To The Moon

Where do you look for investment ideas?

Or better yet, where do you NOT look for investment ideas?

This is something I think a lot about and have developed some loose frameworks over the years.

There are no hard and fast rules when it comes to investing, and I’ve broken every rule I talk about below, but I think it’s important to understand your goals as an investor and how you’re going to find the stocks that allow you to meet those goals.

If I were looking for a steady 8% rate of return, industrials and energy may be a pond to fish in.

But I’m looking for 10x stocks over the next 10 years.

I want companies (and founders) that take big swings and get big outcomes.

Those opportunities aren’t found just anywhere, and eliminating huge swaths of the market helps refine where I do look for ideas. Hopefully, this article, in combination with the article here, gives an idea of where I look for ideas.

Before I get to where I like to fish, let’s look at where I avoid.

Why I (Generally) Avoid Europe

Europe is a great place to visit.

But I wouldn’t want to start a business there.

That may sound controversial, but we’re investors trying to stack the deck in our favor. If Europe isn’t a growing economy that’s great for business, it’s not a great place for investors.

Europe is healthier and has a better work/life balance, but that’s not what drives GDP growth and value to shareholders.

It’s hard to explain how culture plays into any business’s success or failure, but it’s critical. If people are working all hours of the day and night to drive success, you can win. If you clock out at 3:00 and someone else works all night, you’re going to lose.

Again, I’m not making a judgment on how healthy this is; I’m making a judgment on where I want to put my investment dollars. France, for example, averages less than 30 hours of work per week, as shown in the data below!

The working hours thing is interesting because I have seen this in person. In 2005, I was buying manufacturing equipment from Italy for 3M, and we had to race to get ahead of their month-long holiday. We missed, and communication went dark for weeks. That would never happen in the U.S., China, South Korea, Mexico, etc.

More recently, I’ve had a few European startups reach out about advertising with me on YouTube. I’ll respond, and days go by without a response. Days! Urgency just isn’t the way Europeans operate (I know, I’m generalizing, but that’s the point).

There are a myriad of reasons Europe doesn’t have many companies in the global top 500 most valuable companies, and in startups, it’s even less relevant. What’s telling is that even the defense of Europe’s startup culture is littered with companies that are 3rd or 4th best in their own industries, or worse.

This dynamic may change. This clip from an interview with Peiter Levels on Cheeky Pint paints an optimistic outlook while acknowledging how bad things have gotten.

But for now, in public markets, I’m generally staying out of Europe. Odds just aren’t in my favor.

Why I (Generally) Avoid Energy/Industrials/Real Estate/Banks

There are big segments of the market the can provide solid returns, but will likely never have asymmetric potential.

High capital expenditures with non-asymmetric revenue potential isn’t an area I generally swim.

There are exceptions. I liked GM’s potential with Cruise and I own shares of Joby Aviation. But in general, I avoid some of the lower growth and higher capex portions of the market.

Where Do I Look For Opportunity?

I’ve painted a negative picture of the market, but there are plenty of areas I do get excited by.

Technology Stocks

Technology is a big space, but I like to look for companies that can use technology to their advantage to disrupt incumbents.

I’m also looking for areas that haven’t been taken over by tech already.

Bringing Scalable Technology-Native Solutions to Established Industries

Companies like Hims & Hers are going into an industry where the status quo is 1:1 doctors’ visits and bringing a tech focus to the market. So far, that’s meant scaling a doctor’s capability to prescribe to patients, but I think the future will be collecting data and providing diagnosis and insights at a scale unfathomable to incumbents.

You could say the same thing about Robinhood and SoFi, which are digital native companies in a banking/brokerage world filled with branches and people in suits.

Even Zillow fits this theme in housing.

The U.S. (and Innovation Hubs Specifically)

I mainly focus on U.S. companies.

The fact of the matter is, the Top 7 most valuable companies in the world and 17 of the Top 20 are U.S. companies.

Odds are, the next 10x stock will come from the U.S.

That doesn’t mean there aren’t opportunities elsewhere. It simply means the Asymmetric Portfolio will skew to U.S. because that’s where the fish are…and that’s where I’m going to fish.

Even within the U.S., there are areas of focus, though. Silicon Valley’s culture of risk-taking and innovation can’t be denied, so many big opportunities come from there. Minneapolis is a healthcare hub, New York is a finance hub, and Miami is a startup hotspot today. There’s value in being in the highest value ecosystem when creating something disruptive.

Depending on the company, the region they start in can be important.

Financials Matter

Finally, the financials of a company do matter, and I try to skew toward companies that are profitable with good balance sheets.

Odds are, good financials are going to compound, and I’m stacking the deck in my favor.

In October, I put out these stats on the Asymmetric Portfolio.

• 12 of 23 stocks have a net cash balance

• 7 of 23 stocks have a P/E multiple under 30.4x, the multiple of the S&P 500

• 16 of 23 stocks have a P/S multiple under 10x

• 14 of 23 stocks have a 10% revenue growth rate or higher

  • 7 of 23 stocks are growing over 20% Y/Y

  • 5 of 23 stocks are growing over 30% Y/Y

• 18 of 23 stocks are generating positive free cash flow

• 109.8% is the average return of a stock in the portfolio for at least 1 year

It may surprise you that I have a relatively conservative portfolio when you look at the percentage of companies with no debt or positive free cash flow, but that’s how I find winners!

Where You Fish Is Important

Just because I don’t generally buy European stocks doesn’t mean all European stocks are bad.

The same goes for China or industrials.

What I’m trying to do is increase my odds of success in any investment.

This acknowledges the uncertainty involved in investing, and if I stack the deck in my favor in as many ways as possible, it increases the odds of success for the portfolio overall.

Use the market’s advantages to your advantage as much as possible!

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