It appears that we will be in a persistent state of uncertainty, turbulence and what seems like fleeting chaos for the foreseeable future. So we should fully expect our stock portfolios to fluctuate as a result. To help us stay the course, we can remind ourselves that though the S&P 500 is built upon many peaks and troughs, the fact is that it has always overcome the down cycles throughout its history and ultimately rises in value. In the book Great By Choice, Jim Collins and his team dive into how great companies thrive in chaotic and uncertain times, navigating through market troughs and surpassing the competition.
One common theme among these so called 10xer companies—who outperformed the general stock market by at least 15x and as high as 63x— is that they were rigorous in adhering to what Collins calls a SMaC recipe which stands for Specific, Methodical and Consistent. It’s a set of durable operating practices that serve as a repeatable and consistent success formula for the best performing companies in the most difficult of circumstances. Collins and his team came to realize that SMaC practices can be both specific and durable, making their application during volatile times extremely effective.
Collins references how the 10xer Southwest Airlines responded to airline deregulation by following its original “cookie cutter” recipe that has always worked since the company’s inception. Southwest stayed true to its recipe for success regardless of outside forces posing an existential threat. Leadership at Southwest, however, was mindful of amending its SMaC when environmental conditions truly called for it but the amendments were minimal. This was true for all 10xers in the Great By Choice study. Core ingredients within Southwest’s SMaC recipe included remaining a short-haul carrier; utilizing 737s for 10+ years; viewing the passenger as the #1 product—so no air freight or mail services; no food service; no interlining and no seat selection. I’d say this was a pretty bold stance given the competitive landscape brought forth by deregulation. And it paid off. If you invested $10,000 in Southwest in 1972, it would have grown to $10.2 million by 2002, resulting in an annualized return of 25.99%. No other S&P 500 company did better than Southwest during that period.
Small cap stocks ($300 million to $2 billion market cap) in the Russell 2000 U.S. small cap index have been hit hard by tariff threats, sticky inflation and a rising U.S. debt deficit among other factors. Tariffs mean higher operating costs and reduced profits for smaller U.S. companies. And inflation means borrowing costs will remain elevated, making it difficult for these companies to finance expansion and growth. At the same time, increasing U.S. debt raises treasury yields which adds even more friction to business loans. But like all cycles this one will eventually pass.
At UVstocks.io we’ve talked about our strong belief that among the 2000 companies in the Russell 2000 index lie a subset of future 10xers with visionary leadership who are creating a culture of discipline and fanatic consistency where the right people are placed in the right roles. In all likelihood these fledgling businesses are following their versions of SMaC recipes today, recipes that are a clear and concrete set of unifying operating practices, giving these organizations clarity to take action in this unclear world. We firmly believe that this puts them in a position to not only make it through these turbulent times but to actually become better organizations when all is said and done—definitively rising above the crowd over time. These companies will inevitably grow and outperform. And early, long-term investors in these businesses will invariably yield significant returns.
The challenge is finding them.
As a starting point and one way to determine whether a company is adhering to a type of SMaC recipe is to read investor relations communications that give insight into a company’s response to the current geopolitical and macroeconomic climate.
Is the company accepting the brutal facts of the situation, acknowledging the difficulty that lies ahead, or are its statements simply filled with subjective optimism rather than empirical objectivity? Also if the company is pivoting dramatically, then that could be seen as less methodical and more reactionary. But if the company states that it is staying the course, remaining vigorously consistent and adhering to what it knows best, then that is the stuff of a SMaC recipe.
“We found in all our research studies that the signature of mediocrity is not an unwillingness to change; the signature of mediocrity is chronic inconsistency.” — Jim Collins
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P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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