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What I've Learned From 5 Years Of Running A Growth Portfolio – Seeking Alpha

In November 2015, I started a publicly tracked growth portfolio on Seeking Alpha with the intention of turning approximately $275k into $1M by November 1st 2025. It seems a long time ago. Barack Obama was still the US president and the Denver Broncos were the NFL champions. In the meantime, the portfolio has been through the Brexit crisis, fears of Chinese economy collapse, taper tantrums about rising interest rates, and of course, a global pandemic.
While much has changed in the intervening 5 years, the objective of the portfolio was intended to illustrate the power of a long-term investment program which would stay the course, irrespective of political, economic and social change. What a time of dramatic change it has been in between!
The project was inspired by the late, great Jack Bogle who, at that time, bemoaned the fact that the S&P 500 was likely to only return “low single digits” for the next decade. I wanted to achieve something better with my investment capital.
The methodology and strategy behind the project was a fairly simple one. The identification of the best businesses that had dominant competitive positions that were led by visionary driven founders with meaningful skin in the game to incentivize them to create sustainably growing franchises.
More simply stated, I was throwing in my lot with the likes of Marcos Galperin of MercadoLibre (MELI), Jack Ma of Alibaba (BABA), Pony Ma of Tencent (OTCPK:TCEHY), Jeff Bezos of Amazon (AMZN) and Mark Zuckerberg of Facebook (FB) to steward my investment capital to long-term success. The plan from the outset was to make and set the investment, monitor the business progress, take no action if things were tracking and then have the market tally up the totals and indicate the portfolio worth in 10 years.
Here is the portfolio as it stands today.
What I've Learned From 5 Years Of Running A Growth Portfolio - Seeking Alpha
Source: Morningstar.com, Project $1M. Table includes Visa (V),Mastercard (MA), Nanosonics (OTCPK:NNCSF), CSL (OTCPK:CSLLY), Alphabet (GOOG)(GOOGL), Adobe (ADBE), Facebook, Salesforce (CRM), Alibaba, Pro Medicus (OTCPK:PMCUF), Atlassian (TEAM), Tencent, Amazon.com, ServiceNow (NOW), Veeva (VEEV), MercadoLibre and Livongo (TDOC)
What I've Learned From 5 Years Of Running A Growth Portfolio - Seeking AlphaOverall, I’ve been pleased with the results. The portfolio has returned just under 22.5% annualized over this period. This is compared to the 11.7% that the S&P 500 has delivered. The portfolio has enjoyed a handy lead over the S&P 500 (SPY) over this period and also the Nasdaq 100 (QQQ) which has returned 20% over the same period (also, really a great performance).
A total of 41 positions were held at one point or another for the Project $1M Portfolio. There are currently 17 positions today.
Portfolio turnover has been very low over the years, generally averaging less than 5% each year.
The portfolio is quite concentrated, with 5 positions accounting for more than 50% of the portfolio weighting. This type of portfolio structure has been typical over the last 5 years.
Running this portfolio has been an illuminating project for me, and has thrown up a number of learnings.
I realized after a poor first year in 2016 that while growth is good, sustainable growth is even better. I discarded business such as Under Armour (UA), Vipshop (VIPS), Wabtec (WAB) early on when it became clear that there were real questions on sustainability. In some cases I acted preemptively when I sensed that sustainability of growth could become an issue with cases such as Ulta Beauty (ULTA), Starbucks (SBUX), and Chipotle (CMG).
Though some of these moves were not correct, having a more rigorous focus and discipline on finding sustainable growth has generally paid off quite handsomely.
The competitive advantages and long-term tailwinds for the businesses that were retained meant that they had growth drivers available even during a murky macro environment. The portfolio has been built on dominant businesses in electronic payments, digital advertising and e-commerce sectors.
I’m often surprised at the polarization that exists between growth and value camps. I do certainly have a preference for businesses that can increase revenue, profits and cash flow. However, I’ve always wanted to buy such a business at a price less than what that business is worth. To do otherwise means that you don’t make favorable returns on the investment.
I’ve tried over the last five years to identify and purchase really good businesses when nobody else wants to own them. While Alibaba was avoided at IPO, it was later picked up for the portfolio when it sold off into the $60 range. Tencent was topped up when China cracked down against its Honor of Kings gaming franchise. Finally, Facebook was topped up when it sold off to irrational levels in December 2018.
The 1-2 combination of a disciplined value based approach combined with businesses with attractive fundamentals has been very helpful.
Strong bouts of volatility have hit the portfolio hard, and have impacted positions. One of my 8 baggers, MercadoLibre had its position size cut in early 2016, just 3 months after it was acquired. High volatility in spite of strong fundamentals shook me out of the position. The mistake was realized and the position was subsequently bought back a year later at 3 times the price.
What I've Learned From 5 Years Of Running A Growth Portfolio - Seeking Alpha
Source: Morningstar.com
I learnt the costly lesson of loss aversion very early on in this portfolio. It’s the concept that investors are almost twice as averse to losses than they are toward similarly sized gains. The absence of a profit buffer meant that volatility directly hit my cost base in the early days of the holding. That’s the only explanation I can come up with for why I sold a business with great fundamentals, growing users and strengthening its network effect, even though MELI has had multiple moves of 10% or more at least a dozen of more times thereafter.
Project $1M has illustrated for me that once a great business is acquired at favorable prices, it’s important to try and just hold on for dear life unless the investment case is broken. That’s not easy to do because market volatility can move prices around routinely 10 or 20%.
My antidote to that has been to invest with high conviction. I am generally not moved to sell unless the investment case is broken. The downside that comes with this is that I don’t invest in things unless I fully believe in the long-term prospects for the business. It’s part of the reason I’ve consistently missed Netflix (NFLX), because I’ve always failed to see the long-term moat and how it couldn’t be overcome with competitors who were determined to spend on content.
In some instances, being prepared to hold indefinitely also results in overstaying one’s welcome in a position, even when it is maybe clear that the best days of a business are behind it. I’ve been a victim of that with Baidu (BIDU), a position that was initiated in 2015 and which I only recently exited, in spite of its tepid revenue growth over the last few years. The reality is that turnarounds aren’t easy to turn around.
I like to specifically try and measure how successful I’ve been at relative inaction by looking at overall portfolio turnover and the multiples of invested capital that have been earned on a position, which is generally a good indication of letting the portfolio do its work. In the last one year, turnover has been approximately 3% of the portfolio. In 2019 turnover was approximately 2% of the portfolio. In fact, excluding 2016 portfolio turnover has been no more than 5% in any year.
While returns on invested capital are initially a function of market mood, as one’s holding period gets longer, this eventually intersects with business quality and business performance.
When I evaluate the portfolio on this “return of investment capital metric” over a five-year period, I am pleased to see that nearly half of the current positions have at least doubled the initial invested capital. That suggests that the philosophy of “getting out of the way for quality businesses to thrive” has been paying dividends.
While Project $1M has been primarily comprised of large cap businesses, it has been the small emerging ones that have helped drive significant success. Two businesses that were identified for the portfolio very early on, when each were less than $5B in market capitalization, MercadoLibre and Atlassian, have become “8 baggers” for the portfolio respectively.
Another early stage business with significant promise, Pro Medicus has become a 4 bagger. Incredibly, I still think the best is yet to come for all of these businesses. As I recently discussed in my piece, Pause Before You Hit That Sell Button, I believe it’s one of the great investing mistakes to believe that a business which has risen 8 times can’t continue to increase further.
However, my experience with these businesses illustrated another valuable lesson, which I touched on in a recent piece, The Way Investors Cheat Themselves out of Long-Term Wealth Creators.
While I’m satisfied with how MercadoLibre and Atlassian have performed, the thing that I additionally did well with MercadoLibre was that I “averaged up” at a price that was triple my first purchase of MELI at $90 (undoing most of the mistake of selling some early). Neglecting to do so with Atlassian, even though it was consistently acquiring customers and strongly growing revenue, was an error of omission.
It has been a significant eye opener for me through the Project $1M journey just how much wealth accumulation can come from a well picked Emerging Leader, and I’ve discovered a real liking for these types of businesses.
It was really this insight that led to the creation of the Sustainable Growth Marketplace Service, whose Emerging Leader portfolio has returned nearly 100% since inception.
There are a few relevant considerations with the approach.
Founder risk
I’ve borrowed very heavily from the venture capitalist learnings of backing founders with skin in the game who have identified a problem and have a unique approach to solving it.
More than most strategies, the Project $1M portfolio is exposed to founder risk. This is a risk that cuts a few ways in the portfolio. On the one hand a number of the portfolio positions including Alphabet, Facebook and Atlassian have a dual class listing which provides the founders with significant control. This has the potential to take some of these organizations in a direction that may be inconsistent with retail shareholders.
I also carry significant exposure to the founders who set vision, culture and strategy for their enterprises deciding they’ve had enough and looking to step down. That may not significantly impact more mature businesses such as Amazon and Facebook. However, should Marcos Galperin from MercadoLibre or Mike Brookes from Atlassian decide that they’ve enough, then that would harm my portfolio more than most.
Regulatory risk
It’s become increasingly apparent that there is a greater anti-trust concern against some of the larger holdings that are in the Project $1M portfolio. In particular Alphabet, Amazon and Facebook have all been recently singled out as having monopoly power by the Congress with a suggested remedy of a breakup of these businesses.
In addition other large Project $1M holdings Visa and Mastercard have similarly been the subject of scrutiny for a strong exercise of their dominant market position in the past. While these attacks come and go, it’s become increasingly apparent that there is a global movement rein in the dominance of the large tech companies in particular.
The omission of Apple and Microsoft
It’s been to the portfolio’s detriment to not have Apple (AAPL) and Microsoft (MSFT) within the portfolio, with both having annualized returns of greater than 30% over the last 5 years. It would have certainly been additive to the portfolio and helped further enhance the returns.
My fixation on a 10 year time period for the portfolio led to the omission of these businesses and while both are very good businesses, I don’t believe they will be able to generate such strong returns over the next 5 years. Apple in particular has only grown revenue at an annualized rate of 6 1/2% over the last three years. It’s just that the market has now far more highly valued this cash flow stream.
Microsoft is certainly tracking better, with a rate of revenue growth over the last 3 years of almost 14%, though I expect this will slow also the next 5 years. I am happier taking my chances that MercadoLibre or ServiceNow will be at multiples of where the current share prices are compared to the chance that Microsoft and Apple will be a $3T or $4T businesses over the same time frame. Time will tell.
This same logic also holds for why I am happy not to transfer chunks of the Project $1M proceeds into a technology index like the QQQ which is dominated by large-cap holdings Apple, Microsoft, Amazon, Facebook and Google, but instead have larger exposure to some less mature businesses.
Reflecting at the half way point of the Project $1M journey, I am satisfied with the way things have gone. There is always room for improvement, as I discovered in what was a very tough first year. However, what has been most pleasing is defining an approach and being able to give it some time to stick with it. Contemplating the next 5 years, I am more optimistic than ever that the Project’s target outcome should be achieved.
However, I’m certainly not complacent in terms of what’s to come. I do expect some bumps and bruises along the way, as has been the case over the last 5 years. A Black Swan risk of significantly higher interest rates as a result of the deluge of money supply that has flooded the market from central bank printing is not out of the question.
I am only going to focus on what I can control, and I expect some of the emerging stars in the portfolio such as Teladoc and Pro Medicus in addition to Atlassian and MercadoLibre to start powering more of the portfolio’s performance while I take some steps to progressively and steadily scale back positions in some of the past stars such as Alphabet, Facebook and Amazon as they have a less hectic rate of future growth.
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This article was written by
I am an investor who is focused on disruptive businesses that are transforming industries lead by visionary leaders with substantial skin in the game. I have spent nearly 20 years in a formal capacity in various investment banking and corporate advisory roles, having attained my MBA with a concentration in finance. This led me toward a path in Venture Capital and working with entrepreneurs building new technology businesses, and I have had the opportunity to not only invest in a number of amazing privately held businesses, but also play a meaningful role in growing several of these early stage enterprises as well. I am now focused on applying my lens of private market disruption and leveraging secular tail winds to the public markets. This was a journey which I started with my public Project $1M portfolio series and which I have deepened with my marketplace service, Sustainable Growth
Disclosure: I am/we are long CRM, NOW, PMCUF, MA, V, FB, AMZN, ADBE, GOOG, LVGO, VEEV, CSLLY, TCEHY, BABA, MELI, TEAM, NNCSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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