American Funds: An Exception to the Accepted “Rule”
March 20, 2019
American Funds video transcript: “In search of the next Netflix”
Michael Utley: As a small-cap investor, obviously you're looking for companies that are going to grow from that small-cap world into the mid- and large-cap range. So, I'm going to ask you a real easy question: How do you find the next Netflix?
Greg Wendt: Yeah, easy question. We did a study recently, and rough and tough — these numbers are not exact — but over the past decade, 3% of the stocks have accounted for 60% of the return.
Michael Utley: Wow. That’s interesting.
Greg Wendt: You've got to find the Netflix. And you've got to be patient and stay with them. We talked about this study that we did about stocks that are up threefold. There are over 150 of them. You've got to invest in them in size, meaning either they're a big position in the fund, or at least you own a big percentage of the company —
Michael Utley: Right.
Greg Wendt: — and you've got to stick with them. Now, it's easy to look back and say, "Netflix was always going to be Netflix," but there were some real gut-check moments there. I think one thing we always had confidence in was Reed Hastings.
Michael Utley: Yep.
Greg Wendt: And so, how do you find the next Netflix? Find the next Reed Hastings.
Michael Utley: It's all about management, as usual.
Greg Wendt: Addressable market and all that sort of thing. You don't want to be a dynamic, growth-oriented CEO in a dead-end business. But there are lots of businesses out there that a superior executive can execute in.
Michael Utley: At the time you were looking at it, did you have a sense this whole streaming video trend was going to become as big as it is?
Greg Wendt: The way Reed Hastings talks about it is, "Hey, guys, the name of the company is Netflix; it wasn't Disks in the Mail."
Michael Utley: Right.
Greg Wendt: They always had a vision they were driving for. They may have surpassed that vision, in all candor, but it was always supposed to be more than DVDs in the mail.
Michael Utley: Along those same lines, when you find a really unique small company — you invest with it, you stay with it for years — how hard is it then to let it go, sell it?
Greg Wendt: Selling stocks is always hard, because nobody rings a bell at the top, and you either sell too early, sell too late. But the discipline of selling stocks — knowing if it's not an open-ended market, like in Netflix, and it's an industrial company like Curtiss-Wright — understanding where they are in their product cycle really gets important. So, there's no magic answer. That's one reason I like companies that are younger in their lifecycle. That's one reason I've gravitated toward small-cap.
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