This Simple Advice Will Change the Way You Invest

Alpesh Patel|September 24, 2021

When I became a hedge fund manager for high net worth clients, I had a lightbulb moment.

Like all deep insights, it was obvious in hindsight.

And anytime I tell my clients about it, I see a spark in their eyes or a nod of profound agreement.

What is this insight?

Treat any stock investment as if you are hiring that company’s employees to manage your money. They are the custodians of your future wealth.

And just like you would if you were hiring someone for your business or team… you must have strict requirements in order to find the perfect candidates to add to your portfolio.

Find the Best

As I’ve written before, I have several metrics that I use to find companies to invest in. I won’t commit any money to a company that doesn’t meet all of them.

After all, the “hiring pool” has some 9,000 “résumés” (the number of publicly traded companies) to wade through.

Your criteria will help you narrow them down to the top 1%. (You want the best of the best, right?)

These companies are the custodians of your hard-earned money. Their executives (and their employees) are your wealth creators. You have to trust them to deliver.

Thinking this way will help you balance risk and reward. Because while carefully whittling your list down, you may miss out on a long-shot winner.

But do you want to hire the person with no track record, who is so volatile that you don’t know whether they will hit or miss?

Yes, a company like Support.com is up 1,500% in six months… but just because someone won the lottery last week doesn’t mean we should all play. While the return was good, I saw too many red flags.

I’m talking about the company’s sales growth track record, its profitability, its trend, its volatility (high), the unpredictability of its revenues, its dividend record and its cash flow numbers – all of these had me worried.

If I ignored all that for one company, that would mean I would do the same for others… and that’s more risk than I’m willing to take on.

We want companies that will give immense returns but are commensurate with the risk we’re comfortable with.

So yes, we will miss J.Jill (up 450% in six months), Express (up 390% in six months) and Build-A-Bear Workshop (up 303% in six months).

But using strict “hiring” criteria means we will get Perficient (up 100% in six months) on our list, as well as Big 5 Sporting Goods (up 100% in six months) and a lesser-known name like Belvoir Group (up 88% in six months).

These companies hit our metrics for valuation (profits relative to share price), consistent sales growth, cash flow return on capital invested and consistency of share price returns.

And these gains are nothing to scoff at. I’d rather take 100% gains with more certainty than risk my capital on the possibility of 500% returns.

I’m talking about companies like China Online Education Group… TAL Education Group… Washington Prime Group… and Progenity. Each of these is down 90% in six months. That kind of loss wipes out the profits of a long-shot speculative gain.

It’s the People

As I mentioned, this insight about “hiring” companies and their management teams to safeguard my wealth arose from the realization that my hedge fund clients were doing that with me.

When they invested in my fund (even before I launched it), I realized that they were investing in me. They were hiring me for my judgment not just in terms of selecting stocks, but also in terms of picking my team, having risk controls in place – everything.

Again, when you invest in a company, you’re investing in the people within that company. People invest in people. They see through brands and look to what’s behind them.

So when my clients invest in me, I want them to understand that they are investing not in a company, but in a group of people who are charged with growing their wealth.

The bottom line is that it’s about due diligence and duty of care. That’s the language of the legal profession (the profession I joined out of university).

You owe it to yourself to be diligent and to have a duty of care over your investments. Just as you would over your own company, team and employees.

It all stems from that first deep insight: “Treat any stock investment as if you are hiring that company’s employees to manage your money.”