Meet Simon: He backed an ASX 10-bagger and retired at 43

Afterpay is (or was) the jewel in Simon’s investing crown, the 43-year-old retiree owing much of his personal wealth – and his current employment status – to his early backing of the Aussie BNPL pioneer.

The former corporate lawyer from Western Australia also credits a well-known financial tome, One Up On Wall Street, for a large chunk of his success. Author Peter Lynch’s idea that novice investors can outperform the big end of town in their own “circles of competence” was Simon’s primary takeaway from the nearly 35-year-old book.

It was his own expertise in micro-lending and consumer credit – areas of focus in his former life as a lawyer – that enabled him to see in Afterpay what many missed early on.

Simon’s “back of the envelope” calculations at the time suggested Afterpay would hit a market cap of around $42 billion – a $160 share price – which even he concedes seemed ridiculous when the stock was trading around the $6 mark in mid-2018.

“I was 99% confident I would know when a real threat emerged, which made this tiny company with a market cap of around $2 billion safer for me than CBA,” Simon says.
“If it grew at rates I had seen in other factoring/lending products….I thought, even if I was half right, I would do very well.”

In the following Q&A, Simon attempts to convey what was going through his mind when he held a seven-figure sum, and more than 90% of his net worth, in a single stock. He also details the biggest lessons learnt in his 18-year investing journey and reveals his top five stocks currently – including a surprising 42% allocation to the company run by one of the business world’s most polarising figures.

Livewire investor profile

• Name: Simon
• Age: 43
• Employment status: Retired corporate lawyer
• Years investing: 18
• Investment goals: Double my portfolio every five years
• Products used: ASX / USA shares
• Biggest portfolio holding: 42% in Tesla (NASDAQ: TSLA)

How long have you been investing?

I've been learning by trial and error across multiple asset classes since I started working. After a few years as a lawyer, I worked out that it wasn’t SUITS and I needed to start digging a financial escape tunnel. I wanted something that was based mostly on critical thinking, allowed remote work, was repeatable, scalable, and which I thought I could become very good at – which left me with share investing in public companies other than those I was doing legal work for.

What is your investment objective?

I want to double my portfolio every five years, though I expect to hold sideways or down for years and then have sudden re-ratings of my positions when the market finally agrees with me.

What products do you use to execute your strategy?

ASX and USA shares. I believe that the ASX has far more market integrity than the NASDAQ or the NYSE and it also has direct share ownership via the CHESS holding system. I like knowing that my broker or my bank can go bust and it doesn't impact the shares I own.

Conversely, I'm always nervous about my US holdings, as they are custodian-based and the counterparty risk, though improbable, would be devastating if it materialised – just look at regional US banks for recent examples!

How would you describe your strategy?

I am a high conviction, high concentration, diamond-handed, deep Value type of investor. That’s a lot of words but my strategy is perhaps best explained by comparing my thought processes on my best investment versus those on my most irritating one – which are each very different companies.

Afterpay (APT): Having read One Up on Wall Street, I loved the idea that a novice investor might have more “alpha” than “Wall Street” in very narrow areas within their own circle of competence or day-to-day experience.

I am a legal expert in micro-lending and consumer credit. One day I was walking through the mall, much like Emanuel Datt has written about, and I also started noticing Afterpay logos on shops. I looked up its website, saw the terms and conditions, and studied them. I realised this would be massively successful and that all the FUD (fear, uncertainty and doubt) I could find on Afterpay was from financial experts applying a 30-year mortgage mentality to micro-loans that turn over every few weeks.

As an expert in this very narrow area, I was 99% confident I would know when a real threat emerged, which made this tiny company with a market cap of around $2 billion safer for me than CBA. 

I did napkin math and thought it would reach $42 billion, or more than $160 a share, if it grew at rates I had seen in other factoring/lending products. This seemed ridiculous at around $6 a share but humans don’t process exponential growth well, so I thought – even if I was half right – I would do very well.

During the COVID Crash of March 2020, I loaded up when everyone else was selling, even down to just below $9, as it seemed like “blood on the streets”. I sold out enough in the 70s to have all my capital back and then held the rest until the Block takeover.

(I exchanged comments with Livewire contributor Marcus Padley on 12 July 2020 in this article and others on the topic of Afterpay.)

If you have ever dreamt of hitting it big and wondering what it feels like, at the peak I was holding well over 7 figures and more than 90% of my net worth in one share – and I slept well at night.

You would be amazed how soon things beyond your wildest dreams become your brain’s “new normal”. That is when you should remember your investment thesis (and Icarus) and start thinking about risk management.

Mineral Resources (ASX: MIN): I was filtering for high quality and MIN jumped out at me based on its financial metrics and track record. I noticed it had an excellent mining services business but had somehow acquired a lithium deposit for around $100 million that seemed gigantic.

Again, my primitive lawyer napkin math told me that the people saying the deposit was worth billions were right. MIN was valued at around $3 billion but the deposit seemed to be worth that much by itself. As a result, I held on grimly until, finally, management did a deal with Albemarle (NASDAQ: ALB). 

However, I had built up expectations of MIN monetising the deposit alone and there was no special cash dividend, so I sold out in a fit of pique. I didn’t foresee past ~$6-8b market cap and so I “paper handed” the stock. At one point I had tens of thousands of MIN and I like to irritate myself by checking the price each day.

They’re each very different companies but they shared a key feature: there were enough people who thought they wouldn’t achieve their stated long-term goals for them to provide asymmetric risk/reward if they did – with a downside of 100% of the share price versus upside that could be 1000% or more.

If everyone agrees with me, it isn’t investable for me.

Can you please share your top five stock holdings (in percentage terms) and some insights on why you hold each of them?

Tesla (NASDAQ: TSLA) - 42%

I think Elon Musk is an industrial and technological genius and that what he's actually building isn't a car company but rather a giant conglomerate with all the components needed to advance human civilisation to the stars.

Some of these parts are outside Tesla in Space X or Twitter but I think his dream of a real “X” corp will come true and he will unify everything at some point. I think Tesla by itself will be worth trillions and that its biggest product will be the Optimus robot, followed by AI/machine learning as a service.

Pilbara Minerals (ASX: PLS) – 28%

I chose this company by elimination, rather than just loving it straight away. I was looking for a materials play to complement my view that TESLA is going to electrify the world. I wanted a tier-one asset, with management who can execute, in a low sovereign risk jurisdiction – the Kingdom of Westralia – and where the resource was very low cost, such that greatly increased supply would leave it as one of the last miners standing.

I also wanted some ownership of low-cost processing, as that's where most of the value add is with lithium, and developing a plant in South Korea is both low sovereign risk and much cheaper than Australia.

It also had to be zero net debt, as that is my test for mining companies that are printing cash, which is the only stage I invest in, given my limited subject matter expertise.

Woodside Energy Group (ASX: WDS) – 23%

Similar to my reasoning for the stock below, I'm trying to exploit the gap between the push for green energy and the ability of that tech to deliver baseload power. But I also want to help ensure cheap energy for everyone, which I regard as a humanist moral position, as countries improve living standards only if they consume more energy.

A low ESG score also means there is a price discount as many funds can't hold it. I expect that gas will be reclassified by the ESG crowd as "green" once the energy crisis gets worse globally. WDS also doesn't have a full year of results after getting all of BHP's discarded oil assets, and I will inverse BHP M&A whenever I can – much like Jim Cramer.

Lastly, when its big developments up north come online, WDS’s production should skyrocket, offsetting any commodity price declines.

Terracom Limited (ASX: TER) – 7%

One day I saw charts showing the percentage movement in coal futures versus the prices of various coal companies. I noticed a yawning gap, indicating that coal companies – which were previously highly correlated with the coal price – had now moved up hundreds of per cent less than the coal futures.

I figured this gap would close but that the Ukraine war and European winter energy price bump were masking a broader misallocation of capital.

I bought a very large 40%+ position in Whitehaven Coal (ASX: WHC), then I sold out due to the dividend disappointing me and my view that a large buyback at record coal prices was stupid.

I was still looking for long-term exposure to the energy crisis, so I found TER was paying a very nice quarterly dividend, had low-to-no debt and was a little under the radar.

I also couldn't invest in New Hope Corporation (ASX: NHC) as they do cattle farming and I'm vegan. And Yancoal (ASX: YAL) is too controlled by China, which is too much sovereign risk for me.

What was your worst investment? What did you learn from this?

I bought part of a commercial office because I was trying to “diworsify” away from being so share-focused. I learnt that:

• Real estate agents’ version of the going rate on the head lease may mask the existence of subleases that are a fraction of that amount, and
• If a market is saturated enough, there may be nobody to rent from you at any price for years, and even when you do find a tenant, you can have a pandemic shut down your rent entirely.

Like a sovereign black swan attacking you for your bread, this makes a boring commercial rental riskier than a tiny spec mining company that just backdoor-listed on the ASX.

Is there a lesson you’ve learnt as an investor that might help others?

Work out a method of risk management that takes into account how you react emotionally to highs and lows, as volatility will warp your ability to think critically and remember your investing thesis.

I know how nauseous and depressed I feel during a huge drawdown and how bulletproof and awesome I feel when I am up multi-bags. By far the toughest, though, is when you need to do nothing and not much is happening, as you will feel like over trading, instead of waiting for your thesis to play out.

Can you share a personal passion or ambition you have for your future?

Having “Afterpayed” a happy, simple life with my wife and family with 100% control of my time, I feel like I have achieved almost all my ambitions. However, I do daydream about managing a portfolio professionally and getting my wife a Cybertruck.

The lawyer in me has to finish by saying that none of this article is intended as legal or financial advice to anyone to do, or not do, anything.

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