Repeatedly Finding 5-10x Investments Requires a Framework, here is mine:
Note* This is a Prequel to my
if you have not read it, I highly recommend as it is how I evaluate all my stocks.
You have likely seen me catch a lot of winners recently, I’ve written my guide to Asymmetric Investing to screen them, but this is how I find them at scale.
Investment Decision Funnel: Macro to Micro
1. Research, Understand, and Develop a Thesis on the Macro Environment
- Political landscape
- Technological breakthroughs or focus
- Global friction or changes taking place
You must fully understand how the world is moving and where things are headed. You need to watch the news and follow current events. Develop a strong thesis on what things will look like in 6/12/18 months from now.
Example thesis: I believe that in 18 months AI will proliferate through the white collar workforce and companies left behind will be laggards.
2. Identify Key Disrupted or Ascending Sectors in this Future
“What sectors are likely to be disrupted or strained if this future I believe in is valid”
This is how you make sure you are in the “hot sectors” I talk about in my Guide Asymmetric Investing. It’s not some random rotating stack. You should ideally be able to BEAT the market to the upcoming hot sectors and park there if you can properly read the macro.
The folks who sat on energy companies for the last 18 months because they projected out into the future are the ones who are really winning right now. Being early matters and being early comes from research and a data backed thesis.
Next, we identify the key bottle necks in that sector. Let’s continue with the same thesis we had before re: AI adoption.
Example Thesis: In a future where AI is widely adopted and critical, the energy will be a critical component and require extensive build out and become scarce.
3. Zone in on Key Bottle-Necks within Sector
The bottleneck is where progress breaks.
It doesn’t matter how strong a tech wave is if it can’t get energy. Thus immense value is placed on companies solving these problems.
This is where you go from “likely to outperform market” to “wow I just had a 200% year”
If you are in the right sector for the majority of your portfolio, you are going to do well, but identifying the scarcest or most key areas here is where you separate yourself.
You must become an expert in the hot sectors:
- Who are the leaders
- What are the constraints
- What valuations do companies trade at
- Who has unique tech
- Where do things break
This is how you find the bottleneck. The bottleneck is important because it creates scarcity and pricing power. Whoever is solving the bottleneck is going to trade at a significant premium or about to get a re-rating.
If you can figure this out before the market, you will make a lot of money. Let’s continue wit the same thesis above
Example Thesis: Energy will be constrained, but time and grid will be key bottlenecks within the energy sector. Fast, off grid power will be key for AI expansion and buyers will pay up for this.
4. Identify Companies Solving Bottleneck
Solving big problems offers big rewards.
Companies solving bottlenecks in hot sectors are going to have a three things.
- Pricing power and margin
- Order backlogs and revenue visibility
- Rapid revenue growth
These all map out to companies that will not only rise quickly due to fundamentals, they will demand premium valuations due to the security their place in the ecosystem provides.
This a where you lean in. If you get to this point before most of the market, it’s pretty hard to lose money outside of a wider market pullback.
In our AI example we are playing out, leaders here are; battery, natural gas and solar companies solving the AI energy crunch.
If you caught these companies 12-18 months ago before the market got here, you have done very well.
Final step is actually selecting the best companies.
5. Identifying the Best Opportunities in Bottleneck Basket
This is where business fundamentals, product research and market savvy comes into play. You are in great shape if you correctly identified the bottle neck.
As an example, if you simply spread your portfolio across eight companies solving off grid energy for data centers, your portfolio would have exploded.
But if you caught
one year ago by identifying their unique tech and value prop; you’re up 600% in one year.
This is where you dig in:
- Tech advancements
- Scale opportunities
- Margin profiles
- Valuation to peers
- Misunderstood tech
All of these are the areas where great investors separate themselves, but the early work makes sure that even when you miss the BEST company, you are still scoring because you are “hanging around the goal” as they say in hockey.
This process is how I identified
as an elite play even when they had no money, solar was out of fashion, and they were coming off a failed SPAC pivot.
The macro funnel…. all the way down to bottlenecks, and best companies in the space gave me the confidence to deploy heavy capital here even when it seemed crazy at the time.
I hope this piece is helpful.