If you are a growth investor understand the following:
- TAM has lot of pie-in-the-sky included - Growth will slow; make sure your CAGR assumptions are achievable - Current price often includes lots of optionality - Rarely companies continue to "innovate", it is not everyday you can catch lightning in a bottle - Don't confuse "bells and whistles" as "innovation" - Often companies get comfortable with their first product - Beware of companies that are buying revenue/ growth; - Beware of companies that are not buying other companies; Yeap successful companies add "products", "technology", at times even people through purchase; Not everyone can be Apple. - Path to profitability is a must; Not every company is going to be Amazon - Beware of companies that are growing revenues faster than customers (in the early phase certainly) - Dual class shares means you are stuck with management - I was surprised to find a company with $10B valuation, the VC's controlled 30% of the voting because they controlled 50% of B class shares. - Mind the dilution, keep that in your valuation outlook - Understand yourself, and accordingly invest; - The growth stocks are volatile, meaning they can drop 50% on no news and remember at one point Amazon dropped 90%; - When market turns bad or investors sour the drop can be brutal and quick - As my assets grew, it took me many years to not to view a simple 1% move as "there goes a lexus" - If you cannot handle the volatility, then you will exit the stocks at the worst time - Portfolio diversification is very important; - concentrated portfolios require exceptional investing skill; - If you are not a original thinker and copying someone else portfolio, you are not suited for concentrated portfolio - Understand your personal situations like saving for house, college tuition, looking at divorce all impacts concentrated portfolio (separately a solid marriage is the best gift and investment you can ever make) - Competition - Competition catches up; they make their existing solutions/ products adopt, copy critical features - Companies rarely have a superior technology that cannot be replicated - When they cannot buy, they will copy you - Existing players will use their market dominance unfairly (Prime example MSFT, most of their successful products are copycat products) - Incremental solutions sell better than greenfield solutions - The trailblazers spend tons of resources in developing the market; - significant portion of that cost is sunk cost, meaning they cannot be converted to revenue in future - Competition benefits from your market development - Unlike pharma/ biotech, even HW companies, patent protection for SaaS companies are almost nil - Competition will steal your employees, there is nothing the company can do to stop it; - Your biggest competitive differentiator walks out of the door everyday and it may or may not return next morning - Our little secret about growth investing: - Before they all became public, these companies received money from VC’s - The VC's know about these companies, their products, management deeply than you; - The VC’s, their clients, clients parents, neighbors, brother-in-laws, cocktail party friends all heard about this company, - VC's and their clients got-in at the basement - In many cases you are buying from the VC's - The investment banks that bring these companies to public know about these companies better than you; their clients buy at IPO prices - Remember you are buying from the investment banks clients too - The employees, industry folks, partners, customers all know about these companies, and their potential - Often employees get their shares for no cost, yet they sell - Remember you are buying from the employees too - So if you believe, you have found a magic sauce that nobody knew not really
This is not to dismiss growth investments as a fad, or a bad thing, or scare people, rather to help the investors to have a rational outlook and help them succeed in their investments.