The Secret To An Outstanding Growth Strategy Is To Prune Those Growth Ideas That Are Not Working Out

https://www.youtube.com/watch?v=dmEMWylsmb8?start=2668

During his recent interview with Tobias, Daniel Grioli, the Managing Partner at Guisgard Capital, discusses the secret to developing an outstanding growth strategy that will outperform. Here’s an excerpt from the interview:

Daniel Grioli: And then there’s obviously the risk that you have with growth stocks where some disappoint, you think the growth is going to happen and it doesn’t in the market punishes it and there’s the cost of that on your portfolio. So the way I think about growth investing is a little bit like fishing.

Daniel Grioli: So if you think about fishing, if you know what you want to catch, you know what sort of fish you have some idea of its habits, you know what its habitat is, you know the time of day when it’s active and the title conditions when it’s more likely to be searching for food and things like that.

Daniel Grioli: So you go out fishing and you’re not necessarily … you can’t guarantee that you’ll catch a fish, but you’re trying to look for a certain set of conditions. But then you have a choice, if the fish aren’t biting in that place, what you should do is move on to another spot or another time. And I think with growth investing, it’s kind of the same. You can look for a set of conditions, whether it’s EPS growth or whatever. The secret to making it work is actually then pruning out the growth ideas that don’t pan out.

Daniel Grioli: And I think when you look at a lot of these quantitative analysis, what happens is, they’re creating a portfolio of growth stocks that equally rating it and rebalancing it periodically. I would never do that. I would come up with a group of growth ideas and as they don’t pan out, as I try fishing in that spot and I’m not catching anything, I’ll move on. And I think it’s that process of cutting the things that don’t work early before they hurt you. That actually allows you to capture the winners and create an asymmetry between the winners and the losers.

Daniel Grioli: So when a lot of the research happens, that rebalancing, that portfolio construction doesn’t get captured in the way the research question is asked and answered. And I think that’s the secret to making growth work. It’s being very quick to say, well, I thought this company might grow it isn’t. Out! Next fishing spot.

Tobias Carlisle: So that’s the famous old wall streets so what they say you should pull your weeds and water your flowers rather than the other way around. As in let the winners run, but then keep going and anything that’s not performing, pull it out. Replant something else and see how that goes. And you think that that’s a better strategy for if you’ve seen that work for a growth investor.

Daniel Grioli: Yes.

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