By Michael Brush, MarketWatch
Donald Trump makes a lot of questionable comments, but the president is right about one thing: Everybody thinks they’re a great investor in a market hitting new highs.
Some investors really do deserve accolades. Here’s how you tell: They consistently outperform by a wide margin over five or ten years.
Take Ken Broad and his team at the Jackson Square SMID-Cap Growth Fund /zigman2/quotes/209178180/realtime JSMVX +0.44% , for example. It’s up 13.9% over five years compared to 10% for its Russell 2500 benchmark /zigman2/quotes/210598146/delayed XX:R25I +0.06% . It also outperforms by three percentage points over 10 years.
How do they do it? And more importantly, what can we learn from them? Here are six lessons and five stocks to get you started.
1. Think long term
In a market full of short-term investors, volatility can shake you out of good names. This won’t happen if you have a long-term horizon. For Broad, it’s three to five years. This is especially helpful when investing early on in growth stories, a key tactic, because you want to allow time for their businesses to develop.
Broad cites Stitch Fix /zigman2/quotes/208173073/composite SFIX +1.49% , an online apparel company which went to the stock market in late 2017. He compares investing in Stitch Fix now to owning Netflix /zigman2/quotes/202353025/composite NFLX -0.26% early on. Like Netflix, Stitch Fix uses data analytics to decide what to put in front of customers. It’s also a recurring revenue business. In exchange for ongoing fees, Stitch Fix sends customers regular apparel fixes. Customers keep what they like and return the rest. Top executives come from Netflix, Walmart /zigman2/quotes/207374728/composite WMT +0.38% and the Gap /zigman2/quotes/206554267/composite GPS -1.04% .
2. Go small
Big companies like Microsoft /zigman2/quotes/207732364/composite MSFT +0.89% or Apple /zigman2/quotes/202934861/composite AAPL +0.02% have so many analysts following them that potential developments are already priced in. At smaller companies, you can still get an advantage via research.
Broad’s fund buys names up to $7.5 billion in stock-market value. Stocks graduate out of the portfolio when they hit $15 billion. The ideal size for new positions is companies worth $1 billion to $3 billion.
“This is where you have earlier stage and potentially disruptive businesses,” says Broad. At the same time, they’re big enough that they’ve started to prove themselves.
A favorite at the moment is LiveRamp /zigman2/quotes/200307325/composite RAMP +0.62% , which helps companies navigate the fragmented sources of personal data on consumers, to refine marketing pitches. This company changed dramatically last year when it sold a legacy business to focus on consumer data aggregation. It has a $3.5 billion market cap.
3. Be contrarian
How to be “contrarian” changes all the time, depending on what stocks are out of favor. But here’s one way which consistently works: Buy spin-offs. Studies show that spin-offs outperform on average, for these reasons.