Today I am going to share three secrets to successful investing. We share our portfolio of 20-25 stock picks in our monthly newsletter since March 2017 and these stocks returned 191.6% cumulatively vs. 100.4% for the S&P 500 ETF (SPY) over the last 4.5 years.
Our stock picks returned 26.8% on an annualized basis, vs. 16.7% for the S&P 500 ETF. So, how did we manage to beat the market by more than 10 percentage points per year?
We aren’t traders. Most of the times I have no idea which stocks are going to outperform the next day, week, or month.
We are long-term investors. We try to identify stocks that are going to outperform the market over the next one to 10 years.
Long-term investing isn’t competitive at all. Short-term investors cause a lot of distortions in stock prices which create a lot of long-term investment opportunities. I call these long-term opportunities because I don’t know when exactly the market will correct these pricing errors. We covered our shorts and loaded up on beaten down stocks at the end of March 2020 when the S&P 500 Index was trading at 2450. That’s the #1 secret to our success.
On top of that short-term investors usually don’t appreciate the long-term growth prospects of some stocks and these long-term compounders are underpriced. This is the #2 secret to our success. In our monthly newsletter, we try to identify short-term dislocations as well as underpriced long-term compounders to generate high returns.
Stock market investors usually undervalue companies that have hidden assets. Companies that own stakes in other public and private companies, or that invest heavily in business units that aren’t yet profitable (but growing very fast) are among these stocks. This is the #3 secret to our investing success.
Recently I came across a high growth stock that has tons of hidden assets and is trading at an extremely cheap valuation.
That’s why I believe this is one of the best stocks to buy for the next 10 years.
This stock is growing its revenues at a 34% annual rate. At this rate its revenues will grow by 332% in 5 years and 1766% in 10 years. It sounds unbelievable but that’s the power of compounding. Ten years ago Google was growing at similar rates, yet you could have bought Google at a PE ratio of 12. Patient Google investors were rewarded handsomely.
Our stock is growing at a 34% annual rate, yet its PE ratio is less than 20. It is cheaper than the average stock in the S&P 500 Index and, believe me, the average S&P 500 stock isn’t growing at a 34% annual rate.
This stock also owns equity stakes in several public and private companies. The earnings of these public and private companies aren’t reflected in the earnings of our company. These are growth companies that don’t pay any dividends, so most potential investors aren’t aware of the true value of these hidden assets.
Our stock also invests heavily in high growth business units and these investments actually show up as losses in our company’s income statements. Think of Amazon’s early investments in AWS cloud service. Amazon was initially losing billions because of these investments and its stock looked extremely expensive. However, AWS generates nearly $15 billion in revenue per quarter for Amazon today.
Our stock is trading at a PE ratio of less than 20 despite the heavy investments it is making. Otherwise its price-earnings ratio would have been much lower.
We rarely come across stocks that are cheap on the surface, compounding revenues at a very high rate, and have tons of hidden assets and investments.
I talked about this stock in detail in the last issue of our monthly newsletter.
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