Back in Pod #14, Albert and I reviewed Chris Mayer’s excellent book, 100 Baggers. We’ve always known that investing in the right companies can deliver life-changing returns, but the book helped us understand the benefit of catching companies early in their growth story to maximise those gains.
As an investment strategy, this is hard, and it’s also very risky. The majority of very small companies do not grow into very big companies. Most fall down along the way – they misunderstand their market, they fail to execute effectively, or they’re simply unlucky – they might have the right product, but perhaps it’s just the wrong timing and the world isn’t ready to buy what they’re selling.
Acknowledging that difficulty, for several months now Albert and I have been debating the merits of a new Telescope Investing initiative to craft a portfolio consisting of early-stage companies that we believe might have significant growth potential in the long-term.
This would be a very different initiative to the model portfolio, which is designed to outperform the market in the year of its inception. The majority of these ‘hypergrowth’ investments are more likely to stagnate or to fail than to deliver 10x or more returns. However, you only need to be right one time out of ten for the maths to make sense.
Investing in hypergrowth stocks is a high-risk high-return strategy, but we believe it could make sense as part of a balanced portfolio. On this week’s Pod we were delighted to announce the Telescope Investing hypergrowth portfolio, setting out our criteria for identifying those extreme growth companies, and turning the Telescope Investing lenses on a first potential investment, CuriosityStream.
Reflecting the high-risk nature of these investments, Albert and I have decided to limit our initial investment in each hypergrowth stock to 0.5% of our real-money portfolios. This will allow us to place lots of small bets, and to see how the growth stories play out.
Unlike our model portfolio picks and other core portfolio holdings, it’s just not going to be possible to track hypergrowth companies in any detail over a sustained period, as we’re expecting to make many of these smaller investments. The strategy instead is to use the telescope lenses to review companies, and if they add-up, to make the investment and then forget about it for a few years – as Chris might say, to put the company in our coffee can.
We’ll build the hypergrowth portfolio over a long period of time, these are all long-term investments that are unlikely to pay-off in their first few years. We’ll find a suitable way of tracking the portfolio as it comes together, and will post updates from time to time on the overall position.
We’ve identified some filters to help us find companies with hypergrowth potential. By design, these criteria are not especially stringent, as we recognise that the majority of the companies we want to invest in are likely to be early-stage, and usually pre-earnings.
- Under $3B market cap – we’re looking for early-stage companies that the market hasn’t cottoned onto yet
- >10% QoQ growth for last 3 quarters – we’re looking for companies that have high growth in either customer numbers or revenues (ideally both), but failing that might also consider companies with rapidly accelerating growth over consecutive quarters
- Current revenue <10% of TAM – we’re looking for companies that don’t have significant penetration in their market with lots of room to grow. Ideally, they’re operating in an expanding market
- >10% insider ownership – we want companies that have high levels of insider ownership, ensuring that leadership’s interests are aligned with shareholders
We expect these criteria to evolve as we develop our hypergrowth strategy further and look at more companies, but this feels like a pretty decent filter to start with.
We’ll use tools like Fintwit and other services to identify investment opportunities, and of course, we’d welcome suggestions from the Telescope Investing community. If you have an investment idea you’d like us to take a look at, please drop us a line at feedback@telescopeinvesting.com with your thoughts on why this might have hypergrowth potential.
Albert and I are really looking forward to getting our teeth into this topic over the next few months, do please join our growing community of subscribers if you’d like to be the first to hear about our new hypergrowth opportunities as they’re identified!
