The hunt for multi-baggers in a sea of skepticism

I happened to re-read one of my favorite investing essays this week, Use Your Edge, written by Peter Lynch in 1997. I wanted to share it here for a couple of reasons. First—I think offers a few timeless lessons about investing in growth stocks from one of the greats. Second—despite being written 25 years ago, I think his ideas about exponential growth curves are only becoming more relevant in a post-Internet, post-smartphone era. My view is that we’re living through a unique period of industrial consolidation that will lead to winner-take-all dynamics. This landscape has created a fertile environment to hunt for multi-baggers, especially when consensus turns skeptical about the future growth of a company that is just hitting its stride.  “In the 1970s I got interested in McDonald’s,” Lynch writes. “A chorus of colleagues said golden arches were everywhere and McDonald’s had seen its best days.” He continues: 

“I checked for myself and found that even in California, where McDonald’s originated, there were fewer McDonald’s outlets than there were branches of the Bank of America. McDonald’s has been a 50-bagger since. These ‘nowhere to grow’ stories come up quite often and should be viewed skeptically. Don’t believe them until you check for yourself. Look carefully at where the company does business and at how much growing room is left. I can’t predict the future of Cisco Systems, but it doesn’t suffer from a lack of potential customers: Only 10 to 20 percent of the schools have been wired into networks, and don’t forget about office buildings, hospitals, and government agencies nationwide.”

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The intrinsic motivation that drives the people behind the most successful companies

Ravi Gupta, a partner at Sequoia and former Instacart CFO, shared a great little anecdote in a conversation this week with Patrick O’Shaughnessy. Gupta recounts being interviewed by Mike Moritz when he was up for the job at Instacart. At first, the questions were normal fodder for an executive interview—but Moritz quickly pivoted to a near-philosophical line of questioning about the meaning of relationships, family, and the motivations for success. 

As Gupta recounted, “So later I asked Mike… ‘Did you just ask me those questions, or do you ask them of everyone?’ He said, ‘Oh, I ask them of everyone. ‘I said, ‘Why?’ And he’s like, ‘Look, I think that the only thing that endures is the intrinsic motivation, and I think understanding the source of that is critical. Why does it matter if you succeed? What is the thing that keeps you going?” Gupta continues: 

“I would say that I have bought into that. There is this idea of, what is the thing that drives you forward? And it’s not always a nice thing, but it’s interesting. And I would say for very successful people, a lot of times it’s guilt in some form. We’ve talked about, sometimes it’s fear. But I think getting to that so that you can predict whether somebody will keep going and what will make them keep going is pretty valuable and pretty tough, but it’s something I have full religion on now.” (H/T Sandeep Kapadia)

A few more links I enjoyed: 

I Beg to Differ – via Howard Mark
“Many investors – and especially institutions such as pension funds, endowments, insurance companies, and sovereign wealth funds, all of which are relatively insulated from the risk of sudden withdrawals – have the luxury of being able to focus exclusively on the long term …if they will take advantage of it. Thus, my suggestion to you is to depart from the investment crowd, with its unhelpful preoccupation with the short term, and to instead join us in focusing on the things that really matter.”
Carbon Removal Might Be the World’s Most Important Technology. How Does It Work? – via The Ringer
“Last year, somebody explained the problem of climate change to me with a metaphor that I’ve never been able to forget. They said: Imagine a bathtub. The bathtub is the planet’s atmosphere. The faucet is on full blast and it’s quickly filling with water. The gushing faucet represents every source of global carbon emissions, from ‘Big Agriculture’ and energy companies to cars and cow farts. The water is carbon itself. The challenge of climate change mitigation is straightforward: Stop the water from filling the tub, spilling over the edge, and destroying the planet.”

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