Here’s why the best investing opportunities are not obvious 😊

When we look back at the multi-baggers where they began, they were not obvious. We felt (very) sceptical. They do not have a high chance to succeed. Often, they are closer to the brink of surviving. They are the outliers. And now that they are successful and multi-baggers, can they still multi-bag? Are we able to find the next multi-baggers?

You can’t generalise the market to find (exceptional) winners

If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.
Abraham Maslow

Many like to generalise the market situations:

Tech is overvalued. Many tech companies are losing money.
China companies are not investable.
Electric vehicles and artificial intelligence are hot!
In a rising interest rate environment, REITs and stocks will do badly.
The Singapore market is boring; you cannot make money there.

Generalisation is a shortcut to thinking. It assumes that one or a few key variables determine the fate of ALL companies in the sector and country. Every company behaves and performs similarly and has the same results. There is no bell curve of performance throughout the sector and country.

Whenever you find yourself on the side of the majority, it is time to pause and reflect.
Mark Twain

Yes, when bad situations happen, companies can be affected (initially). However, over time, there is a distribution — some will be okay, some do badly and a rare few are thriving. The latter is what we need to find and invest in — it takes time to study and discover them (but not by generalising).

My favourite quote:

Bad companies are destroyed by crises; good companies survive them; great companies are improved by them.
Andy Grove

The multibaggers are outliers.

The best companies and CEOs are the exception, not the rule. They are outliers who defy possibilities and the odds to achieve great things. No one (including themselves) can be sure that the companies will succeed.

They are the disruptors.
Examples: Amazon, Tesla, Nvidia, Google, BYD, Pinduoduo.
The winners are the few high-quality companies that make the impossible possible. Their growth seems unaffected by macro events as shown below. Some created products with their own tailwinds.

Due to market sentiment and scepticism, their share prices may show very different charts from their financial performances. We have to decide which to believe: (a) the share price actions — that the market knows or (b) their financial performance. Over time, as they keep growing and prove the market wrong, the share price will rise to reflect their value.

“Dying, hopeless” companies

These companies have done badly and the market believes that they have a low chance of surviving and turning around. Many have lost interest in them. Many have cut their losses while others just hold on to these stocks. They are slowly forgotten and sunk into oblivion. The share prices have crashed and sunk.

Many companies are barely surviving and some go into liquidation. Some persist and keep toiling to turn around. A few may go on to do well; proving the market wrong. Being perceived as hopeless, they become cheap as everyone dumps them and are heavily shorted. These stocks can rally hard quickly with short covering and market sentiment turning positive as they keep improving and showing signs of turning around. Examples: Tesla, NVIDIA, Netflix and Amazon where the situations were quite dire and the market thought they may not make it.

It takes effort to identify and study them and be contrarian to have the courage and confidence to buy. First, we also have to be open-minded to take a look. We can be wrong. We have to manage our risk rewards to ensure that the rewards are worthy.

The future often looks bad; the past looks better.

The future often looks worse than the past.

All past declines look like an opportunity, all future declines look like a risk.
Morgan Housel

Optimism often sounds like a sales pitch, pessimism sounds like someone trying to help you.
Morgan Housel

A great article: The Seduction of Pessimism by Morgan Housel

Pessimistic/negativity bias. When we look back, we realise the past year was not that bad as expected. And this bias will keep repeating. Aren’t the past and the future on the same continuum of time?

Facts:
1. There will always be people who believe the future will not be good.
2. There will always be problems and issues in this world.

The future looks bleak as experts and gurus prognosticate that the worst is yet to come. There will be countries and sectors that are uninvestable. WW3 is coming! The US will collapse with the debt situation. China will invade Taiwan!

There is a possibility but when will they happen? Do we want to keep being worried and concerned all the time? As time passes, it may not be as bad as we thought. The worst may not happen. The fear keeps lurking. What happened are missed opportunities. Companies continue to operate. We continue to live our lives.

I have often worried about things that never happened. And I can tell you this from experience, it is never worth it.
Mark Twain

Do take the opportunity to observe when there is some nasty news causing the markets to drop:

How do the share prices of high-quality companies or others react in the first week, 3 months later, 6 months later and 1 year later?
How are their businesses compared to that of the competitors initially and over the longer period?

High-quality companies may have an initial dump in their share price with the market and a drop in their financial performance. Gradually, they will diverge and back on an uptrend again. While there are nasty news, we often forget them weeks or months later.

Think different. Zoom out.

Be curious, open-minded with visionary thinking

Change is a constant. Technology evolves. Companies rise and fall. There will be crises and challenges. Our habits, expectations and needs evolve and change too. What was good previously is obsolete and gone — examples: General Electric, Kodak, Motorola and Nokia. The same may happen to the market leaders today.

Being investors, we have to be curious, more open-minded with visionary thinking to see the potential and possibilities in companies and their products. We have to look beyond the popular consensus. These companies are often ‘misfits” or “underdogs”.

Strong opinion loosely held.

Great returns need great effort.

The water is always not clear.
We need to study and examine to know whether they are potential, opportunities or threats. We need to dig to find the gems; they don’t just appear.

Efforts are required period; a repeated theme of this post.

Luck is what happens when preparation meets opportunity.
Seneca

The best investments are often those that are unheard of (hidden gems), counterintuitive, controversial, contrarian or unpopular. They require time to research and analysis to find. Investors who are open-minded to question assumptions and popular beliefs, willing to do their due diligence and take a calculated risk are more likely to find these best investments. We need to be independent thinkers and comfortable being alone. They have to be humble and honest to themselves. There will be mistakes and these are learning opportunities to improve.

Investing is possible; it requires effort.

People use price as their main indicator of value. The underlying assumption is that the market knows — it may not be true, especially in the short term.

Conviction is formed when you did the work others didn’t do and you aren’t intimidated by the critics that can’t see what you see.
Ian Cassel

Primary research: Search wide and dive deep.
Do not confine to the few stocks we know and those frequently mentioned in media. We are limiting ourselves.

Essentially the person who turns over the most rocks. is going to be the person who wins (big). The world is the oyster. If we are confident with our stock-picking skills and are hardworking enough, find the stocks ourselves. Slowly, we will find ourselves early with the stocks that most have not heard of (or vaguely) and enjoy more upside potential (if right). There will be mistakes but slowly and surely, the efforts will be rewarded over time.

In 1993, Warren Buffett sat down for an interview with Supermoney author Adam Smith, and the conversation began like this:

Smith: “If a younger Warren Buffett were coming into the investment field today, what areas would you tell him to point himself in?”
Buffett: “Well, if he were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time.”
Smith: “But there’s 27,000 public companies.”
Buffett: “Well, start with the A’s.”

Second-order thinking.
By doing research and analysis, we develop second-order thinking that helps us anticipate the potential long-term consequences of our investment decisions; and how they may play out over the long term beyond the immediate and short-term effects. It can also help us avoid the trap of short-term thinking which is usually sentiment and emotion-driven and can lead to impulsive decisions and missed opportunities. By taking a longer-term view and considering the potential risks and benefits of an investment over time, we can make more informed decisions and achieve better results.

The best keep learning and keep improving their skills to find good investments.
The efforts put in may not correlate with the number of investments made. Hence, often, investing looks easy but it comes with lots of effort to find great investments and be confident to hold.

Few are willing to put in the effort to study and do the necessary due diligence.
Most people follow others for investing advice. They look for friends and gurus in mainstream and social media for ideas. What happens is lots of herd following, echo chambers and misinformation spiral. They want the profits and not the hard work. They look for shortcuts.

If you consider yourself a stock picker – at some point in your life you are going to have to do the work others aren’t willing to do and bet big on something you believe in … or be fine reading about other people that do.
Ian Cassel

Consistent great returns do not happen by chance. Continuous learning and studying to hone our investing craft are needed.

Compound our learning, compound our return.

It takes TIME to know whether we are right.

It takes time to know whether we are right with our investing thesis. It takes time for the companies to prove themselves; to execute their plans to achieve their goals and to show their resiliency and potential. The market will take time to discover the gems; for the catalysts and tailwinds to help the companies to grow.

It takes time. We have to keep validating our thesis. At times, it may be just blind faith. Hence, buying these companies earlier and having the conviction can be seen as crazy.

At times, we are wrong. They do not play out as we expected them to do. We can either give them more time or we start to trim and sell for better investment opportunities. It is part of our investing learning process to learn, observe, improve and pivot. Over time, we hope that the winners (multi-baggers) can over-compensate for the losses.

Often, it does not look smart. It can be difficult to understand why people buy certain stocks at certain prices which they think are low and attractive. We will only know much later. We need to build our conviction and faith ourselves.

Running into the fire. It is not natural and comfortable.

The bigger the crash, the greater the fear and the more uncomfortable we are. It is natural to be uncomfortable doing the opposite of what is happening to the broader market. Are we right? We do not know until much later and we will not be right all the time. Meanwhile, we can feel stupid and unsettled. We feel scorned when we share what we think is a good investing opportunity. The feeling is not good. Some will turn schadenfreude waiting for our picks to turn wrong.

It takes courage, time and effort to develop an investing approach to look for buys when the market is bearish (i.e. counterintuitive and contrarian). It is not natural and comfortable. We have to push ourselves to be independent, to analyse, to find opportunities and to buy and hold. It takes time to improve our win rate and get used to such a contrarian and counterintuitive approach. This is what buying low is about.

High-quality companies will keep growing.

The best continues to be the best.
Many are surprised how some large high-quality companies such as Apple, Amazon, Microsoft, Visa and Costco can keep growing for a long time despite their size. Many are thinking: They are so big now; it would be more difficult to keep getting 10% average annual growth. They will become more bureaucratic and less productive, making growth difficult.

They have a great leadership team. Their moats remain intact and improving. Their total addressable market keeps expanding due to market trends and the optionalities created with their new products, services and acquisitions. Their competitive advantages and competencies make them not easily dislodged.

For example, Amazon started being an online bookstore. It expanded to sell online in numerous product categories to become a mega online retailer. They disrupted themselves with e-books and expanded into other digital services such as online music and videos. They created a huge market opportunity with Amazon Web Services. They develop their fulfilment services instead of relying on courier service providers. The same applies to other long-term growth companies.

These need not be famous brands like Coca-Cola, Starbucks, Visa, Microsoft, Alphabet or Apple. It can be well-managed companies operating in niche sectors such as Copart and Constellation Software.

Be open-minded and keep validating their growth with our investing thesis.

Obvious bets that people avoid
Many do not like to invest in these large well-known high-quality companies believing that the upside is not good (and boring to some). It is not necessarily true. The peak-to-trough of each market cycle can be wide in percentage terms (as much as 50%, 100% or more) with good long-term potential.

When the market is bearish, high-quality companies with strong track records at low prices are often a good and safer bet.

High-quality companies at beaten-down prices.

Can the winners keep on winning? Will this time be different?
During market plunges, all stocks drop in varying percentages including high-quality companies. It is a good time to look at our watchlist of high-quality companies whose businesses are less affected by the operating environment and have fallen to a more attractive valuation. Also, there may be “hiccups” due to internal problems, mistakes or not meeting earnings expectations and these high-quality companies may also fall.

Looking back, despite several crashes and pull-backs, many high-quality companies like Apple, Visa, Mastercard and Costco have been able to bounce back and go higher. Unfortunately, many are consumed by fear and concerns at that moment.

Is their long-term potential be badly affected that they deserve a much lower valuation? We need to do our homework, study the market history, have the conviction that the market may be wrong and buy at such opportunities.

What gives you opportunities is other people doing dumb things.
Warren Buffett

Fortune favours the prepared.

Look beyond our usual watchlist

Stay open-minded and explore.
Most people focus and stay focused on their usual familiar stocks and sectors within their home country and familiar sectors. Many are reluctant to move out of their comfort zone beyond what is familiar and known to them. Many have their beliefs and generalisations that may not be accurate Examples: Small caps and cyclical stocks are risky. They have their views on US and China stocks.

Circumstances may change and their investments may not yield the same good returns as before or be negatively affected. There may be better opportunities if we bother to look and study.

“When the facts change, I change my mind – what do you do, sir?”
John Maynard Keynes

Insanity is doing the same thing over and over and expecting different results.
Albert Einstein

Step out and expand our horizon. Keep learning and pivot.
Once we are confident of our investing approach and have been able to yield good returns, we should slowly expand our investing universe to find high-quality stocks and not be limited by the existing market we have been focusing on.

Potential multi-baggers

We do not know where the next multi-baggers will come from.
People want to find the next Apple, Amazon, Costco and Visa to have a huge multi-bagger. These can be niches and segments where new technologies or a different way of doing business that is cheaper, better and faster. Unfortunately, they are not obvious. It is analogous to trying to identify a prodigy early and predict their success later in life. No one can know for sure which young high potential, high-growth companies will become successful large companies. It is not about their range of excellent products and services now. Rather, it is their visionary and resilient leadership to overcome setbacks and courage to invest and introduce new products and services to serve the markets and win against the competition.

Disruptions go through the S-curve. It is slowly then suddenly. Unless we have been studying and monitoring the investing ideas at the beginning, these investing ideas are not obvious.

Many like to speculate on which will be the mega winners. Some do have the potential but their share prices will be volatile as they can rally to a very high valuation and crash with any signs of weaknesses. Others are riding megatrends of the sector (electric vehicles, artificial intelligence). Will their growth be able to justify the share price and expectations? Most companies will not succeed. The 80-20 Rule (aka Pareto Principle) or the Power Law will prevail.

Finding and discovering multi-baggers is not easy but it is possible. Very few will make it. It takes skills, experience and lots of time and effort to find the hidden gems in the heap of stocks early and keep validating them to have the conviction to keep holding them tight over the long term to achieve multi-bagger status. It will be an emotional ride and a valuable learning journey as well.

Their track record is short; not battle-tested. They are ambitious; expanding aggressively with growth as a higher priority and profitability as a lower priority.
They are quite unknown and unheard of. They can be controversial and contrary to popular and preconceived notions. The products and business practices can be non-conformist. Their missions are often difficult and impossible; a small David versus a gigantic Goliath. These can also be failing companies having a plausible promising turnaround. They are not obvious. We keep wondering with each situation: Will they make it through?
- How can the iPhone compete and succeed against the incumbents like Nokia and Samsung? It is expensive with high margins. Competitors and new entrants would easily be priced low to grab the market share.
- How can Tesla take on traditional car makers? Tesla would have run out of capital before it succeeds.
- Can Bitcoin be an alternative to fiat money and traditional banking systems?
- Can Uber take on taxis? Can Airbnb take on hotels and serviced apartments?
- Can Google search be disrupted?

Never say never.

The best companies defy what most people think. They have the resiliency to overcome external and internal challenges, keep pivoting and thrive.

Develop an investing strategy and keep honing your investing craft.
Here is my (always) work-in-progress investing approach: Multi-baggers with growth companies

Other related articles:
A section on the not-so-obvious, high-quality investments that I have studied: Deep dives
All Revenue is Not Created Equal: The Keys to the 10X Revenue Club, Bill Gurley, May 24, 2011

The above-mentioned quote, observed in social and political movements, is very applicable to investing. James Stephen Donaldson (aka Mr Beast) said something similar in a different way as shown below.

A new investment idea will be initially ignored by the wider investing community, but as it gains more attention, it may be met with scepticism and ridicule. The investment idea may face more opposition from those who are invested in the status quo. We do not like to be the only one investing in the stock that everyone disagrees with. However, when the share price keeps going up, it becomes widely accepted and profitable. By then, the stock may become overvalued as it is now pricing with higher expectations. It is a reminder that successful investing often requires due diligence and independent thinking. We may go against the market and endure scepticism or opposition in the short term to achieve long-term success. The psychology of the market cycle depicted below is an accurate reflection of the behaviour of the majority of market participants. It applies to the market, a sector or individual stock.

Hence, the best investments are not obvious.

We need to spend time and effort learning and keep improving the craft to develop our edge and find the right investments.
Keep learning and researching for good investments to have the confidence to buy when opportunities arise.
To find the gems in the heap of stocks, it takes effort.
The investments we find can be counterintuitive, controversial, contrarian and unpopular. Many may view these opportunities as: Huh? Are you sure?
This gives us an advantage over the market and a good upside when our thesis is true.
With our confident understanding and evaluation, the seemingly risky opportunities and investments may not be that risky after all. The market may have gotten them wrong.
It is good to read the corporate history of great companies and the biographies of founders to have a more holistic appreciation of the various stages of the companies and the challenges they overcame.
Take a longer view and zoom out. Let the short-term volatility play out and the long-term potential materialises.

We need a growth mindset — be open-minded and curious rather than having preconceived notions filled with biases (i.e. a fixed mindset).

Look harder, look deeper and zoom out.