What makes a stock a good stock? Is its price reasonable? The dividend of sustainable growth? A brand value second to none? These are basic questions that both novice and experienced investors need to consider.
I believe that what makes a stock a good position is that the company behind the stock is “fragile.” In fact, the 10 most vulnerable stocks based on the system I have used in the past five years will average close to three times in 2020.
But what does “anti-fragile” mean? And how to apply it?
What makes them shatter-resistant?
The term was coined by the best-selling author and former trader Nassim Taleb. He believes that we often divide everything in the world into two categories: fragile (things that break easily under pressure) and elastic/sturdy (things that will not break under pressure).
However, Taleb believes that this ignores the third and crucial group: resistance to vulnerability. This refers to things that actually become stronger when under pressure. As an everyday example, consider your muscles: moderate stress (lifting weights) will make them grow again.
Applying it to stocks, an anti-fragile company will have three main characteristics:
- Barbell strategy: A mission-oriented company should devote 80% of its resources to low-risk (high moat) business, and the other 20% to high-risk, high-return (optional) business lines.
- Financial Perseverance: These companies have many customers (no concentration risk) and have balance sheets that can help them survive and thrive in difficult times.
- Skins in the game: In companies led by founders, insiders own a lot of stock, and employees are happy to align the interests of key figures with shareholders.
The idea is simple: when these three factors exist, the company may continue to thrive in the unknown future. First, I will introduce you to the 10 companies in question, and then we will explore why they can successfully advance.
The return rates of the 10 companies in 2020 are as follows:
AMZN data by YCharts
The evaluation company’s barbell strategy is divided into three parts:
- Task-driven: The company’s mission statement should be simple, inspiring and optional.
- moat: The company’s core business should be protected by a sustainable competitive advantage or moat.
- Optional: The company has multiple methods to accomplish its tasks.
All 10 companies have an impressive moat.
|the company||Mission statement||moat||Selective evidence|
|Amazon||“Become the most customer-centric company on the planet.”||
||In the biggest example of optionality, Amazon will do everything it can to continuously improve the customer experience.|
|Alphabet (Google)||“Organize the world’s information to make it universally accessible and useful.”||
||The company’s “other bets” could one day supplement advertising revenue.|
|“Building communities and bringing the world closer together.”||
||What started out as a single website has now been transformed to include Instagram, Messenger and WhatsApp.|
|free market||“Democratize business and finance in Latin America.”||
||Mercado Pago and Mercado Envios show many options.|
|Shopify||“Make everyone’s trade better.”||
||Merchant services and fulfillment networks are obvious signs of selectivity.|
|Crowd strike||“To prevent violations.”||
||The company went public with 10 modules last year and now has 17 modules.|
|Atlassian||“Help unleash the potential of each team.”||
||What started as a single solution (Jira) is now a huge suite.|
|Sea co., ltd.||“Improving the lives of consumers and small businesses through technology.”||
||This gaming/e-commerce/payment company may be second only to Amazon, symbolizing selectivity.|
|Axon enterprise||“Protect life.”||
||What was once just a manufacturer has become a SaaS player.|
|Zoom movie||“Make video communication smooth and safe.”||
||The company launches new products every month.|
In the past decade, companies like Amazon have proven the incredible use of the barbell method. For example, everything the company does is designed to provide the best customer service imaginable. Other companies such as Zoom have just begun this journey, but Zoom has proven that it can benefit from the “shock” of its system.
Financial resistance to fragility is also important. If a company does not have enough cash to maintain its business, then the best mission statement and barbell strategy in the world will not change.
Companies with large amounts of cash, low debt and positive free cash flow can actually From. .Get benefits Economic difficulties. how about it? By repurchasing their own shares, acquiring competitors or simply exiting the market with competitive pricing.
This is also the best option when the company does not rely on only a few customers to provide large sales. If this is the case, then a person can quickly change the company’s prospects with a single touch of a decision.
|the company||Cash/debt||Free cash flow||Customer concentration?|
|Amazon||US$68 billion / US$33 billion||
|Alphabet (Google)||US$147 billion / US$14 billion||
|USD 55 billion / USD 0||
|free market||US$3.3 billion / US$613 million||
|Shopify||US$6.3 billion / US$750 million||
USD 48 million
|Crowd strike||$100 million / $0||
|Atlassian||US$2.4 billion / US$0||
|Sea co., ltd.||US$3.8 billion / US$1.9 billion||
|Axon enterprise||628 million USD / 0 USD||
(20 million US dollars)
|Zoom movie||$1.9 billion / $0||
Yes, there are some outliers. For example, Axon Enterprise has decided to spend more cash than it does now to build new tools for the police department. This trade-off is reasonable.
Other companies, such as Shopify, have also demonstrated the importance of extra cash: The company has provided relief to merchants in the form of loans to help them weather the COVID-19 storm. This not only helped Shopify’s core business, but also earned a huge reputation from the entrepreneurs who supported Shopify.
Skins in the game
Finally, the company should have many skins in the game. This means that those who run the company have the same financial motivation to see that the company performs better than shareholders.
Founders often see their company as a product of their own survival. Therefore, when the founder of the company is still running it, the scale will be favored by investors.
This is also a good sign when executives (insiders) own shares and (via comments on Glassdoor) when employees every day like to work in the company.
|the company||The role of the founder||Insider voting rights||Glass door grade|
|Amazon||CEO Jeff Bezos (Jeff Bezos)||
|Alphabet (Google)||Larry Page and Sergey Brin, board of directors||
|Mark Zuckerberg, CEO||
|free market||CEO Marcos Galperin||
|Shopify||CEO Toby Dolls||
|Crowd strike||CEO George Kurtz||
|Atlassian||Co-CEOs Mark Cannon Brooks and Scott Farquhar||
|Sea co., ltd.||Forrest Lee, CEO||
|Axon enterprise||Chief Executive Officer Patrick Smith||
|Zoom movie||CEO Eric Yuan||
Again, this is not a panacea. You can involve the creators, make a lot of investment in internal staff, make employees happy, but there will still be bad investment.
A simple takeaway
No investment framework is perfect. After achieving such outstanding performance in 2020, it is not surprising to see these stocks underperform the market for some time. It doesn’t matter; investing is to play games for decades, not years.
Currently, finding other companies with these characteristics is my top priority. For you, there is no harm in doing the same.