Guest Interview: Kris 'FromValue'
(Edition Number: Two)
So, as you know, we have now shifted the format of the guest newsletters in such a way that they are now more centered around an interview-like approach. This provides an insight into the guest’s mind, as well as being a more pleasant process from both the guest and I.
Today’s guest is one that I am really excited about, and Kris has provided some excellent and lengthy answers today.
Today’s second guest is Kris (AKA @fromvalue) , who you may know as the founder of the Potential Multibaggers service and as a superb commentator on Fintwit.
Kris is someone I have communicated with numerous times in the past, and I have always been intrigued about the backstory of the potential multibaggers service. Thankfully, he kindly covers that in today’s newsletter.
The potential multibaggers is essentially a community, run by Kris, in which participants will get detailed analysis and insights into the companies that Kris believes have the potential to be multibaggers over the coming years. Kris has proven, numerous times, that he is adept to finding these monsters before they become monsters. Past multibaggers include Shopify at $77, Livongo Health (Now Teladoc) at $26, and Okta at $64. Do me a favour, and go check the prices of those securities today, I’ll wait.
You checked? Amazing picks.
The summary of the community can be found below for those interested in exploring more. You can find the service by using this link.
Kris is transparent about all the ideas he conjures, including insights into the few ideas that don’t pan out so well. Results speak volumes in investing, and the potential multibaggers have swimming pools full of volume. As of October 6th, the multibaggers average gain was a whopping +151.38%, beating the S&P 500 by ~143%, and QQQ by ~112%.
I spent some time sifting through the reviews for potential multibaggers, and there were only 5 star reviews. Not a single person had less than a 5 star opinion of Kris. I think that goes to show what great work he does.
Anyways, I will let you discover that on your own accord. There is no incentive for me to share Kris’ work I must add. I just think that he does great work, and investors should hear about it.
You can find a superb interview with Kris, that he recently gave on the ChitChat Money Podcast, where he discusses Sea Limited using the below link.
Introductions over, lets get down to the meat of the newsletter, and ask Kris some questions.
Hello Kris, I’d first like to thank you for accepting the invitation to partake in this interview-style newsletter piece that I am testing out. Your time is vastly appreciated, and I think that readers will be happy we have a guest of such caliber here at the IT.
First, I think it would be a great ice breaker, for some of the readers who may not be familiar with your work, if you could introduce yourself, and take us through the sequence of events that led to you where you are today, and perhaps some flavor on the kind of work that you do.
My investing journey started in 2013. I knew nothing about investing. My wife was pregnant back then and I got a sort of primal feeling of having to collect for our unborn child. And that's when I started to look at the possibilities.
After months of research on whiskey as an investment (I gave whiskey tastings back then) and art as an investment, I stumbled upon the stock market. And that's how I started investing.
At first, I am made every single possible mistake I can think of: day trading, risky options, currency trading, value traps… You name it and I did it in those first months. But I didn’t want to stop. I wanted to become better, so I studied a lot, I read every book I could find, I listened to a lot of podcasts, I read thousands of articles, mainly on Seeking Alpha.
I also started commenting on articles on Seeking Alpha. My answers got longer and longer and at a certain moment, after one of my comments, there was someone who said that my comments were almost as long as full articles, more interesting and that I should consider starting to write articles myself. So, I did. That was in May of 2016. I became even more passionate about investing and I got really positive feedback on the depth of my analysis.
Then this year, I set up a marketplace on Seeking Alpha, which I called Potential Multibaggers and I have been doing that full-time since September of this year.
I had already written 10 articles for the free part of Seeking Alpha in which I had picked 10 Potential Multibaggers and they reflect who I am: optimistic, forward-looking, broadly interested. My first pick in the series was published on May 2, 2017: Shopify at $77.86. My aim with Potential Multibaggers is to find stocks that can go up 1,000% over the next 10 years. Shopify did that in just 3 years.
So you mentioned the multibaggers work that you do in the previous question, but I am curious about how this idea was sparked? If you could take us through the brief history, the inspiration, and perhaps some of the parts you find most rewarding related to the multibaggers community?
The idea came to me when I read an article about the best and the worst stocks in the 8 years under Obama at the beginning of 2016, when he left the White House. I saw that if you just had 3 of the best stocks and the 7 worst stocks, you would still have substantially outperformed the market. I thought that if I could turn that around and have 7 hugely outperforming stocks and 3 losers, that would be a fantastic concept. But the problem was: what were the deciding factors to decide which stocks would become multibaggers? I was still very much a value investor then back then but I saw that these multibaggers had never something to do with valuation. Most were called ‘ridiculously overvalued’ for the full 8 years. I worked on the concept of finding multibaggers for a full year, studying, back testing, trying to find common characteristics.
I would have studied probably even longer but I read an interview with Tobi Lütke in early 2017, the founder and CEO of Shopify. I looked him up on YouTube and watched all the interviews I could find. I liked him so much, his humor but especially his vision, that I bought shares in February 2017, at $58. I wondered why, though, because at the time Shopify was also called exuberantly overpriced.
I started studying the company in more detail and I saw that it fulfilled all of the criteria that I had been working on for the last year. I added one or two that I found in Shopify and also, looking back, in other multibaggers and I was ready to launch the first Potential Multibagger. Over the years, I have been able to hone the criteria even more and add several other checklist items, which makes my research process more extensive than ever before, without losing sight of the most important thing: does this stock have the potential to gain at least 1,000% in 10 years, which is my benchmark.
How has your investing approach changed over time, if at all?
It has changed dramatically over the years. As I said, I made all of the rookie mistakes in the first few months of investing, Then I evolved into a value investor and I stepped into every value trap there was. Then came a period in which I transitioned to GARP investing, or Growth At a Reasonable Price. My moniker, From Growth To Value, actually comes from that period, when I had the idea that if you have a growth stock and you hold it long enough, it becomes a value stock as well. And then came the switch to Potential Multibaggers. It was not a single moment, it was more of a process. With the launch of the first Potential Multibagger pick and the huge returns of Shopify, I felt as if I had found my home. I always say to my subscribers that your portfolio should reflect who you are. For me, I’m very optimistic in nature and so I have a great allocation to Potential Multibaggers, for example.
I have three categories of stocks that I own. I call them anchor stocks, Potential Multibaggers and Budding Anchors. Anchor stocks are stocks that won’t return 1,000% over the next decade, simply because their market cap is already too big. But I do expect them to outperform the market and they can provide some stability in your portfolio. Examples of stocks that I own in this category include Amazon, Salesforce, and Adobe. Personally, I aim for an allocation of about 20%.
Then you have Potential Multibaggers and there I allocate 50% of my portfolio. As I said, the aim there is for returns of 1,000% over the next 10 years, a bit more than 25% annually.
The third category is new on Potential Multibaggers: Budding Anchors. Those are stocks that still have the potential to rise at least 500% in the next decade, despite the fact that they are already bigger, let’s say somewhere between $30 billion and $100 billion. There I allocate about 30% of my money.
A large number of investors start with “value”. For me, the first book I read in relation to investing was Graham’s ‘The Intelligent Investor’. As a 17 year old, it was a superb introduction to the appropriate mindset one should adopt when investing. I will admit the first time I read the book, it was mainly the mindset takeaways that stuck with me, on account of the fact most of the technical aspects went over my head.
Which investors, past or present, or even mentors outside of the investing space have had the most significant impact on your own approach?
The Intelligent Investor was the first book that I read too and I didn’t like it. I’m not even sure if I finished it. I have studied languages (I have a major in Dutch and a minor in English) and the language of that book was appalling. I took away a few lessons, though, especially that you should invest for the long term at least 3 years. If an investment hasn’t worked out then, you probably have missed something.
For the rest, there were so many influences. Philip Fisher was definitely one, David Garnder with his podcast, Peter Lynch, but I have probably learned most from reading thousands of articles on Seeking Alpha. By reading the bull and bear theses at the same time, I learned how to make the difference between substance and fluff.
I am a huge advocate for considering your library as an asset. Some of my favorite books, which I often go back to, are: The Intelligent Investor, The Innovator’s Dilemma, Stress Test, The Dark Side of Valuation and Common Stocks & Uncommon Profits.
If you had to choose three books, of any genre, that you found either; changed your outlook, or were just fun reads, which would you chose and why?
Only 3 is really hard. The Intelligent Investor won’t be included, as you might guess. I also really didn’t like A Random Walk Down Wall Street by Burton Malkiel. Several concepts in the book are not correct and just an opinion, but he presents them as facts. That you can’t outperform the market, for example. My Potential Multibaggers outperform the market by about 130% per pick on average. But before I start ranting about that book, let’s move on.
If I could only pick three, I would first choose 100 Baggers by Chris Mayer. In his book, he shows 365 stocks that have turned $10,000 into $1,000,000 and more. All of them had drops of at least 50%, most several times. That already debunks the Wall Street myth that volatility equals risk.
I also would pick Unscaled by Hemant Taneja, which had a deep impact on my investing, even though it is not an investing book, but more a vision about the future of different industries. The main point is that scale was an advantage in the 20th century, but a disadvantage in the 21st century and that we can make things more personal with artificial intelligence. That sounds counterintuitive but Taneja makes really strong points about this and shows real-life examples. I read the book when I researched Livongo before I picked it in December last year at $24.86. Taneja founded the company together with Glen Tullman, but he was the money guy. His new book Unhealthcare is also a great read.
The third book would also be outside of investing. Nassim Nicholas Taleb’s books were really important in forming my investment approach. The Black Swan is his most popular one and it’s definitely also applicable to investing, but I liked Skin In The Game and Antifragile even more. Skin In The Game makes that I always invest together my subscribers. Antifragility has even become one of the Potential Multibagger characteristics, so I would choose this one as my third book. Taleb is provocative and sometimes rude, but I know no other author who can challenge your thinking like him. Even if you disagree, your own beliefs are honed because they are challenged. That immediately illustrates the concept of antifragility itself, because antifragility means things that become stronger if there is challenge or chaos. Because Taleb was so important for me, almost all my stock picks have done incredibly well during the pandemic, also those that I had picked long before. Livongo comes to mind, but also Roku, for example.
Concentration in high conviction positions is one of the most efficient ways to earn outsides returns. However, it can also be an excellent way to blow up your account. What is your take on position sizing, or allocation in general?
My belief is simple: you shouldn’t be too concentrated. You should even be more diversified than before. If you look at the numbers, you see that traditionally, you could be well-diversified with about 12 stocks. But the volatility of the stock market has become much higher because it has become easier to invest. And that’s why you would need about 25 stocks to have the same diversification now. Volatility is not risk, but volatility works on the brain of most investors and can be the reason why he or she underperforms. You are your own worst enemy then.
Historically, about 4% of stocks return 25% and more annually over a period of 10 years, which means that they go up almost 1,000% over that period. Together that’s hundreds of stocks. If you research really well, you can completely crush the market and be fully diversified. I have about 30 holdings now, but I will keep investing along my Multis (that’s how my subscribers are called) and if I pick a new stock, I will add it to my own portfolio.
This one is somewhat personal to the investor, but some state that a portfolio that will help you sleep better at night is a positive thing. However, not everyone would agree. I, for one, appreciate the notion of a better night’s sleep with some more ‘secure’ positions. At the same time, I never like to consider the notion that there are such things as ‘safe’ investments when concerning equities.
What is your take on that?
If you lose sleep over investments, you are not doing it well. My take is that volatility is not risk. Risk is how likely you are to lose your money, not how much a stock goes up or down over the short term.
If you don’t know your investment well enough, you’ll panic and might sell and that is the only circumstance in which volatility is a risk, through your own anxiety. If you know that and you train yourself to get rid of that anxiety, you can become a good investor. And if you can combine it with knowledge, you’ll become a great investor.
Knowledge is a superpower. Let me give you an example. I picked Square as a Potential Mulitbagger at $75. In March of this year, one full year later, it was at $32. I bought with both hands, bringing down my average price to $57 because I knew the company very well. It’s up more than 400% since then. If you didn’t know the company well, you would listen to the bear arguments. People look at the price too much. I even wrote a free article on Seeking Alpha when Square was down so much and I never got so many angry comments. One commenter wrote that I was “leading the sheeple over the cliff.” He added that the stock would crash further to single digits. If you are not armed with knowledge then, you might think that the stock price shows that these people are right. But I think that the “sheeple” who followed me on that call will be very happy.
Coming back to safer investments, I have a few anchor stocks but a lot of investors would not consider Salesforce or Amazon as stabilizing factors. But these companies are the Coca-Cola and Pepsi of our time. And you shouldn’t forget that if you are very certain that you have stocks of top-notch companies in your portfolio, volatility is an opportunity. I have always found it strange that a stock that falls is seen as risky but a stock that fell (so in the past) becomes an opportunity. Cream rises to the top and if you have the best companies, their stocks will do great again. It could take a few weeks or months, sometimes a year, but they will return, as long as you focus on quality.
This is largely a speculative exercise, but it can be fun to speculate. When we consider some of the trends taking place, perhaps in the early innings of their trajectory, many will cite e-commerce, and I would have to agree. For me, I would think that areas such as Payments, Cyber Security, Traditional Banking and Healthcare appear to be ripe for disruption.
What are some of the areas that you feel will be most disrupted, or perhaps shown the most promising disruptors over the next decade, and why?
I think you already list some of the most important trends for the next decade. Innovation and disruption always take much longer than most people think. If you think that SaaS, Software-as-a-Service is standard now, forget it. It has just a market share of 20% of the professional market and even less in the individual market. That means that SaaS still has a long way to go. This is an example of knowledge that can protect you from your emotions, all those people shouting that SaaS stocks are so overvalued and ‘a bubble’.
Amazon started in 1994. After 26 years, it’s still growing its revenue by more than 30%. New developments come fast but the roll-out takes long, often decades. That’s another reason why you should hold your best stocks for the very long term.
I will add a few extra trends: individualization of everything. That will be through AI, as I already explained, but also with 3D printing, for example. Digital communities will also become much more important, as you see with Peloton now. And that means that more companies will become platforms. Of course, electrical vehicles are also a clear trend and a green economy in general. Another sector that is ripe for disruption is education. As an investor, I keep an eye on these and other long-term trends, but you have to find a company that shows excellent execution, not just the intention to disrupt an industry. It should be the leader of the disruption, not an also-ran.
I personally think that investing is as much about mindset as it is about skill. Moreover, you can never dismiss the variable of luck.
In some instances, an unskilled investor will be rewarded by luck, or circumstance. A bull market can create validation of one’s ideas and lead to assumed intelligence or skill.
In some instances, a skilled investor can discover a value-creating opportunity and have to exercise considerable patience before the thesis is materialized and the market reflects what the investor had hoped.
My question to you, is how do you view the relationship between these variables in investing, and to what extent would you say each is important?
Mindset is in my opinion more important than skill even, although that knowledge, which I put in the skill camp, can help you and protect you, so the two, mindset and skill work closely together.
But I don’t agree that you can never dismiss luck. With your mindset and knowledge, you can erase luck. Luck is often in the timing but not in the big returns over the long term. If you held a stock through several 50% drops and now it’s up 1,000%, I think you can’t say that you were lucky. If you buy and it rips up 20% over the next week, sure that was lucky. But what does 20% mean compared to 1,000%? Sure, you need some patience sometimes, but if you know what you are doing, it’s much easier to have patience. Again, skills and mindset. After my first year of holding, Square was down by 60% but it’s up more than 170% now since it became a Potential Multibagger and I’m pretty sure that over the long term it will go up much more. I picked JD.com at the very worst day.
It was down almost 65% after a year and it took almost 2 years before it was in the green again. It’s up 80% now, beating the market by more than 50% and I’m pretty sure it will beat the market by much more in the years to come. So mindset and knowledge can completely rule out luck. I look at the fundamentals and as long as those stay sound, I hold. Skill is important and mindset is. Luck is not if you are a true long-term investor.
Lastly, my favorite quote, comes from Graham. The one concerning the short term voting machine and the long term weighing machine. I find it helps me reconcile the irrational price action in the near-term. I do not know who first coined it, but another of my favorite quotes is “If you don’t laugh, you’ll cry”. I find this quote helps me appreciate the randomness of life and the lack of control we have over external factors.
What is your favorite quote, and why?
Can I take a quote that I made myself? Then it would be: “Everybody is a long-term investor until the stock price crashes.” I think you understand that with my answer to the previous question. People depend too much on luck and if the stock price goes down, they start to panic. You should be prepared for this and you shouldn’t think that the stock price “tells” you something. The business results tell you enough, the stock price is often just an emotional reaction to the business results.
And in that same context, you could use a quote by Aristotle: “We are what we repeatedly do. Excellence, then, is not an act but a habit”. If you train yourself to hold for the long term through the ups and especially the downs of the stock market, you’ll can be a super investor.
Questions from Twitter:
In this segment, we collected questions from the Twittersphere, and present them to Kris .
@fradeduarte: “What to do when a portfolio focused on high growth companies becomes a portfolio with more mature companies with lower CAGR?”
As I explained, I have three categories of stocks. The most mature are anchor stocks. If a high-growth stock becomes an anchor stock, which means that it will still outperform the market but they provide stability as well. As long as they give me that, it’s OK for me. I might trim to not let my anchor allocation go over 20% but that’s it.
@junkiemarket: “Simple question but what is his thought process on investing into individual stocks vs ETFs (ARKK) that contain a large majority of the names that a growth investor likes?”
Everybody has to do what he or she likes. If you don’t want to invest too much time and effort in research or reading, I think ARKK’s ETFs are a great solution.
But I just want to point out that ARKK has certain rules that they have to follow, about size allocation, for example. They also buy and sell every single day, which brings down their returns as well. Every month, I put together a monthly portfolio for my subscribers. Those are all meant for the long term, not for a month or so. I just show how you can put together a portfolio because all of the monthly picks go into the yearly portfolio. But on average, these monthly portfolios beat ARKK by 10% per month, not even including ARKK’s fee. So, I think it’s clear why I want to invest in individual stocks.
@usmxn_a: “What's the best way in learning how to properly understand a company’s financial statements and what categories do you consider before purchasing stocks”
I think too many investors think that everything is in the numbers. That’s simply not true. We have two parts of our brain. The left is more about rationality, numbers and thought processes, the right is more about creativity, imagination, and (the interpretation of) emotions. I see tons of people only using their left side as if they can see everything in the numbers. Some investors only judge with their right side of their brain. These people are the ones that think: this is a long-term trend, this is a company within that long-term trend, let’s buy it, without looking at quality.
You have to combine both. In a financial statement, I mainly look to see if there are no red flags of any kind. For example, if you have revenue growth of 50% but the expenses rise by 60% and this is not an outlier then there is a serious problem. So, I start out using my right side: I look at the company, its management, its company culture, and many more things that you can’t see in the numbers. If I like all of that, then I go checking the numbers if they match with what I have seen in the qualitative analysis.
That wraps up today’s guest newsletter, which marks the second edition of this series. I want to thank Kris for providing such detailed answers, and taking the time to contribute, and make us all a little but smarter after reading that.
Stay tuned, as we have some excellent calibre guests lined up for you in the coming weeks.
You can find previous editions of the guest interview series below:
• Edition One: Bill Brewster
• Edition Two: Kris FromValue
• Edition Three: ValueStockGeek
• Edition Four: AdventuresInFI
• Edition Five: Brian Feroldi
• Edition Six: Brad Freeman
• Edition Seven: Mostly Borrowed Ideas
• Edition Eight: Richard Chu
• Edition Nine: Kermit Capitál
• Edition Ten: Liviam Capital