These 10 stocks averaged almost three times in 2020. They all share this 1 feature

What makes a stock a good position? Is it affordable? A sustainable and growing dividend? Unmatched brand value? These are the essential questions that novice investors – as well as experienced investors – need to consider.

In my opinion, what makes a stock a good position is that the company behind the stock is “antifragile”. In fact, the 10 most antifragile actions in a system I have used in the past five years averaged almost three times as much in 2020.

But what does “antifragile” mean? And how can you apply it going forward?

What makes them anti-fragile?

The word was coined by best-selling author and former merchant Nassim Taleb. He says that we often group everything in the world into two groups: the fragile (things that break easily under stress) and the resilient / robust (things that don’t break under stress).

But, Taleb argues, this ignores a third critically important group: antifragile. This refers to things that really get stronger when exposed to stress. For an everyday example, think about your muscles: the right amount of stress (weight lifting) makes them grow even stronger.

Applying this to stocks, an antifragile company would have three main characteristics:

• Barbell Strategy: A mission-oriented company must dedicate 80% of its resources to low-risk (high gap) businesses and another 20% to high-risk, high-reward business lines (optionality).
• Financial fortitude: These companies have many customers (without risk of concentration) and have the kind of balance sheets that can help them survive and thrive in difficult times.
• In-game skin: Businesses led by the founder, where insiders have many shares and employees are happy to be there, align the interests of key people with shareholders.

The idea is simple: when these three factors are present, companies are likely to continue to thrive in the unknown future. First, I’ll show you the 10 companies in question, and then we’ll see why they made the cut.

The 10 companies

The 10 companies, with their returns in 2020 below, are:

AMZN data by YCharts

Barbell Strategy

The assessment of a company’s bar strategy is divided into three components:

• Mission oriented: The company’s mission statement must be simple, inspiring and optional.
• Pit: The company’s core business must be protected by sustainable competitive advantages, or moats.
• Optionality: The company has several ways to fulfill its mission.

All 10 companies have impressive moats.

Data source: Company resources for mission statements.

Some companies, like Amazon, have demonstrated an incredible use of the barbell method in the past 10 years. Everything the company has done, for example, aims to offer the best service imaginable. Others, like Zoom, are just getting started, but Zoom has already demonstrated that it can benefit from “shocks” in its system.

Financial antifragility

Financial antifragility is also important. The best mission statement and bar strategy in the world won’t make a difference if the company doesn’t have enough money to stay in business.

Companies that have a lot of money, little debt and positive free cash flows can really benefit from economic crisis. How? Buying back your own shares, acquiring rivals or simply putting the competition out of business.

It is also best when the company does not depend on just a few customers to make sales. If that were the case, a single decision by a single person could, with a touch of a pen, quickly change a company’s perspective.

Data source: Yahoo! Finance, SEC filings. Free cash flow presented based on previous 12 months.

Yes, there are some outliers. Axon Enterprise, for example, decided to spend more money than it now earns to develop new tools for police departments. This exchange is reasonable.

Others, like Shopify, have proven the importance of this extra money: The company has provided merchants with relief in the form of loans to help them weather the COVID-19 storm. This not only helped Shopify’s core business, but it also yielded enormous goodwill from the entrepreneurs who drive Shopify.

In-game skin

Finally, companies must have a lot of skin in the game. This means that those who run the company have the same financial incentive to see it do well as the shareholders.

Founders often see their companies as existential consequences of themselves. Therefore, when the person who started a company still runs it, the balance tilts in favor of investors.

It is also a good sign when executives (insiders) own shares and (through evaluations at Glassdoor) that ordinary employees like to work at the company.

Data source: SEC files; full voting power of the most recent proxy statement or annual report. * It is an average between Shopee and Garena.

Again, none of this is a silver bullet. You can have founders involved, heavily invested insiders and happy employees and still have a bad investment.

A simple takeaway

No investment structure is perfect. After such a great performance in 2020, I wouldn’t be surprised if these stocks underperformed the market for a while. This is OK; investing is a game to be played for decades, not a few years.

For now, looking for other companies that share these characteristics is my top priority. It wouldn’t hurt for you to do the same.