A Real-World Investing Approach

We often mention that we've been lucky to have worked with some great and insightful professionals over the years.

One of the more interesting people with a very differentiated approach is our friend Berna Barshay.

Berna came to Wall Street in a very untraditional manner.

In our recent episode of the HX Podcast, she told the story of how – although she was a theater major – she got a coveted interview with Goldman Sachs. She decided to take an unorthodox approach and, instead of being straight, decided to interview with some attitude.

The Goldman interviewer appreciated her verve and decided to give her the job!

Instead of going to Broadway, she joined the most storied investment bank on Wall Street…

Over the next several decades, she built quite a career as an investor while developing a unique approach to research and investing.

She is now working with our friend Herb Greenberg on an excellent new platform for investors called Wall Street Beats. You should check it out here.

Today's HX Daily shares some of her key investing principles for investors.

Here they are…

1) INVEST IN WHAT YOU KNOW

“I think one thing that is key for people just starting out is investing in what you know. I feel like we all have, you know, core competencies. You know, if you love fashion, or you love travel, or you love sports or technology, look for investments that intersect with your areas of passion, right? Like, if you do a lot of sports betting, maybe you should be looking at the online sports betting companies and figuring out which one's going to be the winner. If you love fashion, then maybe you should look at the different retailers and apparel companies and figure out who will be the future winner.”

We love this approach at HX Research and often recommend it to our readers. 

It was the core of Peter Lynch's investment approach, and if you go to my (Enrique Abeyta) Twitter profile, you will see that his book "One Up On Wall Street" is at the top of my reading list.

There are many reasons why investing in what you know can help your investment results.

First, you can better understand the industry and a company if you are familiar with it. This can help you recognize companies with competitive advantages and how they might maintain them over time to generate superior returns.

Second, it can also help you gain insights that other investors might not tune into.

Berna shares an example in the film industry where her knowledge of a popular book series gave her insight into the potential for a film series for one of the movie studios. This turned into one of her biggest winners.

Lastly, when you understand a company and its industry, you are likelier to stick with the investment through normal volatility.

Great stocks don't go up in a straight line, and having the confidence to maintain your investment over time is critical to harvesting significant returns.

2) VALUATION AND EXPECTATIONS 

“Identifying a great company is only half the battle because you have to buy it at the right price with the right expectations built in.”

Berna brings up a great point in combining these two metrics.

It is not just about the quality of a company or the valuation – it is about the expectations.

She discusses how apparel retailer Lululmeon Athletica Inc. (NASDAQ: LULU) is a great company. They have a fantastic track record and create substantial economic and shareholder value.

Here is the stock chart of LULU for the last year…

They are still growing very nicely but have seen that growth slow as they grew. Given that the valuation and expectations grew over time, even though it is still a great company and growing – the stock has been hit hard recently.

She shares a similar situation with Starbucks Corporation (NASDAQ: SBUX). 

It is an excellent company with a great track record; the stock has done great. However, its valuation and expectations got very high, and now the stock has stumbled.

She compares it to one of her favorites – footwear company Crocs Inc (NASDAQ: CROX).

Despite the company’s success over time, there was much skepticism about the sustainability and popularity of the product. Expectations were relatively low, and as they beat those expectations, the stock moved much higher.

Here is the stock chart of CROX across the last couple of years…

3) INVEST IN CHANGE

“I've always gravitated towards financial restructurings, operational restructurings, change of management, buying a transformational acquisition, a transformational divestiture, these kinds of things where I find it really interesting where a company is going to look different going forward than it did looking backwards.”

Berna makes a fascinating point about how much of trading and investing is being dominated by machines now.

They may be able to identify technical and operating factors, but the machines can't analyze and develop opinions about change.

If the future is going to be different than the past, they don’t have the data to work off of to develop an insight.

This is similar to "investing in what you know" in that human investors will always have an advantage over machines.

CROX is a great example. Back in 2021, they bought a fast-growing competitor called HeyDude. Many investors were not familiar with it and were very skeptical.

They were wrong, and the stock skyrocketed.

We encourage you to check out Berna on X/Twitter and at Wall Street Beats.

It is well worth your time!