Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 53

Sometimes, it pays to find the truly visionary leaders

There is obvious merit in investing in high quality companies with extraordinary prospects. Many of you may be familiar with what defines a quality business – a high return on equity, sustainable competitive advantages, solid cashflows, minimal debt and first-class management.

But many investors may not properly consider a company’s prospects, and yet these are as critical to long-run returns as everything else combined. We find assessing a company’s quality is relatively straightforward, however a company’s prospects are revealed only in the future, and the future is largely uncertain and hence difficult to quantify. The investing car we drive enjoys a great rear view mirror, but a rather murky and blurred windscreen.

Think about longer term growth prospects

Nevertheless, your returns will be driven by the future and not the past, and so it is vital that the prospects are bright.

If a company has many of the characteristics associated with quality, there is a better chance it can maintain reasonable returns into the foreseeable future. But as a company becomes larger, it will become harder to maintain a high growth rate. Just ask Warren Buffett, whose Berkshire Hathaway returns, over the most recent five years, have failed to keep ahead of the S&P500. Ultimately, the growth prospects of a company are likely to plateau, and in Australia that happens sooner rather than later thanks to our geographic isolation and relatively small population.

So the key to successful value investing is not whether something is cheap, but whether its prospects for long-term growth are good. That idea certainly flies in the face of value investing’s conventional wisdom but as we all know, conventional wisdom is long on convention and short on wisdom. Identifying those companies that are capable of growing earnings materially in five, ten or twenty years is the search for the goose that lays the golden egg.

One of the questions we like to consider is not only whether a company can grow its share of the market – that’s helpful - but whether the company has sufficient ‘momentum’ to grow and become the market.

Charlie Munger, the other half of Berkshire Hathaway, offers some advice on this topic:

“Averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But, very rarely, you find a manager who's so good that you're wise to follow him into what looks like a mediocre business.”

Going beyond the present day fundamentals

When investing, the priority is to ensure a business’s fundamentals are sound. But to assess long-term potential, you need to think like a visionary. Where will the company be if it continues to do the same thing for the next couple of decades, maybe even one hundred years?

The founders of Google are doing just this. In the company’s first annual report as a listed entity in 2004, the founders Sergey Brin and Larry Page stated that Google’s mission is “to organise the world’s information and make it universally accessible and useful”. This is an infinitely large task for a long term company.

Since inception, the founders have been focused on owning every part of the information chain. If investors initially framed the company’s potential as its ability to grow web searches, they may not have realised the value that Google was capable of generating (Larry and Sergey also discuss this issue in the report).

Google has gone on to introduce wearable technology, invented driver-less cars, invested in fibre-networks, and even plans to launch weather balloons in remote regions to provide wireless internet connection. To the founders, the focus wasn’t on sustaining a certain level of growth. Rather, the focus was on creating the most dynamic company achievable. When considered from this perspective, there seems to be no limit to the growth that may result.

Of course, valuation is just as important. Even if the company has extraordinary prospects, if the share price is trading at a prohibitive premium, you must consider the opportunity cost of your returns. With that said, identifying a company’s long run potential will influence your assessment of its intrinsic value, which may prevent you from selling if growth disappoints in the short-term, or perhaps encourage you to enter if growth appears to be maturing.

Value and growth are thus two sides of the same coin.

Brin and Page concluded their first shareholder letter with:

“If Google were a person, it would graduate from high school in 2016. Given a typical life span, it would expect to be around for almost a century – or more, thanks to continual innovations in healthcare technology. Today, it would only have seen a glimmer of its full potential. We’re just getting started.”

When a company becomes the market, it can be very difficult for competitors to penetrate its position, or scale the buttresses upon which the platform for sustained growth is built. As Google’s visionary leaders are demonstrating, the growth in long run intrinsic value will be determined by the management’s ability to seize the prospects.

 

Roger Montgomery is the founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able

 

  •   14 March 2014
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

On the virtue of owning wonderful businesses like CBA

How do different investing styles work?

What makes a company attractive?

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.