Lessons learned: The one that got away
Mindset is an important enabler in being open to learning from mistakes. This wire highlights lessons learned from a mistake of mine.
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:
Dominance in Their Niche: These companies carve out an advantage—be it product, cost, service, or technology—that sets them apart.
Durable Demand: They can increase prices on current products, broaden share of wallet with new products, improve cost profiles, and scale efficiently.
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.
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.
Fast forward 15 reporting periods: SNL's earnings grew consistently at over 25% CAGR, a large portion of capital reinvested into expanding its network, and increased liquidity in the stock as founders gradually reduced their ownership over the years.
Their superior service and product offerings won more market share, creating a virtuous cycle that competition remain shy of matching.
Today, SNL's stock is 10x its price back then, dramatically outperforming the market. Its PE multiple has doubled, compounding shareholder returns well above the substantial earnings growth the business delivered.
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.
Key Takeaways Investing Takeaways:
1. Think Long Term: Visualize how a company might evolve by looking beyond the immediate horizon.
Asking questions like, "What will achieving your strategy enable you to do next?" can provide valuable insights.
2. Embrace Probability: Investment decisions are rarely black and white. Acknowledge that no assessment is guaranteed to be accurate forever. Remain flexible and adaptable.
3. Avoid Anchoring: Don’t get stuck on your initial perspective. Keep an open mind and regularly revisit interesting opportunities.
A stock not right for you today might be perfect later. Investing is a marathon, not a sprint, and patience is key to success.
Follow Michael Teran, Peter Wilson & myself for Quality Investing insights.
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Tim Riordan has 25 years funds management and accounting experience.
Most recently, Tim was the Head of Direct Equities at Aware Super. Tim was responsible for managing the 11 strong equities team as well as 4 portfolios, with combined FUM of $3.5bn.
Tim's primary portfolio responsibility was the $2bn ASX mid cap industrials fund which he ran with Michael Teran.
Tim holds a Bachelor of Commerce (Accounting), earned the Financial Risk Manager (FRM) designation and is a Chartered Financial Analyst (CA) charterholder. Tim is the Portfolio Manager of the Blackwattle Mid Cap Quality Fund.
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The information in this article has been prepared by Blackwattle Investment Partners Pty Limited (ABN 24 663 839 094) (BIP). BIP is a corporate authorised representative of Blackwattle Licensing Pty Limited (ACN 665 711 839 AFSL 547 617) (corporate authorised representative no. 001304362).
This article contains general information only and is not intended to promote or recommend any particular product or services offered by BIP. It has been prepared without taking into account the objectives, financial situation or needs of any investor. Before making an investment decision, investors should read the relevant offer document and seek professional advice to determine whether the investment is suitable for them.
This article is current as at the date indicated, and may be superseded by subsequent market events or for other reasons. No representation or warranty is provided as to the reliability or accuracy of the information contained in this article. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. All investments contain risk and may lose value.
Neither BIP nor its related bodies corporates guarantee the performance of any financial product or the return of an investor’s capital. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct. Actual returns could differ significantly from any forecasts, estimates or projections provided. Past performance is not a reliable indicator of future performance.
Please contact BIP if you would like to know more about the products and services we offer.
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Tim Riordan has 25 years funds management and accounting experience. Most recently, Tim was the Head of Direct Equities at Aware Super. Tim was responsible for managing the 11 strong equities team as well as 4 portfolios, with combined FUM of...
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Tim Riordan has 25 years funds management and accounting experience. Most recently, Tim was the Head of Direct Equities at Aware Super. Tim was responsible for managing the 11 strong equities team as well as 4 portfolios, with combined FUM of...
Expertise
No areas of expertise
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