch stocked the Magellan Fund with more than 100 companies that went on to become 10-Baggers.
Stocks that generate those types of returns can completely change your entire financial future. Buying into just a few 10-Baggers can supercharge the overall returns of even a diversified investment portfolio.
But finding these high-flying performers is no easy feat. It requires diligent upfront research, a methodical investing process, and a boatload of patience.
Are there future 10-Baggers available in the stock market today? If so, how do we go about finding them? And if we’re fortunate enough to find and invest in them, how should we deal with them becoming an outsized position?
In our June Team Podcast, our 7investing advisors share our approach to finding 10-Baggers. We reveal the different metrics and factors that we each look for, as well as several of the personal lessons we’ve learned along the way.
Publicly-traded companies mentioned in this interview include Alnylam Pharmaceuticals, Apple, Costco, CrowdStrike, FireEye, MongoDB, Repligen, Tesla, and Ubiquiti Inc. 7investing’s advisors may have positions in the companies mentioned.[su_button url="/subscribe/" style="flat" background="#84c136" color="#ffffff" size="6" center="yes" radius="0" icon="" icon_color="#ffffff" desc="Get full access to our 7 best ideas in the stock market for only $49 a month."]Sign Up Today! [/su_button]
00:00 – Introduction: How to Find 10-Baggers
1:20 – Maxx Chatsko: What Makes a Biotech 10-Bagger?
7:20 – Dana Abramovitz: A Venture Capital Approach to Finding 10-Fold Returns
11:16 – Dan Kline: Finding 10-Baggers in Retail
21:17 – Steve Symington: Where to Find 10-Baggers in Tech
29:16 – Simon Erickson: Investing in Disruptive Innovation to Find 10-Baggers
33:23 – Anirban Mahanti: The Art of Hunting for 10-Baggers
Simon Erickson 0:01
Hello everyone and welcome to our 7investing team call podcast. I’m 7investing founder and CEO Simon Erickson, joined by my other lead advisors, Dan Kline, Maxx Chatsko and Steve Symington. Gentlemen, how are we doing on this lovely afternoon?
Dan Kline 0:15
Doing well. And Simon, I’ll point out that you just go in the order that we’re seen on the screen. And I always get to the meetings. First, there’s no preferential treatment as to why but I follow the Tom Coughlin ‘Get to the meeting five minutes early rule.’ So I’m always here before anybody else.
Simon Erickson 0:29
This is true. And you get the first dibs on the on the notification for that one, then. Our topic this month is about finding 10 baggers, which is an intriguing one, because when we go out and we find investments, oftentimes our overall portfolio is guided by our largest positions. And those largest positions often grow in size over time. And so we’re going to chat a little bit today about how do you find 10 baggers? How do you find companies that will eventually be worth 10 times your original investment? In addition to how do you find them? What do you actually do when you hold on to a 10 bagger? Are you okay with letting this grow into a larger position? Or do you trim it over time? We have different perspectives on this as a team. And we wanted to share those with everyone listening into this podcast. We’re also joined by Dana Abramovitz. Also our 7Investing lead advisor, Dana, welcome to the program as well. So let me start with you, Maxx, if you don’t mind me picking on you first. You know, there’s a lot of different ways we can find 10 baggers out there, but how do you kind of think about this in your own portfolio?
Maxx Chatsko 1:32
So I tend to focus a lot on drug developers, which can make a great hunting ground for multi baggers and 10 baggers, of course. I don’t actually specifically, look for 10 baggers, when I’m researching stocks, I kind of just let it happen. And I don’t think you have to actually look for micro-caps specifically to find a 10 bagger. But I tend to notice that the drug developers that have sustainable, outsized gains tend to have a couple of different characteristics. So one is that they have technology platforms. And that just means that they have a lot of ways to leverage their technical capabilities, and have a very broad pipeline. It insulates them from failure, it allows them to, you know, mitigate risk and spread risk across multiple pipeline programs. And this helps gains become durable. We’ve seen companies that shoot up real fast, right? And maybe then they have one asset, and everyone gets really excited. But if something happens, that single asset or two, we can see the shared gains immediately evaporate.
So a good example is Amarin (NASDAQ: $AMRN), right, is developing a “fish pill” for cardiovascular risk reduction, it had a valuation of close to $9 billion, not that long ago. And then some concerns crept up about intellectual property protections and so on. And today, the company is valued at less than $2 billion, even though that drugs actually having a lot of market success. That’s because the company doesn’t have a pipeline as anything else to lean and fall back on. So that can present a risk to your portfolio.
Another thing I look for is, you know, companies addressing pain points. And this sounds obvious, but it’s pain points are not easy to pinpoint sometimes, right. So for example, like, you know, if you look at genetic medicines, they address the pain point that you can finally, you know, start to treat the root causes of disease, DNA and RNA. However, each of those each genetic medicine modality has its own obstacles, and pain points in and of itself. So there’s little nuances there, you might need to understand a little bit more of the technology in order to identify those, but some companies are doing better than others in terms of overcoming their obstacles.
And then third, and this is something I’ve really focused on a lot lately, is probability of success. And I think this is what drives a lot of these outsized gains within the drug development industry. So you know, drug developers don’t have fundamentals in terms of revenue, or, you know, earnings or cash flows. So the way that we model these are trying to predict their outcomes is with net present value calculations. And one of the biggest components of that is the probability of success. So we try to say what’s the what’s the likelihood that this asset will eventually get to market. So for an earlier stage asset, it’s very low, because that doesn’t make it through more development. And things get de-risked as they mature.
But Wall Street is often wrong about new therapeutic modalities that it doesn’t have any data on so it doesn’t know how to model them. And it can also be wrong about modalities that have had problems in the past, but then later have technical advances. So it doesn’t always value those in properly. So a great example would be Alnylam Pharmaceuticals (NASDAQ: $ALNY), one of the pioneers of RNAI, back in the early 2010s Alnylam Pharmaceuticals, couldn’t get a new paint color for the office approved and you know, but eventually it made a couple different technical advances and made new stabilization chemistry for the actual drug payload. And then it invented GalNAc, which is a sugar, attaches on to the payload, and gets the payload exactly to the liver safely, quickly, efficiently, very low doses only need dosing once every three months, or maybe even once a year for some of these. So now the company actually enjoys the highest probability of success of any therapeutic modality in the industry by a significant margin. From phase one onward, the company has a 60% probability of success that any of its drugs you’re gonna get approved, the industry average is less than 10%. So of success when Wall Street’s wrong about that it’s a good good characteristic to to look for in terms of potential multi baggers.
Simon Erickson 5:46
Those are great points, Maxx, like you said, you’re in biotech, you’re in the life sciences space, we’re not just trying to find rocket ships out there, looking for durable competitive advantages, pinpointing those pain points, and then probabilities of success. So say that you do find a 10 bagger, you find a company that goes on it’s now 10 times your original purchase, do you de-risk your portfolio knowing that this is life sciences and drug developers? Or do you let something like that ride for the long term?
Maxx Chatsko 6:14
I haven’t had this problem yet. But the closest company I’ve had to being a 10 bagger would be Repligen Corporation (NASDAQ: $RGEN) and it’s not actually a drug developer at all. So this has become a larger position in my portfolio than I originally intended. But I’ve just stopped adding to it and have built my portfolio kind of around that. So it’s one of my anchor positions in my portfolio. It’s a nice stable business, it’s going to grow along with the wider biological drug industry. So I’m pretty happy with that right now. But yeah, I think this would probably be a personal decision, right? If you felt uncomfortable with the position being some very large part of your portfolio, maybe you could trim back, I’m young enough, and maybe I take a little more risk than others, I guess. But I would be okay with something being more than, say, 25% of my portfolio or so. But that would be a personal decision, I would think.
Dan Kline 7:06
Yeah, thanks very much Maxx. It’s really interesting, especially in this space, when you see some companies shooting up or down, sometimes up 1,000% in a single day, like you mentioned on one of our recent shows, but it’s really better to find those durable advantages. Dana, let me bring it to you. Because I know that you follow a lot of healthcare and Life Sciences companies as well. Maxx had a great description of what he looks for in 10 baggers in life sciences, anything you’d like to add to that on your approach to finding 10 baggers?
Dana Abramovitz 7:35
Well, I was kind of trained more in venture capital, rather than publicly traded companies. So my background is more in startups. And in life sciences and healthcare and biotechnology, you don’t have a lot of the same things that you have with like a tech company that has been generating revenue for years and years. And so you have to look at things, alternative pieces of information besides just revenue and sales and all that. And so I look at the team and the leadership and the vision. Is it the right group of people that can deliver on the vision? Does the vision make sense? The product market fit, so, like, what is the product? What is the market? How large is the market? And where does it fit and play in that?
Just because if people like your product, if there’s a need for your product, then they’re generally gonna buy your product if it’s a good one, and so I kind of look at those types of things. What else do I look at? So the business model, how they’re making money, generating that revenue, and if it’s a subscription model, or if they’re just selling one thing at a time, and how that fits into all of that so that when they are generating revenue, and the total addressable market, like how big can they grow into and if they’re already at that capacity are there plans to expand into adjacent markets? So those are the types of things that I look at.
Simon Erickson 9:36
Sounds fantastic. It sounds like just like a venture capitalist would. You look for some very qualitative things? It’s not just P/E ratios. It’s not just a multiple of sales or anything like that. It’s what is the team that’s in place? What are they doing? Is this really a need in the marketplace? I can see that’s something where your expertise and healthcare would go a really long way.
Dana Abramovitz 9:54
Yeah, and I’ll look at that first and if those like meet my criteria, then I’ll look at the financials and make sure that everything makes sense and that lines up. And typically it does, right, and if the team is functioning the way it’s supposed to; meeting the vision and the company culture, and the product fits the market, and there is a large market, then the financials will follow.
Simon Erickson 10:22
Venture Capitalists always have exit strategies, Dana, they want to make sure that their funds have a nice return for their investors. You don’t have to play by those same rules as a public market investor, would you be comfortable letting a 10 bagger ride in your portfolio? Or do you like to take a little bit of risk off the table?
Dana Abramovitz 10:38
I haven’t experienced that yet. So right now I’m my largest investment. So totally different situation. It’s very personal. Me personally, I have a little bit less timeline than Maxx. And I tend to invest in things that I have a little bit more control over. So, again, if I trust the team, know the team, I may hold on to it a little bit longer, yeah.
Simon Erickson 11:15
Perfect. Thanks very much, Dana. Let me get a different perspective on this as well. Dan Kline talked about two people following the healthcare industry, you follow some very different parts of the market? What’s your approach to finding companies that could become 10 baggers out there?
Dan Kline 11:27
Yeah. So like, Maxx, I don’t really think about 10 baggers. But I do think, is this company growing and scaling? And what benefits is it going to get as it gets bigger. So if you look at a retailer, and maybe they’re operating 100 stores in five states. Well, that’s a certain supply chain. And then to go into other states, you need to do the hub and spoke approach, which might be warehouses it might be increasing relationship with vendors and trucking companies. As you start to hit that growth and have a more spread out location, you can see the path to where they’re going to go. So those early stage two and three hundred location companies tend to not be public. When they hit public, when they’re at that like six, seven, you know, even a thousand number, that’s when you start to see how long does it take them to get there, what efficiencies are they gaining?
Because if you’re just a random, huge company, if you’re Walmart (NYSE: $WMT), you can go to our Home Depot or whoever you can go to a supplier and say we’d like to buy from you, we will place an order for $10 million worth of your product, but you have to sell it to us for 2% cheaper than everybody else. And you have to lower the cost by 2% every year, that’s, that’s actually a pretty typical term for dealing with a company like that. So a smaller up and coming company isn’t going to have that kind of negotiating power. So as they get bigger, what are they gaining? Now, you’re not always going to know that it’s not like companies at their quarterly call, say we pay 2% less now for Lay’s potato chips than we did last year. But you are going to see their ability to sort of have some clout and know what that means you’re going to see, okay, when I worked in the family business, when I could bring in a full container of scaffolding, that gave me a lot of leverage over a smaller guy who had to split containers and pay more, or wouldn’t be able to bring them in as often.
So if you look at a company and say, Okay, wow, they have a most of the country reach, well, that’s going to make their digital distribution cheaper, because they might send you in Texas, Simon, something from one of their stores, an awful lot of retail chains are now doing a large percentage, if not all of their digital fulfillment from their stores. So the bigger you get, you become a bit of a snowball rolling down a hill. So if I could get in early, and I will point out that there is one early stage retail company that I’m a very big fan of. And I do think the growth could be quick. But even there, you can’t build retail stores that quickly. They’re very capital intensive. Take a company, I’m not an investor in and I’m not an investor, because I just I don’t like the shopping experience Dollar General (NYSE: $DG), Dollar General knows where it’s next 10,000 stores are gonna go. But they only open about 1000 a year. Some of that is well population shifts, and you don’t want to open all your stores at once and not be able to adjust. The other thing is there’s just finite resources, you can only spend so much money.
So yeah, as a company amps up like Dollar General, it’s gonna be a lot faster than say, you know, a target’s ability to roll out stores, because those are so gigantic, but I sort of look at what speed it’s gaining. Are they attracting good executives? Are they handling the problems well? Because every retailer is gonna have problems, they’re gonna have bad quarters, they’re going to have Wait a minute, women’s apparel used to be 82% of our business. Now, it’s only 62%. Is that because we got good elsewhere? Or is it because women don’t like us anymore? So how they handle those things, their ability to deal with things like management changes, maybe that’s not the CEO leaving, but if there have been 18 CFOs in 15 years, like there can be red flags. And that’s not necessarily a killer, that particular one that just might mean the CEO was kind of a jerk to work with. And that’s, you know, we’ve seen lots of jerks do well.
But those are the things that as a company gets bigger, you get more and more insight into how they actually operate, how they play in different markets, you know, there might be some retail chains, I’ll give one that’s not public. Wawa is a very popular, very high end call it convenience store gas station. And they until a few years ago did not operate in Florida. When they moved into Florida, they picked a couple of areas, they dotted in a couple of stores. And they wanted to make sure Floridians liked them the way people in other part of the countries did. And they did. And now they’re building something like 1500 WaWa’s in West Palm alone, now, that’s a joke that’s in Florida alone. But it’s a lot and it’s quick. And that is a company i’d absolutely own if they were public. So I don’t have a specific ‘Oh, I can see that company is going to be that big,’ because with retail, it’s going to be a slow burn. If I get a 10 bagger in 10 years, I’ll be pretty damn happy with that. That said, I have some 7Investing picks that have been in my portfolio for years, that are three and four baggers over the past couple of years. Because we have seen retail move into sort of a winners win losers lose with just a very few in the middle. You know, your Macy’s and your Kohl’s are still in the middle. But for the most part, we know who the winners are. And we know who the losers are.
It sounds like you’re looking for that controlled growth, Dan. You want to see it. It doesn’t happen overnight. But you have the right management in place, that kind of expanding, it’s working everything that you just mentioned. At some point, I’m sure that people are focusing less on the upfront store count, and maybe some other metrics over time. How do you think about retail as a company evolves, as the company gets bigger, it starts hitting 600-1000, stores, whatever it might be on your radar? Do you look at different metrics or different things so that they might eventually become a 10 bagger one day,
So there are some chains where same store growth matters. But there’s some where it don’t. Again Dollar General same store growth doesn’t matter, their stores max out at a certain number. They know what that number is, it might move a little if the merchandise changes. But for the most part, that’s not the metric. For me, I look a lot at the bottom line is the profit margin improvement. And I don’t necessarily mean what they retain, because I’m fine with investing some of that profit into your supply line, doing what companies do to be better 10 years from now, which we’ve seen with all the major retailers that are winning now have generally done that, but I want to look and see anecdotally, are they getting better at handling goods? are they spending less per item shipping, are they having an increased average revenue per user, which means their relationship is strong with with their customer.
So I think it’s actually the hidden metrics that matter more. And we’ve seen it during the pandemic. There are some companies out there where they have very loyal customers, but our work pattern, our commute pattern has changed. So maybe you had breakfast at Denny’s every morning, I’m picking a place no one would have breakfast every morning just to be as broad as possible. And all of a sudden, you’re not going to work. But when you go to Denny’s, you’re like I’m getting a 2, 4, 6, and an eight, they have a $2, $4, $6, $8 menu. I’m getting one of each because I haven’t been there. I know that’s a silly example. But it’s adding on the donut to your morning coffee. So you have to watch those patterns. In the pandemic, things change. So when we go to our favorite stores, instead of spending the three, four or $5, we’re spending most days maybe now we’re spending, you know, 8 to 10 because it’s more of an event.
So I watch for all that stuff I watch for the management explanations of changes. Obviously we saw a lot of like curbside pickup, even at places I would never expect curbside pickup just because for a while people didn’t want to go into stores. Well, how did they deal with that? Were they ready for it? How are retailers right now handling the fact that there’s no workers to hire like So? Are they are they paying more had they already invested in being a good place to work? It feels really smart right now for say like a Costco (NASDAQ: $COST)where people love to work. That ‘wow, they pay their workers all along, they retain them.’ So now in this post pandemic labor crisis, they don’t have that problem. And if they need to open a new store, they can go to their workers and say Hey, could you tell your friends who have crappier jobs than this that maybe they want to come work here there are some real strategic advantages and I would say the last god 15-16 months whatever it’s been with the pandemic have actually shown some of those things that ‘Oh, wait a minute, like planning and supply chain and long term investing in employees we;; that really pays off,’ and those are going to be the winners.
Simon Erickson 19:32
Makes a lot of sense. Those efficiencies are harder and harder as the supply chain gets larger and larger. Same personal perspective question I asked to Maxx and to Dana, are you comfortable holding on to a 10 bagger in retail? Is it getting stronger and stronger, you’d want to let that ride in your portfolio?
Dan Kline 19:46
So you and I had this discussion offline because it’s actually really different in retail. I am 100% comfortable holding it if I look at the company and say there is still room to to grow there. This has never happened. To me, and again, I’ll pick a non public company just to give an example, in theory, Dunkin Donuts has reached saturation in New England, it is possible they will hit saturation in the rest of the country, and might figure out what countries they work in and what they don’t. So is there a theoretical point where I look at that company, if they were still public and say, there’s not going to be any significant growth, they already do grocery store, they already sell breakfast cereal, they’ve tried other things, they’re never going to be able to move the needle with like pizza, or whatever it is, or Baskin Robbins, which they own. And you know what the growth story is played out. In theory that can happen, I will say it’s never happened. As far as I can tell. And good retailers find other ways to operate and take advantage of what they’re doing. There’s an awful lot that they sell at, say, Walmart or Home Depot, or Lowe’s that they didn’t sell 10 years ago. And that’s something that we’re seeing an explosion of, you know, we just saw that Best Buy is going to stock grills and other things. And Lowe’s and Home Depot both started selling gym equipment and more appliances and other things. Well, those be permanent? Not all of them. But in theory I would sell but I don’t actually think it will ever happen to me.
Great point’s Dan. Thanks very much and good point as well about the the sensitive nature of valuation in retail. Steve, let me bring it to you next, Dan mentioned that retail is very different than tech is I know that you are typically a technology investor. But how do you kind of think about going about finding 10 baggers?
Steve Symington 21:31
Well, I think maybe one of the most important points to my investing process is that I don’t generally buy stocks, if I don’t think they’re going to be a multi bagger, right? Every single stock I own, I think has that potential. And maybe the biggest thing, the biggest place that I start is finding large addressable markets that are either ripe for disruption, or that somebody is creating anew. So, you know, a lot of the companies that I look for that I think could be 10 baggers, which is again, as we pointed out, already kind of an arbitrary milestone, but it feels good, right? Saying I returned 10x my investment. But I’m looking for companies that are either disrupting existing markets, whether it’s insurance, or whether it’s cybersecurity, and actually, you could argue that cybersecurity is one of those Well, 10, 15, 20 years ago, barely existed, relative to its current potential anyway. And I’m looking for companies that will either create new markets to disrupt old ones or muscle into an existing market that is ripe for disruption.
The other thing I’m looking for is relatively small to medium (market)cap. If I’m looking at a lot of these multi baggers. That doesn’t mean that large cap companies like a trillion dollar company can’t be a multi bagger. But we can safely say that the chances for a $5 billion company, for example, to become a $50 billion company, assuming all else is equal, is going to be easier than a $1 trillion company to become a $10 trillion company, right that the economies of scale become much more difficult at that point. So, I did an interview with Chris Mayer, the author of 100 baggers last summer. And one of the things that he actually points out in his book 100 baggers, is the average revenue, I think of the 100 baggers that he studied, he studied 365 100 baggers over the past couple of decades, basically. And I think he said, the average revenue if memory serves for those companies that their starting point was about $399 million annually. And the average market cap was about 500 million. So you’re looking at a $500 million company becoming a $5 billion company in that sense, right?
So, when you’re looking at these, most of the biggest winners start relatively small. And we could arguably increase. You don’t have to look for a $500 million company today. We know we’ve had conversations with a co worker Anirban, about the fact that small cap isn’t exactly what we were thinking of, you know, looked back 10 years ago, a small cap company isn’t necessarily the $500 million company anymore, because we have to account for increasing market capitalizations overall. So I might, you know, expand that definition to include companies that are maybe in the $2 to $10 billion range if I’m looking for sort of the the small cap definition. So I think that’s kind of changed over time.
So again, finding large total addressable markets, relatively small, small to medium cap companies. And preferably, another thing is capable of generating recurring revenue streams. If we’re talking retail or restaurants or something, you’re talking about people coming back and buying more products from you. But in the software world, your recurring revenue is a big thing. Also that’s something that you can pull in easily and insurance as well. Tthey need customers need to be able to come back, you can’t just be a one and done sale kind of thing or something where someone buys from you every few years. I’m looking for monthly, or at the very least annual recurring revenue from the same customers, and I want them to be able to spend more. I also look for companies with optionality. Right? And this is sort of when you get these bonus revenue streams, companies that can expand, that’s kind of nice. Classic cases maybe insurance companies like Berkshire Hathaway right? They can acquire anybody they want to and tack it on to their businesses and have incremental revenue opportunities, or different lines of insurance or bolt on acquisitions.
But when we’re talking about other companies with optionality take Tesla (NASDAQ: $TSLA). Tesla’s another example right? That one’s already kind of been a multi bagger in its own right. Simply from its autonomous vehicle operations, but we also have kind of a nearly ignored energy side of things with their solar and energy. And also you have the car sale itself, but subscription revenue possibilities from the autonomous driving aspect that they’re looking at turning into kind of an additional purchase, but also Robotaxi fleet down the road. There’s a lot of ways for companies like Tesla, for example, to make money. So optionality is a fantastic thing to look at for companies to maybe disrupt multiple industries, based off of their core technology. So yeah, that’s that’s kind of how I approach it. Anyway, finding them in the first place.
Simon Erickson 26:36
Yeah. Great point, Steve. So you said look for a large total addressable market, tend to start a little bit smaller to allow that growth of 10x over time, and the recurring revenue is all great points. But tech is tough, right? tech is a tough, complex beast. I mean, even just using cybersecurity the example you said, we’ve seen companies like CrowdStrike (NASDAQ: $CRWD), go on, and succeed incredibly, where companies like FireEye, did not. On electric vehicles, Tesla has obviously done fantastic. Anyone who’s not named Tesla in electric vehicles has not done as well. How do you know when to hold on to your winners after a company becomes a 10 bagger? Do you automatically hold this? Do you trim it because tech moves fast? You think about this?
Steve Symington 27:17
I don’t mind hanging on to companies like this indefinitely. And that’s that’s kind of one of the things I think actually it’s easier than people think to find 10 baggers, the harder part is sticking with them and determining what to stick with. And I think a key part of that in one of our core values here at 7Investing is creating a thesis, right? knowing why you own what you own, finding certain metrics and milestones that you want to keep track of to determine if a company is on track and worth holding. And I don’t mind allowing these companies to become outsized chunks, my portfolio because in my experience, over the years, these 10 baggers, you know, and I’ve had a couple of 10 baggers a couple 30 baggers, and actually Nvidia, my very earliest shares come with some of those, which I’ve trimmed along the way, unfortunately, I think my earliest shares, and I bought her up, like 85x at this point.
But I don’t mind letting them run because I think additional multi baggers tend to pick up the slack. And so I don’t mind it, you know, if I see a company that’s grown on sudden it’s 25% of my portfolio, and I looked at it and I go, do I want to trim that? No, winners tend to keep on winning, in my experience, so I like to hang on to them and, and and let them just continue to stoke ridiculous returns, because I think that’s maybe the most fun part. And it might mean some more portfolio volatility, but I like buy and hold and there’s several companies that I’ve had in my portfolio for over a decade and, and are pretty big multi baggers and some retirement accounts. I don’t mind not paying taxes on those when I eventually, you know, so it’s kind of inconsequential to me. So, yeah, I like hanging on.
Dan Kline 29:05
All great points. Thanks very much to you. We’ve also seen that sometimes the best performing accounts are from people that forgot they even had their accounts they bought the right companies and just sat on them for decades, definitely aligns with what you were saying there. Just to add my perspective on this as well about finding 10 baggers, I tend to think of a 10 bagger as the market is missing something really big. The institutional investors that have $10 billion accounts or more and the algorithms that are following along with the stock market are missing something qualitative, as many of my fellow colleagues have said on this call. They’re missing something really important out there that’s not appearing in plain sight. And to me, that thing that they’re missing is disruptive innovation, which when I’m looking for 10 baggers, I’m looking for disruptive innovation to completely flip the script on existing markets.
Simon Erickson 29:54
And I think that this happens in order of magnitude changes. You don’t want to go out there and tear out your existing infrastructure and your existing process for something that’s going to incrementally improve your costs by 5%. But if it’s going to improve your cost by an order of 10x, where you’re spending $10 million on something before now, you could do it for $1 million, you might make a change for something like that. Or another big one is productivity, would you go out there and and change the way that everybody in your organization is doing something for a 5% productivity improvement? Maybe you would, but most companies probably wouldn’t. But if you get a 10x improvement in productivity of your workforce, you might be much more inclined to do something like this.
And so what I tend to look for is what are these order of magnitude changes that are happening out there at the market level? And then who are the companies that are actually really taking advantage of those? And we’ve seen this through history a couple of times, right? We’ve seen these 10x, order of magnitude improvements. If you looked at mainframes, you know that IBM was selling to these large institutions like NASA, back in the 60s, this transition to many computers that were then being able to be sold to corporations and enterprises. And DEC, the Digital Equipment Corporation, during the 1960s alone, increased its revenues by 100x by selling mini computers to this new customer group. We’re looking at ubiquity. Originally, ubiquity. Network. Steve, I know, you know, remember this company, they didn’t want to go after the large contracts that Cisco and their competitors were going after that had huge bids and huge sales forces. They wanted to develop more portable wireless broadband equipment for high speed internet transmission. And so they went after things like soccer stadiums and universities and libraries and had engineers speak directly with the engineers of their customers. And they grew their revenue tenfold during this last decade, as well and MongoDB, one that my colleague and Anirban Mahanti was talking about in the live stream show not long ago. This is a company that’s doing cloud based Database as a Service, that’s very different than how Oracle has done that. And it’s, its product Atlas is still continuing to grow at 70% per year, you see these 10x order of magnitude improvements all around. I think that we’re seeing a lot of them in healthcare right now. I think that we’re seeing a lot of them in quantum computing right now. One of those that we that I like to point out is the cost of a whole genome sequence was $1.5 million in 2008. That was only 13 years ago. I know Dana Abramovitz is smiling because she knows that I’m about to say that it can be done for less than $500. Today, depending on how you’re comfortable having your data shared back in the same timeframe back in 2008. In fact, most of yours up into 2010, NASA was charging an estimated $20,000 per kilogram to send a payload into outer space. And today’s SpaceX is Falcon Heavy rocket can send that same kilogram into orbit for less than 15 $100. Again, another order of magnitude improvement. Another one that you are keeping an eye on of certainly is cloud computing, as the cost of data storage and the cost of data process processing continue to get lower every single quarter enabling companies to learn more about their organizations. And so my approach to finding 10 baggers is to be patient to look for those large market order of magnitude changes that are taking place, and then find the companies that are either enabling those changes being the picks and shovels providers behind a large trend, or those who are actually using them for their larger organization to benefit from. Okay, Anirban Mahanti down in Sydney, Australia. And you’re going How is it that you go about finding 10 baggers for your portfolio?
Anirban Mahanti 33:33
Simon? Great question. I don’t have a specific formula, which is, which makes these things very interesting, because there’s no specific formula, I think, for finding 10 baggers. But usually what I do is I have a bunch of considerations that I considered, I wrote about this, essentially, which says, Well, you know, you want a 10 bagger, you typically need a large market opportunity. Right? Now, the large market opportunity is great, because, you know, it gives you an opportunity to grow your revenue. But if you’re not innovative, then you’re, you know, lunch is gonna be eaten by somebody else. So that’s, you know, that’s the second consideration. You want an innovative company in a large market opportunity. Then, you know, I look for things like fanatical following, right? If you have an article following what I say is, it gives you the opportunity to innovate, it gives you the opportunity to actually do things that you would otherwise not be able to. And I think that’s very important, because that’s how, especially technology which is where most of these 10 bags, I find most of these 10 baggers, you need to continually innovate, and I guess disrupt yourself. The other thing that I think is really important is a mission. You know, the emissions matter because it is how you hire the talent. And I read somewhere that you know, there’s always a sub shortage of, say, software engineers but there’s there’s an even bigger shortage of things like machine learning engineers, and machine learning scientists. So when you put when you think about building great things for the future, you need great people, those come in short supply. So you can only attract the best by having an opportunity that really gets them an opportunity to excel. And that’s really important. You know, they also, you know, people, great engineers also think about scale and impact their work is going to have. The other thing I look for is sort of the quality of the team, the quality of the people. And this is not necessarily about one person, it’s not about being Steve Jobs, or Elon Musk. It’s about having that structure and people around you. And this is hard to do. But I’ll give an illustrative example, you know, and in my article, I use Apple as an example, I think examples in you can say, well, that’s, you know, 2020 hindsight, hindsight is 2020. But I think the advantage here is that you can actually relate to it but you think, you know, people think of Tesla as an example, Elon Musk, but there’s a lot there are a lot of people like Andres Karpati, for example, who leads the vision and AI team, you know, that guy is a genius, right? And you need to just realize that you know, what he delivers and brings last construction, you know, we also often tend to think that 10 baggers means we need to start small, I don’t think that’s necessarily true. There’s a lot of 10 baggers that have actually happened from $50 billion size in 100 billion dollar size, or even $200 billion size. Don’t let sighs I don’t let size get in the way I try to think of size relative to opportunity. So this is something like six things that I think about. What is interesting about these six things is that none of them are quantitative. As such, they’re very qualitative, which means they’re not going to easily show up in screens. Right? This is where studying and sort of, you know, practicing and looking and learning about businesses come into play.
Simon Erickson 36:55
That’s a great point Anirban, I might ask you the same question that I asked Steve, who also likes to look for tech companies for 10 bagger potential out there, which is tech changes quickly, you know, there’s a lot going on out there, especially in the software space. If you do get lucky enough to find a company that’s a 10 bagger, or has increased significantly in value, it’s a large portion of your portfolio. Do you hold on to that for a long, long periods of time? Do you de risk your portfolio? How do you think about holding on to 10 baggers once they get in the portfolio?
Anirban Mahanti 37:27
That’s a brilliant question. So I’ll prefix with something we say a lot at sell investing, which is investing in such personal things. So you know, this is what I do, you know, might not apply to other people, I generally do not train. And the reason I do not trim is a large portion of my holdings are in taxable accounts. So the moment I trim and have to pay taxes, and also have to pay the highest rate of tax that, you know, it’s not in a retirement account, just the advantage of lower rate, lower taxation. So I tend not to trend because what I try to think about is, if I sell now, to make up, I actually need to earn more than what I would you know, given that I’m going to pay taxes on that, right. So you have to think of the after tax effect, which, you know, you should never use tax as a bogey. But I do. In this case, that’s what I do trim if a position because too large and unsustainable in you know, it makes doesn’t help me sleep at night. But I’m also, you know, I do this day in day out, I’m very tolerant, with volatility, I could run with a position as large as 25 30%. And I would just add my new funds to somewhere else to basically compensate for that. But I wouldn’t necessarily say that it’s something everyone should do, but I generally don’t trim. The other thing I keep in mind is, and this is important, I think it’s sometimes you pick a 10 bagger, or you think it’s a 10 bagger doesn’t do anything. But there are many companies, which haven’t done anything for years. So Disney is a great example. Right? I mean, it didn’t do anything for years. And then it shot off when Disney Plus, you know, I think Activision Blizzard or something that doesn’t many companies, which you know, have been flat for a number of years. So I think patience is really important. And you know, and if a large position doubles, right, that has an even larger impact on your portfolio, yes, the risk has increased as well. But in a life losing doubling doesn’t have to turn back, just doubling had a pretty significant impact on your portfolio on a return on a weighted return basis. So that’s how I think about it.
Simon Erickson 39:24
That’s fantastic. So we’re doing a couple of things in urban setting the look for a large investable market with an innovator at the front, find a fanatical following, especially for tech companies with a strong mission statement, visionary leadership that oftentimes is geniuses out there and don’t trim those positions. Let those positions ride if not just for tax reasons, because it can also provide outsized returns. Thanks very much, and you’ve been great perspective. Thank you, Anirban. So there you go. It goes five perspectives today from how our team thinks about finding 10 baggers, companies that go up 900% and are eventually worth 10 times your original investor. That you made into the master Scott describe the tech the tech platforms and the probabilities of success for drugmakers. Dana says that she thinks about life sciences and healthcare is kind of like a venture capitalist might not so much quantitative all the time, but also qualitative factors. Dan mentioned that in retail, it’s a lot about controlled growth, and improving the profit margins and the strengthening buyer power of organizations as they get larger and expand over time, Steve that says that he’s looking for multi baggers from a large total addressable market that starts small and has recurring revenues. And myself, I added that I tend to look for order of magnitude opportunities for disruptive innovation. So thanks for tuning. I think this is a really, really interesting topic. We could talk many, many more times about finding 10 baggers, and how that can have a huge impact on your investment portfolio over time. Thank you to all of my lead advisors for contributing to this month’s team podcast and thank you for tuning in. We’re here to empower you to invest in your future. We are 7investing.
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...
Anirban and Matthew were joined by Alex Morris, creator of the TSOH Investment Research Service, to look at seven former market darlings that have taken severe dives from...
On episode 5 of No Limit, Krzysztof won’t let politics stand in the way of a good discussion - among many other topics!