The adage of vying to hit singles and doubles instead of home runs remains relevant to a "boring," quality-focused investment approach. Though speculative investments have the potential for extraordinary returns, many more result in permanent capital impairment.
However, we'd argue there's a difference between home runs derived from speculative investments, and those derived from companies that can continually compound over many years. The outsized leadership of high-quality compounders such as Apple Inc., Microsoft Corp., Amazon.com Inc., and Alphabet Inc. over the past decade suggest that a limited number of home runs can indeed have a profound impact at large.
It is perhaps no surprise that most of the companies mentioned above are technology focused. Given their asset-light nature and the growth of the markets in which they operate (and often create), technology companies can be terrific compounding investments, in part explaining the often-associated sky-high valuations reflecting this potential.
However, the prospect of rising interest rates has caused a rerating in many technology companies over the past few months.
Here's a framework we use for trying to narrow the probabilities in analyzing fast-growing technology companies in an effort to improve our odds of identifying compounders.