Lessons learned: The one that got away

In the world of long-only investing, we often face two critical pitfalls:

• Losing money on the downside, which is capped at 100% of the position size.

• Or missing out on owning a stock that continues to rise, compounding into hundreds of percent over time.

Our experiences as investors teach us invaluable lessons about recognizing and seizing high-quality investment opportunities.

High-quality companies can come in various forms, pattern recognition from our focus on these types of companies over many years reveal some common traits:

1. Dominance in Their Niche: These companies carve out an advantage—be it product, cost, service, or technology—that sets them apart.

1. Durable Demand: They can increase prices on current products, broaden share of wallet with new products, improve cost profiles, and scale efficiently.

1. Sustained High Returns: Their returns are higher than most and stay that way longer than expected, we call this Enduring Quality – a key source of advantage for our process and strategy.

1. Strong Leadership: Often led by founders or long-term executives who drive the company's cultural aims.

Reflecting on my past experiences managing portfolios, one particular case stands out: Supply Network Limited (ASX: SNL).

SNL supplies truck and bus spare parts to specialist mechanics, offering the widest variety of parts and best-in-class service levels. This allowed them to charge reasonable prices and earn solid returns with ever increasing scale.

During 2017, SNL had a market cap approaching $100 million and was trading around $2 per share. The founders held around half the shares at the time.

Despite its attractive 13x Price Earnings (PE) ratio enhanced by strong alignment from the founders, its small/micro-cap status and associated low liquidity made it seem less appealing for our portfolio, a large pool of capital, to own.

Interestingly these gains have been achieved over several years, even after delivering strong results all the way through to 2022, investors buying the stock then would have still doubled their capital to today.

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