The Path of Progress
I write a lot about my mistakes. I’ve made many, and continue to make many. I realized that investing is an endeavor where I will always make mistakes. As long as I pursue this project, I will never be “perfect”. I’ve come to peace with that, and this newsletter is one of the ways to rub my nose in my mistakes to learn.
Today I’m going to talk about something I’ve gotten right. I think of it as “investing along the path of progress”. The handful of startlingly successful investments that I’ve made over the years all generally followed this idea. Simply put, I invested according to my thesis and increased my investment as the company executed over time. It sounds simple, and it is. But it is not easy. In fact, it can be quite challenging. Let’s break it down:
According to a thesis: I’ve talked before about my somewhat lackadaisical research process (Running Your Own Race). My diligence on a company might be lighter than what a more skilled and professional investor would do, but I definitely enter every investment with a thesis of what I think is required for a successful outcome. My most successful investments were ones where the execution matched what I thought would happen. Sometimes there are pleasant surprises! Sometimes it’s as simple as believing management. I had one particular investment where I just looked at a company’s strategic plan, thought it looked good, and then monitored that they did what they said they were going to do.
Increase my investment over time: As I learn more about a company and watch them execute, if they do what they say and the results start to show, then I would invest more. Sometimes this was at a lower price than what I entered at - which sounds really great in retrospect but can be difficult in the moment. Imagine that you are investing in a company. You think they are executing well according to your thesis - but the stock price goes down! You start to second-guess yourself. “What do these sellers know that I don’t?” I have found that focusing on the progress a company makes and avoiding thinking about the stock price is essential.
More often, as the company executes, the stock price starts to rise. I’m pretty average, so if I notice things are getting better, I’m sure it must be obvious to other people. Then you get to buy more of your company at a higher price. In the past, this was difficult for me. I’m more of an “if you liked it at $10, you will love it at $5” kind of investor. So the need to invest more as the price rises was a foreign concept. Buying on rising prices is something I’ve come to accept and expect if a company executes. Putting more money to work in a winning idea is the one way I have moved “good” investments into the “great” investment category.
It’s not all in a straight line: all of this sounds really great on paper. In the real world, it is messy. Even companies that execute well are thrown curve balls. Often company execution feels like two steps forward and one step backward. How much of a leash do you give management if they don’t deliver? One quarter, two quarters? Years? It is tough to decide. In investing, I believe that “everything everywhere is situational”. I.e. there are never any absolute truths. Sometimes things legitimately take longer than expected. Sometimes management doesn’t want to tip their hand about their plans or progress. I have faith that if things work as they should, there will be a numerical result that you can see and measure: increased revenue, increased earnings, reduced debt, or share count.
Investing in the path of progress is the model that I have used with most of the investments that were multi-baggers for me - think 2, 3, or 5X your initial investment. Hopefully, it is a framework that will help you own companies that can pay off handsomely over time.