Today, I'm providing a recap of my Selfwealth Live session from this week. Be warned, this update is for serious investors. You can watch Selfwealth Live on the Selfwealth YouTube channel.

Hunting for 🇺🇸 multi-baggers – 5 lessons for long-term investors

Here are 5 key learnings from last night's session. I'll keep them concise. Feel free to join me next Wednesday or say g'day on Twitter if you're keen to follow up.

1. Revenue growth matters

Amongst the top-performing US stocks over the past decade, shown above, you can see that revenue growth matters -- a lot. Finding a company that can layer growth on top of growth like clockwork (known in the industry as the Compound Annual Growth Rate or CAGR) is special. We've talked in the past about the importance of companies having a wide moat / competitive advantage that can keep competitors out -- thus allowing the business to keep growing.

This idea reminds me of the findings from Boston Consulting Group (BCP), which studied the USA's top 10% of companies and found that over 10 years, revenue growth was the most powerful predictor of a top stock's performance. Of course, it's not the only thing to watch...

Tesla Inc (NASDAQ: TSLA)(#2) is the standout example, having compounded its revenue at an incredible 74% per year, on average, over 10 years. Interestingly, the top 50 US stocks I pulled had compounded revenue at 22% per year whereas the 51-100 cohort grew, on average, at 13.8% per year. Over 10 years, an extra 7% is a big deal.

2. Debt levels

Points two and three are intertwined: how does your company fund its growth?

Interest rates have been super-low for the past decade, so we know it's been easier than ever for companies to binge on low-cost debt to fuel their revenue growth. However, we also know, if only intuitively, that too much debt can cripple companies.

Eventually, debt-heavy companies pay the piper.

And, it turns out, the piper may be coming to collect very soon with interest rates on the rise -- rapidly -- across the globe.

Of the companies in the top 100, 57 had net cash positions. That's not exactly scientific -- given we should have monitored them over time, rather than after they experienced growth.Of the top stocks, Amazon.com (NASDAQ: AMZN) (#55) has the most net cash (cash minus total debt) of $81 billion while Microsoft Corp (NASDAQ: MSFT) (#96) has the most net debt at $26.7 billion. Microsoft has been quite acquisitive over the years.

Interestingly, the debt-to-equity (D/E) ratio of the top 100 performing companies was, on average, 46% lower than the largest 500 US companies by market cap.

3. Share issuance

One of the things I've noticed in reading and researching companies over the past 10 years is that many of the 'high flying' tech or life sciences companies pay bucket loads of shares out to employees instead of paying them cash. They call this 'Stock-Based Compensation' or SBC and it's now shown in the financials. It's great when stock prices are rising...

Companies like Block Inc (NYSE: SQ) or Pinterest Inc (NYSE: PINS) love a bit of SBC (disclosure: I own both -- and neither made the top 100).

The thing is, increasing the number of shares on issue means dilution for existing shareholders (unless a buyback is done). For example, even if your revenue is going up 10% per year, when you're selling/giving an additional 10% of shares to employees or acquired companies each year, your revenue per share will go backwards (see point #1).

Curiously (this is something I didn't expect to find) the top 100 performing companies are over twice as generous with issuing their shares compared to the largest 500 US companies.

On average, the top stocks issue an additional 2.8% of shares every year whereas the largest 500 blue chips issue around 1.16%.

This could, potentially, be explained by the size. That is, it's easier to issue 5% ($500 million) of your stock to make an acquisition if you're a $5 billion company versus a $50 billion company trying to issue 5%.

Still, let's not disregard this lesson: maybe it's okay for a company to be a little generous with employees and/or when undertaking acquisitions? Or maybe the lesson is this: get a job at a great growth company and ask for as much SBC as possible!So how much is too much? In Australia, a company like Zip Co Ltd (ASX: ZIP), or Slater & Gordon Ltd (ASX: SGH) (mea culpa) before that, might make for good counterpoints.

4. Have a thesis & stick to it

Pro Medicus Ltd (ASX: PME) is an Australian company I own. When I originally recommended it for our Rask Invest service, at around $7.45 a piece, the company was already firing on all cylinders in the USA. Its top-dog status in radiology software was already well-known (specifically, I'm referring to how medical images are sent and received in hospitals). For example, PME had already signed the Mayo Clinic in the USA.

One of the key questions from the Live session this week was: how do you know when these top-performing companies have run their race?

In answering that, I referred to countless episodes of The Australian Investors Podcast, such as the Curtis Larson discussion, on which expert guests constantly refer to 'watering your flowers, not your weeds'.

In other words, winners often keep winning.

For me, I think this idea of backing winners may lean into the often-quoted study by Arizona State University Professor Hendrik Bessembinder, which shows that less than a handful of per cent (e.g. 2-5%) of all stocks -- think Pro Medicus, Apple, Amazon, Netflix, whatever -- account for all of the stock market's better performance versus short term bonds.

If we agree on that, we know that after we've found a winning company for our portfolio we should keep backing it (see below).

But when do we know if there's room to run or if it's time to sell?

This is where your proper research skills come into question: how well do you know the company's growth strategy, and market opportunity, and what's the probability it can execute? At the end of the day, your ability to predict the future of any company comes back to these three things.

As Kip McGrath Education Centres (ASX: KME) CEO Storm McGrath told me recently, "great ideas are cheap; well-implemented ideas are expensive." In pursuit of multi-bagger returns, too many investors get lost in the bright lights and shiny marketing documents put out by company CEOs and investor relations departments.Key points to consider: 

1. Understand how a company creates value for its customers (i.e. research the product/service and know why customers choose your company over competitors).

2. Use industry research and official (e.g. government) data point to determine the market size for yourself -- being genuinely realistic and remembering that in business the only constant is change (i.e. what you know and believe about an industry today will most likely be drastically different in 3 or 5 years).

3. Think in probabilities to determine the likelihood of success. Too many new investors I meet think this way: Tesla has fantastic electric cars >> everyone needs a car >> market size = the world >> buy Tesla! In every industry there are competitors, changing economics, geopolitics and national security, supply chain risks, management uncertainties, culture... the list of things you'll never be able to predict scientifically go on and on and on... So, you've got to think more like this: the industry is THIS large but not everyone can afford a Tesla >> the company's competitive position is strong but not perfect and competitors do X, Y, and Z just as well >> so the market size is probably smaller than I'd imagined >> just to be sure, I should know what the company's valuation would be under different scenarios of A%, B% & C% market penetration. 

Once you have done this type of research where you acknowledge the known and unknown risks, which takes quite a while, you can create your 'thesis', or reason for owning an investment. It's best to write these down and reflect on them as news or results come to light.

When your thesis has broken ('Oh, no -- sales of new Teslas aren't growing nearly as fast as I had predicted!') that's when you know it's time to revisit your investment. Remember to measure your results and theses over many years -- not jump at the first sign of a bad quarter.

There's a reason I measured the returns of the top 100 companies over 10 years -- and not 10 months!

5. Optionality

Optionality is undervalued -- hence the name "option". It refers to a company's ability to come out with successful products or services you never expected. Alphabet calls them "other bets".

For most of its life, Amazon was almost exclusively an online marketplace. In the early 2010s, however, something started to change. Amazon's AWS cloud computing platform was catching on big time. By 2013 (the first year its results were reported separately to analysts) AWS was generating $3.1 billion of revenue.

In 2021, that figure was $62 billion!

What were we just saying about revenue growth... 

Today, AWS accounts for around 75% of Amazon's operating profit. I dare say most of Amazon's valuation today is based on AWS.

For a moment I want you to imagine being back in 2010, the first year from which I pulled my data, and saying to yourself "I heard there's this little division inside Amazon called AWS. I heard it's catching on. It could be a $62 billion business in 12 years."

[Punchline: they would have locked you up and thrown away the key! But this is optionality at its finest!]

To a lesser extent, we were/are seeing something play out with Apple and its Services business. And meanwhile, Tesla's cost of production is rapidly falling but its true endgame is becoming more software-focused. How about NVIDIA, a top 3 finisher on the list, and its ability to capitalise on blockchain computing -- something that came out of nowhere in the 2010s. Or Netflix and its shift from mailed DVDs to streaming in the 2000s.

All of these companies had immense growth challenges they faced at one or more times, and overcame them with innovation in an adjacency. Most of the innovations caught investors off-guard. So investors in the market failed to accurately capture their value -- that's my favourite kind of call option.

There are a bunch of takeaways on optionality and how to spot it in the wild. And I've written about them at length for Rask members before. At 1,500 words, however, we can save that discussion for next time.

~ Owen