I fully agree with this view point. The problem is that exceptional businesses are so rare, that you sometimes need to fill the portfolio with mediocre businesses that are valued at stupid prices which are set for a rerating in the medium term (1-2 years). It takes balls of steel to have a portfolio of 3 stocks like Nick Sleep. For now I have 1 stock which I know very well which meets all of these criteria, perhaps a second one, and a bunch of them which meet several points, but I am not 100% sure that they can meet all points. The economies of scale shared is one where it is difficult to know unless you are a customer of their products, and I also tend to gravitate to businesses that are niche and without competition, so what can you compare their value proposition to? Just my thoughts.
Thank you, that's helpful framework for assessing potential compounders. I tried to apply it to SEA Limited, my biggest position by far:
1. Customer value: yes. Shopee is positioned as the cheapest, focuses on high volume of orders with a low average order value.
2. Economies of scale shared: yes. Delivery cost keeps coming down, they pass the savings to the consumer.
3. Capital allocation: probably yes. Examples: raised capital near the top of the 2021 mania, switched focus from growth to profitability when the tide turned against them, stepped back quickly when expansion into new regions didn't work (e.g. Europe).
4. Resilient unit economics: yes for the gaming division, but hard to tell for ecommerce and fintech (early stage, haven't faced a major crisis yet).
5. Valuation: probably reasonable if one believes in the secular growth of South East Asian economies, SEA's moat in ecom and a large runway for the lending business.
I fully agree with this view point. The problem is that exceptional businesses are so rare, that you sometimes need to fill the portfolio with mediocre businesses that are valued at stupid prices which are set for a rerating in the medium term (1-2 years). It takes balls of steel to have a portfolio of 3 stocks like Nick Sleep. For now I have 1 stock which I know very well which meets all of these criteria, perhaps a second one, and a bunch of them which meet several points, but I am not 100% sure that they can meet all points. The economies of scale shared is one where it is difficult to know unless you are a customer of their products, and I also tend to gravitate to businesses that are niche and without competition, so what can you compare their value proposition to? Just my thoughts.
Thank you, that's helpful framework for assessing potential compounders. I tried to apply it to SEA Limited, my biggest position by far:
1. Customer value: yes. Shopee is positioned as the cheapest, focuses on high volume of orders with a low average order value.
2. Economies of scale shared: yes. Delivery cost keeps coming down, they pass the savings to the consumer.
3. Capital allocation: probably yes. Examples: raised capital near the top of the 2021 mania, switched focus from growth to profitability when the tide turned against them, stepped back quickly when expansion into new regions didn't work (e.g. Europe).
4. Resilient unit economics: yes for the gaming division, but hard to tell for ecommerce and fintech (early stage, haven't faced a major crisis yet).
5. Valuation: probably reasonable if one believes in the secular growth of South East Asian economies, SEA's moat in ecom and a large runway for the lending business.
PLTR may be a good comp to the 2000 CSCO. I could see that chart in 2050.
Best Scaling for long term with consistent intrinsic value growth:
Intrinsic Value Growth Factor
= (1 + Gintrinsic_value)
=
( 1 + Gnet_profit )² / ( 1 + Ginvested_capital )
.
Intrinsic Value Growth = 0 at break even point :
( 1 + Gnet_profit )² / ( 1 + Ginvested_capital ) = 1