Authored By Louis Stevens
In the last week or so, I've shared with you the "Fast Growers" quote from Peter Lynch's acclaimed book, "One Up On Wall Street," which I strongly, strongly encourage you to read.
As an aside, I recently considered the nature of this book, and I thought that the book was noteworthy insofar as it's marketed as a book the every day person, but it contains all of the secrets, frameworks, and philosophies of arguably the second best fund manager of all time (behind Warren Buffett). A true stock picking genius who committed his life to the craft. I've read most of the great investing books, such as The Intelligent Investor, but none has the ROI on my time that One Up has. So, whether you're just getting started or an analyst or fund manager yourself, I would encourage you to read Mr. Lynch's thoughts and re-read them, as they are the approachable and timeless ideas of one of the greatest fund managers of all time.
With that veneration out of the way, we can now think about one of Mr. Lynch's frameworks together, which, importantly, L.A. Stevens has augmented with its own philosophies and frameworks, the principals of which have been borrowed from other great business minds.
In One Up On Wall Street, Mr. Lynch shared his favorite framework, which, as he wrote, produced 10 to 40 baggers (stocks that 10x'd to 40x'd the investor's money), and even 200 baggers (stocks that 200x'd the investor's money).
Let's read that quote, then we will interpret it together and provide the aforementioned augmentation whereby we all become better, more thoughtful investors.
"The Fast Growers
These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers. With a small portfolio, one or two of these can make a career.
A fast-growing company doesn't necessarily have to belong to a fast-growing industry. As a matter of fact, I'd rather it didn't, as you'll see in Chapter 8. All it needs is the room to expand within a slow-growing industry. Beer is a slow-growing industry, but Anheuser-Busch has been a fast grower by taking over market share, and enticing drinkers of rival brands to switch to theirs. The hotel business grows at only 2 percent a year, but Marriott was able to grow 20 percent by capturing a larger segment of that market over the last decade.
The same thing happened to Taco Bell in the fast-food business, Wal-Mart in the general store business, and The Gap in the retail clothing business. These upstart enterprises learned to succeed in one place, then to duplicate the winning formula over and over, mall by mall, city by city. The expansion into new markets results in the phenomenal acceleration in earnings that drives the stock price to giddy heights."
-One Up On Wall Street by Peter Lynch
This quote was originally written in 1989; however, it's as relevant as it's ever been today.
Each company in the above quote has a modern day analogue:
Instead of Anheuser-Busch capturing market share in the alcoholic beverage industry, we've witnessed Celsius rapidly capture market share in the energy drink industry. Identical setup, but of course not perfectly identical beverage markets.
Instead of Marriott, or La Quinta Inn which was another successful stock case study Mr. Lynch provided in One Up, today, Airbnb is the new enterprise eating market share within the existing and mostly mature hotel industry.
Instead of Taco Bell, over the last twenty years, we've witnessed Chipotle eat into the market share of fast food restaurants with its unique, differentiated offering. Very notably, the former CEO of Taco Bell, Brian Niccol, transitioned into the CEO role at Chipotle in the 2010s and has shepherded the company successfully ever since. We've come full circle!
Instead of Wal-Mart taking market share from the department stores such as Sears in the 1970s and 1980s, today, Coupang and Sea Ltd. are eating into the market shares of retail concepts in SE Asia and Korea.
Same concepts; different eras.
Speaking of unique, differentiated offerings, I mentioned earlier that I would provide an augmentation to the Fast Growers framework, so let's briefly touch on that before wrapping up.
The Fast Growers concept is indeed a successful framework, but let's take it a step further so as to better understand what mechanisms are actually driving the growth of these Fast Growers and what we should look for when attempting to buy the next Fast Grower.
Inverse Bubbles & The Innovator's Dilemma
L.A. Stevens has shared its Inverse Bubbles framework in the past, the material for which I would encourage you to read; however, to put it concisely, it is a framework where we purchase fast growing companies within stagnant, mature, and existing total addressable markets (i.e., industries). It's important to note that we're targeting existing TAMs here where the process is as simple as siphoning spend away from the existing incumbents, as opposed to building a new industry entirely, which is often a herculean feat that slowly plays out over decades and often results in failed stocks or huge setbacks for the companies trying to build new industries from nothing.
Additionally, in the Inverse Bubbles framework, we look for businesses, and their associated stocks, that offer materially differentiated products whose unit economics are proportionately differentiated relative to the economics of the products offered by incumbents within the existing industry.
The Innovator's Dilemma, a concept elaborated in Clayten Christensen's book, The Innovator's Dilemma, is the idea that new enterprises, such as those Mr. Lynch decrribed and such as those I shared just above, succeed because they offer new products that, very importantly, have unique economics that make it hard for incumbents to compete with the new enterprises.
That is, incumbents often struggle to beat scrappy new enterprises with far fewer resources not because the new enterprises offer a product that simply cannot be replicated, but rather because the economics of the new product are as differentiated as their products, and to replicate the new economics would mean cannibalizing or, in some cases, destroying the incumbents' business models.
This creates a dilemma, or "The Innovator's Dilemma," for the incumbents and allows new enterprises to consume market share within the incumbents' industry.
In short, we look for fast growers within Inverse Bubbles, i.e., existing TAMs, who benefit from The Innovator's Dilemma.
Notable examples of the last couple decades have been companies like Tesla and Chipotle, both of whom have generated huge returns for their shareholders.
$20K Invested Equally In Chipotle In 2011 Has Become ~$1.4M Today
