Growth Potential Trumps Valuation with Puru Saxena
FEATURING: PURU SAXENA
On high valuations –$AMZN traded > 30 P/S multiple during TMT bubble (’99). Those who had the misfortune of investing at the peak of the bubble have still made almost 40X over 20 years (CAGR of ~20%)!
Cheaper the better but biz quality + time > valuation
— Puru Saxena (@saxena_puru) June 25, 2020
Q: Give us an overview of your background in the markets. What is your investing style?
A: I started my career in investment management in 1998 and from 2001 to 2016, I ran my own investment management firm. In early 2016, I returned investors’ capital and my firm was acquired by a Hong Kong-listed asset management firm and since then I’ve been managing my personal investments. I invest in disruptive, high-growth companies with long runways and my portfolio is fairly concentrated (18-20 companies). To manage my downside, I also hedge my portfolio using a trend-following strategy.
Q: The chart above shares how Amazon (AMZN) stock was deemed expensive during the dot-com bubble, but has delivered outsized returns over the past two decades. What does this say about investing during periods of relatively high valuations?
A: After being active for over two decades in the financial markets, I am now convinced that, over the long run, the overall quality of a business and its growth runway trump valuation. Of course, the best returns are captured when one invests in great businesses that are temporarily beaten down (due to recessions or some other exogenous shock), but even if one buys into a high-quality compounder at a rich valuation and the time horizon is long enough, the return is still satisfactory. So nowadays, I try to invest at a fair valuation, but I also remain invested unless the valuation is very frothy. .
Q: How do you evaluate investment opportunities? What are some of the key metrics that you look at?
A: I look for founder-led, disruptive businesses that are growing very rapidly, the latter of which tells me these companies’ products and services are in high demand. Companies can doctor their earnings but unless there is outright fraud, it is pretty difficult to doctor revenue.
Recent studies have shown that over the long run, revenue growth has been the single biggest factor behind market cap growth. Certainly, earnings (margins) have also moved the needle somewhat but the bulk of the market cap growth has come from revenue growth (growth of the underlying business). This makes sense because if you sell more products or services, grow at a very high rate year-over-year and do so for several years, how can the value of the business not keep up?.
Q: How has YCharts added value to your investment analysis? What tools within the platform do you leverage the most?
A: YCharts is a fantastic tool; all the data I need is easily accessible and it can be absorbed quickly because of the great visuals and Fundamental Charts. YCharts really helps me analyze companies and allows me to compare various companies in one sector across multiple metrics such as margins, cash flows, valuations, and more.
Q: You have a large following on Twitter and frequently post a stat or visual accompanied by your own unique perspectives. What’s most valuable to you in engaging with the fintwit community?
A: I’m very fortunate in the sense that I set up my investment management firm when I was just 24 years old and was able to retire after 15 years (39 years old).
For the past 4 years, I’ve just managed my own portfolio and fintwit allows me to interact with other like-minded investors and traders. Furthermore, by posting my own investing decisions on my timeline, and also my monthly performance summary, I keep myself motivated. I am competitive by nature and this is my way of being accountable and staying at the top of my game.
Last, but not least, it brings me great joy to know that my posts help thousands of people all over the world, and the generous, kind comments that I get from my followers on a daily basis make it all worthwhile. I’ve been asked by a few people to manage their hedge fund/ETF or start my own paid stock picking service, but frankly, I enjoy my retired life and at this stage, I’m happy to just give back.