(To be clear at the outset, I own shares of NVDA. I bought some in 2017 at around $37 a share, at the suggestion of my son, Brendan. I bought more in 2019 at around the same price–after the stock had fallen from $70+. It’s up by 18x since then. I sold a small amount a couple of months ago, mostly because the position had gotten to be 15%+ of the money I actively manage for myself. 80%+ of the liquid assets my wife and I have is in equity index funds, so the NVDA position is around 3% of the total.

I spend most of my time nowadays as a photographer (danduane.com) rather than as the analyst /portfolio manager I was for close to 30 years. To my mind, because of this, a much larger position in a volatile stock like NVDA would be foolish.)

Also, this topic take a few posts.

understanding what growth stocks are

Growth stocks are ownership shares in companies that one holds in the belief that future earnings are going to be better than the market expects (as deduced from today’s price) and/or for a longer period than the market expects robust growth to continue. In the best case for holders, the market holds mistaken beliefs in both these factors.

I’ve found through experience that a garden-variety growth stock is kind of a one-hit wonder. That is, the company has explosive earnings growth for around five years, after which it matures, earnings growth turns relatively pedestrian and, just as important, very predictable. In other words, there are no more positive surprises. The truly great growth companies, however, have an open-ended aspect to them. That’s because nimble management (a rarity, in my view) is able to morph the company into something else as its original focus matures.

My favorite example of this is Walmart (WMT):

–the original Walton family concept was to open large discount variety stores on the outskirts (where land is cheaper) of towns in the US with under 250,000 in population–and take away customers of the smaller, higher-priced, higher rent, more limited selection downtown stores. As Wall Street began to catch on to what WMT was doing, enterprising analysts did the obvious. They figured out how many towns there were in the US that fit this description and concluded that WMT had maybe a ten-year run before that market was saturated. This set parameters on how much the stock might eventually be worth–and also a sell-by date when the WMT steamroller would run out of competitors to crush.

—but, as WMT was beginning to run out of places to expand–it was denied entrance to California and most northern cities by politically powerful, already-established competitors, and to the Northeast by lack of availability of land–it took its act outside the US. Mexico was the notable home run. And it entered the still-youthful warehouse store market with Sam’s Clubs.

—then, as these new ventures began to mature, it added grocery to its offerings, creating superstores that would also compete directly with traditional supermarkets.

All the while, it enjoyed the tailwind of the “Reagan Revolution,” whose creative destruction pushed large swaths of the middle class downmarket to WMT.

The main point here is that by continuously reinventing itself, WMT turned what might otherwise have been a decade of super earnings growth to more like a quarter-century. 

Just as important, the stock’s profit outperformance ultimately began to evaporate, for three reasons:

–WMT’s existing markets and retail concepts began to mature

—no new retail concepts emerged, and

—management lost the pulse of the retail market when it underestimated/misunderstood the turn to online shopping.

Those three factors comprised an important sell signal.

more tomorrow