I worked for ten years in a value shop. Maybe a strange place for a growth investor like me to be, but it was close to home and I could make my own hours, so I got to watch my kids grow up.

By far the best of the value managers I worked with had a mantra “If a company can generate revenues, there should be a way to make profits.” The how and the when are less important.

For the growth investor, in contrast, it’s almost all about the how. In my last post, I pointed out that the very best companies, the Walmarts or the Apples, are able to reinvent themselves so that they can keep making strong profits as the world around them evolves. This is unusual, though. More common is the company where it’s more right-place-right-time and one great, maybe long-lasting, but only one idea. Think: IBM, Cisco, the department store…

basic questions

–what is the market the company addresses with its products/services?

–how fast is this market growing? at the rate of overall GDP? –hopefully much faster

–what is the structure of the market? Here I mean relative market share. A market made up of firms A, B and C, each with 30% of the market is most likely far different from one where the market shares are 30%, 25%, 15%. In theory, the first should have far fewer tiny forms to be picked off by industry leaders, and should therefore be much more competitive than the second, but the facts can vary widely. Common sense, experience and reading a good college marketing textbook are what I’ve found most helpful (for what it’s worth, I went to NYU business school at night while I was working as an analyst during the day).

–what is each major firm’s strategy? does it focus on one market segment or try to be a supermarket for everyone? how is that working out? who is the strongest competitor? where are the substitutes? barriers to entry?

–what are the keys to success? …low-cost producer? innovative products? focused client base? Again, how is that working out.

know a lot about a few things

For me anyway, I’ve found this better than knowing a little bit about a whole bunch of companies.

exit strategy

Generally speaking, I’ve been the most successful with stocks that I’ve held for a long period of time. Still, I think it’s important to at least consider what circumstances would make me want to sell a given holding. There are all sorts of secondary considerations, like position size or finding something new and possibly better. More essential, though, is–to rephrase–what would be an early warning indicator that earnings growth is about to roll over.