Austin explains why established leaders that execute well tend to be "expensive" for a reason.
November 22, 2020
Over the last several years, the biggest improvement I’ve made to my investing process is to invest in companies that are established leaders with a history of executing well. When I started investing, I often looked for companies that were “cheap” in beaten-down industries like the energy sector and airlines. More often than not, those companies kept being “cheap” while the “expensive” stocks kept getting more “expensive”.
My major takeaway was that companies that have become market leaders generally did so because they had great management with great vision. That vision manifested into innovative products that came to be market leaders. Once those companies found traction in their markets and began seeing success, more and more talented people wanted to work there. Those talented people continued the tradition of improving current products and developing even better new products. Then the cycle repeats itself.
This is how Amazon, Apple, Microsoft, and Google have grown to be over $1 trillion market capitalization companies. They started as risky “bold idea,” found product-market fit, continued to attract talented people, and the positives continued to compound.
This isn’t to say that I invest in every “hot stock” with a rising share price. I heavily scrutinize the underlying businesses and look for companies with great management, great products, and great fundamentals in markets that will be larger in the future. I also don’t immediately jump ship and sell a company after a bad quarter or a few months of dropping share price. Great businesses hit turbulence. When this happens, I keep an eye out to ensure they haven’t lost what made them great in the first place and as long as the business continues to execute, I’ll tend to leave my investments alone.
In summary, I want to own great companies and like to buy more shares as I see management continue to execute well. This usually means my second and third purchases are at a higher share price than my first purchase. This seems counterintuitive, but it has been the formula for the greatest investments in my portfolio.
Buy, then add higher as the business continues performing!
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