Why and how we invest
When I started my investing journey close to 5 years ago, the quote below by David Gardner, who was one of the biggest influencers in how I invest, resonated a lot to me and kept coming back to me time after time.
“Make your portfolio reflect your best vision for our future. Always be thinking ahead, be optimistic, think about the world that you want to create. Because sure enough, your dollars and mine, our capital, is helping shape the world. Truly we are shaping the world every day with our financial decisions. And the future matters so very deeply.”
This is also the reason why the mission of Vision Capital (public companies) and Vision Capital Ventures (private start-ups) is to invest in companies that reflect our best vision for our future, changing and shaping the world for the better.
It is also the reason why our investing style is called Vision Investing. You can also read more in my book, “Vision Investing: How We Beat Wall Street & You Can, Too!”.
Looking at a real life example
We thought it would be worth spending some time to illustrate with an example of a basic financial analysis to bring across the point. The intention is to provide some thoughts of how we think about this profoundly and how it influences what companies & startups we eventually invest in.
I came across this company as I started to notice a number of investors starting to mention that it is high conviction investment for them. For now, I won’t share the company name. Let’s delve more into the details below.
(1) Rising Stock Prices. This company has returned a meteoric rise of 3,020% over the last 4 plus years with annualised returns of over 105% p.a.
(2) Strong Business Fundamentals. The long-term stock price appreciation was supported by very strong rapidly growing business fundamentals of growing revenues, profits and cash flows.
Top-line revenues grew 663%, but profits (EBITDA +1,090%, EBIT +1240%, Net Income +1270%) and cash flows (OCF +1,010%, FCF +5,470%) all grew even much faster than revenues.
“Where revenues, profits & cash flows go, the stock price eventually flows.”
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham
(2) Rising Profit Margins. Profit & cash flow margins are not just positive. They are best-in-class. There are very very few companies in the world with profit margin profiles that look remotely like this. And in fact, the profit and cash flow margins have been rising over the last 6 years, and are all almost above 50%! Scalability, economies of scale, significant operating leverage are all clearly evident in the business and unit economics.
(3) Financially strong. The company has zero debt and net cash of $382m. Cash balances have grown as much as cash from operations and free cash flows have grown. If a company has no debt, and it is still profitable and generating cash flows, it theoretically cannot go bankrupt until the business itself deteriorates.
(4) Rapid growth. Revenues on average are growing between +40–60% YoY, profits and cash flows are growing even faster +40–100% YoY (excluded free cash flows because the growth rates were even higher).
In short, financially this company has a rare combination of:
- Rapid growth and likely very sustainable
- Best in-class-profit margins
- Pricing power evident in rising gross profit margins
- Scale and operating leverage evident in rising profit & cash flow margins
- Strong balance sheet, with no debt and net cash
It looks like a potentially winning long-term multi-bagger opportunity that would warrant a deep dive into understanding the business itself.
Unveiling the mask
The company is Evolution AB (STO:EVO). Evolution has a leading position among live casino operators in both Europe and North America, and aspires to be the the leading online casino provider in the world. Evolution focuses on live casinos and RNG (random number generator) casinos. It has been growing faster than the global online casino market, and gaining market share.
Evolution develops, produces, markets and licenses fully integrated online casino solutions for gaming operators. The gaming operators then market and offer the products to their end users. Evolution’s customers include the majority of the largest online gaming operators in Europe and North America, as well as a growing number of land-based casinos that have begun to offer games online.
Knowing that it is okay to say no
When I found out what Evolution was facilitating the online gambling business, it was very clear I had to say no right away.
Personally, I came from a broken family. My parents were divorced when I was young as a kid. My father was a habitual gambler and had racked up countless debts and that threw my family into the doldrums. My mother had single handedly raise two children up and helped to repay a vast majority of those debts over many years. It was one of the toughest periods in my life. If I could, I would never allow myself or anyone to experience that again.
Gambling is setup for the player to statistically keep losing over the long-run, and that’s why there is the saying “the house always wins”.
Profits are made based on addiction, which is not a business we want to own and that does not reflect our best vision for our future, changing and shaping the world for the better.
This could very well potentially be likely be a winning multi-bagger investment opportunity in the making. We have no idea. But it is not a business that we want to spend more time further to understand, or less want to own.
There are many ways to make money and generate returns, and every investor has their own way, approach & philosophy. Just that, this investment is not for us, and we are perfectly okay. We will continue to see lots of these, we just to remain faithful, consistent and stay true to our mission, philosophy and ourselves.
Play the game that works best for you, not that of others.
13 Jun 2021 | Eugene Ng | Founder & CIO| Vision Capital
Find out more about Vision Capital where we have beaten the market by more than 4X over the last 4 years: https://visioncapital.group/
Check out our recently published book on Investing, “Vision Investing: How We Beat Wall Street & You Can, Too!”. We truly believe that the individual investor can beat the market over the long-run. The book chronicles our entire investment approach. It explains why we invest the way we do, how do we invest, what we are we looking out for in the companies, where do we find them and when do we invest in them. It is available for purchase via Amazon, currently available via two formats, Paperback and eBook
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This article is solely for informational purposes and is not an offer or solicitation for the purchase or sale of any security, nor is it to be construed as legal or tax advice. References to securities and strategies are for illustrative purposes only and do not constitute buy or sell recommendations. The information in this report should not be used as the basis for any investment decisions.
We make no representation or warranty as to the accuracy or completeness of the information contained in this report, including third-party data sources. The views expressed are as of the publication date and subject to change at any time.
Hypothetical performance has many significant limitations and no representation is being made that such performance is achievable in the future. Past performance is no guarantee of future performance.