My Theme-based Motley Investment Philosophy

Hi all,

I posted my year end review and that attracted some healthy discussion, both over at Saul’s board and at the HG Philosophy board. Several posters asked me about my underlying investment philosophy.
o The original year-end review post:…
See the above for a whole heap of discussion around the risk/reward profile of the portfolio.
o Following the discussion and some thinking, I got rid of a few losers. This generated an even longer discussion around the sell rational, group think, etc etc. It’s probably worth a read. See here:…
o The Deranged Monkey Criticism folks were interested in the year-end review thread and they had some questions, and this post is largely in response to their queries. You can see that thread here:…
I also want to flag a very good post by Chris, who talks about ‘The Fear of Missing Out’. It’s related to some of the above posts, so have a look as well, if you are interested:…

Okay, so back to the original motivation behind this thread. This is an attempt to put down some of my thinking in words, mostly in an attempt to ‘self explain’ what I do, why I do what I do etc etc. By no means is this meant to be a guide for others to follow.

I ‘m generally looking for ‘growth’ investments although I do mix them with some ‘value’ and ‘dividend’ plays. My most favoured approach is to invest in secular mega trends. The question I am asking is — Is there a secular trend that is going to make the addressable market much larger than it is today? I like to invest in secular trends through top dogs because these are investments one can hold for a long long time. These are investments where one generally doesn’t need to worry too much about quarterly reports, one bad quarter, and so on. None of these imply that I am not following the businesses, it’s just that these can generally be investments that will be held for the long-term (5 - 10 years). This is essential the centre piece of my investment approach.

The Motley Fool is my hunting ground for investment ideas. David’s picks in Stock Advisor, Rule Breaker picks, and now many Hidden Gems picks are the source of many of these ideas. As a technologist, I enjoy these picks as these more or less come from the technology sector. Below is a list of the mega trends I ‘m currently considering:

o Industrial Internet of Things.
Internet of things as a concept has been around for decades. Researchers worked on these ideas in the early 1990s. The example that was often touted at those days was the Internet connected toaster that would tell you today’s weather while you wait for your toast, and the fridge that would tell you when you have run out of milk. However, in the past few years, the concept has evolved to bring big changes to how industries operate. Fleet management is one such area. For instance, the Michelin Group uses sensors inside
tires combined with analytics to coach
truck fleet drivers on how to save fuel. There are other uses, such as real-time tracking for optimising use of fleet, tracking to enable preventive maintenance etc. Insurance telematics, i.e., insurance based on driving habits (something which Progressive does provide) is another use case. The CAMP & SWIR investments are attempting to capture the module side of the IoT business. Both companies sell communications modules for IoT applications. Both companies also provide cloud-based applications for analysing the data being collected by the communications equipments.

o Information dissemination & the Internet.
We all are spending more time on the Internet. More people are getting connected to the Internet. My thesis is that novel Internet-based communications platforms are going to thrive for years. I like both Facebook and Twitter in this category. Facebook has enabled me to connect with my school friends who are scattered all over the globe. Facebook helps me stay in touch with my large extended family. Twitter, I see as a news dissemination platform. It’s a perfect platform for ‘one’ to ‘many’ communication. Both Twitter & Facebook will change over time, but I don’t see their relevance diminishing in the immediate future. I also like LinkedIn for similar reasons; it’s changed how businesses and job hunters communicate. I like TRIP for all it provides to the travellers of the world.

o Search & advertising.
This one is again an Internet play and search and advertising are at the very core of the Internet. Ideally, here I should have owned Google & BIDU, but both Google and BIDU looked expensive and I found Yandex (the Russian search engine) to be significantly cheaper, so I recently added Yandex. This is a risker pick because of the geopolitical situation but it does have some advantages. YNDX will be able to ride the storm (I think!), and this pick provides me exposure emerging economy exposure with lots of growth potential. CRTO is a newer holding, specialising in the re-marking advertising world. They are the upstarts challenging the incumbents.

o Healthy eating.
This is a mega trend, worldwide. People are becoming conscious of what they eat. They want to know where the food they are eating came from, and how was it processed. People want to eat ‘organic’ food. Whole Foods is a play on this trend. It’s the market leader in the organic groceries business and it can ride this positive mega trend for the years to come. ZOES, the small Mediterranean restaurant concept, can also be considered to fit into this theme.

o Clean energy.
The world is finally coming to understand that climate change is real and we must do something about it. This is another mega trend that one can ride. Tesla is very good example in this category. They have taken the automobile industry head-on with a car loveable, practical car. Solar City is another one. Power Solutions International (PSI) is not really in the same league as TSLA & SCTY, but it’s a profitable, fast growing business that provides exposure to "clean tech” power systems running on alternative fuels such as natural gas, propane, and biofuels.

o Minimally invasive surgeries/robotics surgery.
Minimally invasive surgeries using robots has been under the scanner for sometime, with proponents advocating advantages such as shorter hospital stay times because of the minimally invasive nature of the surgery and lower complication rates because of the high precision provided by robots. Opponents have harped on costs and high setup times for these surgeries. I argue that this is a ‘old school’ versus ‘new school’ fight, one that’s going to be won by the new age surgeons. Also, these technologies have other potential such as the ability to facilitate remote surgeries (this is still many years out). The opportunity here is global, and the Asian opportunity is often misunderstood. Hospitals in Asia are going to be big consumers of this technology over the next decade. I have invested in Intuitive Surgical, the leader in soft tissue robotic surgery. This company is profitable and the market leader. I have also invested in an upstart in the spine/brain computer-assisted surgical system developer called Mazor (MZOR). This company is not yet profitable but it has a very large opportunity in front of it.

o The ‘eating out’ mega trend.
I think this is also a trend. People love to eat out and the numbers seem to be increasing, world over. This is one reason I like restaurant stocks. Stocks like SBUX are going to do well over the next decade with expansion in China and India. I also like upstarts like ZOES and CHUY because it plays into this trend. Then, there’s MIDD which sells various commercial kitchen equipment to restaurants. This is yet another way to play this trend. I also really like the MIDD management and they have done very well growing the company through a number of acquisitions that have fuelled both the top and bottomline. MIDD is working on the next-generation of commercial ovens (less energy, faster turnaround times etc).

o 3D printing and rapid prototyping.
While 3D printing technologies have been around for decades, it is now thought of being at a stage where the technology can see mass market adoption. I have invested in it via Stratasys (SSYS), one of the leaders in the 3D printing world. I also have some indirect exposure to 3D printing via Proto Labs (PRLB), a leading manufacturer of custom parts for prototyping and short run productions. Prototyping and short production runs (which are production runs a product for an initial trial or initial supply while the manufacturing processes & supply chains are being setup) are inherently low volume manufacturing. Recently, PRLB has been extending its capabilities, most recently into 3D printing via the FineLine acquisition.

o e-Commerce, electronic payments, and online banking.
This one is easy. MELI & AMZN provide nice exposure to online retail. MELI provides electronic payment exposure as well. Then, there’s Master Card, which will continue to benefit as more and more commerce happens via electronic payments. INBK and BOFI are plays on online banks. BOFI has done very well, with industry leading efficiency ratios, but today one has to pay a premium multiple (in terms of Book Value) to buy into BOFI. INBK, however, is selling for less than book value because it’s efficiency ratio is sky high. Having spent a lot of time closely following INBK, I believe that INBK is about to turn the crucial corner. This coming quarter should show how it’s doing with its investments in staff and IT. One should note that INBK has done well, transforming itself from a lender for RV & horse trailers (!!) to a lender that’s mainstream with a diversified loan book, a growing deposit base, and all the good stuff. INBK is also founder led with founder having around a 10% stake. Directors have been buying shares. Given the book value and founder-led culture I have been happy to have about 3% riding on this micro cap.

o Mobile and wearable computing.
Apple is my torch bearer for mobile and wearable computing exposure. Apple lead in the mobile phone space is clear and it’s ability to innovated is now time tested. Apple pay is probably another peg in the wheel to make mobile payments seamless. Many companies have tried to make a meaningful wearable. The fitness trackers have been successful to some extent but no mainstream watch has been successful. Apple with it’s stick and well oiled iOS ecosystem is well placed to get the wearable market going with its Watch. And, I love Apple for the amount of cash it generates each quarter. Unbelievable! I also had an investment in INVN, which I sold out because of issues I have with their progress and management.

In addition to ‘growth’ investing by themes, I occasionally invest in other ‘growth’ ideas where it appears the addressable market is potentially much bigger than what the company currently addresses, and that these opportunities are available at a reasonable price.
These are typically the ‘local’ to ‘national’ concepts, where a business is expanding from being a regional operator to being a national or international operator. Here, I look at the success at the regional level and determine if the business has a fair chance of succeeding at a much larger scale. Examples include CHUY, ZOES, TTS, and LL. Sometimes, I ‘m looking at concepts that have been extremely successful in other countries and are now being launched in the US (CSTE).

I realise that my ‘growth’ focussed investment style makes my portfolio risker. I mitigate the risks, to some extent, by adding stocks from the ‘value’ or ‘dividend’ world. These I have mostly drawn from the Fool’s Inside Value newsletter and some more recently from the Fool’s Hidden Gems newsletter. For these investments, I ‘m looking to get in at a good price multiple and ‘m generally looking for businesses that are led by superstars (so that it can be a jockey play) or ones that have significant moat (e.g., assets that are unique that provides them some strategic advantages). Following are examples in this category:

  • My retail investments in ROIC, STAG, and HHC. All are led by stellar management teams. ROIC & STAG offer solid dividends.
  • The Liberty Global (LBTYK) Investment fits this bill as well. Liberty has A class assets (the cables) and is led by a smart capital allocator.
  • US Ecology (ECOL) is another one. Nuclear waste disposal is highly regulated, so entry of new competitors is not straightforward, giving existing players a protective moat.
  • Seaspan (SSW) is another one. It’s yielding 6% and the long-term contracts the company signs on the shipping containers ensure steady cash flow. Economic slowdown will hurt this one, but economic slowdown will invest stock as such, so this is just as bad as anything else. Debt is concern but the company has managed debt without issues.
  • PGR and MKL are insurance plays. Both have excellent insurance underwriting histories and these should be steady growers. PGR’s float & cash is invested in high-quality fixed-income securities, but these are on shorter duration bounds and should be able to capitalise on any increases in interest rates. Both are very good underwriters with combined ratio in the 95-97% range (i.e., they make monies on the policies they write). I like both holdings They are led by able leaders and over time should be able to provide nice compounded gains.
  • LUK is a diversified holding company with investment banking (Jeffries), energy, mortgage servicing, car dealerships, and beef processing. This one is an interesting one as it has undergone some changes at the top (Jeffries CEO is now in charge as part of a well thought out transition plan) and LUK is also trading at a discount to book value. I ‘m slowing building my position up on this one, using options to add to my position via ATM written puts.

The investment theme is a very important consideration for me. Selecting investments within a theme involves a process which is still very much a WIP. Within each theme, I ‘m looking for stalwarts. I ‘m looking for business where founders are still at the helm and I ‘m generally looking for strong insider ownership. I ‘m looking for strong revenue growth, around 20-25% annualised at the minimum, for the past few years. I can be okay if the company is not yet profitable provided profitability appears to be within sight. I ‘m also looking at geographical diversification wherever it is possible. Once I like an investment prospect, I usually start by taking about a 0.5 to 1% position. As I learn about the position, I add to it if it seems like a good fit. I pay attention to the Fool’s Best Buy Now lists. These are often timely reminders to consider a position addition.

That’s all for now.



Anirban, what a great post! Thank you so much. I think I’ll read it two or three times to really absorb it. Wonderful!


Anirban and Saul
This might help you fill this out……

In Theme 1/10 I posted on 3D Printing – (…)
In Theme 2/10 I posted on Natural Gas, Shale & Clean Energy – (…)
In Theme 3/10 I posted on Internet of Things/M2M – (…)
In Theme 4/10 I posted on Robotics – (…)
In Theme 5/10 I posted on Cloud, big data and cyber security - (…)

I got bogged down last year and the incessant politics on NPI sort of dulled my motivation to continue but fortunately Anirban has done such a great job I may not need to.



A rec is not enough.

+1 on Ant’s threads! Amazing stuff there. I still search for them. I did it last week to find out the difference between CAMP, SWIR, ANET, etc.

Great resource


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Now, we need to convince him to complete the series … somewhere.