TAM Spotters Tip #1 - Buy and Hold… The Golden Ticket!

Welcome to our first Total Addressable Market (TAM) Spotters publication.?Being a “first edition,” we wanted to open big, to share one of the most important investing tips you will ever hear.?It doesn’t matter your age, because it took two of the authors decades to practice this tip faithfully.?Ready…

Buy and hold a basket of great stocks!?Period!?Done!

As the legendary investor Warren Buffet once said, “if you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”

A company’s short-term stock price is impacted by numerous random or transitory noises, such as investor sentiment, breaking news, near-term macroeconomic developments, comments from various market “pundits,” to name a few. These factors can have a sudden impact on the price of a stock in the short-term, but their impact typically does not change the long-term trajectory of a great stock. However, they do make investing in the short-term (some call it speculating) an extremely difficult task, as the combined impact from these ever-changing noises on any stock is generally impossible to forecast on a consistent basis.?

Another important fact to bear in mind is that a good stock may not always be profitable in the early years after going public.?Some companies forgo profits to grow their market share and capture as much of the total addressable market as possible.?This time lag from their IPO to turning profitable also makes investing in the short-term challenging.

Investing with a long-term horizon helps to eliminate these transitory noises and simplifies an investor’s decision-making process by allowing the investor to stay focused on the fundamentals that attracted them to the investment in the first place.

If you believe in a stock, buy it for the long term and forget about the daily stock market gyrations.?As long as the company stays true to why you originally invested in the company, don’t worry about the daily dips.?A matter of fact, dips are the best time to buy more shares.

What Defines a “Great” Stock

What is a great stock you ask??A great stock:

• Is innovative or disruptive to existing business models
• Is a market maker and focused on building an infrastructure or ecosystem for it to thrive in the long-term
• Is significantly growing revenue in the early years
• Is very profitable in the later years as the company matures
• Is adaptable in the later years with the ability to create new streams of revenue
• Has eccentric and passionate founders in the early years
• Has great leaders in the later years
• Has a total addressable market that presents tremendous customer growth potential
• Has a product or services that makes it hard for competitors to compete or replicate
• Has a brand that resonates with customers over other brands offering similar services or products (e.g., Apple, Nike, Disney)
• Makes sense to you as an investor (i.e., you understand their business and are passionate about it)

If you can’t passionately explain why you have invested in a stock and what the company does in 20 seconds, you shouldn’t own the stock.

Defining a Basket

Of course, we can’t pick stocks like Netflix, Apple and Microsoft in their early years every time.?That is why it is important to pick a basket of great stocks.?As legendary investor Ron Baron once said, “I loved buying these businesses that could grow tremendously from what they were now.?Finding smaller companies people ignored, but then what would happen is that out of the ten things you bought, two or three would be amazing successes.”

There is a lot of literature on what an investor should consider a diversified portfolio.?The more stocks you own, the more diversified your portfolio is.?The mores stocks you own, the more time consuming it can be to manage your portfolio.?As you spread out your cash, you significantly reduce the chance of losing all of your money.?However, spreading out your cash can limit the upside gains of your portfolio if you do find the next Netflix or Tesla. ?As a rule of thumb, a portfolio of 25 or more equal-weighted stocks would essentially eliminate most of the idiosyncratic risks or rewards associated with individual stocks.

Finally, diversification depends on where you are in your investing journey.?A younger investor with only a few thousand dollars and no other investment assets may want to spread their money across five to ten stocks.?A more mature investor may want to invest in 20 – 30 stocks, outside of the mutual funds in their defined contribution plans at work (i.e., 401(k), 403(b), 457, etc.)[1] .

[KB] I currently target holding ~20 stocks.?My top five positions represent about 65% of my portfolio, largely thanks to the incredible rally in a few of my stocks which I plan to hold for another decade.?My top five stocks are (ROKU, APG, PLTR, MKTX, CHWY).

[MH] When it comes to my direct stock holdings outside 401(k) retirement account, I own a more concentrated basket of 9 stocks and/or options exposure. My top equity positions are in electric vehicle (EV), electric vertical takeoff and landing (eVTOL) and cryptocurrency related sectors for longer term focus. ?I am also opportunistically exposed to equities of these sectors through short term options (a few weeks), median term options (a few months) and long-term options (1 or 2 years).

[NB] I currently hold 9 stocks.?Since I started investing when I was seventeen, I have not sold a single stock.?My first stock purchase was Roku (huge winner).?My second stock purchase was OXY (definitely not a huge winner).?My top five positions are (ROKU, DIS, ENLC, OTLY, MKTX).?Dunkin Donuts would have been second on my list, but the stock doubled before it was acquired by Inspire Brands at the end of 2020 and I was forced to sell.????

Netflix Illustration

In order to illustrate our point, we pulled the historical price activity of Netflix.?Netflix went public on May 23, 2002, at a split adjusted price of $1.156 (i.e., Netflix split 2-for-1 in 2004 and 7-for-1 in 2015).?If you had bought on the market open back in 2002, and held until today, you would be up 46,037%.?Stated another way, if you had bought 1000 shares at a cost of $1,156, your holdings would be worth a staggering $533,540 today!?

Let’s just say you took a little time to believe in Netflix’s vision and waited almost three years before investing. If you had waited until May 2, 2005 to purchase 1,000 shares at $1.647, your $1,647 would have increased 32,561%.

Why is buy and hold important here??Since the company went public, an investor would have experienced three years where Netflix’s stock priced dropped by over 60% from January 1st of the year.?Two of these drops were in the first two years of going public.?The third was in 2011, when the stock was up less than 800% (i.e., if you had jumped ship then, you would have missed the remainder of the run up to a 46,000%+ gain).

There were only three years that January 1st was the lowest price of the year.?In 16 out of 19 years, you would have dropped below the January 1st price at some point during the year.?In 10 of 19 years you would have experienced a 20% or greater decline during the year.?If you had sold on any of these declines, you would have missed out on gains of almost 550% (low of 2016) to approximately 143,000% (low of 2002), depending on when you panicked.?Stated another way, you would have been scared out of Netflix gains of 20,000% or greater in six out of the first seven years.

The lessons learned from Netflix: Buy and hold a great stock, ignore the daily gyrations, ignore the annual gyrations, and focus on the long-term TAM of the stock.

Closing Thoughts

The key to building generational wealth is simple.?Buy and hold a basket of great stocks.

Closing tips from the authors:

[KB Tip] Regardless of your age, I would recommend listening to Barry Ritholtz’s Masters in Business podcast.?Two of his podcasts specifically address buy and hold. The first podcast, Ron Baron on Investing in Tesla and SpaceX, was published on January 29, 2020. In it, Mr. Barron talks about the importance of buy and hold, targeting small companies, partnering with smart people, and finding business owners that you can trust and believe in.?The second podcast, Martin Franklin on Building Businesses, was published on July 17, 2020.?This podcast was so inspirational, Sir Martin Franklin’s buy and hold approach to investing, commitment to building great businesses, and track record of success inspired me to invest in APi Group Corporation (APG) which has become my second largest position.??

[MH Tip] To establish an understanding of what technologies, industries, and sectors will grow and drive developments in the world we live in for decades to come (or what industries may be disrupted in the meantime), we need to look into the mega trends of our age, such as technology shifts, demographic changes, urbanization, globalization (or deglobalization), climate and resources pressure, etc. ?ARK Invest, a deep research-driven investment management firm focused on innovation and led by legendary investor Cathie Wood, has done a good job of calling out these trends. Ark Invest has been very generous and transparent in sharing their research and investment ideas. You can find further information on their website https://ark-invest.com/ and at its YouTube channel https://www.youtube.com/c/Arkinvest2015/videos .

[NB Tip] Find products you truly love and invest in their stock.?I bought Dunkin Donuts because of the passion people have for their products, and the room they had for expansion across the country.?I bought OTLY after their IPO because I have loved their products for years. I actually asked my dad about buying their stock in early 2019, but they were still private company at the time.?Lastly, I own Roku because of my dad… I call that one default investing via family excitement and pressure.?It has worked out though since I am up almost 350% ??.

COMING UP NEXT:

Our next article will share some resources to learn about investing.

AUTHORS:

Kevin Bingham is a credentialed actuary who has worked as a consultant, an insurance industry professional and a venture capital investor.?Mitch He is a credentialed investment professional who has worked as an investment banker, an institutional insurance asset management professional and a venture capital investor.?Nikki Bingham is a college student and stock investor sharing ways to earn those “tendies” and the perspective of the younger generation.?

NOTE:

This article is provided for information purposes only.?It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. It is important for each investor to perform their own due diligence before making any investment decisions.

All opinions expressed in this article are the authors personal opinions and are not endorsed by, nor do they represent the opinions of any previous or current employers.

[1] When it comes to investment allocation and planning, an investor should make decisions on a total asset basis. This means take all your assets such as cash, stocks/bonds, retirement accounts, investment insurance policies, real estate properties, other valuable collections, etc. into consideration. This would be a lengthy topic for discussion in a separate publication. This article, however, focuses the reader’s attention on the stock investment aspect.