Markets occasionally misprice persistent growth opportunities, and that is the essence of great growth investing.
Apple and Amazon are examples of the power of persistent growth. Shares of AAPL and AMZN are up 10x since 2012. The S&P 500 is up a little over 3x. If markets were truly efficient at discounting the future, AAPL and AMZN shouldn’t have outperformed the market by this much. The market didn’t appreciate the persistence of smartphones, e-commerce, and the cloud, creating opportunities for investors who did.
Persistent growth is rare and uncomfortable. Few companies sustain 20%+ annual growth for a decade plus. Only 51 companies have done it since 2010 off a revenue base of $100 million. Because persistent growth is so rare, market participants are hesitant to expect it in their estimation of present value. Instead, markets often discount linearly declining growth, a rational expectation for common companies, but persistent growth companies are far from common.
To successfully invest in persistent growth, we must profit from where the world is going.
Embedded in that slogan are three core ideas: Where the world is going, profit, and patience.
To successfully invest in persistent growth, we must profit from where the world is going.
Where the World Is Going
Persistent growth depends on the paradox of change and consistency. Change sparks a new opportunity; consistency enables a change to take hold.
The smartphone was a groundbreaking technological innovation that was built on the consistent human desire for information, connection, and communication. E-commerce was an efficient change in how we shop that addressed the consistent human need for goods. Cloud was an extension of scaled infrastructure that addressed the consistent desire for efficiency and lower cost.
A persistent growth investor must have a view on where the world is going — what will change, what won’t change, and how the changing and unchanging will collide with one another to create persistence.
Profit
It’s not enough to have a view of where the world is going. The investor’s job is to profit from that insight.
Profiting from persistent growth investments comes from buying stocks for less than they are worth in the future. A persistent growth investor must own stocks when the future is not yet obvious, and the market will agree with him later. Sometimes this means paying seemingly high valuations for the best persistent growth stocks, but these high valuations are proven illusory over time. The best persistent growth companies generate persistently great cash flows that accumulate to higher present values.
Patience
The defining characteristic of persistent growth is that it sustains at higher rates for longer than the market expects. By its nature, persistent growth demands investor patience. Persistent growth stocks can be worth owning for years, even decades.
Over time, persistent growth stocks will ebb and flow with the moods of the market. Optimism and doubt will come and go. Interest rates will vary. A successful persistent growth investor tests his thesis against these challenges but doesn’t let the market confuse him about the continued prospects of persistence.
Patience paired with persistence yields superior performance.
Deepwater specializes in persistent growth investing. That’s what makes us different.