How to pick an investment that’s about to take off

In an investment landscape filled with hype and speculation, the challenge for investors lies in identifying companies that are not only growing but are also positioned to sustain that growth over long periods.

Many businesses enjoy temporary success driven by macroeconomic trends, investor sentiment or clever branding, but true long-term winners share specific traits that set them apart.

While it’s easy to be swayed by charismatic CEOs and well-crafted investor presentations, there’s more to look at under the hood of a potential investment.Credit: Getty

So, how can investors separate substance from illusion and position themselves for long-term gains?

The foundation of any great growth company lies in its leadership. Exceptional management teams do more than just deliver quarterly earnings – they have a clear philosophy, tend not to follow the textbook, and execute consistently through evolving market conditions over long periods.

While it’s easy to be swayed by charismatic CEOs and well-crafted investor presentations, true leadership is reflected in a company’s ability to take calculated risks, demonstrate a deep sense of ownership and build enduring customer relationships.

Management at companies poised for sustainable growth often share these three critical attributes:

1. The ability to take calculated, transformational risks: Growth is driven by visionary decision-making, not reactive gambles. Companies that take strategic, high-impact risks – such as Hermès’ decision to reduce store count to heighten exclusivity in the ’90s, or Netflix’s pivot to streaming – often set themselves up for long-term dominance.
2. A leadership mindset of long-term stewardship: True leaders prioritise resilience and legacy over short-term financial manoeuvres. Take Brunello Cucinelli of the eponymous fashion label – he’s methodically built his company through sustainability and craftsmanship rather than chasing immediate profit.
3. A business model that builds a movement, not just a brand: Companies that cultivate deep customer relationships and brand loyalty – like Tesla, Lululemon and Lego – are often better positioned for enduring growth than those that rely on aggressive, short-term marketing.

Avoid companies priced to perfection

Even the best companies can become poor investments if stock is purchased at unsustainable valuations. Investors should be wary of businesses trading at extreme multiples, where the market has already priced in years of flawless execution, even if the companies themselves are run by exceptional teams.

Instead, seek opportunities where a great business is facing non-company-specific risk or is overlooked due to unfavourable macroeconomic trends.

These moments create rare opportunities to acquire stakes in outstanding companies at compelling valuations. During the COVID crisis, an exceptional investment window opened to buy into Europe’s leading ticketing and live events company – an opportunity driven purely by extreme macroeconomic pessimism.

Yet, despite the broader market turbulence, the company’s financial strength and competitive edge remained unshaken, making it a truly once-in-a-generation opportunity. The company has tripled its share price since then.

You don’t need to chase once-in-a-generation bargains like this, but as long as you enter at a reasonable valuation, you’ll stack the odds in your favour, limiting downside risk while letting great management teams work their magic over time.

Capitalising on shifts in sentiment

Market sentiment fluctuates, even for companies with strong fundamentals. Over time, even the best businesses will experience cycles of heightened optimism and periods of doubt.

When sentiment turns excessively bullish, valuations can become stretched, making stocks more vulnerable to sharp corrections. Even with exceptional companies, investors should expect losses if multiples become overextended and market expectations rise to unsustainable levels.

To manage this risk, investors should look to trim profits when valuations soar beyond historical norms and reallocate capital into high-quality businesses facing temporary negative sentiment.

This continual process of trimming and reallocating ensures that investors capitalise on sentiment changes while staying anchored to fundamentally strong companies. Mastering this dynamic approach can lead to superior long-term returns while taking the heat out of any portfolio.

Successful investing is not only about finding the right companies – it’s about entering at the right price and continuously optimising your portfolio. By investing alongside exceptional management teams, purchasing shares at reasonable valuations and capitalising on shifts in sentiment, investors can build a strategy that compounds wealth over time.

The key is discipline. Rinse, repeat, and stay focused on long-term value creation.

Lawrence Lam is the author of The Founder Effect and managing director of Lumenary, with over two decades of expertise in global equities, risk management and advising boards on investment strategies.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.

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