Edited by Brian Birnbaum.
My investment strategy is to identify world-class companies early and hold them forever. This strategy tends to yield tremendous returns long-term, which linear and short-term thinkers fail to envisage.
I only hold five stocks in my portfolio: AMD, Palantir, Hims, Tesla and Spotify. Spotify and Palantir have each returned my total capital invested–i.e. they are worth, individually, my entire portfolio’s cost basis, with my Spotify investment up 5X and Palantir up 10X. I’ve been holding AMD for just over a decade now and Tesla for over eight years, with the former up 28X and the latter 32X. Hims represents my latest big bet, with my original purchase up over 87% since roughly early 2023.
I’ve made just eight investments in my lifetime. Five are either multi-baggers or on their way to being so. I’ve made three mistakes along the way–a great result in terms of ratios. Investing greats such as Charlie Munger have stated that win percentages around 50-60% will net extremely fruitful results, which is due to the asymmetrical upside of compounding.
The above five picks have resulted from spotting world class companies early with the intent to hold them for decades–which milestone I’ve already crossed with AMD. Generally, folks tend to overestimate a company’s progress over the course of a year yet drastically underestimate what it can accomplish in a decade or two. This is the biggest and most easily exploitable arbitrage in the modern stock market.
This phenomenon is best evidenced by Benjamin Graham’s best investment–which made him more money than all previous net-net investments.
In 1948 Benjamin Graham made a $712,000 investment in GEICO. 25 years later, his investment would grow into a jaw-dropping $400M. That’s a 562X return in a quarter of a century, a striking feat in itself. Most important and relevant to us is the fact that Graham’s GEICO investment was a huge departure from his usual cigar-butt method. Rather than purchasing a mediocre or even bad company at a cheap price, he bought a fantastic business at a reasonable price. Unsurprising to investors like us all these years later, GEICO made Graham more money than all his other cigar-butt operations combined.
GEICO’s business model–selling insurance directly to the consumer–was highly disruptive back in 1948. Eliminating the middlemen lowered overhead costs and gave GEICO a cost advantage. By focusing on passing ongoing cost reductions back to consumers–coined by Nick Sleep as shared economies of scale–GEICO has since built a tremendous amount of goodwill with customers, making it increasingly harder for competitors to take market share.
The above innovation was the main driver behind Graham’s 562X return. However, what inevitably enabled Graham to obtain such a spectacular return–versus a mere two or three fold increase in value–was holding for decades. Most investors tend to sell quickly at the first sight of meaningful gains. In my view, investors sell quickly because they’re not truly in touch with the fundamentals. Indeed, once a company 10Xes, the next tenfold increase in market value is usually easier if capital is well allocated. Instead, most investors think to themselves that the given company can’t possibly grow much more than they already have–a result of the linear, technical thinking rather than fundamental, asymmetrical mental model that I teach in my course.
This is increasingly true as we move into the 21st century and network effects take center stage worldwide. I’d argue that if GEICO were born today, with a similarly disruptive and competitive approach, the 562X return would’ve taken less than half the time. After all, GEICO’s (as with all insurance business’) model involves merely acquiring customers that contribute to a common fund and making payouts when something bad happens to any one of them. Network effects accelerate this process exponentially, versus running the operation in an analogue format, as GEICO did during Graham’s time.
Hence, Graham’s approach to his GEICO investment is even more relevant in this day and age. Meanwhile, as of 2021, the average US equity holding period has declined to fewer than ten months, as you can see in the graph below, with investors essentially forgoing the most effective way to make money in the stock market: holding stocks for a long period of time. When great investors say that “doing nothing” is the path to excellent returns, they are absolutely right.
The modern financial industry makes particular emphasis on the quarterly performance of companies because this serves to maximize transactions, which in turn maximize fees. By setting arbitrary expectations, the industry creates an environment by which investors will be inclined to buy and sell stocks unnecessarily. This generates a great deal of revenue for the industry by robbing investors of great long term returns. It also makes those that share bullish long term views seem irrational, since quarterly analysis is the primary focus.
My five holdings share many traits as those of Graham’s GEICO pick. In my view, they print cash by solving a growing volume of acute customer pains in a way that’s increasingly harder to replicate. They reinvest the cash to solve more problems at still lower costs that they pass back to customers in the form of still lower prices. Such a virtuous cycle leads to a rising earning power over time, which drives the stock price up.
The key driver of these companies is a world-class culture resulting from extraordinary management. Borrowing from Naval, culture is the co-operating system that defines how people work together in a company which broadly determines their collective fate. A great culture is the largely necessary antecedent to increasing profits; a company that’s obsessed with its end customers and has a high tolerance of failure is unlikely to become irrelevant.
The easiest way to spot a world-class culture is when a company performs a series of impossible achievements sequentially. This is what brought me to Hims: they put together a vertically integrated healthcare infrastructure while deploying subsequent healthcare verticals outside of the traditional healthcare insurance system and producing positive cash from operations. Such a chain of unbroken accomplishments represents a statistical anomaly and is therefore either the result of an even more unlikely string of luck or a much more likely reason we can describe as exceptional talent.
Discerning between luck and talent is the essence of conviction. It’s largely untransferable and the distinction can rarely be communicated in quantitative form. Regardless, once you spot and acquire a company of this sort, selling at the first sight of meaningful performance is the biggest mistake investors make. So long as the company’s culture remains optimal, it’s fairly likely they’ll continue outperforming over the long term as GEICO did, regardless of whether the stock gets pricey in the short term.
Driven by the focus on passing cost savings to customers in the form of lower prices, GEICO stock is up 20-fold since 1996. Indeed, had Graham not sold his position he would’ve made more money in the past 20 years while dead than he would’ve made in two or three lifetimes picking undervalued stocks, which serves to illustrate that over the long term stock prices track cultures, and if cultures remain sharp, stock prices likely continue rising.
When I say Hims and Palantir have 100X potential from here, I am simply looking out a decade or two from now and extrapolating their respective value-generating mechanisms. Hims makes more money and gets harder to replicate as they deploy more verticals and more subscribers utilize a personalized treatment. Palantir makes more money and gets harder to replicate as they productize their digital twins atop data that took decades to aggregate, making building on their platform exponentially easier and more advantageous. The same applies to all my other picks: time is their friend and not their enemy.
In effect, I seek to build a “portfolio of GEICOs” that I can own forever. When I first buy these companies I do so with the idea of holding forever, moving to sell only if fundamentals deteriorate or I find opportunities so much better that it warrants the tax hit and switching risk. They are all asymmetric opportunities in that I acquired them at rock bottom prices (which were actually deemed as very expensive at the time by many), when there was far more upside than downside. However, as these companies continue executing, they tend to generate subsequent asymmetric situations in which there’s a lot more to gain.
I first bought AMD in 2014, because I believed their chiplet strategy was going to yield great results on the CPU side. The stock is down over 40% from its ATHs now, with the market convinced that AMD is now a mediocre player in the semiconductor industry. Yet, my in-depth understanding of their technology leads me to believe they’re set for a further 20X increase in market capitalization over the coming decade.
It’s rare nowadays to find an investor or firm that holds a company for two decades. I may indeed get AMD wrong. But if I get it right, my investment will be worth tens of millions. Like Graham, I understand that, although there is risk in my five holdings, there is risk in all holdings, yet far less in the best of them. Furthermore, I stand to make far more money by holding onto these stocks than by trading them. If my theses turn out to be wrong, I will simply collect the lessons and execute the same strategy again until I succeed.
Until next time!
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You can also reach me at:
Twitter: @alc2022
LinkedIn: antoniolinaresc
Respect the concentration and commitment. (I hold two of these as 1st and 3rd largest positions, so maybe a bit biased also)
Do you live off your portfolio returns or plan to in the future?
Few books or articles help shape one's thought process, and this article really had an impact on me. Thank you for sharing your gift, Antonio.