Snowball Special Issue No. 015: Looking for Ten-fold Stocks

Chapter 6 Talking about the logic and method of growth stock investment

Kong Gaifa, Private Equity Researcher of Geshang Financial Research Center, published on February 2014, 2

In 2013, there was a unilateral bull market on the GEM, and investment in growth stocks was once again sought after by investors.When it comes to growth stocks, most people think of them as start-up stocks, emerging industries or high-tech stocks, but this is not the case.

In 2003, the growth stocks in people's eyes were electricity, petrochemicals and steel; in 2007, banks and real estate were represented; in 2009, non-ferrous metals and coal; in 2013, the Internet and media became the biggest winners.The reason why these industries can rise in each stage has its special background, and at that stage, most people firmly believe in its development prospects.For example, the famous "beautiful 50" in American history was considered to be a stock that must be held or even held forever at that time. However, many companies have declined or completely disappeared today.There are always great deviations in human's prediction of the future. Many whimsical things finally become reality, while many things that are taken for granted are often far from reality.

The so-called growth stocks refer to the stocks whose growth rate is at the leading level in the current industry and are considered to have good development prospects and room for growth.But from the above examples, we can see that there are no stocks with high growth forever, and growth stocks only exist in a specific stage. Even if it is a company that can continue to grow, the growth rate will eventually slow down and become a traditional industry or a stable growth industry. .But this does not mean that investing in growth stocks is meaningless. If we can seize each stage of high-growth stocks, the final result must be very amazing.Of course, it would be even more wonderful if, like Buffett, he could find a company as great as Coca-Cola or even a company that would never need to be sold.

Everyone has their own way of investing in growth stocks.Let me briefly introduce the system for investing in growth stocks, and you can optimize it according to your own situation.

The first step is to choose an industry.The choice of the industry is the most important thing. Choosing the right industry is basically half the battle. Even if the buying point is wrong or the company is not good, as long as the industry is still growing at a high speed, it should not be difficult to get mixed up. But our purpose is not here, continue look down.

We can choose industries from three perspectives: social development, human needs, policy support, and the direction of scientific and technological development.From the perspective of social development, for example, environmental protection is a problem that we must face and solve. In the future, a large amount of investment will be required, and the industry will benefit from it; It will bring high-speed growth opportunities to related industries; in addition, urbanization will stimulate the explosive growth of mass brand consumer goods.Human needs are constantly rising, from the most basic material needs, safety needs, and social needs to spiritual needs. The explosion of the media sector this year is the most obvious demand-driven.Of course, human needs are ultimately restricted and guided by the development of science and technology, and the rapid popularization of mobile smart terminals since 3 has brought great opportunities for the development of consumer electronics.Therefore, the future Internet of Things and intelligence are very clear development directions.

The second step is to choose a company.The industry only gives an approximate range, and ultimately depends on the enterprise to achieve profitability.However, choosing the right company does not mean that the other half is successful, because the choice of buying point is also very important, which determines your mentality and ultimate profit.

The points that should be paid attention to when selecting a company are: growth rate, industry status, business model, management, etc.Business growth is critical.Usually everyone invests in growth stocks to invest in companies with the fastest growth rate, but obviously the driving factors and duration behind the growth rate are more important.Benefiting from the continuous increase of users or having pricing power, we welcome the high growth driven by the increase in gross profit margin brought about by price increases, while the quality of growth brought about by one-time revenue or mergers and acquisitions will be greatly reduced.The position of an enterprise in the entire industry chain is very important, which determines its competitive advantage.It is particularly critical to choose companies with moat advantages, including but not limited to competitive technologies and brands, unrepeatable natural monopoly resources, high barriers to entry, channel advantages, and so on.In addition, the business model is also very important.A good business model can make money lying down; a bad business model is like a flower in a mirror, and profits are always out of reach.A good management team is also very important.We can examine the vision, ability and management methods of the management, whether the management has the ambition to make the enterprise bigger and stronger, and whether the management has the spirit of sharing.

The third step is to value the business.There are many methods of valuation, but it is difficult to correctly value a company.Graham clearly told us in "Securities Analysis" that the purpose of securities analysis is not to determine the intrinsic value of a certain security, but to try to find out whether this value can provide protection for the price.Therefore, investors who are calculating the valuation accurately all day long are tantamount to seeking fish from a tree. Buffett also simply compares his investment to buying something for 4 yuan with 1 cents, which is definitely true to Balao!
Precise valuations are not required, but approximate valuations are required.At present, there are two mainstream valuation methods - PEG method and market value method.When we have already carried out the first two steps, the smaller the PEG, the better. It is relatively reasonable if it is less than 1 times, and it is a bargain if it is less than 0.6 times. If it exceeds 1.2 times, it may be suspected of being overvalued: It is also a rough estimate to look at the growth space of an industry or an enterprise from a global perspective.For example, we can calculate the market size of baby products needed by calculating the new population every year in the future.Second, it is also very useful in calculating whether a business is overvalued.For example, if the market value of a company exceeds the size of the entire industry, or the market value of a small brand company exceeds the industry leader, it is obviously overvalued.In addition, PB, market-sales method, discounted cash flow and other valuation methods can be used for reference and comparison.

We have basically finished introducing the methods of growth stock investment.So how to find growth industries and stocks?Industry researchers can make judgments ahead of the market from data such as industry prosperity, price, and sales; investors who are good at trend or technical analysis can also use stock price changes to discover changes in the industry, and then find the reasons behind them; Friends who do face-to-face or technical analysis don’t have to worry, Peter Lynch, a growth stock investment guru, told us: You can find investment targets from life, and the effect is more direct than research.For example, the box office explosion of a series of movies such as "Lost in Thailand" in 2014 can reveal the spring of the film and television industry. More and more colleagues around me are using smartphones such as Apple, Samsung, and Xiaomi. The convenience and popularity of WeChat have all Clearly tell us the direction of investment.

The methods mentioned above are simple and easy to understand, and everyone is using them, but the results are very different.Judgment on the market, selection of industries and stocks, requirements for valuation, mentality and operation, these factors may lead to different results.Stock trading is an art, not a science. Growth stock investment should not be taken out of stock investment alone. It is always the same. If you can combine some correct stock trading ideas, I believe it will definitely make your growth stock investment even more powerful.

(1) Do it in combination with the market.We put industry selection first. In fact, we should also consider the market before industry selection. If the market trend is downward, then we are already on the side of small probability before investing.

(2) Pursue certainty as much as possible.Always put safety first, if you can vote or not, then don't vote; if one company is surer than another, then give up the uncertain one.

(3) Choose the right buying point.After choosing a company, wait patiently for the right time.The mentality of making money when you buy it is different from the mentality of being 20% ​​quilt when you buy it. The mentality affects the operation and determines the result.

(4) Know how to stop winning at the right time.Those who can buy are apprentices, those who can sell are masters, and those who make money can put it in their pockets are their own.If the valuation is too high, the performance growth rate declines, or the stock price meets expectations, it is necessary to consider the issue of selling.

(5) It is better to have a catalyst.Sometimes we choose the industry and get the right stock, but we don't get the approval of the market and it never rises.Therefore, it is very important to buy the right stock at the right time. Time is also a cost. Try to choose a company with a catalyst.

Wonderful comments:

A maverick pig:
In 2003, the growth stocks in people’s eyes were electricity, petrochemicals, and steel; in 2007, banks and real estate were the representatives; in 2009, non-ferrous metals and coal were the representatives; in 2013, the Internet and the media became the biggest winners.The reason why these industries can rise in each stage has its special background, and at that stage most people believed in its development prospects.For example, the famous "beautiful 50" in American history was considered to be a stock that must be held at that time, or even a stock that could be held forever. However, many companies have declined or completely disappeared today.There are always great deviations in human's prediction of the future. Many whimsical things finally become reality, while many things that are taken for granted are often far from reality.

(End of this chapter)