WEBVTT 00:00:00.000 --> 00:00:01.899 Welcome back to the Deep Dive, where we take 00:00:01.899 --> 00:00:04.139 a complex stack of sources, articles, foundational 00:00:04.139 --> 00:00:06.940 texts, and investor notes and deliver the critical 00:00:06.940 --> 00:00:11.000 insights right to you. And today we have a really 00:00:11.000 --> 00:00:13.160 fundamental topic. Absolutely. If you've spent 00:00:13.160 --> 00:00:15.320 any time at all looking at the markets, you've 00:00:15.320 --> 00:00:17.820 probably wrestled with this core identity question. 00:00:18.399 --> 00:00:21.820 Are you a value investor or are you a growth 00:00:21.820 --> 00:00:24.660 investor? Right. It's presented as this big choice 00:00:24.660 --> 00:00:27.699 you have to make. Pick a team. Pick a team, exactly. 00:00:28.379 --> 00:00:30.820 Or... And this is the really intriguing part. 00:00:31.000 --> 00:00:34.000 Are those terms, as some of the titans of finance 00:00:34.000 --> 00:00:37.000 suggest, actually completely meaningless? That's 00:00:37.000 --> 00:00:39.479 the big question. So today our mission is to 00:00:39.479 --> 00:00:42.200 answer that by diving deep into the world of 00:00:42.200 --> 00:00:44.679 growth investing. And we want to achieve four 00:00:44.679 --> 00:00:47.240 key things for you, the listener. OK, let's lay 00:00:47.240 --> 00:00:49.780 them out. First, we need to get a really precise 00:00:49.780 --> 00:00:53.060 definition of growth investing and, you know, 00:00:53.060 --> 00:00:55.060 contrast it with that traditional view of value 00:00:55.060 --> 00:00:57.950 investing. The classic show. Second. And this 00:00:57.950 --> 00:01:00.329 is where it gets fascinating. We will explore 00:01:00.329 --> 00:01:04.030 the powerful philosophical connection, the synthesis 00:01:04.030 --> 00:01:07.310 between the two concepts, the one articulated 00:01:07.310 --> 00:01:09.670 by some of the most famous figures in capital 00:01:09.670 --> 00:01:12.530 history. Right, how the supposed offices actually 00:01:12.530 --> 00:01:15.090 merge. Then third, we'll look at the critical 00:01:15.090 --> 00:01:17.510 risk mitigation strategy that kind of emerged 00:01:17.510 --> 00:01:20.329 from some pretty spectacular market failures 00:01:20.329 --> 00:01:23.390 in the past. Learning from mistakes. Always important. 00:01:23.689 --> 00:01:25.890 And finally, we will break down the practical 00:01:25.890 --> 00:01:28.609 vehicles, the actual arenas you might use to 00:01:28.609 --> 00:01:30.769 execute a growth strategy in the real world. 00:01:30.870 --> 00:01:33.010 Our initial source material gives us the essential 00:01:33.010 --> 00:01:35.409 definition right away. It says growth investing 00:01:35.409 --> 00:01:38.290 is an investment strategy focused purely on capital 00:01:38.290 --> 00:01:40.989 appreciation. And that's a key phrase, capital 00:01:40.989 --> 00:01:43.890 appreciation. It is. The investor doesn't necessarily 00:01:43.890 --> 00:01:47.170 care about current income, like dividends. They 00:01:47.170 --> 00:01:49.890 are focused on one thing and one thing only. 00:01:49.989 --> 00:01:51.969 How much that stock price is going to go up over 00:01:51.969 --> 00:01:54.930 time. That's the entire game. It is. And to kick 00:01:54.930 --> 00:01:57.969 this off, we have to recognize what makes a growth 00:01:57.969 --> 00:02:00.549 investor fundamentally different from, let's 00:02:00.549 --> 00:02:04.069 say, a traditional value investor. A growth investor 00:02:04.069 --> 00:02:08.949 seeks companies that are showing signs of above 00:02:08.949 --> 00:02:12.639 average growth. Above average. So growth that 00:02:12.639 --> 00:02:15.539 significantly outpaces the general market or 00:02:15.539 --> 00:02:18.699 maybe their specific industry. Exactly. And that 00:02:18.699 --> 00:02:20.500 brings us to the immediate flag, the thing that 00:02:20.500 --> 00:02:22.900 would make a traditional value investor sort 00:02:22.900 --> 00:02:25.990 of. Pause. The price, the metric they focus on, 00:02:26.009 --> 00:02:28.129 the stock price compared to its current financial 00:02:28.129 --> 00:02:30.669 performance. That's it. When you look at the 00:02:30.669 --> 00:02:32.789 standard valuation metrics, and we should probably 00:02:32.789 --> 00:02:34.610 define a couple of these. Yeah, let's do that. 00:02:34.689 --> 00:02:36.870 The big one is the price to earnings ratio, or 00:02:36.870 --> 00:02:39.590 PE. Right. And all that is, is you're comparing 00:02:39.590 --> 00:02:42.110 the current share price. to the company's earnings 00:02:42.110 --> 00:02:44.530 per share over the last, say, 12 months. And 00:02:44.530 --> 00:02:46.689 a traditional market like the S &P 500 might 00:02:46.689 --> 00:02:49.590 trade at a PE of, what, 15 or 20, something like 00:02:49.590 --> 00:02:51.729 that. That's a pretty normal range. So a value 00:02:51.729 --> 00:02:53.569 investor, they might be hunting for stocks trading 00:02:53.569 --> 00:02:57.009 at a PE of 10 or maybe 12. Because on paper, 00:02:57.150 --> 00:02:59.229 based on what it's earning right now, it looks 00:02:59.229 --> 00:03:01.889 cheap. It looks like a bargain. A growth investor, 00:03:01.990 --> 00:03:05.639 though. They might see a stock with a P .E. of 00:03:05.639 --> 00:03:08.819 40, 60. I've even seen them in the hundreds and 00:03:08.819 --> 00:03:11.699 not blink. Which seems insane on the surface. 00:03:11.719 --> 00:03:14.240 Why would you pay that much? Because they are 00:03:14.240 --> 00:03:17.319 betting that the E in that P .E., the earnings, 00:03:17.419 --> 00:03:20.099 is about to explode upward in the future. They 00:03:20.099 --> 00:03:22.460 are paying a huge premium today for tomorrow's 00:03:22.460 --> 00:03:24.979 profits. OK, let's unpack this, starting with 00:03:24.979 --> 00:03:27.460 the fundamentals. If a growth company looks so 00:03:27.460 --> 00:03:30.680 expensive now, what on earth justifies that risk? 00:03:30.919 --> 00:03:33.599 The justification is all about potential. versus 00:03:33.599 --> 00:03:36.120 its current establishment. I mean, growth investing 00:03:36.120 --> 00:03:38.699 means choosing a company that has yet to reach 00:03:38.699 --> 00:03:41.000 its full potential. It hasn't saturated its market. 00:03:41.139 --> 00:03:43.139 So you're getting in on the ground floor, or 00:03:43.139 --> 00:03:45.300 at least not the penthouse suite? You hope so. 00:03:45.479 --> 00:03:48.840 And it requires a ton of research. You, the investor, 00:03:48.960 --> 00:03:52.319 are consciously taking on a higher risk compared 00:03:52.319 --> 00:03:55.159 to, say, putting your capital into an already 00:03:55.159 --> 00:03:57.419 established, maybe debt laden, but very stable 00:03:57.419 --> 00:03:59.719 utility company. Right. A company that's been 00:03:59.719 --> 00:04:01.740 around for 100 years and isn't going anywhere, 00:04:01.860 --> 00:04:03.840 but also isn't going to grow at 50 percent a 00:04:03.840 --> 00:04:06.979 year. Exactly. So it's a commitment to that potential 00:04:06.979 --> 00:04:09.819 outcome, which means the investor must truly 00:04:09.819 --> 00:04:13.199 believe they've found something special, a unique 00:04:13.199 --> 00:04:16.019 competitive advantage. But what are the tangible 00:04:16.019 --> 00:04:19.069 signs? The financial characteristics that signal 00:04:19.069 --> 00:04:22.550 a genuine growth company, not just hype. Our 00:04:22.550 --> 00:04:25.170 sources give us two really defining financial 00:04:25.170 --> 00:04:28.290 characteristics. The first one is, well, it's 00:04:28.290 --> 00:04:30.810 pretty obvious. Let me guess. They have to actually 00:04:30.810 --> 00:04:34.009 grow. They have to actually grow. They must have 00:04:34.009 --> 00:04:35.870 the potential to grow their revenue and earnings 00:04:35.870 --> 00:04:39.240 at a rate that is... statistically demonstrably 00:04:39.240 --> 00:04:41.160 higher than the market average. We're talking 00:04:41.160 --> 00:04:43.660 15 percent, 20 percent annual growth when the 00:04:43.660 --> 00:04:46.439 S &P 500 might just be chugging along at 7 percent. 00:04:46.579 --> 00:04:48.879 A huge difference. And the second characteristic, 00:04:49.079 --> 00:04:51.180 this is where they really break from the traditional 00:04:51.180 --> 00:04:53.899 value plays. It relates to how they manage their 00:04:53.899 --> 00:04:56.629 cash. This is absolutely critical. Growth companies 00:04:56.629 --> 00:04:59.709 will often, and I'd say necessarily, reinvest 00:04:59.709 --> 00:05:01.689 their entire earnings back into the business. 00:05:01.810 --> 00:05:03.790 Every single dollar. Every dollar. Think of them 00:05:03.790 --> 00:05:06.029 like a high -performance engine that just consumes 00:05:06.029 --> 00:05:08.350 all of its own fuel to maximize speed rather 00:05:08.350 --> 00:05:10.329 than letting any of it trickle out. So they're 00:05:10.329 --> 00:05:13.189 constantly funding R &D, scaling up their infrastructure, 00:05:13.490 --> 00:05:16.250 expanding into new countries, or just marketing 00:05:16.250 --> 00:05:18.529 like crazy to grab more market share. All of 00:05:18.529 --> 00:05:21.709 the above. Which is precisely why they typically 00:05:21.709 --> 00:05:24.290 do not pay dividends to their stockholders. Right. 00:05:24.370 --> 00:05:27.569 A mature company, say, a big bank or a consumer 00:05:27.569 --> 00:05:30.029 staple company, they'll return a portion of their 00:05:30.029 --> 00:05:32.629 profits to shareholders every quarter as a dividend. 00:05:33.129 --> 00:05:36.350 It's a reward for owning the stock. But a growth 00:05:36.350 --> 00:05:38.529 company tells its investors something very different. 00:05:38.569 --> 00:05:41.259 It says, we are keeping your money. And we're 00:05:41.259 --> 00:05:43.500 keeping it because we can generate a much higher 00:05:43.500 --> 00:05:46.279 return for you by reinvesting it into our business 00:05:46.279 --> 00:05:48.740 than you could likely achieve by taking that 00:05:48.740 --> 00:05:50.420 cash out and trying to reinvest it yourself. 00:05:50.699 --> 00:05:53.779 That is the implicit promise. Every dollar they 00:05:53.779 --> 00:05:56.180 earn gets poured back into development or expansion. 00:05:56.459 --> 00:05:58.819 The very things that fuel that above average 00:05:58.819 --> 00:06:00.939 growth rate we talked about. And the root of 00:06:00.939 --> 00:06:02.699 this potential, according to the sources, it 00:06:02.699 --> 00:06:05.420 usually comes from one place. It does. It typically 00:06:05.420 --> 00:06:08.139 stems from the company offering a unique or advanced 00:06:08.139 --> 00:06:10.819 product that gives them a sustainable competitive 00:06:10.819 --> 00:06:13.980 edge, what some people call an economic moat. 00:06:14.279 --> 00:06:16.180 So they have something that's hard to copy, that's 00:06:16.180 --> 00:06:18.519 disruptive, that allows them to either steal 00:06:18.519 --> 00:06:21.220 market share from incumbents or even better, 00:06:21.259 --> 00:06:24.360 create a whole new market out of thin air. That's 00:06:24.360 --> 00:06:27.420 the ideal scenario. Now, before we get into how 00:06:27.420 --> 00:06:29.939 these ideas all converge, we really have to ground 00:06:29.939 --> 00:06:32.160 this in a bit of history. This is not a new concept 00:06:32.160 --> 00:06:34.240 that just popped up the Internet. Right. Who 00:06:34.240 --> 00:06:36.879 were the original architects of this whole philosophy? 00:06:37.120 --> 00:06:39.160 We have to recognize two foundational figures. 00:06:39.439 --> 00:06:42.459 The first is a man named Thomas Rowe Price Jr. 00:06:43.019 --> 00:06:45.439 T. Rowe Price. I know that name from the mutual 00:06:45.439 --> 00:06:48.500 fund company. The very same. He is often called 00:06:48.500 --> 00:06:51.459 the father of growth investing. And for a very 00:06:51.459 --> 00:06:54.399 good reason. He didn't just practice it informally. 00:06:54.420 --> 00:06:57.680 He defined it. He promoted it. And he institutionalized 00:06:57.680 --> 00:07:00.660 it through his company, T. Rowe Price, which 00:07:00.660 --> 00:07:05.300 he founded way back in 1937. Wow. 1937. So this 00:07:05.300 --> 00:07:07.819 systematic focus on growth companies as a distinct 00:07:07.819 --> 00:07:10.500 strategy actually dates back to the era of the 00:07:10.500 --> 00:07:12.439 Great Depression. That's fascinating. What was 00:07:12.439 --> 00:07:14.379 his big insight at the time? Well, at a time 00:07:14.379 --> 00:07:16.399 when most investors were just looking for safety 00:07:16.399 --> 00:07:19.139 and dividends, Price's main contribution was 00:07:19.139 --> 00:07:21.600 identifying that certain companies, regardless 00:07:21.600 --> 00:07:24.439 of the overall economic cycle, had these inherent 00:07:24.439 --> 00:07:26.920 characteristics that allowed them to grow their 00:07:26.920 --> 00:07:30.120 earnings faster than inflation, faster than the 00:07:30.120 --> 00:07:32.240 general economy. So he was looking for outliers. 00:07:32.500 --> 00:07:36.220 He was. And he focused heavily on specific industries. 00:07:36.439 --> 00:07:39.139 He loved pharmaceuticals, technology, electronics 00:07:39.139 --> 00:07:42.139 sectors that he viewed as having these enduring 00:07:42.139 --> 00:07:45.120 structural growth tailwinds. He was one of the 00:07:45.120 --> 00:07:47.439 first to really move away from the traditional 00:07:47.439 --> 00:07:50.279 model of just. buying stocks with low P .E. ratios 00:07:50.279 --> 00:07:53.959 in mature, slow growth industries. So his framework 00:07:53.959 --> 00:07:56.420 was essential in establishing growth as a legitimate, 00:07:56.560 --> 00:07:59.439 distinct investment category, not just, you know, 00:07:59.439 --> 00:08:01.939 wild speculation. Absolutely. He gave it a structure. 00:08:02.040 --> 00:08:04.759 So Price laid the institutional and industrial 00:08:04.759 --> 00:08:07.379 foundation. Right. But the second pioneer, he's 00:08:07.379 --> 00:08:09.519 the one who gave the average investor the actual 00:08:09.519 --> 00:08:11.879 manual for how to identify these stocks based 00:08:11.879 --> 00:08:14.160 on their management and their qualitative characteristics. 00:08:14.459 --> 00:08:16.360 So that would be Phil Fisher. That would be Phil 00:08:16.360 --> 00:08:21.350 Fisher. His influence is arguably even more direct 00:08:21.350 --> 00:08:24.310 on modern stock picking. His book from 1958, 00:08:24.709 --> 00:08:27.389 Common Stocks and Uncommon Profits, is still 00:08:27.389 --> 00:08:30.009 considered, you know, the Bible for identifying 00:08:30.009 --> 00:08:32.090 growth companies. So if price was more about 00:08:32.090 --> 00:08:34.750 the big picture, the industry trends, Fisher 00:08:34.750 --> 00:08:37.230 was more about the company itself. That's a great 00:08:37.230 --> 00:08:40.110 way to put it. Price was more quantitative. Fisher 00:08:40.110 --> 00:08:42.490 was fundamentally qualitative. Can you elaborate 00:08:42.490 --> 00:08:44.850 on that qualitative approach? What was Fisher 00:08:44.850 --> 00:08:47.929 looking for that the traditional number crunchers 00:08:47.929 --> 00:08:50.309 were just ignoring? Fisher was famous for what 00:08:50.309 --> 00:08:52.929 he called the scuttlebutt method, which is a 00:08:52.929 --> 00:08:55.350 great name. Scuttlebutt. I like it. Instead of 00:08:55.350 --> 00:08:57.690 just looking at a P .E. ratio on a balance sheet, 00:08:57.809 --> 00:09:00.350 he urged investors to get out of their chairs. 00:09:00.590 --> 00:09:03.110 He wanted them to talk to competitors, customers, 00:09:03.389 --> 00:09:06.720 suppliers, even former employees. To gather gossip 00:09:06.720 --> 00:09:09.000 and intelligence the scuttlebutt about where 00:09:09.000 --> 00:09:11.960 the company really stands in its industry. Precisely. 00:09:12.220 --> 00:09:15.019 He believed the true long -term value of a company 00:09:15.019 --> 00:09:17.700 lay in things you can't easily quantify. The 00:09:17.700 --> 00:09:19.600 quality of its management team, its long -term 00:09:19.600 --> 00:09:21.759 goals, and that unique competitive advantage 00:09:21.759 --> 00:09:23.860 we mentioned. I remember reading that he actually 00:09:23.860 --> 00:09:26.000 formalized this into a checklist, didn't he? 00:09:26.080 --> 00:09:28.960 He did. His famous 15 points to look for in a 00:09:28.960 --> 00:09:31.820 common stock. And they were almost all qualitative 00:09:31.820 --> 00:09:34.779 measures. Things like, does the company have 00:09:34.779 --> 00:09:37.970 an honest and focused management team? Or is 00:09:37.970 --> 00:09:40.429 the company truly committed to research and development? 00:09:40.669 --> 00:09:42.610 Or does the company have an above average profit 00:09:42.610 --> 00:09:45.350 margin, which gets a little more quantitative, 00:09:45.570 --> 00:09:48.610 but it's still about quality. Right. It sounds 00:09:48.610 --> 00:09:51.090 like Fisher was perfectly willing to pay what 00:09:51.090 --> 00:09:53.549 looked like a high price for a stock if it checked 00:09:53.549 --> 00:09:56.470 all 15 of his bonds. Because he believed those 00:09:56.470 --> 00:09:59.090 qualitative features are what guarantee sustained 00:09:59.090 --> 00:10:01.769 future growth. The very thing that justifies 00:10:01.769 --> 00:10:03.669 paying that high P .E. ratio in the first place. 00:10:03.769 --> 00:10:06.570 Absolutely. Fisher's big lesson was that if you 00:10:06.570 --> 00:10:08.450 found a company with superior management and 00:10:08.450 --> 00:10:11.070 an enduring product advantage, the current price 00:10:11.070 --> 00:10:13.990 was secondary to its long -term potential. These 00:10:13.990 --> 00:10:16.649 two figures, Price and Fisher, they really established 00:10:16.649 --> 00:10:18.830 the traditional school of thought that growth 00:10:18.830 --> 00:10:21.870 is a distinct style focused on capital appreciation 00:10:21.870 --> 00:10:25.149 fueled by reinvested earnings and unique products. 00:10:25.429 --> 00:10:29.029 But now, now we have to look at how that traditional 00:10:29.029 --> 00:10:32.750 division was, for lack of a better word, absolutely 00:10:32.750 --> 00:10:36.009 dismantled. Right. Because the story doesn't 00:10:36.009 --> 00:10:37.789 end there. Here's where it gets really interesting. 00:10:37.950 --> 00:10:40.669 Because the conversation doesn't stop with that 00:10:40.669 --> 00:10:43.409 traditional divide, we have to discuss the philosophical 00:10:43.409 --> 00:10:46.149 convergence of you that was articulated most 00:10:46.149 --> 00:10:48.470 famously by one of the world's most successful 00:10:48.470 --> 00:10:51.009 investing duos. We're talking, of course, about 00:10:51.009 --> 00:10:53.490 Warren Buffett. And he was heavily influenced 00:10:53.490 --> 00:10:56.409 in this by his partner, the late Charlie Munger. 00:10:56.450 --> 00:10:59.309 Right. And they spent decades challenging this 00:10:59.309 --> 00:11:02.590 core assumption that growth and value are these 00:11:02.590 --> 00:11:06.669 two separate opposing strategies. Their own intellectual 00:11:06.669 --> 00:11:08.950 journey is fascinating. They started with Benjamin 00:11:08.950 --> 00:11:12.250 Graham's pure. Deep value approach, you know, 00:11:12.269 --> 00:11:14.710 the famous buying dollars for 50 cents, looking 00:11:14.710 --> 00:11:16.990 for cigar butts on the ground with one good puff 00:11:16.990 --> 00:11:19.669 left. Very quantitative, very focused on the 00:11:19.669 --> 00:11:21.750 balance sheet and what a company is worth in 00:11:21.750 --> 00:11:24.809 liquidation. Exactly. But they evolved and they 00:11:24.809 --> 00:11:26.809 moved toward a synthesis that really changed 00:11:26.809 --> 00:11:31.350 everything. And the idea that Buffett, who everyone 00:11:31.350 --> 00:11:34.409 thinks of as the ultimate value investor, would 00:11:34.409 --> 00:11:36.389 eventually say there is no theoretical difference 00:11:36.389 --> 00:11:39.019 between value and growth. I mean, that sounds 00:11:39.019 --> 00:11:41.419 like heresy to a lot of people. It does. It sounds 00:11:41.419 --> 00:11:43.659 like he's betraying his own team. So how did 00:11:43.659 --> 00:11:45.639 he arrive at that conclusion? And how does it 00:11:45.639 --> 00:11:48.039 unite these two seemingly opposed approaches? 00:11:48.480 --> 00:11:51.500 Well, it forces us to use the ultimate financial 00:11:51.500 --> 00:11:54.860 tool, the bedrock of all valuation. which is 00:11:54.860 --> 00:11:57.960 a discounted cash flow analysis, or DCF. Okay, 00:11:58.019 --> 00:12:00.019 let's break that down simply. Buffett's position 00:12:00.019 --> 00:12:04.200 is definitive and it's very clear. The intrinsic 00:12:04.200 --> 00:12:07.440 value of any business is the present value of 00:12:07.440 --> 00:12:09.820 all the cash flows that business is expected 00:12:09.820 --> 00:12:12.419 to generate over its remaining life. Period. 00:12:12.580 --> 00:12:15.580 Full stop. So the value of a stock today isn't 00:12:15.580 --> 00:12:17.700 defined by what it earned last year. That's the 00:12:17.700 --> 00:12:20.379 E in PE. It's defined by all the money it's going 00:12:20.379 --> 00:12:21.759 to earn from now until the day it eventually 00:12:21.759 --> 00:12:24.000 ceases to exist. Exactly. You're trying to figure 00:12:24.000 --> 00:12:25.759 out what all those future profits are worth if 00:12:25.759 --> 00:12:27.659 you had them in your hand today. Yeah. And that 00:12:27.659 --> 00:12:30.519 is where growth comes in. Ah, okay. I see where 00:12:30.519 --> 00:12:32.740 this is going. Growth is always a component in 00:12:32.740 --> 00:12:35.039 that calculation of value. There's no way to 00:12:35.039 --> 00:12:37.200 separate it. If you expect a company to grow 00:12:37.200 --> 00:12:39.980 its cash flow by 20 % a year for the next decade, 00:12:40.240 --> 00:12:42.940 that future stream of cash is going to be far, 00:12:42.980 --> 00:12:45.639 far larger than a company you only expect to 00:12:45.639 --> 00:12:48.299 grow by 2 % a year. So mathematically, growth 00:12:48.299 --> 00:12:50.740 isn't a style of investing at all. It's just 00:12:50.740 --> 00:12:53.240 a crucial variable in the value equation itself. 00:12:53.539 --> 00:12:55.879 That's the core realization. It's just math. 00:12:56.179 --> 00:12:58.379 Buffett elaborated on this, saying that the importance 00:12:58.379 --> 00:13:01.740 of that growth variable can range from almost... 00:13:01.980 --> 00:13:04.960 negligible, say, for a mature pipeline operator 00:13:04.960 --> 00:13:08.340 to absolutely enormous for a high -flying tech 00:13:08.340 --> 00:13:11.000 disruptor. And crucially, its impact isn't always 00:13:11.000 --> 00:13:13.679 good. That's a fantastic point. Its impact can 00:13:13.679 --> 00:13:15.779 be negative as well as positive. If a company 00:13:15.779 --> 00:13:17.580 is growing recklessly, maybe it's loading up 00:13:17.580 --> 00:13:20.639 on unsustainable debt to expand or it's pursuing 00:13:20.639 --> 00:13:23.019 these terrible acquisitions that destroy shareholder 00:13:23.019 --> 00:13:25.899 value. That's bad growth. And that bad growth 00:13:25.899 --> 00:13:27.899 component would actually reduce its calculated 00:13:27.899 --> 00:13:31.159 intrinsic value. It actively subtracts from it. 00:13:32.009 --> 00:13:34.909 That reframing is so powerful because it just 00:13:34.909 --> 00:13:38.149 eliminates the tribalism in investing. It means 00:13:38.149 --> 00:13:41.470 you can't possibly assess a company's value without 00:13:41.470 --> 00:13:43.909 first assessing the quality of its future growth 00:13:43.909 --> 00:13:46.389 trajectory. Which is what led to Buffett's often 00:13:46.389 --> 00:13:48.509 quoted statement about the redundancy of one 00:13:48.509 --> 00:13:50.570 of the most popular terms in all of finance. 00:13:50.870 --> 00:13:53.289 Right. He argues the term value investing is 00:13:53.289 --> 00:13:56.960 itself redundant. How so? Well, if you think 00:13:56.960 --> 00:13:59.080 about it, why would anyone ever buy a security 00:13:59.080 --> 00:14:02.299 unless they calculated that its value was at 00:14:02.299 --> 00:14:05.299 least sufficient to justify the amount they paid? 00:14:05.759 --> 00:14:08.460 If you're buying a stock for $100, it's because 00:14:08.460 --> 00:14:12.000 you believe it's worth $100 or you hope more. 00:14:12.299 --> 00:14:14.580 If you didn't believe that, it wouldn't be investing. 00:14:14.879 --> 00:14:17.080 It would be pure speculation or just gambling. 00:14:17.139 --> 00:14:19.019 You're just hoping someone else comes along and 00:14:19.019 --> 00:14:21.259 pays more for it later for no good reason. That 00:14:21.259 --> 00:14:23.659 makes perfect sense. Whether I'm buying a stock 00:14:23.659 --> 00:14:25.679 trading at 10 times earnings because I think 00:14:25.679 --> 00:14:28.480 it's unfairly cheap, or I'm buying a high growth 00:14:28.480 --> 00:14:30.940 stock at 50 times earnings because I calculate 00:14:30.940 --> 00:14:32.960 that its future cash flows make it worth, say, 00:14:33.059 --> 00:14:37.179 60 times earnings, I'm still doing the same fundamental 00:14:37.179 --> 00:14:40.059 action. You are. You're performing the same action. 00:14:40.899 --> 00:14:44.460 Calculating whether the future value justifies 00:14:44.460 --> 00:14:46.820 the price you are paying now is the definition 00:14:46.820 --> 00:14:49.769 of rational capital allocation. And this whole 00:14:49.769 --> 00:14:52.730 philosophical synthesis, this blending of quality 00:14:52.730 --> 00:14:55.049 and price, is just perfectly captured in that 00:14:55.049 --> 00:14:58.269 famous guiding maxim that summed up the shift 00:14:58.269 --> 00:15:00.870 in the Buffett and Munger approach. The big one. 00:15:01.090 --> 00:15:03.509 It's far better to buy a wonderful company at 00:15:03.509 --> 00:15:06.070 a fair price than a fair company at a wonderful 00:15:06.070 --> 00:15:08.669 price. Let's really spend a moment on that quote 00:15:08.669 --> 00:15:10.769 because it is the ultimate instruction for you, 00:15:10.809 --> 00:15:12.870 the listener. The traditional value investor, 00:15:13.129 --> 00:15:15.610 the one steeped in Ben Graham's tradition, would 00:15:15.610 --> 00:15:17.750 have gone straight for the fair company at a 00:15:17.750 --> 00:15:19.570 wonderful price. Oh, absolutely. That's their 00:15:19.570 --> 00:15:22.570 whole game. They prioritize the price, the discount 00:15:22.570 --> 00:15:25.990 above everything else. And that fair company 00:15:25.990 --> 00:15:28.990 at a wonderful price is that stock we mentioned 00:15:28.990 --> 00:15:31.710 that's trading at a P .E. of 10. It looks cheap 00:15:31.710 --> 00:15:34.460 on the surface. It looks cheap. But if it has 00:15:34.460 --> 00:15:37.519 no sustainable competitive advantage, no real 00:15:37.519 --> 00:15:40.139 growth potential, and it's facing all these structural 00:15:40.139 --> 00:15:43.000 headwinds in its industry, it might just be a 00:15:43.000 --> 00:15:46.139 value trap. Meaning the price is low for a very 00:15:46.139 --> 00:15:48.840 good reason. Its future is flat or maybe even 00:15:48.840 --> 00:15:51.279 declining. Exactly. It's cheap and it's going 00:15:51.279 --> 00:15:53.940 to stay cheap. But the wonderful company, on 00:15:53.940 --> 00:15:56.200 the other hand, the one that Synthesis prioritizes, 00:15:56.279 --> 00:15:58.279 is probably that growth company we described 00:15:58.279 --> 00:16:00.639 earlier. The one with the unique product that's 00:16:00.639 --> 00:16:04.000 constantly reinvesting its earnings and possesses 00:16:04.000 --> 00:16:06.860 that wide economic moat. That's the one. And 00:16:06.860 --> 00:16:09.200 it might be trading at a PE of 30, which initially 00:16:09.200 --> 00:16:11.580 feels expensive to a traditional value investor. 00:16:11.740 --> 00:16:15.000 But 30 times earnings is a fair price for a wonderful 00:16:15.000 --> 00:16:18.279 company. And why? Because that wonderful company 00:16:18.279 --> 00:16:21.039 generates massive sustainable cash flow growth, 00:16:21.139 --> 00:16:24.080 which compounds over time. Buffett and Munger 00:16:24.080 --> 00:16:26.159 realized that paying a little bit more up front 00:16:26.159 --> 00:16:29.360 for a truly exceptional business, a growth business, 00:16:29.620 --> 00:16:32.559 yields exponentially greater returns in the long 00:16:32.559 --> 00:16:35.500 run than getting a mediocre business for a steal. 00:16:35.799 --> 00:16:39.220 So the quality of the growth far, far outweighs 00:16:39.220 --> 00:16:41.580 the benefit of getting a big initial discount. 00:16:41.820 --> 00:16:44.899 By a country mile. The implication for you, the 00:16:44.899 --> 00:16:48.419 listener, is crystal clear. True investing, regardless 00:16:48.419 --> 00:16:50.720 of what you call it, requires you to prioritize 00:16:50.720 --> 00:16:53.039 the quality of the business, the wonderful company 00:16:53.039 --> 00:16:55.679 aspect, which is inherently linked to its sustainable 00:16:55.679 --> 00:16:58.320 growth potential over just finding a cheap current 00:16:58.320 --> 00:17:01.000 price. It shows how growth potential isn't separate 00:17:01.000 --> 00:17:03.500 from value. It's integral to assessing it. It's 00:17:03.500 --> 00:17:06.119 the ultimate aha moment. Growth doesn't compete 00:17:06.119 --> 00:17:08.259 with value. It is the engine of value creation. 00:17:08.579 --> 00:17:12.180 But. But, and this is a huge but, this leads 00:17:12.180 --> 00:17:14.420 us directly to the inherent practical risk in 00:17:14.420 --> 00:17:16.910 growth investing. paying too much for that future 00:17:16.910 --> 00:17:19.490 potential. Exactly. Even a wonderful company 00:17:19.490 --> 00:17:21.910 can be a terrible investment if you wildly overpay 00:17:21.910 --> 00:17:25.029 for it. And that brings us to the crucial mitigation 00:17:25.029 --> 00:17:28.130 strategy that emerged from, well, from investors 00:17:28.130 --> 00:17:30.490 learning this lesson the hard way, particularly 00:17:30.490 --> 00:17:33.869 after the spectacular failures of the late 1990s. 00:17:33.890 --> 00:17:37.390 Growth at a reasonable price, or JOROP. JOROP. 00:17:37.589 --> 00:17:40.009 The need for this really stemmed from market 00:17:40.009 --> 00:17:43.009 euphoria, right? If growth is so valuable, what 00:17:43.009 --> 00:17:45.269 stops an investor from just paying any price 00:17:45.269 --> 00:17:48.190 for it? Well, for a while there in the late 90s, 00:17:48.190 --> 00:17:51.349 the answer was nothing. Nothing stopped them. 00:17:51.549 --> 00:17:54.549 except the painful reality of future results. 00:17:55.230 --> 00:17:58.009 JARUP is the hybrid strategy that tries to capture 00:17:58.009 --> 00:18:00.549 the best attributes of both philosophies. OK, 00:18:00.630 --> 00:18:03.029 let's define this hybrid. JARUP investors are 00:18:03.029 --> 00:18:04.650 looking for stocks they believe will deliver 00:18:04.650 --> 00:18:06.849 that above average growth. Yes, they want the 00:18:06.849 --> 00:18:09.170 growth. But they apply a rigorous value discipline 00:18:09.170 --> 00:18:11.569 to the selection process. They insist that the 00:18:11.569 --> 00:18:14.029 stock must not be too expensive. And the key 00:18:14.029 --> 00:18:17.000 here is defining that word reasonable. It's squishy. 00:18:17.279 --> 00:18:20.039 How do you quantify whether a high price is reasonable 00:18:20.039 --> 00:18:22.019 for a company with high growth? This is where 00:18:22.019 --> 00:18:24.319 a technical balance comes in, a specific metric 00:18:24.319 --> 00:18:26.839 that links the three key components, price, earnings, 00:18:26.960 --> 00:18:30.299 and growth. And that metric is the price to earnings 00:18:30.299 --> 00:18:33.319 to growth ratio. Or the PEG ratio. The PEG ratio 00:18:33.319 --> 00:18:35.740 is so elegant in its simplicity, but it's an 00:18:35.740 --> 00:18:38.079 incredibly powerful tool for JARP investors. 00:18:38.220 --> 00:18:40.519 You just take the standard PE ratio that we talked 00:18:40.519 --> 00:18:42.680 about. And you divide it by the expected annual 00:18:42.680 --> 00:18:44.839 growth rate of the earnings. That's it. So you're 00:18:44.839 --> 00:18:47.400 putting price in the context of growth. Exactly. 00:18:47.500 --> 00:18:49.920 And the ratio provides a crucial rule of thumb. 00:18:50.299 --> 00:18:53.500 If a company has a PE of 20 and its expected 00:18:53.500 --> 00:18:57.099 annual growth rate is also 20%, then you divide 00:18:57.099 --> 00:19:00.980 20 by 20 and your PEG ratio is 1. And a peg ratio 00:19:00.980 --> 00:19:03.140 of one, or maybe a little less, is generally 00:19:03.140 --> 00:19:05.200 considered the sweet spot for a GARP investor. 00:19:05.480 --> 00:19:07.920 It is. A peg of one means you are paying one 00:19:07.920 --> 00:19:09.880 unit of price for every one unit of expected 00:19:09.880 --> 00:19:12.759 growth. You are, in theory, paying a reasonable 00:19:12.759 --> 00:19:15.160 price for that growth. But if the PEG is, say, 00:19:15.240 --> 00:19:19.039 2, for example, a PE of 40 for a company that's 00:19:19.039 --> 00:19:21.539 only growing at 20%. Now you are paying twice 00:19:21.539 --> 00:19:24.099 as much as the growth seems to justify. That's 00:19:24.099 --> 00:19:25.920 when the price starts to look unreasonable. It's 00:19:25.920 --> 00:19:28.740 a red flag. So the PEG ratio basically serves 00:19:28.740 --> 00:19:31.759 as the disciplinarian. It's the little voice 00:19:31.759 --> 00:19:34.019 of reason that prevents the investor from falling 00:19:34.019 --> 00:19:36.619 into that growth at any price trap. That's the 00:19:36.619 --> 00:19:38.619 core mechanic. And this strategy didn't just 00:19:38.619 --> 00:19:41.589 appear out of thin air in a text. It gained immense 00:19:41.589 --> 00:19:45.210 popularity after a massive, painful market reckoning. 00:19:45.309 --> 00:19:47.950 And that historical context is just essential. 00:19:48.390 --> 00:19:51.930 JRP became significantly more fashionable after 00:19:51.930 --> 00:19:54.269 the bursting of the dot -com bubble around the 00:19:54.269 --> 00:19:57.069 turn of the millennium. Why was that period the 00:19:57.069 --> 00:19:59.849 ultimate cautionary tale? Oh, the dot -com era 00:19:59.849 --> 00:20:03.130 was the absolute height of pure, unbridled growth. 00:20:03.869 --> 00:20:06.890 At any price. I mean, investors were buying companies 00:20:06.890 --> 00:20:09.430 that often had zero earnings. Sometimes they 00:20:09.430 --> 00:20:11.509 had zero revenue. They were pre -revenue. Pre 00:20:11.509 --> 00:20:13.930 -revenue. All based on the speculative hope of 00:20:13.930 --> 00:20:16.609 exponential future dominance. Metrics like P 00:20:16.609 --> 00:20:18.990 -E ratios became totally irrelevant because the 00:20:18.990 --> 00:20:21.289 E was negative or non -existent. I remember the 00:20:21.289 --> 00:20:23.089 common defense at the time was that you weren't 00:20:23.089 --> 00:20:24.869 buying current profitability. You were buying 00:20:24.869 --> 00:20:27.470 future eyeballs or market share. You were buying 00:20:27.470 --> 00:20:30.880 the future. Exactly. But the valuation models 00:20:30.880 --> 00:20:33.339 were completely disconnected from that DCF math 00:20:33.339 --> 00:20:35.759 we discussed earlier. People were assigning these 00:20:35.759 --> 00:20:37.980 astronomical valuations to growth rates that 00:20:37.980 --> 00:20:41.019 were purely speculative. They were stories, not 00:20:41.019 --> 00:20:43.279 spreadsheets. And when the market reality hit? 00:20:43.400 --> 00:20:45.460 When investors finally realized that a company 00:20:45.460 --> 00:20:48.279 like, say, Pets .com, which was growing its revenue 00:20:48.279 --> 00:20:50.660 but just bleeding cash on every single sale, 00:20:50.859 --> 00:20:53.599 would never, ever turn a profit that could justify 00:20:53.599 --> 00:20:56.839 its market cap. Well, the failure of the growth 00:20:56.839 --> 00:20:59.640 at any price approach became terrifyingly clear. 00:20:59.799 --> 00:21:02.279 And the result was devastating for those investors. 00:21:02.519 --> 00:21:05.079 The lesson was painful but clear. Attaching a 00:21:05.079 --> 00:21:07.940 high speculative price to a security in the hope 00:21:07.940 --> 00:21:10.460 of astronomical future growth is an inherently 00:21:10.460 --> 00:21:13.410 fragile strategy. If the actual growth rate, 00:21:13.450 --> 00:21:15.930 the real world results, fails to live up to those 00:21:15.930 --> 00:21:19.049 lofty, often hyperbolic expectations, the price 00:21:19.049 --> 00:21:21.289 of the security doesn't just dip. It can plummet 00:21:21.289 --> 00:21:24.450 swiftly and severely and wipe out entire portfolios. 00:21:24.549 --> 00:21:27.069 Right. It's a collapse. So the GARUP strategy 00:21:27.069 --> 00:21:29.269 is essentially the risk management layer for 00:21:29.269 --> 00:21:31.910 the growth investor. It's that critical thinking 00:21:31.910 --> 00:21:35.049 aspect, managing your own expectations versus 00:21:35.049 --> 00:21:37.849 the price you have to pay to avoid buying into 00:21:37.849 --> 00:21:40.640 the bubble of excessive optimism. It's the mature 00:21:40.640 --> 00:21:43.039 stage of growth investing. It's saying, yes, 00:21:43.099 --> 00:21:44.880 I want to find stocks with high growth rates, 00:21:44.980 --> 00:21:47.980 but I have to ensure they are trading at reasonable 00:21:47.980 --> 00:21:50.799 valuations by using tools like the peg ratio. 00:21:51.059 --> 00:21:53.000 It's proof that the most sophisticated investors 00:21:53.000 --> 00:21:55.200 have really synthesized the forward -looking 00:21:55.200 --> 00:21:58.059 vision of Price and Fisher with the value discipline 00:21:58.059 --> 00:22:00.920 of Buffett and Munger. They accept that quality 00:22:00.920 --> 00:22:03.519 growth is paramount, but price discipline is 00:22:03.519 --> 00:22:06.529 the necessary anchor to reality. Excellent. So 00:22:06.529 --> 00:22:08.589 we've covered the theory, the philosophy, the 00:22:08.589 --> 00:22:11.410 big synthesis, and the crucial risk mitigation 00:22:11.410 --> 00:22:14.269 strategy. Now let's move from these abstract 00:22:14.269 --> 00:22:17.369 concepts to actual execution. Right. Where the 00:22:17.369 --> 00:22:19.609 rubber meets the road. Exactly. Say you, the 00:22:19.609 --> 00:22:21.549 listener, you've decided you want to implement 00:22:21.549 --> 00:22:23.829 this refined growth investment strategy, the 00:22:23.829 --> 00:22:26.950 JARP approach. What are the actual vehicles and 00:22:26.950 --> 00:22:28.650 arenas you might focus on? Where do you even 00:22:28.650 --> 00:22:31.480 start to cast your net? Our sources lay out six 00:22:31.480 --> 00:22:34.359 primary arenas where growth investors typically 00:22:34.359 --> 00:22:36.880 look for opportunities, these above -average 00:22:36.880 --> 00:22:39.519 returns. And they're defined by different types 00:22:39.519 --> 00:22:42.579 of growth catalysts, from huge macroeconomic 00:22:42.579 --> 00:22:46.450 trends down to very specific... corporate actions. 00:22:46.589 --> 00:22:48.690 OK, let's start with the big one, the geographical 00:22:48.690 --> 00:22:52.170 area that always screams potential, even if it 00:22:52.170 --> 00:22:54.589 carries immense volatility. That would have to 00:22:54.589 --> 00:22:57.009 be emerging markets. We're talking about economies 00:22:57.009 --> 00:22:59.829 and entire geographies that are in the process 00:22:59.829 --> 00:23:03.569 of rapidly industrializing, modernizing or urbanizing. 00:23:03.670 --> 00:23:06.349 So they offer high potential for rapid economic 00:23:06.349 --> 00:23:08.750 and corporate growth. Just because they're starting 00:23:08.750 --> 00:23:11.710 from a much lower baseline than, say, the U .S. 00:23:11.710 --> 00:23:14.230 or Europe. That's the whole thesis. When we talk 00:23:14.230 --> 00:23:15.789 about growth in these markets, there are a few 00:23:15.789 --> 00:23:18.549 key factors that drive those above -average returns 00:23:18.549 --> 00:23:21.210 for companies there. What are they? One is demographics. 00:23:21.869 --> 00:23:24.369 You often have a rapidly expanding middle class 00:23:24.369 --> 00:23:26.750 that is adopting modern consumer habits for the 00:23:26.750 --> 00:23:29.130 very first time, buying their first car, first 00:23:29.130 --> 00:23:31.269 smartphone, first washing machine. A massive 00:23:31.269 --> 00:23:34.430 wave of new consumption. A huge wave. Another 00:23:34.430 --> 00:23:37.000 is infrastructural. You see massive government 00:23:37.000 --> 00:23:40.079 spending on roads, communication networks, power 00:23:40.079 --> 00:23:43.039 generation. That creates these huge tailwinds 00:23:43.039 --> 00:23:45.660 for construction and materials companies. And 00:23:45.660 --> 00:23:47.920 historically, the classic example of this was 00:23:47.920 --> 00:23:50.380 the BRIC nations in the early 2000s. Exactly. 00:23:50.380 --> 00:23:53.480 Brazil, Russia, India and China. For a time, 00:23:53.500 --> 00:23:55.880 they were offering growth rates that just dwarfed 00:23:55.880 --> 00:23:58.420 the developed markets simply due to the sheer 00:23:58.420 --> 00:24:00.619 pace of them catching up. The risk, of course, 00:24:00.680 --> 00:24:03.599 is massive. You're dealing with... Currency volatility, 00:24:04.059 --> 00:24:06.779 political instability, and much lower regulatory 00:24:06.779 --> 00:24:09.940 standards. It's high risk, high potential growth. 00:24:10.200 --> 00:24:12.740 Absolutely. You are often paying a lower price 00:24:12.740 --> 00:24:15.059 for the stock, maybe a lower P .E. than you'd 00:24:15.059 --> 00:24:17.420 pay for a Western counterpart, but you are taking 00:24:17.420 --> 00:24:19.700 on all of these greater external risks. You're 00:24:19.700 --> 00:24:21.839 hoping the sheer pace of that economic expansion 00:24:21.839 --> 00:24:24.720 carries the company forward despite the risks. 00:24:24.960 --> 00:24:27.440 Okay, so that's the geographic play. Next, we 00:24:27.440 --> 00:24:29.440 have a strategy that's focused not on geography, 00:24:29.660 --> 00:24:32.720 but on timing the business cycle. Recovery shares. 00:24:32.799 --> 00:24:34.359 Recovery shares. So these are companies that 00:24:34.359 --> 00:24:37.400 have experienced a significant downturn. A huge 00:24:37.400 --> 00:24:39.619 one. Maybe it was because of a broad recession 00:24:39.619 --> 00:24:42.859 or temporary slump in their specific sector or 00:24:42.859 --> 00:24:46.019 even a specific fixable corporate or operational 00:24:46.019 --> 00:24:49.740 problem that they had internally. So the growth 00:24:49.740 --> 00:24:51.980 you're looking for here isn't sustained forever 00:24:51.980 --> 00:24:55.039 market dominance. It's a massive burst of growth 00:24:55.039 --> 00:24:57.680 as they just return to their pre downturn profitability 00:24:57.680 --> 00:25:00.099 or maybe even higher. That's it. It's a bounce 00:25:00.099 --> 00:25:02.400 back play. Can I give a concrete example? Please. 00:25:02.660 --> 00:25:05.220 Think about the auto manufacturing sector during 00:25:05.220 --> 00:25:08.859 the 2008 -2009 financial crisis. Demand just 00:25:08.859 --> 00:25:12.420 cratered. Company valuations plummeted. PE ratios 00:25:12.420 --> 00:25:14.559 became completely distorted because earnings 00:25:14.559 --> 00:25:16.859 vanished. It was an existential crisis for them. 00:25:16.980 --> 00:25:19.640 It was. But an investor who recognized that, 00:25:19.640 --> 00:25:21.420 you know, people will eventually start buying 00:25:21.420 --> 00:25:23.900 cars again and that government intervention might 00:25:23.900 --> 00:25:26.059 stabilize the sector could have bought those 00:25:26.059 --> 00:25:28.319 shares at deeply distressed prices. And the growth 00:25:28.319 --> 00:25:30.769 they were seeking was that steep... high percentage 00:25:30.769 --> 00:25:33.509 climb back to normalcy as the economy recovered. 00:25:33.849 --> 00:25:37.210 You're buying low on the expectation of cyclical 00:25:37.210 --> 00:25:40.269 growth that is well above the market average. 00:25:40.390 --> 00:25:43.109 But for a defined period of time, you're not 00:25:43.109 --> 00:25:45.630 necessarily holding it for 30 years. Then we 00:25:45.630 --> 00:25:47.910 have a category that might seem a bit counterintuitive 00:25:47.910 --> 00:25:51.150 to pure growth investing, blue chips. This circles 00:25:51.150 --> 00:25:53.910 right back to the Buffett Munger synthesis. Blue 00:25:53.910 --> 00:25:56.849 chips are these established, often massive companies. 00:25:56.910 --> 00:25:59.309 We're talking trillion dollar market caps. They're 00:25:59.309 --> 00:26:01.309 financially stable. They often pay dividends. 00:26:01.509 --> 00:26:03.630 And they're typically seen as the cornerstones 00:26:03.630 --> 00:26:06.589 of a value portfolio. So how on earth does an 00:26:06.589 --> 00:26:09.650 already massive company still achieve? above 00:26:09.650 --> 00:26:12.029 average growth. It seems like the law of large 00:26:12.029 --> 00:26:14.609 numbers would work against them. It does, but 00:26:14.609 --> 00:26:16.450 it can be done through disciplined, sustained 00:26:16.450 --> 00:26:19.910 expansion. This could be through strategic, synergistic 00:26:19.910 --> 00:26:22.109 acquisitions that open up entirely new markets 00:26:22.109 --> 00:26:25.210 for them. Or, this is more common now, through 00:26:25.210 --> 00:26:27.549 dominance in a revolutionary new product line 00:26:27.549 --> 00:26:29.430 that expands their existing moats significantly. 00:26:30.190 --> 00:26:33.130 So a hypothetical example might be when a massive 00:26:33.130 --> 00:26:35.109 tech company decides to enter the health care 00:26:35.109 --> 00:26:37.470 or the financial services sector with some unique 00:26:37.470 --> 00:26:40.410 product. That's a perfect example. They are still 00:26:40.410 --> 00:26:43.390 a blue chip, but that new division's growth rate 00:26:43.390 --> 00:26:46.369 might be 30 percent or 40 percent annually, which 00:26:46.369 --> 00:26:48.529 is enough to pull the whole enterprise into the 00:26:48.529 --> 00:26:51.480 growth candidate category. They offer stability 00:26:51.480 --> 00:26:54.019 combined with these pockets of strong growth 00:26:54.019 --> 00:26:56.559 characteristics. Okay, the fourth vehicle is 00:26:56.559 --> 00:26:58.579 probably what most people think of immediately 00:26:58.579 --> 00:27:01.960 when they hear the words growth stock. Without 00:27:01.960 --> 00:27:05.619 a doubt. Internet and technology stocks. This 00:27:05.619 --> 00:27:08.160 sector, historically, has been the single greatest 00:27:08.160 --> 00:27:10.380 source of above -average growth over the last 00:27:10.380 --> 00:27:12.960 three decades. They are the textbook example 00:27:12.960 --> 00:27:15.880 of a company with a unique or advanced product. 00:27:16.099 --> 00:27:18.160 And the product allows them to scale rapidly 00:27:18.160 --> 00:27:20.720 with very little marginal extra cost. That's 00:27:20.720 --> 00:27:23.359 the key, right? That is the magic. It's often 00:27:23.359 --> 00:27:25.259 known as high operating leverage. Think about 00:27:25.259 --> 00:27:27.779 network effects. A traditional factory can only 00:27:27.779 --> 00:27:29.880 increase its output by building another factory, 00:27:30.019 --> 00:27:32.720 which is incredibly expensive and slow. But a 00:27:32.720 --> 00:27:35.329 software company? A software company. can serve 00:27:35.329 --> 00:27:38.829 10 million users for almost the same cost as 00:27:38.829 --> 00:27:42.029 it can serve 1 million users. That non -linear 00:27:42.029 --> 00:27:44.609 scaling potential is what drives the exponential 00:27:44.609 --> 00:27:47.670 growth rates required to justify those initially 00:27:47.670 --> 00:27:51.250 high PE ratios. So this is where pure innovation 00:27:51.250 --> 00:27:54.009 -driven growth tends to live, but it's also where 00:27:54.009 --> 00:27:56.750 the highest PE valuations are found, which makes 00:27:56.750 --> 00:27:59.210 that gerop discipline we talked about absolutely 00:27:59.210 --> 00:28:01.349 essential. You have to have it here or you will 00:28:01.349 --> 00:28:03.930 get burned. Shifting from sector to size, we 00:28:03.930 --> 00:28:06.470 have the fifth category, smaller companies. This 00:28:06.470 --> 00:28:09.109 refers to companies with a lower market capitalization. 00:28:09.289 --> 00:28:11.710 You'll hear them called small cap or micro cap 00:28:11.710 --> 00:28:14.029 firms. And while they may not have an entirely 00:28:14.029 --> 00:28:16.890 unique world changing product, they have vast 00:28:16.890 --> 00:28:19.109 untapped potential simply because they're small. 00:28:19.289 --> 00:28:21.329 It's just easier for a smaller number to double, 00:28:21.390 --> 00:28:23.490 isn't it? That's the simple math of it. A small 00:28:23.490 --> 00:28:26.609 cap company that's worth, say, $500 million wins 00:28:26.609 --> 00:28:29.220 a major new contract with $50 million. That's 00:28:29.220 --> 00:28:31.480 a huge deal. It's a massive percentage increase 00:28:31.480 --> 00:28:34.160 in its revenue and earnings. And it often translates 00:28:34.160 --> 00:28:37.460 to explosive high percentage growth in the stock 00:28:37.460 --> 00:28:40.319 price. But a multibillion dollar company would 00:28:40.319 --> 00:28:42.740 barely even notice that same contract in their 00:28:42.740 --> 00:28:44.779 quarterly report. It would be a rounding error. 00:28:45.039 --> 00:28:47.539 These smaller firms are nimble. They're often 00:28:47.539 --> 00:28:50.220 focused on a very specific niche and they have 00:28:50.220 --> 00:28:52.500 the potential for this kind of explosive growth. 00:28:52.819 --> 00:28:55.980 But this category is inherently high risk, high 00:28:55.980 --> 00:28:58.390 reward. And because of their limited liquidity 00:28:58.390 --> 00:29:01.049 and the fact that not many analysts cover them, 00:29:01.190 --> 00:29:04.250 they often require the most deep Phil Fisher 00:29:04.250 --> 00:29:07.109 style scuttlebutt research. You have to do the 00:29:07.109 --> 00:29:08.690 homework yourself because no one else is doing 00:29:08.690 --> 00:29:11.009 it for you. And finally, a highly specialized 00:29:11.009 --> 00:29:13.289 area that requires a different type of intellectual 00:29:13.289 --> 00:29:16.670 focus altogether. Special situations. This is 00:29:16.670 --> 00:29:19.329 a fascinating one because the growth here is 00:29:19.329 --> 00:29:21.960 triggered not by. typical business performance, 00:29:22.200 --> 00:29:25.380 better sales, better marketing, but by unique 00:29:25.380 --> 00:29:28.299 non -market corporate events. So these are often 00:29:28.299 --> 00:29:30.980 regulatory, structural, or strategic changes 00:29:30.980 --> 00:29:34.160 that suddenly unlock latent value or trigger 00:29:34.160 --> 00:29:37.059 a sudden surge in growth. That's it. What falls 00:29:37.059 --> 00:29:39.440 under the umbrella of a special situation growth 00:29:39.440 --> 00:29:42.079 play? Well, it could be a corporate event, like 00:29:42.079 --> 00:29:44.599 a tax -free spinoff. Where a larger company hives 00:29:44.599 --> 00:29:47.319 off a rapidly growing but previously hidden division 00:29:47.319 --> 00:29:51.460 into its own company. Exactly. And the new separated 00:29:51.460 --> 00:29:54.339 entity suddenly trades on its own merits and 00:29:54.339 --> 00:29:57.230 often achieves a much higher valuation. It could 00:29:57.230 --> 00:29:59.890 also be a regulatory change, say, a government 00:29:59.890 --> 00:30:02.069 suddenly approving a new technology that one 00:30:02.069 --> 00:30:05.650 specific company dominates. Or a strategic merger 00:30:05.650 --> 00:30:08.730 that creates such intense cost savings that profitability 00:30:08.730 --> 00:30:11.509 just skyrockets almost overnight. So the growth 00:30:11.509 --> 00:30:13.730 here is event -driven rather than trend -driven. 00:30:13.809 --> 00:30:17.089 And it relies on expert -level research to identify 00:30:17.089 --> 00:30:19.569 that catalyst before the rest of the market fully 00:30:19.569 --> 00:30:22.190 recognizes its implication. It's a very specialized 00:30:22.190 --> 00:30:25.809 game. But these six vehicles taken together show 00:30:25.809 --> 00:30:28.130 that executing a growth strategy isn't just about 00:30:28.130 --> 00:30:30.329 throwing money at the next flashy tech stock. 00:30:30.490 --> 00:30:32.950 No, it's a systematic approach that covers all 00:30:32.950 --> 00:30:35.450 these diverse market environments from geopolitical 00:30:35.450 --> 00:30:37.289 trends and emerging markets all the way down 00:30:37.289 --> 00:30:39.890 to specific corporate reorganizations. It's about 00:30:39.890 --> 00:30:42.549 being opportunity agnostic. It is. It's about 00:30:42.549 --> 00:30:45.369 identifying reliable catalysts for above average 00:30:45.369 --> 00:30:48.400 growth. wherever they may occur, and then ensuring 00:30:48.400 --> 00:30:51.480 that your valuation discipline, that GARP discipline, 00:30:51.660 --> 00:30:54.420 is applied universally across the board. Which 00:30:54.420 --> 00:30:56.420 just confirms the core lesson of this entire 00:30:56.420 --> 00:30:58.460 deep dive, that the research and the critical 00:30:58.460 --> 00:31:01.119 thinking are absolutely essential because paying 00:31:01.119 --> 00:31:04.599 too much for growth will always, always destroy 00:31:04.599 --> 00:31:07.440 value. No matter how good the story is. Absolutely. 00:31:07.500 --> 00:31:09.700 So let's bring it all back together for you, 00:31:09.720 --> 00:31:12.339 the listener. We started with that core definition 00:31:12.339 --> 00:31:15.579 of growth investing, a focus on capital appreciation 00:31:15.579 --> 00:31:18.359 by seeking companies with above average growth 00:31:18.359 --> 00:31:21.519 rates. Even if they look pricey by standard PE 00:31:21.519 --> 00:31:23.900 and PB metrics. Right. Because they reinvest 00:31:23.900 --> 00:31:25.779 their earnings rather than paying them out as 00:31:25.779 --> 00:31:27.960 dividends. And we recognize the foundational 00:31:27.960 --> 00:31:30.920 pioneering work of T. Rowe Price and Phil Fisher. 00:31:31.450 --> 00:31:33.630 We then dove into that profound philosophical 00:31:33.630 --> 00:31:36.750 synthesis articulated by figures like Buffett 00:31:36.750 --> 00:31:38.910 and Munger, revealing that growth is not some 00:31:38.910 --> 00:31:41.529 separate philosophy, but an essential component 00:31:41.529 --> 00:31:44.730 of calculating intrinsic value itself. Right. 00:31:45.410 --> 00:31:48.210 Investing by definition is seeking value, and 00:31:48.210 --> 00:31:50.589 the true measure of that value is the discounted 00:31:50.589 --> 00:31:53.549 value of all future cash flows, a calculation 00:31:53.549 --> 00:31:56.829 where growth is the absolute key variable. And 00:31:56.829 --> 00:31:58.849 then the practical response to the inherent risk 00:31:58.849 --> 00:32:01.289 of overpaying for that future potential, the 00:32:01.289 --> 00:32:03.470 great cautionary tale of the dot -com bubble, 00:32:03.630 --> 00:32:06.410 was the implementation of the GARP strategy. 00:32:06.880 --> 00:32:09.720 Growth at a reasonable price. This hybrid that 00:32:09.720 --> 00:32:12.079 blends the high growth target with a value -oriented 00:32:12.079 --> 00:32:15.240 focus enforced practically through metrics like 00:32:15.240 --> 00:32:17.519 the peg ratio. All to ensure that you aren't 00:32:17.519 --> 00:32:20.019 paying more for the stock than the expected growth 00:32:20.019 --> 00:32:22.259 rate really warrants. This entire journey just 00:32:22.259 --> 00:32:24.460 underscores that successful investing requires 00:32:24.460 --> 00:32:27.279 a forward -looking perspective, deep research 00:32:27.279 --> 00:32:29.680 into a company's competitive moat and its management. 00:32:29.859 --> 00:32:31.920 That's the Phil Fisher component. And the discipline 00:32:31.920 --> 00:32:34.390 to apply mathematical rigor. That's the Buffett 00:32:34.390 --> 00:32:37.369 component. You have to have a robust thesis about 00:32:37.369 --> 00:32:39.650 why they will be able to continue to reinvest 00:32:39.650 --> 00:32:41.970 those earnings successfully and profitably. So 00:32:41.970 --> 00:32:43.869 what does this all mean for you? We've explored 00:32:43.869 --> 00:32:46.190 the foundations, but we've also touched on some 00:32:46.190 --> 00:32:48.809 incredible jumping off points for your future 00:32:48.809 --> 00:32:51.609 learning that build on this idea of synthesized 00:32:51.609 --> 00:32:53.569 investing. Right. There's more to explore here. 00:32:53.710 --> 00:32:56.630 For sure. If you want to dive even deeper into 00:32:56.630 --> 00:32:59.490 quantifying growth potential within that value 00:32:59.490 --> 00:33:01.630 framework we talked about, you should look into 00:33:01.630 --> 00:33:05.039 a concept called PV Geo. The present value of 00:33:05.039 --> 00:33:08.079 growth opportunities. Exactly. And PVGO explicitly 00:33:08.079 --> 00:33:11.400 separates a stock's current value into two distinct 00:33:11.400 --> 00:33:14.700 components. The value of its current assets if 00:33:14.700 --> 00:33:17.119 it just never reinvested another dollar. And 00:33:17.119 --> 00:33:19.380 the specific additional value that's contributed 00:33:19.380 --> 00:33:22.279 by all of its future growth projects. That separation 00:33:22.279 --> 00:33:24.700 is key to understanding Buffett's synthesis on 00:33:24.700 --> 00:33:26.779 a mathematical level. You might also want to 00:33:26.779 --> 00:33:30.460 explore quality investing, which formally prioritizes 00:33:30.460 --> 00:33:32.819 those wonderful company characteristics. Things 00:33:32.819 --> 00:33:35.559 like... high returns on capital and wide economic 00:33:35.559 --> 00:33:38.440 moats. Or the concept of magic formula investing, 00:33:38.599 --> 00:33:40.839 which is a system that seeks to blend value and 00:33:40.839 --> 00:33:43.299 quality factors systematically. So it means the 00:33:43.299 --> 00:33:46.400 definition of expensive might just be the starting 00:33:46.400 --> 00:33:49.220 point for tomorrow's wonderful company. But only 00:33:49.220 --> 00:33:51.019 if you're smart enough to calculate that the 00:33:51.019 --> 00:33:53.559 growth opportunities truly outweigh the price 00:33:53.559 --> 00:33:55.960 you pay today. That's the real challenge. That's 00:33:55.960 --> 00:33:57.980 something to think about until our next deep 00:33:57.980 --> 00:33:58.279 dive.