June 6, 2024

Focus On The Inevitable

Authored by Rahul Setty

When it comes to the stock market, individual investors and funds alike tend to play hero ball. Searching desperately for the next great trade to fuel their portfolios, short-termism takes a hold; what started as an obvious long opportunity with competitive moats, reasonable valuation, and long tail for growth turns into an analysis-paralysis battle of side-stepping a phantom drawdown. 

Is the company’s stock done performing at a high level? Is the growth runway over, with competitive advantage deteriorating? 

And not to forget the dreaded: Is it too late to buy? Did I miss it?

Everyone has done this before, allowing fear, uncertainty, and doubt creep into their minds and drive suboptimal decisions and outcomes. The truth is, when one can pair a secular trend with competitive moats and drive strong customer satisfaction, it’s rarely too late to make significant money. 

Peter Lynch, 13-year powerhouse fund manager of Fidelity’s Magellan Fund in the 1970s & 80s, spoke to the notion of noticing a secular trend through the lens of Wal-Mart in public markets in an interview with Frontline: 

“You could have bought Wal-Mart ten years after it went public -- Wal-Mart went public in 1970. You could have bought it ten years later and made 30 times your money. You could have said, "I'm very cautious. I'm very careful. I'm gonna wait. I want to make sure this company -- they're just in Arkansas and I want to watch 'em go to other states." So you watch, five years later the stock's up about four-fold. You say, "I'm still not sure of this company. They have a great balance sheet, great record." I'm going to wait another -- wait another five years, it goes up another four-fold. It's now up twenty-fold. You still haven't invested. You say, "Now I think it's time to invest in Wal-Mart." You still could have made 30 times your money because ten years after Wal-Mart went public they were only in 15 percent of the United States. They hadn't saturated that 15 percent and they were very low cost. They were in small towns. You could say to yourself, "Why can't they go to 17? Why can't they go to 19? Why can't they go to 21? I'll get on the computer. Why can't they go to 28?" And that's all they did. They just replicated their formula. That doesn't take a lot of courage. That's homework.

Ironically, one would have been hard-pressed to find a company or stock evoking more visceral hatred throughout the 1960s, 70s, & 80s as Wal-Mart. Yet, it is precisely the investor that followed closely Wal-Mart’s customer value proposition, unit economics, sales, and store coverage within the US would reap the greatest reward, though later investors waiting for the company to be de-risked still made life-changing returns.

When investing for the long term – the only timeline on which business happens – it is crucial to select investments not only with idiosyncratic value drivers, but those that will continue to thrive in a growing landscape for their products and services. Far easier than identifying the re-rate of the melting ice cube is depositing capital into an internal compounding machine, driven by a quality business with tailwinds and aided by time. 

What are the inevitabilities that you see playing out over the next decade, and how are you poised to take advantage of them as an investor?

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