GROWTH

INVESTORS
Your Personal Blueprint
to Finding the
Ypur Personal Blueprint to Finding the Next 10x Stock

CONTENTS

Pages

1 INTRODUCTION
2 A growth mindset, not a growth criteria

3 GROWTH MINDSET PRINCIPLE #1 - DON’T BE A

VALUE INVESTOR IN GROWTH STOCKS
6 From theory to practice: a business-first approach

7 GROWTH MINDSET PRINCIPLE #2 - LET THE BUSINESS

DO THE HEAVY LIFTING
9 From theory to practice: let business drives value

12 GROWTH MINDSET PRINCIPLE #3 - VOLATILITY AND

HUGE RETURNS GO HAND IN HAND
14 From theory to practice: your support system to hold
stocks

15 GET SMART: GROWTH STARTS WITH YOU

16 APPENDIX
Ypur Personal Blueprint to Finding the Next 10x Stock

Dear Smart Investor,

Buying a 10x stock is possible and not as hard as you may imagine.

You don’t have to use any hidden formulas or special criteria to uncover big stock winners
before anyone else.

You don’t even have to buy stocks during a market downturn.

In fact, all of my 10x stocks were bought during times when the stock market had already
recovered, much like where we are today.

Take a look...

Online streaming provider Netflix (NASDAQ: NFLX), which is up 180x

Mexican restaurant chain owner Chipotle (NYSE: CMG), which has increased by over 33x
Latin American online retailer Mercado Libre (NASDAQ: MELI), which has gained 33x as
well

If you juxtaposed the NASDAQ index from 2007 to 2011 against the different years when
these stocks were bought, as shown below …

Source: Yahoo Finance

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Ypur Personal Blueprint to Finding the Next 10x Stock

… you will find that NONE of the stocks were bought during 2008 or 2009, a tumultuous
period when the index was cut in half.

So, if all of the above are not the reasons behind outsized returns ...

… then, how do you find the elusive 10x winner among the thousands of stocks that are
available to you?

A growth mindset, not a growth criteria

Identifying a company with strong potential for 10x returns is the first step.

But it is only half the battle.

You will notice that the vast majority of the 10x stock examples above occurred over a period
of 10 years or longer.

That explains why it’s not just about a criteria for finding great stocks.

Identifying the elusive winning stock is hard enough …

… but if you fail to hold those shares, the 10x returns you seek may elude you.

That would be a shame.

If 10x returns are what you seek, you need to have the tenacity to hold a great stock over the
long term to fully realise its potential.

Hence, a different mindset is needed -- a growth mindset.

Over the next few pages, we will describe how we approach growth investing, sharing three
key growth mindset principles that you can use to find, and critically, improve your chances
of scoring 10x returns.

Some of the ideas may be unconventional. But then again, a 10x gain from a stock is not a
conventional return.

So, keep an open mind. If all of the above sounds good to you, please join us as we reach for
the stars …

Ad astra (to the stars!)

Co-Founder, The Smart Investor

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 Ypur Personal Blueprint to Finding the Next 10x Stock

Growth
Mindset
Principle #1 Don’t be a value investor in growth stocks

A useful way to understand growth investing is to contrast its mindset to

traditional value investing.

Value investors are often found hunting for stocks in the bargain bin.

But any value hunter worth their salt would know that stocks are often cheap for a good
reason.

Most likely, the underlying business or its industry has run into some problems.

As such, the base assumption is that business is broken somewhere …

… and it is the duty of the value investor to figure out what went wrong.

Under this value lens, the share price you pay plays an important role to compensate for the
risk taken, and any unexpected downsides.

In short, the value investor approach can be summed up in two key questions …

What stock is on sale today?

Followed by, what could go wrong with that stock?

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Ypur Personal Blueprint to Finding the Next 10x Stock

For the value investor, a low price tag on

a stock comes first, before considering
the business behind the stock.

Value mindset Growth mindset

What's on sale? What to own?

What could go wrong? What could go right?

Discounted cash flows Discount to market

opportunity

In contrast, growth investors are not looking for businesses that have stumbled or broken
down.

Instead, they will be looking for businesses that are already firing on all cylinders.

Typically, these companies have a working business model with visionary leaders or
seasoned executives at the helm.

Such businesses usually exhibit consistent levels of revenue or profit growth, often growing
faster than their industry.

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Ypur Personal Blueprint to Finding the Next 10x Stock

In short, in contrast to value investors …

The growth investor’s mindset puts the quality of the business at the forefront of
every consideration.

From there, the growth investor’s primary concern is to determine whether the good things
happening at the business today can sustain itself in the years or decades ahead.

In other words, in addition to considering the downsides …

…. a growth investor’s mindset looks ahead and thinks about upsides -- how things will turn
out better than expected.

To be sure, you are free to choose between value investing or growth investing.

Both approaches do work.

My clear preference, of course, is growth.

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 Ypur Personal Blueprint to Finding the Next 10x Stock
From theory to practice:
a business-first approach
There is nothing wrong with hunting in the
bargain bin.
But what you find may not be what you
want.
For the growth investor, the choice of the
company is all important -- therefore, it is
the first consideration.
Take Amazon.com (NASDAQ: AMZN), which
was listed in 1997.
Between 1997 and 2009, the online retailer
grew its sales from less than US$150 million
to over US$24.9 billion, an amazing feat.
During this period, Amazon’s free cash flow
turned from an outflow of US$3.7 million to
a positive inflow of over US$2.9 million.
In short, the company was already firing on
all cylinders by the time I purchased my first
batch of shares in 2010.
The next step was to figure out whether its
growth can continue.
Back in 2009, online shopping penetration
was only a little over 4% (according to the St
Louis Federal Reserve) indicating that there
was plenty of room to run with Amazon well
positioned to take advantage.
Today, the penetration has exceeded 13.1%
as growth played out over the last decade.
Clearly, there is room to run for Amazon,
even with its trillion-dollar market cap
today.
Meanwhile, e-commerce penetration in
markets such as Southeast Asia remains in
the mid-single digits.
Early leaders in the regional market, such as
Sea Limited (NYSE: SE), could be poised to
benefit as retail sales move from offline to
online.
Sea’s Shopee app is topping the charts in
monthly active users (MAU) and total time
spent in Southeast Asia, Taiwan and Brazil.
At the moment, the company’s e-
commerce operations are financed by its
profitable Garena gaming division which
houses Free Fire, the highest-grossing
mobile game in Latin America, Southeast
Asia and India.
The popular mobile game has amassed a
massive base of 150 million daily active users
in the second quarter, a testament to its
wide appeal.
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 Ypur Personal Blueprint to Finding the Next 10x Stock

Growth
Mindset
Let the business do the heavy lifting
Principle #2

Every week, there will be stocks falling to their 52-week lows.

But hunting in the bargain-bin may not be the best place to find truly great companies.

Oftentimes, you have to be willing to pay up for great businesses.

In doing so, you have to let the business performance do the heavy lifting.

Let me explain ….

The two key drivers of value

In my book, there are two key factors that can cause a share price to increase: the free cash
flow per share (FCF/S) and the price to FCF (P/FCF).

Explainer note: You can use the combination of earnings per share (EPS) together with the
price-to-earnings (P/E) ratio, too.

If you multiply FCF/S with P/FCF, you will get the share price.

This simple equation implies that the movement of FCF/S or the P/FCF will have a
DIRECT and EQUAL impact on a company’s share price.

But that is where the similarities between the two factors end …
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Ypur Personal Blueprint to Finding the Next 10x Stock

Factor #1: Free cash

flow per share (FCF/S)

In my eyes, the first factor, FCF/S is a figure

that is within a company’s control.

If the management team does a good job,

they will bring in revenue, keep costs and
capital expenditure in check …

… then, the business will generate both

operating and free cash flow (FCF), as a
result.
Factor #2: Price to free
Under a scenario where the FCF/S goes up
while the P/FCF remains the same, the cash flow (P/FCF)
share price will increase.

The primary driver in this case is clearly the

FCF/S, a proxy for the management’s effort. On the other hand, the P/FCF is a ratio that
is driven by stock market sentiment ....

… and therefore, is not within the

management’s control.

If the stock market is feeling optimistic, a

higher ratio is rewarded to its shares.

Conversely, if sentiment turns sour, the

stock market will bid down the ratio.

As such, under the scenario where the

P/FCF goes up while the FCF/S remains the
same, the share price will also increase.

Unlike the first scenario, though, any gains

driven by P/FCF growth are less reliable, as
market sentiments can turn on a whim.

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Ypur Personal Blueprint to Finding the Next 10x Stock

From theory to practice:

let business drives value

As investors, we have a choice.

We can focus on getting the cheapest price possible.

In that case, the P/FCF ratio is the key focus.

The lower the ratio, the better.

Or we can focus on the business, and let it do the heavy lifting.

Under the second option, we will be looking for growth from the FCF/S to drive share price
growth.

As a growth investor, my focus is always on the latter -- let me explain why.

In June 2010, I bought shares of Apple (NASDAQ: AAPL) for a split-adjusted share price of
US$8.75.

As of 4 September 2021, shares have risen to over US$154, providing a pleasing gain of over
1,660% excluding dividends BUT …

… while the returns were pleasing, the wide disparity between the gains in Apple’s
FCF/S and P/FCF paints a telling picture on what matters more if you want to score
a 10x return.

For the period between June 2010 (when I bought the stock) and September 2021 (present
day) the FCF/S rose from a little under US$0.47 to around US$5.65.

In other words, there was a gain of over 12x from the FCF/S alone.

Without even considering the P/FCF ratio …

... we can conclude that the share price gain of around 1,660% was primarily driven by the
FCF/S gain.

Our above is summarised in the diagram on the next page.

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Ypur Personal Blueprint to Finding the Next 10x Stock

Source: Apple’s SEC filings; Morningstar; author’s calculation

For completeness, we can say that there was help coming from the P/FCF ratio increasing
from 18.7 in June 2010 to 27.3 in September 2021, for a rise of around 46% overall.

However, this gain pales in comparison to the heavy lifting done by the FCF/S.

In conclusion, this exercise is created to make a point to you, my dear reader …

… if you focus on the company’s performance, which is, in this case, represented by the
FCF/S, you stand a chance of seeing your investment increase by multiples of its original
value.

There is nothing wrong, of course, if you want to pay a cheaper price.

We won’t begrudge you for doing that.

But consider this …

Even if I paid a more expensive P/FCF ratio of 27.3 times back in June 2010, my returns
would match the gain in the FCF/S which is 12x.

Let’s just say that I have yet to see an unhappy investor who made 12 times his or her
money.

Beyond Apple, there are several other US companies that are smaller in size but have
already exhibited the propensity to generate free cash flow.

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Ypur Personal Blueprint to Finding the Next 10x Stock

The choices are varied, ranging from Wingstop (NASDAQ: WING), a chicken-wing
restaurant chain with over 1,500 outlets, Etsy (NASDAQ: ETSY), a popular online
marketplace for hand crafts and freelancer network Fiverr (NYSE: FVRR).

Esty’s marketplace brought together 5.2 million active sellers and 90.4 million active
buyers for the first six months of the year, generating gross merchandise sales (GMS) of
over US$6.18 billion during the period.

As its network grows bigger, GMS should increase alongside.

Esty’s growth has been highly profitable; for the first half of the year, the marketplace
operator drew in over US$1 billion in revenue, generating over US$260 million in free cash
flow in the process.

Wingstop, on the other hand, has opened over 200 outlets over the last 12 months fueled
by its profitable operations.

Over the past year, the restaurant chain generated US$272 million in revenue which, in
turn, provided the company with the financial firepower of US$72 million in operating
cash flow.

These funds are used to reinvest, to build more restaurants and sign up more franchisees
to further its growth.

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 Ypur Personal Blueprint to Finding the Next 10x Stock

Growth
Mindset
Volatility and huge returns go hand in hand
Principle #3

The biggest winner in my personal US

stock portfolio is Netflix (NASDAQ:
NFLX), with a gain of almost 180x.

Suffice to say, the returns have far

exceeded any expectations I had.

But if you thought that the journey to

180x gains was a smooth ride up to
the summit, you may want to think
again.

The graph below, which shows the

maximum decline of Netflix’s stock in
any one year, demonstrates the
volatility of the stock.

Source: Yahoo Finance

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 Ypur Personal Blueprint to Finding the Next 10x Stock

To be explicit, between 2007 and 2021, there have been four instances when the stock got
cut in half during the year.

In fact, shares even fell by almost 80% in 2011 alone.

I can tell, first hand, that being a shareholder during that moment can be rather
embarrassing.

But that’s the price you have to pay if you seek big winners.

The road to 10x returns is unconventional, to say the least.

Even the best leaders will stumble along the way, making errors that can leave you a little
red in the face.

That is why Peter Lynch once said, the most important organ when investing in the stock
market is your stomach, and not your brain.

Your ability to stomach the pain of temporary declines will determine whether you
can succeed in scoring a big return, or not.

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Ypur Personal Blueprint to Finding the Next 10x Stock

From theory to practice: your

support system to hold stocks

“If you have a 10% chance at 100x returns, you should always
take it. You’re still going to fail 9/10 times, but the rewards
are well worth it.”
-- Amazon founder, Jeff Bezos

As humans, our natural tendency is to avoid losses.

This phenomenon, termed loss aversion, was identified by psychologists Amos Tversky and
Daniel Kahneman.

According to their study, the pain of losses is twice as powerful, psychologically, compared
to the joy of a gain.

This is why investors are unlikely to take a 10% chance for a 100x gain.

The thought of losing 90% of the time will likely overwhelm the investor into throwing in the
towel.

You need to do more than believe in the strength of your stomach.

We believe that you can benefit from building your own personal support system.

This system helps to keep you calm, roll with the punches that the market will throw at you,
and prevent you from making emotionally-charged decisions.

You can start with the basics: an emergency fund.

Or you may build up a dividend portfolio that continues to pay dividends if that suits you.

Bottomline: optimise your stock portfolio and personal support system to support
rational decisions.

Your future self will thank you for doing so.

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Ypur Personal Blueprint to Finding the Next 10x Stock

Get Smart: Growth starts with you

“The first rule of compounding is to

never interrupt it unnecessarily.”
-- Charlie Munger

A growth mindset is the secret to a growth investor’s success.

By following the 3 principles outlined, you can effectively find 10x stocks without being
bogged down by distracting metrics.

From there, you have to be willing to let the management team grow the business, without
interrupting unnecessarily.

If you’re not patient enough, you might sell a great stock too early and end up with lower
returns.

We put this to practice in one of the services we run - The Smart All Stars Portfolio.

For every stock we buy, we plan to hold it for 5, 10, even 20 years and beyond.

We put our own money on the line to buy them and construct a growth portfolio in full view
of our members.

In addition, we also explain how we segment different stocks by risk, and how to size the
stock positions to commensurate the amount of risk we take for each stock …

… all in an effort to show that our theories are not just for show, but can deliver actual
returns.

If you’re interested in learning more about The Smart All Stars Portfolio, contact us at
hello@thesmartinvestor.com. We’ll be happy to provide you with more details!
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Ypur Personal Blueprint to Finding the Next 10x Stock

Appendix

Full list of my stocks that have gained 10x or more.

Source: Google Finance; author’s calculation; gains do not include dividends

Disclaimer: Chin Hui Leong owns shares in Apple, Amazon, Alphabet, Chipotle Mexican Grill, Booking Holdings,
Intuitive Surgical, MercadoLibre, PayCom, Netflix, Sea Limited and Fiverr.
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