Am I a closet growth investor?

I’ve noticed that I’ve been steadily amassing positions in technology companies recently. It caused me to reflect on whether I’m making a conscious (or even unconscious) transition to being a growth investor.

 

While I’ve made a fixed decision to not dramatically add to equity positions, I’ve been doing some slight shuffling of items in my portfolio.  The first of several moves that I made toward growth was setting up a venture portfolio. It’s still early days for this portfolio. However, I’ve been pretty pleased with how it’s been moving on.

I also made some moves into adding some more established growth names in the technology space. Bidu, Yandex and Priceline were all names that I initially added earlier in the year, and further added to as technology names got hammered recently.

Finally, in recognition of the fact that some of the more established dividend players had dramatically appreciated in value, I recently made some moves to “lighten” some classic dividend payers and invest the proceeds from the sale of these positions into some more early stage technology companies. The recent sell off saw me add Yelp, Trip Advisor, Twitter, Facebook and Fireye to my portfolio.

I had the opportunity to stop and think through the reasons for my interest in adding so many technology names recently and I think that it all boils down to wanting to see some additional growth and drive in my portfolio and the ability to have one or 2 positions that could significantly propel the value of my portfolio forward.

It got me thinking…..Is this a change in the focus on wanting passive income?

I’m pretty comfortable with the passive income that we are deriving now. Between the dividend portfolio and the rental, we are on track to get to $50k in annual passive income by 2016. It would obviously be nice to keep increasing the passive income, however it will be very much incremental from here.

With general market yield at 3-4%, investing in blocks of $10,000 will get me $300 incrementally. That’s not dramatically moving the needle for me on my $50k passive income base, not to mention the fact that I don’t have $10,000 readily available. The short to medium term impact of putting my money to work is fairly limited to buy additional yield.

What’s attractive about growth ?

Makes multiples look insignificant

One of the big complaints about growth companies is that market multiples are absurd, 40x, 80x even 500x of profit (or in the worst case revenue!).  While multiples at those levels seem absurd, growth companies can often sustain growth levels in excess of 40-50% p.a for a sustained period of time as they create and define new markets.

At the end of this super growth phase, there can be a period of sustained growth still well in excess rates of gdp. Depending on how long this ex-growth phase is, the multiples that these companies will eventually trade on will look fairly small.

New markets, opportunities

Growth companies are often in new industries and defining new markets that have a small set of players, all of whom are experiencing rapid growth.  While this can mean minimal barriers to entry as new markets get definied, it typically also means pricing freedom as a lack of competitiveness and limited supply creates many opportunities for players to extract value.

Rapid growth can create long term value

The star growth players can create substantial value and end up being the next large established incumbent. In that scenario, the increase in market cap can be 10x+ depending on when the company is discovered. A more likely situation is that these growth players will be acquired by large established incumbents if they demonstrate success, but category creators can see long term success as independent businesses (ie Google, Priceline etc).

One of the things that I struggled with initially with tech investing was the volatility associated with owning a piece of some of these growth names. That negative experience pushed me completely away from growth. In retrospect, I now realize that was going after the wrong “growth companies” that really weren’t about growth at all, but were speculative in nature as far as product or revenue. Picking companies that have strong user demand and revenue growth and that are scalable businesses should be a recipe for solid long term wealth creation.

However, I still haven’t forgotten the huge volatility that comes with some of these tech names. In fact, the recent sell off in tech names should be a reminder to everyone as to how the markets are prone to excessive overvaluation and undervaluation of growth names. The beauty with solid dividend players is that you aren’t generally prone to these bouts of manic valuation changes, which is why I like these dividend payers so much.

The strategy that I’ve developed to hedge this crazy volatility of growth names is to buy in small chunks of across a number of names. In contrast to days gone by, when I invested a disproportionate share or my wealth in a few risky high tech names, I’ve become more comfortable investing a much smaller initial stake in some of these names, and progressively adding to them over time. It’s a strategy that I’m employing for my venture portfolio, and I find it’s a much more palatable way for me to ride out volatility.

So in answer to the question of whether I’m a closet growth investor? Certainly I am finding that given when my investment portfolio is today, I’m more attracted to high growth names to add more tangible, near term wealth accumulation to my investment portfolio.

But I am wiling to hazard a guess that the bulk of my investment portfolio is still in stable, classic dividend names which underwrite the risk associated with some of these speculative high growth names. In the coming weeks, I’m going to do a breakdown of my overall portfolio to see whether this in fact the case.

Speak Your Mind