What returns can one generate in the Public Equity Market

A few days ago Bloomberg published an article how Sequoia Capital, one of the worlds most successful Venture Capital firms, has returned 8x, 11x and 11x on three of their funds. That’s quite a lot!

When trying to put these numbers into perspective I started asking myself: Would it be possible to beat this performance on the public equity markets?

So a few thoughts & assumptions:

  • We are picking individual stocks in US Public Equities, 50 in total
  • 20% – 40% will on average generate amazing returns
  • 60% – 80% will on average generate market average returns
  • To keep the model simple, we are not adding to our winners
  • Everything will be invested at once and evenly accros the 50 stocks (using fractional shares)
  • Timeline is ten years, don’t sell anything
8x return11x return
20 % will outperform by41,2 % | 31,5x46,8 % | 46,48x
40 % will outperform by32,6% | 16,8x37,6% | 24,33x
Read: 20 % of 50 stocks have to grow 41,2 % per year for ten years, and 80 % have to generate market returns (8% per year) to generate a total 8x return.

On average a stock in the top 20% would in ten years do 31,5x return.

So is this possible?

If you look back the last ten years, there have been quite a few stocks that have done this:

  • NFLX: 54x
  • MKTX: 38x
  • DPZ: 33x
  • ABMD: 33x
  • NVDA: 32x
  • URI: 27x
  • ALGN: 24x
  • AMZN: 24x
  • AVGO: 22x
  • TTWO: 18x
  • REGN: 18x
  • AAPL: 14x

(a graphical overview from Yahoo Finance can be found here)

Without TSLA or NIO which have been bid up like crazy in the last 18 months.

To be a little more conservative I think that on average one can expect a good portfolio to have 20% of the best stocks to return 30 % every Year, leading to a total return of the portfolio after ten years of 4,5x. If you can broaden the range to 40% of the best stocks: then you are looking at 6,81x already.
Also I do believe that a great portfolio can have the top 20% of stocks grow 45% YoY, which will lead to 10x over ten years.

So yes, if you’re portfolio of public stock is concentrated enough, e.g. 20 to 30 stocks and you happen to find 4-6 companies that perform like the above mentioned, it would be possible to 10x your porfolio in 10 years. Which would mean that you would have an CAGR of 25,9 %.

The goal is clear, your aim should be to find stocks that do at least 25 % CAGR, even you have a few misses the ones that will do 45 % will help you achieve 10x over ten years!

Good luck &let me know on Twitter how the journey goes!

Onwards,

Ping

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