Shareholders and investors are always on the lookout for a listed company that might deliver exceptional returns – and by that I mean more than 5 times your money over 2 or 3 years.
Here is a guide that you might find useful.
Firstly, you might be doubtful that this author has any idea whatsoever on this topic. Fortunately, I have indeed been at the heart of a few companies that fit this criterion – Noxopharm (I am a founder–director of NOX) has delivered some fortunate investors a 2,000% return over a bit more than 2 years and Cynata Therapeutics Ltd (I am a co-founder of Cynata Inc., 2011) has risen 100% in recent months as well.
Next, I am sure there will be companies that do not match the profile I offer you here. There are companies that have flourished because of their charismatic leaders, a good amount of luck or because they were medical cannabis companies – some things just happen.
But let’s hope that the success of some companies will also be based on something more substantial – so we can justify taking an active role in investing and stock-picking.
In a nutshell, I believe that wonderful companies are the combination of a powerful simple idea and good execution.
Of course there are many OK companies that are based on an OK idea. These companies should do OK, but just OK isn’t likely to deliver exceptional returns to investors unless it is over a long period – which is then actually unexceptional. Many recent health app companies I look at have an OK idea – often competing with like-minded software people with the same idea to bring transactions together or act as some intermediary that wasn’t needed before. The barriers to entry are low, the investment required is modest and the failure rate is high. Vitamin companies are also in my OK-category, so are big mining companies, pizza chains and established banks – you get the idea.
What could be a simple powerful idea?
Noxopharm is based on a simple powerful idea. The drug idronoxil worked wonderfully in the laboratory and in rodents to treat cancer, but didn’t work in human patients – turns out, the human body deactivates the drug. The simple idea was to reformulate the drug so that the drug was ‘hidden’ from the human biological processes that rendered it impotent – allowing it to enter cancer cells and pack its full punch. This gave us NOX-66 as a new way of treating cancer and the simple idea turned powerful.
Exopharm is another company I have invested in. Exopharm has a simple powerful idea – harness the potent regenerative power of stem cells but without the cells themselves. Stem-cells worked wonderfully in the laboratory and in animals to treat a range of age-related illnesses, but didn’t work too well so far in human patients – turns out, stem cells usually are not active for long in humans either. The simple idea is to treat aging people who have much reduced levels of stem cells in their bodies with stem cells secretions and not the cells themselves. A most active part of the stem cell secretions is natural nanoparticles called exosomes. Exopharm has the technology to manufacture clinical-grade exosomes cheaply at large scale. Patients will be treated with exosomes regularly as a completely new way to treat a range of age-related illnesses and potentially even to extend human healthspan – imagine how powerful this idea might become.
Intertwined with powerful is the notion of disruptive. Tesla is a company based on a powerful idea and big-scale disruption to the established automotive industry. I think that many (or indeed most) powerful ideas are disruptive – and through disruption the companies hijack financial value from the establishment they attack – giving shareholders a disproportionate financial return in a relatively short time – Kogan might be a good example here, at the expense of Myer et al.
There will be plenty of other examples of powerful simple stories for your consideration. Maybe I am a little bit like Warren Buffett in that I don’t like to invest into a company that I (and likely many others) can’t understand what they are trying to do. Noxopharm is trying to make cancer treatments actually work, Exopharm is trying to make us age better by harnessing the mechanism behind how stem cells work.
That brings me to good execution. Having a powerful idea is useless if we don’t make it happen with some urgency and a sense of mission. Good execution needs a good team made up of good people with a nice balance of determination, energy and experience. It also needs adequate funding (not too much and definitely not too little) and some time. My proposition is that companies with a powerful simple premise don’t need an Olympic-grade management team – they just need to be good enough to get it done well and without delay.
Above all, I think these aspiring wonderful companies need to focus on the core of what each is trying to do and what investors (supporters) expect it to do. If it is Noxopharm – then build a dedicated and motivated expert biotechnology team and run numerous credible clinical trials to validate the core idea. If it is Exopharm, make the exosomes as a proprietary product and show they change people’s lives and improve healthspan with high utility.
As investors we have limited time and there are around 2,000 companies listed on the ASX. How to prioritise your interest? My suggestion is that you look for the companies that have a simple powerful idea and a good ability to focus and execute. We should not expect that even superhuman effort or wishful thinking can convert a poor idea into a wonderful company.