How I made 6.4x returns since 2023 (MUST READ)
The following is a complete culmination of my entire findings since I started my investing journey. This will perhaps be my best comprehensive article that I have ever put out in terms of quality, simply because the information in here took me years to fully understand.
Over the years, I have studied the greatest investors of all time and analyzed what made them so great.. what did their famous winning trades have in common? How were they able to consistently beat the market? After several years of learning, reading books, and experimenting with different strategies through trial-and-error, I believe I have found the best investing strategy to date.. I don’t really have a specific “investing process” but rather I try to find asymmetry wherever I can, and by doing so, I have been able to attain a CAGR of 77.36% since 2023 and realize 6.4x returns.. yes, I have made mistakes when I first started, but I analyzed what I did wrong each time and promised to never make the same mistakes again.
So what is my strategy?
From most of my stock pitches, you would think I’m a “deep value, buy below NAV and hold” type of guy, but that’s not the entire story.. not at all.
I’m a huge fan of the lollapalooza effect from Charlie Munger’s book, “Poor Charlie’s Almanac.” A lollapalooza effect is essentially where the thesis behind a trade is made up of a bunch small, different catalysts that when combined together, form very attractive pitches which usually end up as great investments or trades.
Hold on to this definition, as it’s very important.
My goal as an investor is to find a lollapalooza effect wherever I can and use it to my advantage. That is, to maximize the tailwinds (catalysts pushing the trade in the right direction) and minimize the headwinds (the risk that could screw me over).. This is the game of investing in a nutshell. Buying great companies below book value is a tailwind. A great company with a durable moat achieving consistently high returns on capital is a tailwind. Riding a bull market is a tailwind. The point is to catch as many of these tailwinds as you can simultaneously and minimize your exposure to risk (the potential of turning out wrong) as much as you can.
Now you might be thinking, “well what are the different forms of tailwinds that I need to be focusing on? What makes a great investment?”
This differs a bit between industries, but ultimately it’s not that hard to understand. You’re looking for complete no-brainers. This is your job as a researcher/investor, to find these types of opportunities. You are not here to try and force-find opportunity in areas where there just isn’t any.. You should be able to recognize a great opportunity when you see one, where it’s like a 2x4 brick hitting you in the head, telling you to buy immediately.
So for example in my “deep-value” stock pitches, my stocks tend to trade below NAV, trade at a low EV/FCF multiple, have forecasted growth in sales + eps, along with a bunch of other different smaller catalysts that also work in my favor. I like these types of “deep value” plays because the lollapalooza effect is just so extreme, that these trades are almost guaranteed to turn out well just based on pure math.. The only way a “deep value” investment can fail and leave you with a terrible return is if you buy declining businesses with deteriorating fundamentals.. This is why current “deep value” stocks such as ADOBE are crashing despite the market being at all time highs.. Why? Because Adobe is fundamentally deteriorating from the rise of AI, hence why the term “value trap” exists.. So if you’re buying “deep-value”, you want to buy companies that are still growing/improving fundamentally, or if in commodities, you want to buy right before the upcoming bull cycle where the underlying asset is about to start appreciating in value..
But seeking “deep-value” isn’t the only area of investing where you can find lollapalooza effects.. For example, contrary to the opinions of most “value investors” you can buy great companies at expensive-looking prices yet still achieve great returns.. This is what Munger taught Buffett.. the only caveat to this is that the “great company”does indeed have to be a great company.
But what makes a great company, a great company??
In the tech industry for example, the holy grail of investing is the following:
“Technology creates the moat. Moat creates pricing power. Pricing power drives margins. Margins justify higher multiples. Multiple expansion drives stock appreciation. This is how you get life-changing returns.. not by simply buying the cheapest “deep value” P/E stocks, but by identifying the companies building strong competitive positions before the market truly recognizes them.”
This can also be dumbed down and simplified to the following:
Companies that are consistently growing sales, growing eps, growing margins..
this is what the market ultimately cares about when valuing a stock.. and if a stock IS exemplifying these characteristics, then it is, in fact, showing signs of pricing power and therefore a potential moat as mentioned from the tech example..
It sounds so simple but this is extremely, extremely, extremely important.. A stock even displaying just 2/3 of those variables will trade at a significantly higher premium than competitors. This doesn’t mean that it’s a bad investment, but you just have to make sure that you’re buying at the RIGHT TIME!! And by “buying at the right time,” I don’t necessarily mean to to wait for the stock’s P/E ratio to fall before it can qualified as “investable...” This is a major misconception in the investing world!
Let me explain:
My absolute favorite investing books are “100 baggers” by Chris Mayer and “Trade like a stock market wizard” by Mark Minervini.. These books are absolute MUST-READS btw.. Now even though one of the books is centered around long-term investing while the other is based on relatively shorter-term trading, both massively emphasize that you must be buying fast-growing companies, which just so happens to usually be during their prime-growth years, AKA during their stage 2 company cycle (stage 1 is establishing identity / early stage, stage 2 is fast growth, stage 3 is consolidation, stage 4 is maturation.. then cycle repeats if the company doesn’t go bankrupt after stage 4..)
It was noted in both books that for pretty much every single huge run up in stock price that a company has had, the run up was almost entirely during the company’s stage 2 growth phase where they were growing their at their fastest.. so by definition, the best time to buy stocks is during their prime-growth years AKA during their stage 2 company cycle. This makes sense because the market rewards growth a looott. In general, the higher the growth and the more consistent it is, the more violent the stock runs up.
A classic example is if we look at Monster Beverages’ run, which became a 100x within 9.5 years..
How did this happen ??
“If you have a brand that catches on, grows, and hits scale, the costs start to slowly unwind.” - MONSTER CEO
this is a perfect example of a lollapalooza effect where their products were so iconic and in demand that multiple tailwinds occurred at once, which resulted in all 3 of the variables to occur: sales, eps, and margins ALL EXPLODED.
Net sales grew over 6x from 2002 - 2006
EPS exploded by 0.04 from 2002 to 0.99 in 2006
Gross margins grew from 34.8% in 2002 to 52.3% in 2006
Keep in mind that as the stock appreciated 100x in less than 10 years, the stock’s average p/e during those same 10 years was 28.9.. not exactly “value material.” The same trend is seen with almost every other multi bagger whom often had loftier P/E ratios..
The message to take away from this, is that if the company is set to KEEP GROWING SALES, EPS, AND/OR MARGINS, THE STOCK PRICE WILL FOLLOW THE FUNDAMENTALS AND KEEP GOING UP. This is why I have no problem buying stocks at their all time high’s if forecasted sales + earnings are expected to keep climbing. Also, depending on how a stock is already valued, growth in sales + eps + margins can certainly justify a multiple re-rating going higher if the stock isn’t already trading at an unreasonable valuation. Regarding when to exit such a trade, in both of the books, they mention the sell-point trigger is once the growth starts to fade and eps starts to decline, suggesting the company may be approaching its stage 3 phase. This is important because declining growth is a major headwind for a stock for the same reasons that a growing company is a major tailwind, so you must be aware of what phase the company is at if you’re trying to decide whether to keep holding or sell.
Now, simply just buying during a company’s stage 2 growth phase will usually work just fine, but you can improve returns by reducing the time it takes for the trade to start to work in your favor.. to really get the best timing for entering a trade, you have to incorporate TA, which is exactly what Stan Druckenmiller, one of the greatest investors ever, happens to do. He buys based on fundamentals, yes, but his buy-point is entirely dictated with TA to enhance his odds of immediately making money on his trades.
The charting structure for equities is simple. No stock, however good it may be growing its sales + eps + margins, goes up in a linear fashion over the course of years.. every single multibagger stock has had price rises followed with periods of consolidation in the form of a “base.” The bases serve as consolidation areas where the stock takes a breather after each large run up.. this is healthy and completely normal. A pull-back is also healthy and completely normal.. As long as the stock is headed in the right direction fundamentally, the technicals will always follow!!
So the best, ideal buy point is during a company’s stage 2 phase, yes.. but the BEST POSSIBLE buy-point is during that same stage 2 growth phase PLUS buying on the verge of a “breakout” from a base where the stock has already taken a break and consolidated for a while.. This makes sense if you think about it. You don’t want to buy on a linear run up because you could be prone to get hit with a pull back and/or consolidation phase, and you also don’t want to buy right in the middle of a base because the stock will be going no where for some more time.. so you want to always initiate the buy-point during the tail-end of the base and BUY THE BREAKOUT GOING UP!!
You can be able to tell if the consolidation phase is about to end by paying attention to the following:
- Volume declined steeply compared to the start - middle stages of the base. The low volume simply means that demand for the shares has lessened, which is due from traders being discouraged that the stock hasn’t gone anywhere in quite some time.. The lower volume also suggests that buying the breakout will make the price action look like a squeeze, since with low volume it doesn’t take a lot of buyers to bid the price up, and there will be a lot of buyers ready for the next leg up.
- There will naturally be a couple of pull-backs during a base.. ideally, the drawdown severity of the pull-back should subsequently lessen.. aka the pull-backs should get “tighter/smaller” with each time they happen.. you’d know you’re getting close to a breakout when the last pull-back is super tight, and is conducted off lower-than-average volume !!
***this TA framework is based off Mark Minervini’s strategy and i am summarizing it in a nutshell, but I’d highly recommend reading his book “trade like a stock market wizard” as mentioned earlier***
Now to really put everything together (buying stocks during their growth phase, lollapalooza effects, TA,) here is a perfect example of a massive winning trade that I took which encapsulates everything mentioned here so far..
I made a sizable investment in Micron when it was at $450 in April. Even then, there was a lot of backlash for going long. Here were the popular counter-arguments for the trade: “BUT IT WENT UP 4X ALREADY WITHIN A YEAR.. IT JUST MADE AN ALL TIME HIGH!! ITS A COMMODITY!!!”
And here is what I saw:
- Mag7 spending $300 billion on ai capex spend, with most of it going towards gpu clusters, and every gpu cluster requires large amounts of HBM + DRAM which Micron supplies
- HBM supply was already sold out for the rest of the year + HBM demand strongly exceeded supply, suggesting massive pricing power..
- Sales + eps + margins were to set to absolutely EXPLODE
- Fwd p/e was valued at roughly 6-7x
- Micron was one of the few (1 of 3) companies that produces high quality memory chips, and is the only U.S. based producer
- Micron completely stepped away from the historically lackluster consumer electronics segment and went 100% into suppling ai data-centers
So what happened?
Revenue grew by 74% q/q
EPS grew 106% q/q
Gross margins completely exploded from 39% a year ago to 85% today… yet the stock was only trading at 7X fwd earnings ……
Talk about a lollapalooza effect and complete no-brainer investment. Unsustainable ai capex spend or not, bubble or not.. the company performed exactly as predicted and shareholders got paid. The stock ended up doubling from 500B mkt cap to over 1T within 1-2 months of my purchase in April..
So why did I buy specifically at $450 in April? Well, the stock was taking a break from its prior run up, so it entered a period of consolidation which lasted 3.5 months. During this phase, the stock contracted 4 times. And as you can see on the last contraction, the pullback was extremely small (tight) and was done off low volume, signaling that the consolidation phase may have been on the verge of finishing. I loaded up here at $450, about 1-2 days before the breakout candle occurred, in which the stock completely exploded post-breakout for the next leg up.
Always remember that fundamentals drive technicals !! The higher the growth rates, or the more one-sided the lollapalooza effect is, the harder the stock will rip !!
I hope you enjoyed reading this, as making this took quite some time to really articulate everything in a single article.