A Value Investor’s Guide to Growth Stock Investing
Alliance Meeting 2018
The four mistakes value investors make:
Investing in low-quality companies that look cheap.
Failing to buy high-quality companies because they didn’t look cheap.
Buying high-quality businesses and selling them too early.
Failing to understand and appreciate powerful technologies and trends.
How a company performs over time is more important than current valuation – Tilson had this backward at the beginning of his career.
The four mistakes that growth investors make:
Overestimating future growth and projecting past growth into the future.
Paying too high a price for a stock.
Falling in love with great companies and failing to see when they should.
Getting suckered into “story stocks.”
Big Lesson #1: Stocks tend to follow earnings.
High valuations haven’t mattered for certain growth stocks.
You want to find companies with accelerating revenue growth.
Beware of value traps – companies whose earnings decline and decline. It is almost impossible to make money on a stock, however cheap, that just goes down and down. Ex. Bed, Bath, and Beyond getting killed by Amazon.
Big Lesson #2: Look for inflection points.
Combine value and growth approaches and buy a great growth stock at a value price – that’s the dream.
Don’t wait for a stock market correction to do this – 90% of the time you should ignore the market and zero in on specific companies.
How to identify inflection points:
Happens when sentiment is bad but you believe good things are going to happen.
This means you have a variant perception – an insight or opinion that differs from the mainstream.
To have a correct variant perception, you have to have some sort of unique data, thought, or analysis.
You’re most likely to find inflection points in a niche where you have deep knowledge and relationships.
Big Lesson #3: Let your winners run – as long as the story remains intact.
Three most dangerous words in investing: “I missed it.”
Even if the stock has gone up considerably, you haven’t missed it if the story is still intact.
You must sell if the story falls apart.
Stock recommendation #1: Alphabet (Google)
Greatest business on earth.
The growth rate is still accelerating despite its size.
Stock recommendation #2: Facebook
Second-greatest business on earth.
Only one third the size of Google, so there’s still a lot of room to grow.
Margins are nearly double Google’s.
We’re at an inflection point since Facebook has seen drawdowns – buy Facebook.
Stock recommendation #3: Howard Hughes
Real estate company that owns five major properties.
Been flat for 4.5 years – we’re now at an earnings inflection point.
Bitcoin is a scam – you will get blown up.
Pot stocks are in a major bubble that is due for an implosion.
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