GARP Investors?

[no_free_lunch]

Just out of curiosity I ran the numbers on the list of stocks at the very start of this thread.  There were 10 listed, I ran the numbers on 8 as there were some complexities with 2 of them.  It gave a return of 39.8% vs the SP500 at 34.9%.  It's a very simple and limited study but the results were good.  It's an interesting strategy, worth following.

[Guest Schwab711]

I think there are two main components to an investment return, 1) multiple expansion/depression and 2) return from underlying business.

 

1) This is what PatientCheetah, LC, and others have mentioned. You want to look for industries with excellent return characteristics as a whole. These may or may not have a sufficient amount of re-investment opportunities due to demographics and consumption patterns which leads to simple vs. compound return rates being more easily measurable (or witnessed in a single year)

 

2) This is why we all chase excellent businesses if possible. If the underlying business is experiencing annual growth such that the compound rate of return over a sufficient period of time is excellent then you probably have something. These returns may be artifically high (as some have alluded to) if the company is capturing additional market share as opposed to a growth in the demand of the product/service.

 

If you can find an industry with excellent returns, with a product/service that is necessary and in high demand (preferably a luxury item of a necessary product), whose market share is already fairly high (to ensure that ROIC can be trusted to continue), has some law/network that depress competition, and demand for the product outpaces inflation while production costs experience deflationary forces, then you really have something.

 

FICO's credit scores unit sticks out to me as meeting all of the criteria and, due to the low-cost of seeing your credit score vs. disposable income, I also see a long runway for GPD beating growth. The product has high operating leverage such that margins will likely improve as time goes on. Due to a combination of laws, brand recognition, and network effects, FICO is unlikely to be replaced for a significant period of time.