Investing Theory: Just Keep Buying Great Companies at Good Prices
Just keep buying great companies at a good price. It sounds so simple, but I think this investing philosophy can beat the market. Let’s dive in and see if we can’t make some money here.
Great Companies
Just keep buying great companies sounds so easy until you try to formulaically identify what great companies look like. I don’t believe a formula or system exists that can consistently tell you what stocks to buy or even which companies are great. But I do believe many great companies have some indicators in common. Past results are the best indicator of great companies. To me, I’d rather wait for great results than take on the extra risk of predicting what great companies are. Waiting on entering great companies sacrifices early returns for significantly reduced risk.
Here is what I use to predict which companies are great:
- Optionality, past and present
- Consistent experimentation
- Continued iteration
- Good karma
- Pricing power
- Mission driven
- Reinvestment
- Vision for the future
- Strong financials (low debt, strong unit economics, higher revenue growth, etc…)
- Historical results (MOST IMPORTANT)
Yet, despite all of these items, you also need to have a gut feeling. Determining a great company can be surprisingly difficult, but to be a stock picker, you need to trust your gut. If you can’t, just buy index funds. It’s a nice easy way to invest, just not the way for me.
Good Price
The highest ROI activity is analyzing your past mistakes and deconstructing the common root structures behind those mistakes. Prior to last year, I never owned Amazon, Facebook, Apple, Google, etc… They have all turned out to be amazing investments, but I missed on them. My thought process at the time was two fold:
- I was too late
- They were too expensive
I was wrong on both. Not only was I not late, but I would have been early. Plus, these stocks weren’t expensive, they were a bargain. Worse yet, I had done this time and time again with numerous different stocks. The same mistake was made dozens of times across a long time horizon. Eventually a self reckoning came when an internal contradiction finally came to the surface. Amazon was my favorite company, my favorite stock and an overall great investment… that I didn’t own. I quickly came to understand that one of my mental models was broken. I had a flaw in my thinking that was undermining my returns.
Determining what a good price is can be hard. Discounted cash flows can be a tool, but as with any models, small assumptions can make a world of difference. How long and how fast you grow can profoundly change a model. The easiest answer to all of this is DCA (just keep buying). Great companies are rarely overpriced for long periods of time.
But DCA isn’t the answer for all. I’ll use simple valuation metrics such as price to sales or price to earnings/free cash flow. If using price to sales, I try to keep in mind the long term margin % I think the company can hit. Add some napkin math to factor in growth rates, then you should have an idea of whether the valuation is reasonable. Time has taught me to be more open to higher valued companies, IF I’m convinced they are a great business. BUT this doesn’t mean buy at any cost. Tesla looks like a great business, but the back of the napkin math doesn’t get close. I see tons of great businesses, so don’t worry on missing one.
I Want to Get Rich, But I’d Rather Not Go Broke
Everyone’s objectives as an investor are different. Personally, my objective is to make as much money as possible while minimizing risk. The key part of that statement is minimizing risk. If I were solely chasing maximum returns, I’d put all of my money into crypto. I believe long term crypto will have the highest returns. I’ve already 10x’d my investment on crypto. I believe another 10x is possible, but no doubt crypto is terribly risky. I don’t want to go broke, but I want to get rich.
Ultimately, investing is risk management. When and what you enter determines most of your risk. I’m less worried on diversifying across asset classes as much as I am concerned owning multiple great businesses.
Great Companies at a Good Price
I believe a key element of an investing philosophy is it’s scalability. Over time, I will change but I hope my investment philosophy grows with me. I hope “just keep buying” never changes, but “great companies at a good price” keeps evolving. Defining a great business is difficult and predicting them is 10x harder. And valuing businesses is a never ending quest. The philosophy of “great companies at a good price” can be constantly expanded and refined.
I believe I can beat the market by this investment philosophy, but also mitigate a significant amount of risk. Beating the market with minimal risk sounds like a dream. My dream.
