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Livewire Markets

October 27, 2023

How your expertise can drive investment gains (and 2 stock ideas)


Chris Conway

Investing in what you know is a cornerstone for many famous investors. Which industries, brands, products are you passionate about?

Many of the world’s most famous investors have championed the idea of only buying stocks you are familiar with.

Peter Lynch, author of ‘One Up on Wall Street’ and manager of the Fidelity Magellan Fund from 1977 to 1990, was famous for the maxim ‘only invest in what you know’, which encourages investors to leverage their knowledge and experiences to find opportunities.

He has since qualified that idea by saying, “I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock”. Lynch adds that this approach leaves out the role of serious fundamental stock research. “People buy a stock and they know nothing about it,” he says. “That’s gambling and it’s not good.”

Having qualified the original idea, Lynch explains his philosophy by suggesting that people should use their specialised knowledge to identify stocks to be further analysed and decide if they are worth owning. He uses the example of someone working in the steel industry, saying, “If you’re in the steel industry and it ever turns around, you’ll see it before I do.”

Warren Buffett had a similar approach but from a different angle. Rather than using what you know to hunt for ideas, Buffett advocated being aware of what you don’t know and steering clear of business you don’t understand. Founder of IBM, Tom Watson, had a similar notion, saying, “I’m no genius. I’m smart in spots—but I stay around those spots.”

In any event, having a passion for an industry, a brand, a product can put you in a valuable position when it comes to considering investment opportunities.

A personal experience

I am a confessed car nut and I have a particular penchant for European sports cars. I watched Mary Manning’s thesis on Ferrari at Livewire Live with keen interest and found myself nodding along in agreement. And as compelling as Manning’s thesis was, one element she didn’t touch on was Ferrari’s expanding model lineup.

The brand is famous for always making one less car that the market demands – for example, Ferrari made 499 units of the most recent hypercar, the LaFerrari. It also only used to produce a V8 and a V12 model, and the odd special edition car.

These days, whilst hardly being a ‘volume’ carmaker, Ferrari has no less than nine models available, as well as another seven in the ‘special series’. Ferrari has learnt that its customers – often multi-millionaires and billionaires – can afford more than the two or three models they used to offer.

Being a car nut and a lover of Ferrari, I bought the stock several years ago when they announced they would build an SUV – something they had previously promised never to do. The combination of building one less of a model than the market demands but expanding the model lineup, appeared to me to be a surefire way to boost revenues.

Perhaps only a car nut would know some of the facts I’ve outlined above and think to buy the stock. Being that it’s probably as close as I’ll ever get to owning a real one might also have something to do with it.

Considering the above, I recently reached out to a handful of fund managers and asked them to share a stock that they hold in their portfolio and that they know well, independently of simply holding it as an investment.

Thanks to Bob Desmond from Claremont Global and James Tsinidis for participating in the global instalment. Next week, I hope to bring you the local stock instalment.

Bob Desmond – Claremont Global – Visa (NYSE: V)

My Visa card is something I use daily and intuitively understand.

I pull it out first thing for my morning coffee, the daily commute, lunch and the return journey home.

That is a minimum of four times a day I am looking at that logo and unconsciously absorbing the trust and convenience that card brings.

Visa moves over $14 trillion annually, is accepted at over 100 million merchants globally, and has over 4 billion cards in circulation. An average transaction is just under $55 – on which Visa are making, on average, 11c per transaction.

The business has many layers of competitive advantage – from its trusted brand, network effects and technology.

It’s exactly the type of business Claremont Global likes to own – strong organic growth, recurring revenues, low cost to the value delivered, high margins and low capital intensity, which delivers very strong free cash flow.

Not only do we see the value in its products, we also see decent value in its shares, which are currently trading at a multiple of just under 24x next twelve-month consensus earnings – well below the ten-year average of 27x, which is one of the many reasons why this is a core holding in our portfolio and has been for the last six years.

James Tsinidis – Munro Partners – Liberty Formula One (NYSE: FWONA)

Being from Melbourne and having a Grand Prix hosted here, I was always aware of Formula One. However, I never followed it closely until Drive to Survive came out on Netflix. The docu-series was so well made and gave a great insight into the sport and the personalities involved, so I started to follow F1 closely.

I wasn't alone here. F1 clearly owes Netflix a beer, because the series has brought in a lot of new fans, particularly in the world's largest consumer market, the US.

Thankfully for us as investors, we could invest in the sport via Liberty Formula One, a US-listed stock. The American owners, part of the Liberty Media dynasty, acquired the company from Bernie Ecclestone in 2017, and management has significantly grown the sport, outside of the traditional older male demographic. In media, eyeballs equal earnings, and in stock markets, stock prices follow earnings growth. We think F1 has plenty of growth ahead of it.

The company makes money through three main sources:

  • race promotion (licensing the race to a local promoter, for example, the Victorian Government for the Melbourne GP),
  • media rights (e.g., Sky in the UK, ESPN in the US) and;
  • advertising and sponsorships (racetrack signage).

We expect all three of these key sales lines to keep growing strongly, particularly in the US, where the sport has a relatively low fan base.

Other catalysts we see for the stock, include the Las Vegas race, which is the first time it has been hosted there, and we expect it will draw in millions of new American fans (18 November 2023) and new TV rights negotiations, particularly with an expectation that the big tech companies will bid for F1 rights against the incumbent pay TV operators, given their thirst for offering live sports to their subscribers.

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