Financial Freedom from A Simple Formula
By KCR standards, this post is somewhat wicked. For long-time readers, we hope the following creates a grin. For anyone new, we hope that you contemplate the merciless empirical facts we provide.
As this bull market has run riot, we see retail investors besieged by impossible claims from celebrity CEOs, portfolio managers, and newsletters chasing fast growth stocks. This post is our official and only entrant into the fray. We provide a specific and simple formula to build wealth buying growth stocks to achieve financial freedom.
We believe KCR has THE most accurate formula out there and will share it in this missive. This formula uncovers the secret to finding the stocks to buy where their market caps could increase 10x or more.
First. The simple concept. All you need to do is buy companies that will grow their sales above the median for the next decade. Never mind the claims that some technology is allegedly going to change the world. See our piece Are Clean Tech Stocks a Short.
You don’t need to be able to figure out the next big thing. Just buy companies that are going to consistently grow sales just a little faster than the median. Don’t worry about profits, interest rates, or balance sheets. We have the formula for finding the firms that will grow sales slightly more than the average firm in the market.
Figure 1 below provides the most recent evidence. You could ignore all the pundits about spectacular gains in future profits to be expected in emerging businesses. Just get sales right, and you would already have achieved financial independence. This is a formula that will help your retirement plans, savings accounts and improve your personal finances.
In the chart below, the dark blue line shows that if you bought the stocks that had above-median sales growth over the last decade, you would have turned $10,000 into $120,000. $1 million into $12 million.
Compare that to the suckers in the broad market. Over the last 10 years, the broad market has turned $1 into $3.65. READ ON to learn the formula to find the stocks that make up that blue line.
Steps to Financial Freedom
We show that by focusing on firms that consistently beat the average firm’s sales growth, the market eventually starts to recognize the brilliance of our method.
Figure 2 below shows how the firms that simply grow sales consistently above the median eventually get ever higher multiples than the market. In 2012, a firm that grew revenue faster than the market median traded at almost the same multiple as the broad market.
But by the 10th year, the firms that simply grew faster than the median each year received a massive multiple premium to the market.
Think about what we are showing you. Just find the firms that can do one simple thing consistently well. NOTHING ELSE.
All the analysts with their discounted cash flow models talking about how to find the next “Amazon” stock and where the exponential growth is – that is theater in our view.
Think about how much easier it is to just focus on making sure your portfolio is only stocks that are going to be above the middle. No need for grand-slams. Just a little above average.
Focused on trying to find the next Amazon, people lose sight of a simple program for riches like ours!
In our view, the obsession with hitting grand-slams is misplaced. Just humbly focus on who will consistently beat the median firm on sales growth. Eventually, the market recognizes the importance of doing little things right.
Figure 3 below merely shows the data in the prior chart differently. The chart shows how the firms that achieve this modest goal of consistently beating the typical firm’s revenue growth see multiple expansion year after year. Over the last 10 years, these companies have gone from being valued at a market multiple (2012) to being valued at a 300% premium to the market.
We don’t want you to think this is some recent phenomenon that doesn’t stand up to historical scrutiny. This formula for massive wealth creation has worked with shocking consistency over history.
Figure 4 below shows the data presented above over all of history. On average, companies that beat the market’s median level of sales growth soar to a ~120% premium by year 10.
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