Project $1M has been on a tear over the last year or so. I have particularly benefited from the upsurge in stock prices of high growth businesses. This has resulted in significant profits on many individual positions. Projects $1Ms paper gains are over $125k in just over 2 years. This is largely due to the underlying quality of the holdings and the raging bull market.
The question has posed by some commenters as to what I will do with these paper profits. The answer to that question is that I don’t plan to take profits anytime soon. Now some may argue that such a decision is fool hearty given where markets are today. Some of you may be thinking, Integrator you are a fool, ego is driving your decision! Markets are at all-time highs, bubble levels even!
It’s true that most positions in Project $1M are trading at or above fair value. They also have had a run of continuous appreciation which makes it more likely that there will be some level of correction in some or all of these positions in the near term. So with that said why am I not looking to take profits?
Firstly, if you believe that interest-rate’s may be subdued for an extended period of time, there is an argument to suggest that equity markets and valuations are still reasonable (as opposed to cheap). I’d say that this is particularly the case with businesses that are in high growth mode. The upshot of the argument that interest-rate‘s are likely to remain low for an extended period of time is that the substitution of capital for labor and innovation in artificial intelligence will likely keep inflationary pressures subdued and interest-rate lower for an extended period of time.
I am an investor in high-quality. Rule Number One of investing in my book is to not lose your investment capital. I found the best way to do that is to invest in high-quality names. These names are businesses that have high returns on invested capital, strong cash flow generation, pricing power and owner driven management. As a result, my investment landscape is actually fairly limited. There are probably a maximum of 20 to 30 growth names that I would consider investment in at any point in time.
The problem with other alternative high-quality growth names is that they are also equally elevated in terms of price. Pockets of the market that seem to be reasonably valued or attractively priced are so for very good reasons. The reason that in store brick-and-mortar retailers such as Macy’s (M) and JCPenney (JCP) are trading at historical lows is that they are suffering from real structural problems and there are significant risk factors associated with their longer-term prospects.
Growth stories in the retail space such as Ulta (NASDAQ:ULTA) are likely worth a look, though you wonder if their business will suffer from the same impacts. Then, there are turnaround stories like Chipotle (CMG) that also look cheap considering historical pricing, but turnarounds are turnarounds for a reason. In Chipotle's case, it’s hard to change customer perceptions and to successfully do so takes significant time and investment.
I prefer businesses that are riding structural tailwinds and that will benefit from underlying trends in the economy. Most of the businesses in Project $1M are the beneficiaries of such structural market forces. They have natural tailwinds that are propelling their businesses forward. Most of the businesses in Project $1M either benefit from network effects or operate in markets where a 'winner take all' condition dominates. This is seen in businesses like Amazon (AMZN) and Ali Baba (BABA) where a critical mass of users tends to lead to a critical mass of merchants which essentially makes competitors irrelevant.
It’s also in effect with businesses like Facebook (FB) where users tend to gravitate to a social media platform that has the majority of their friends again providing strong network efforts and making alternatives irrelevant. This phenomenon also exists for businesses like Visa (V) and MasterCard (MA) where users of credit card instruments want to have access to networks that have the greatest number of merchants who accept those payment instruments. Network effects and winner take all markets provide natural inbuilt growth drivers for continued market penetration as the businesses continue to grow. It’s literally the business equivalent of the rich get richer.
Thus while pricing for many of my core positions may look richly valued at this point, the intrinsic value of these positions will only continue to grow over time as they take additional advantage of network effects and progressively gobble up greater market share. When you layer on top of this the secular market drivers for things like e-commerce, online advertising, electronic payments and the growth tailwinds in markets like China and Latin America there is a reasonable expectation that these businesses will be worth significantly more in a decade than what they are today.
That’s not to say that these positions are not without risk. However the natural market forces propelling these businesses help to significantly reduce their business risk. I’m comfortable with what I hold. Irrespective of pricing and valuations, there is a lot to be said for just being comfortable in your underlying positions. Believe it or not, Project $1M is truly a SWAN portfolio for me. That’s because the underlying positions in Project $1M continue to get stronger, and their businesses improve with time.
While stock prices will oscillate, market timing is a generally a fools errand. I have discovered as a result of personal experience just how difficult it is to accurately time the market. Selling out on a high-quality business with the intention of buying back in can lead you to a situation where you remain on the sidelines as the business continues to grow higher and higher in value. One remains in wait-and-see mode waiting for an opportunity to buy back in.
My experience with MasterCard has taught me that businesses with strong growth drivers have the consistent ability of surprising to the upside with respect to market expectation. They tend to march on, relentlessly forward. Remaining invested in such businesses where the investment thesis has not changed has generally proven to be a profitable experience for me. Selling out with the intention of buying back in later can leave you permanently on the sidelines while the upswing in growth continues.
The reality is that the strong growth that we have experienced in stock prices will come to an end at some point and there will be a correction. There is also a likelihood that this correction will be material and my portfolio value will see a significant decline.
However I think the odds are very good that many of the positions in my portfolio will be significantly higher in share price in a decade. As I have determined that I have an inherent lack of ability to try to time stock market corrections, I am content to let my businesses continue to grow and compound.
Disclosure: I am/we are long MA, V, FB, MA, AMZN, BABA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.