Patience is the Key to Long-Term Investment Performance

Pouya David Yadegar is Founder and CIO of Prime Opportunities Investment Group, LLC, a fundamental value-based equity investment firm for high net worth and institutional investors.

Patience is everything in equity portfolio management, and while there can definitely be danger in holding onto favorites for too long, the reverse is also true. Portfolio managers with overly rigid sell discipline can close out positions too soon, missing out on months or even years of stellar performance, just because a stock reaches an arbitrary target price.

For example, consider Amazon, the online bookseller that has grown into a dominant force in global retail. At Prime Opportunities Investment Group, we first invested in Amazon in 2009, when few institutional portfolios owned it. We saw a company with a strong competitive position and lots of room to run. And run it did, appreciating by more than twentyfold from 2009 to 2020 and becoming, in the process, a very common institutional holding.

For most investors, Amazon’s dramatic post-financial-crisis run would have triggered a sale, if not in 2011 or 2012, then at least by 2015. But in our view, even as the stock price doubled and tripled, the fundamentals remained strong; while Amazon’s price had soared, so had its earnings potential.

Indeed, in 2020, we continued to hold Amazon, and as the pandemic forced massive changes in consumer behavior, Amazon’s competitive position strengthened even further. The stock advanced by more than 76% in 2020, significantly outpacing the S&P 500 Index’s total return of 18%.

Simply put, as we saw the differential between its stock price and our assessment of its intrinsic value shifting—we adjusted accordingly.

Our experience with Amazon demonstrates a key principle of successful investing. That is, active investing doesn’t necessarily mean active trading. Tremendous value can be unlocked by understanding companies’ value as businesses over long periods, and then by committing to the best of these stocks for the long-term.

Our research process is straightforward but not easy. For our long positions we generally emphasize companies that meet four criteria:

Sustainable competitive advantage: Our research identifies companies with a large “moat” to keep out competitors. The presence of a moat enables a company to attract and retain significant market share for long periods of time. This moat can take a variety of forms, from significant capital expenditures to high barriers to entry to a well-known brand with substantial mind-share and loyalty among consumers. When a company’s products, services and market position are well-established, it significantly lowers downside risk.

Excellent management: We look for companies that are led by a CEO and/or management team that have demonstrated an ability to execute. This may include companies that are still led by the founder, who often has a substantial equity stake in the company—aligning their interests with those of shareholders. In our view, the presence of a proven and capable CEO is often significantly underappreciated by the market.

Large untapped market potential: We seek out companies that operate in large and growing markets that offer them the opportunity to grow their intrinsic earning power for many years to come. For companies with sustainable competitive advantages and highly differentiated products/services, the presence of a large market allows the company to continue compounding its free cash flow and earn high returns on capital over a long period of time. At times, the companies we invest in are creating a new category or market opportunity by virtue of the highly differentiated nature of their products and services.

A business model we understand: We generally avoid companies and industries that are overly complicated and carry too many pitfalls for us to truly feel comfortable with assessing their long-term valuations on a risk-adjusted basis. We prefer companies that we are familiar with and whose products, services, balance sheet, management, etc., we can fully understand.

Companies that fit these parameters can be found across various market caps. We do not believe that in order to achieve high returns, one must invest in risky startups. In fact, the weighted average market capitalization of our portfolio is over $50 billion on both our long and short book. Contrary to conventional wisdom, we believe there are significantly mispriced opportunities in the market even amongst large, well-known, and established companies.

We see ourselves as fundamental value investors. Value, to us, simply means a large delta between the current market cap and our expected five-year price target. By not limiting ourselves to traditional definitions of value, we’ve been able to identify long-term growth potential in companies as diverse as Amazon, T-Mobile, Tesla, Peloton, Roku, and Chipotle. Every company is different, and the key to identifying undervalued stocks is assessing each company’s long-term earning potential—regardless of whether it may be defined as a traditional “value” or “growth” stock.

We follow the same methodology on our short positions. In our long-short portfolio, we have the ability to short stocks that we believe are fundamentally overvalued, given their weakness in the same variables—competitive advantage, room to grow, and management quality. We often hold both our long and short positions for multiple years, and we’ve been able to find opportunities across both our long and short book.

Although, as noted above, a rise in share price won’t automatically trigger a sale, we do consistently focus on sell discipline as well. We continually rebalance and reevaluate our holdings to make sure they still fit our guidelines, and we sell securities when they reach our long-term target price, when they exceed our maximum position size, when the fundamentals deteriorate, or when better opportunities can be found.

Our process isn’t complicated, but it is difficult to execute. It requires our team to ignore the

noise and avoid herd mentality. We don’t worry about short-term market movements, focusing only on individual stocks. We also maintain simple, transparent, and conservative risk management parameters such as avoiding options and excessive leverage to achieve our returns. We just concentrate on picking good companies and selling when the time is right—not when we’ve hit some artificial milestone.

We believe that the key to long-term outperformance is to know not only when to buy, but also when to hold and when to sell. Just as important as the decision to buy, successful investing requires exercising patience and not selling a company before it’s had a chance to achieve its full potential. At Prime Opportunities Investment Group, we’ve been able to identify long-term growth potential in numerous companies since our inception, and more importantly, to realize that potential for our clients over a multi-year cycle.

The views expressed are those of the portfolio manager as of May 2021, are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.