Growth stock strategy in a volatile stock market.
Find your investment "golden pig", these tools help you react quickly!
Applying the "Pig Trough" theory to investment
Let's start with an interesting theory of "Pig Trough".
Famous fund manager Foster Friess discovered in the process of raising pigs: If a pig trough can hold 15 pigs, when a hungry pig (the 16th) forcibly enters the trough, another pig will be pushed out. The one being pushed out might be a pig that has already eaten and is fat, tender, and happy.
The same applies to investment. The company may become "fat and happy" and reduce the reinvestment for future growth. In the market, there may always be more "hungry" companies that are more eager to grow.
Therefore, Friess would sell such ''fat and happy'' companies and buy more ''hungry'' companies. For example, sell stocks with 20-30% upside potential and invest in stocks with 60-70% upside potential. Then each new stock selection would replace the old holdings. This reflects a never-satisfied, perpetual-rolling, and always-seeking-new-opportunities investment mentality.
Based on this unique investment philosophy, Friess developed his "pig farm" - FriessAssociates Co. and Brandywine Fund. The book "Investment Masters" published in 1997 mentioned that the average annual return of the fund in the 10 years since its establishment was 18.4%, and the assets managed during this period increased from $0.1 million to $4.2 billion. This also led to Friess being named one of the "greatest investors of the century" by CNBC and one of the most successful fund managers of this generation by Forbes Magazine.
How to find the "golden pig"?
If we describe more "hungry" companies as "golden pigs," how did Friess develop his "golden pig"?
Compared with macro market factors, Fores is more concerned about the strength and prospects of the company itself. Fores encourages obtaining valuable information from suppliers and competitors through conversations, which coincides with the concept of Fisher. When looking for growth stocks, it is important to first consider the industry. According to master Phillip Fisher, there are two key tools to consider.
In summary, there are two important dimensions, profitability and valuation. This actually coincides with the refined strategy of James L. Callinan in Discovering growth stocks in small and medium-sized enterprises, there are two refined strategies!
Regarding profitability, a longer time period (such as 3 years) can be used to observe profit growth through net income growth rate and revenue growth rate, and the overall profit level and profit stability can be judged by the proportion of operating profit rate and main business profit, as well as whether there are some companies that can bring profit surprises (that is, the profit performance exceeds the market expectations).
Regarding valuation, Friess values the P/E ratio. Even when many analysts focused on website click-through rates and tended to use the P/S ratio in the case of a large number of Internet companies in the late 1990s, Friess insisted on using the P/E ratio and buying for sustained profitability instead of ''dreams.'' He believes that a reasonable P/E ratio level is 16 times, and those above 25 times are usually not considered.
In terms of valuation, Futu Bull also has more detailed valuation analysis functions, including historical distribution and industry distribution of P/E ratio. For specific operations, please refer to "Company Valuation: Easily Mastering the Intrinsic Value of a Company."With the above two strategies: a mature industry company with a 30% annual profit growth and a P/E ratio of 10 times may be more worthy of consideration than a company in an emerging industry with a 60% annual profit growth and a P/E ratio of 30. If in a specific industry, after in-depth analysis of a company's financial statements, industry position, growth potential, it is found that a very promising company, but its stock price does not reflect its true value, then it may be a potential stock.After finding the "golden pig," we also need to build a good fence.
Combining the above two evaluation points and the "Pig Trough" theory mentioned earlier, let's take a look at some specific examples of Friess' investments. In 1998, Friess' research found that many technology stocks held by Brandywine Fund, which seemed to be glamorous, had a weakening trend in profit growth, so he sold most of the investment targets (assets accounted for more than 75% of the portfolio). But because a new opportunity that met the standards was not found, the income ended up being held in cash, resulting in a loss of 0.65%. This behavior was controversial at the time, but later when many growth funds plummeted, Brandywine Fund experienced an increase.
After finding the "golden pig", a fence must be built.
Combining the above two evaluation points and the "pig trough" theory mentioned earlier, let's take a look at a specific example of Frohlich's investment. In 1998, Frohlich Research found that many seemingly bright technology stocks held by brandy funds had a tendency of weak profit growth, so they sold most of their investment symbols (assets exceeding 75% of the portfolio). However, because they did not see any new opportunities that met their standards, they ended up storing their profits in cash, resulting in a loss of 0.65%. At the time, this behavior was controversial, but later, when many growth funds plummeted, brandy funds instead experienced growth.
By the profit and valuation-based evaluation criteria and flexible investment portfolio management (excluding "sick pig" stop-loss + finding "golden pig" opportunities), Friess' brandy fund portfolio also interprets the meaning of "diversified investment". According to the "Investment Master", the brandy fund's investment portfolio contains 220 stocks, with an average annual turnover rate of 180%, which means that the average holding period is less than 6 months. This requires keen insight into market changes and rapid reaction.
Is this over yet? You also need to pay attention to the fence to prevent some "bad pigs" from getting in. For example, Friess believes that companies in a value chain formed by "customers, suppliers, competitors, potential competitors, or substitute products or services" that are in a disadvantageous position are risky for investors. They may have few suppliers or customers, and their profits may be taken away quickly. For example, risk management is very important for financial companies, which has a certain degree of opacity, so Friess will be more cautious and not take risks unnecessarily.
Futubull features help you react quickly in your investments.
Speaking of quick reaction to the market, Futubull has many features that may help you.
For example, when you think a stock has growth potential but its valuation is high, you can set a alert when the stock price falls to a certain level.
For example, using the market monitor function, you can find abnormal data on the market, and see if some stocks that are bullish suddenly drop in price, but their intrinsic value is not affected.
For example, using the Level 2 function, you can obtain more real-time, in-depth, and detailed trading data to help you analyze market sentiment, determine price points, grasp opportunities, and trade the stocks you want to trade.
For example, you can also use stop loss orders to control risks when the stock moves in the opposite direction to your determination and reaches the price you set. Or use take-profit orders to harvest profits when the stock price reaches a support level, and be safe. For more detailed information, see Five types of orders: buying stocks at expected prices, are you interested? and 3 types of orders: helping you earn more and lose less!
That's about it for Foster Friess's growth stock investment philosophy, strategies, and related extensions. I hope it has inspired you, and welcome you to leave your thoughts or feelings in the comments section!