‘Upside for shareholders can be supernormal’: Global fundie’s guide to successful stock picking

This expert has some valuable tips for all ASX investors.

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A young man wearing glasses writes down his stock picks in his living room.

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Stock picking is something of an art, and not one that all investors are good at. In fact, it is arguably a discipline that no one can ever truly master. All we can do is just try to do a little better each time.

Even the great Warren Buffett readily admits that he is still on a learning journey and occasionally makes a mistake.

As such, investors should always try to take their investing game to the next level. After all, the better we are at investing, the higher the likelihood we can build wealth at the fastest rate possible.

So it might be well worth reading How I became a global investor by Montaka Global Investment’s Andrew Macken.

Stock picking tips from an expert

Firstly, Macken describes how he first started out on his investing journey by focusing on the debt, or bond markets. However, he soon realised that the share markets were more exciting, and offered better potential returns. Macken states that:

While the return to debt-holders is limited, the return potential to shareholders is unlimited. As a firm’s assets compound in value over time, the growth accrues to shareholders.

However, as all ASX investors would know, not all shares are created equal. When stock picking and searching for the cream of the crop, Macken has a few characteristics he looks for:

I found there are a class of ‘privileged’ businesses that have highly-entrenched positions, operate in structurally growing sectors, and which have very high entry-barriers to would-be competitors.

But in order to truly stock pick and get the very best returns possible, that’s only half of the equation. The other half is waiting for the right stock price to buy in at:

I learnt from some of the best professors in the world that, no, markets are not always efficient. And that price and true value can deviate from each other from time to time – and occasionally, quite substantially.

The magic happens when these two things combine. That is, when privileged businesses are really mispriced by the market. When this happens (assuming the mispricing is an underpricing, not an overpricing) the upside for shareholders in these businesses can be supernormal.

But Macken also argues that Australian investors need to look beyond our shores to find the kinds of privileged companies that really have global scale. He says, “I realised that the world’s best businesses were probably not all located in Australia”.

Where to look for ‘privileged companies’

He names e-commerce giant Amazon.com Inc (NASDAQ: AMZN) as a truly privileged company that gets mispriced by the markets. This, he believes, is because most investors routinely failed “to appreciate its advantages and the enormity of the end-markets into which it was growing”.

Macken also identifies America’s largest private health insurer UnitedHealth Group Inc (NYSE: UNH), enterprise software company Salesforce.com Inc (NYSE: CRM), tech titan Microsoft Corporation (NASDAQ: MSFT) and investment management stock Blackstone Inc (NYSE: BX) as companies that he reckons fulfil his criteria of a ‘privileged company’ and are worthy of a closer look.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Amazon.com and Microsoft. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon.com, Blackstone, Microsoft, and Salesforce. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended UnitedHealth Group. The Motley Fool Australia has recommended Amazon.com and Salesforce. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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