Next Thesis Approach
The Next Thesis investment strategy is 85% influenced by Ben Graham and 15% influenced by Phil Fisher. Lol just kidding - that's Warren Buffett. Also I don't 100% know what that even means.
Here are a few of the things I do think about...
Products we ❤️
"Throw that crystal ball out, you can't predict anything. What you can do is recognize when lightning strikes." — Peter Fenton
One of the easiest ways to recognize when lightning strikes is by thinking about some of the new things in your life that have earned your love and loyalty. Great products are often the foundation of great businesses for a few reasons. First, it’s easier to acquire more customers. When you love a product, you tell your friends. You follow the brand. You write nice reviews. Great products don't have to be sold; they're bought. Second, great products have loyal customers so the companies have sustainable growth. A customer that lasts for a year is only 10% as valuable as a customer that sticks around for 10. As a bonus, it’s more fun to invest in products you love because it’s rewarding to see those companies succeed.
Great Team 🏆
The world changes a little bit every day. A great product or business insight might lead to success this quarter and maybe this year but top talent and strong culture can generate a decade of success. It isn't easy to scale and maintain a high talent bar.
"A players hire A players; B players hire C players; and C players hire D players. It doesn't take long to get to Z players. This trickle-down effect causes bozo explosions in companies." — Steve Jobs
Talent also isn't easy to judge and just being smart isn't enough. Sustainable success also requires tenacity, appetite for risk, open mindedness, and many other intangibles.
Great Market 🌊
The S&P500 has returned nearly 10% a year over the past 90 years. That means the average investment in the index fund would double in 7 years - that's a pretty high bar! Hence, I look for businesses that have the potential to be 5X more valuable than they are today. Without that that upside I believe it would be difficult to achieve a level of return that justifies the risk.
"Software is eating the world." — Marc Andreesen
This makes tech businesses particularly compelling. A growing market multiplied by a business with growing market share can create decade-long tailwinds that are often underestimated. Bet on the future.
Market Power 💪
Success breeds competition. It is inevitable. How will your investment fare when it arrives? That depends on whether the company has a durable strategic advantage and with it, market power. Hamilton Helmer gives us a window into these conditions in 7 Powers. I aim to invest for the long term (5+ years) so durable advantages are critical.
Bet on what you know 📚
"Risk comes from not knowing what you're doing." — Warren Buffett
I believe investors should strive to be in the top decile of knowledge about a company before investing. Otherwise, the risk exposure is hard to justify. Betting with the crowds won't beat the market - you'll be too late. Lazy analysis won't beat the market - you'll miss something important. Weak conviction won't beat the market - you'll lose faith in a downturn. Don't have time to get in the top decile? No problem - just buy index funds 😉
Of course, these aren't the only things that matter but this is how I start. In a follow-up post, I shared my thoughts on timing and price.