Opinion: This surprising investment strategy crushes the stock market without examining a single financial metric

I’m not a professional stock picker, but over the past decade my portfolio has beaten the stock market by a factor of three to one.

Unlike Peter Lynch, who advocated investing in the makers of the products you love and who in my opinion stand out as one of the greatest of all stock pickers, I haven’t looked at a only financial metric to build my portfolio. Instead, I just ranked the competitors in each industry based on customer love, and then I bet on the winner.

My portfolio has worked so well because the market underestimates the economic power of customer love. When customers feel loved, they ask for more and refer their friends. It is the economic flywheel that drives lasting prosperity, and the companies that are inspired by it generate surprising levels of profitable growth.

To measure customer love, I used the Net Promoter Score (NPS) that I created 20 years ago. It captures the likelihood that a customer would recommend a product or service to a friend or colleague. I relied on the market to incorporate all of the financial information into the current share price.

My buy and hold investment portfolio started with the 11 NPS Public Leaders described in my 2010 book, “The Ultimate Question 2.0”: Amazon AMZN,
Meta Platforms (formerly Facebook) FB,
Apple AAPL,
Cost of Wholesale Costco,
Google GOOG parent alphabet

Southwest Airlines LUV,
American Express AXP,
JetBlue Airways JBLU,
Verizon Communications VZ,
T-Mobile US TMUS,
NortonLifeLock NLOK
and Metro PCS Communications (which merged with T-Mobile in 2013).

Looking back some of these actions seem obvious, but at the time the book was written they were anything but. Amazon had a lower market capitalization than eBay. T-Mobile was considered by many to be the weakest player in mobile telephony.

In the years that followed, however, this group’s extraordinary customer orientation paid off. From January 1, 2011 to December 31, 2020, these stocks outperformed Vanguard’s Total Stock Market Index exchange-traded fund VTI
by a factor of 2.8 to 1. (This performance is weighted according to market capitalization and rebalanced quarterly in the same way as the rebalancing of VTI).

Fred reichheld

Since then, Bain & Co., where I have worked since 1977, has applied NPS to a long list of industries and created NPS Prism, a data benchmarking service that ranks competitor NPS on an apple-to-apple basis. . As we examine more and more industries, we continue to discover new NPS leaders, one of which is Texas Roadhouse TXRH,
Discover DFS Financial,
Tesla TSLA,
Fluffy CHWY
and FirstService FSV.

I sit on the board of directors of FirstService, a real estate services company whose social media management #FirstServeOthers provides insight into their business philosophy. In the 25 years since the IPO, its annual total return to shareholders has been just under 22%, a better record than all but seven of the 2,800 companies with revenues of at least 100. million dollars when listed on NASDAQ.

For a long time, like many large customer-centric organizations, it has remained off the radar screens of investors. One reason: GAAP accounting sorely lacks a measure of customer focus. It doesn’t even require organizations to report how many customers they serve, let alone how many return, increase purchases, or recommend friends and family.

It is therefore difficult to find comparable data. I first discovered online pet supplies retailer Chewy when their self-reported NPS appeared in their IPO documents. Chewy does a terrific job of harnessing the special emotional bond between owner and animal, with things like the hand-painted animal portraits that the company sends in the mail as a surprise thank you to customers, who delighted. , then publish them, with glowing testimonials, through social media.

By our calculations, Chewy’s NPS beats Amazon’s NPS by 24 points in its class – an extraordinary performance. Chewy’s own numbers are slightly different from ours, however, and the inconsistency in self-reported numbers is one of the reasons we’ve developed a new metric called Earned Growth Rate. It measures revenue growth generated by loyal customers and their referrals by combining net revenue retention (NRR), the proven back-for-plus statistic used in the Software as a Service (SaaS) industry among others, with New Customers Won (ENC), measuring how much new customer spend is earned through referrals rather than purchased through promotional channels.

Exemplary NPS First Republic Bank FRC
has in the past gained 82% of the growth of its deposits, with 50% coming from existing customers and 32% from referrals. Warby Parker WRBY,
the pioneer of direct sales to consumers in the field of prescription glasses, wins nearly 90% of its new customers thanks to referrals.

You can use this calculator to estimate the earned growth rate of your business.

Abingdon Press

In addition to these metrics, it is also possible to identify NPS leaders by their common characteristics.

  1. They apply the golden rule – love your neighbor as yourself. This often means avoiding bad profits. Discover Card, for example, never sells debts to collection agencies.
  2. They empower their frontline employees to serve customers in creative ways. Companies like Chewy that give employees the freedom to serve their customers with empathy and creativity build trust and loyalty in their business.
  3. They integrate customer returns in store and online. Tech-rich companies like Warby Parker are increasing direct feedback with digital signals from customers and front-line employees to guide decision-making, which is essential in helping businesses respond to holiday buying trends this season. .
  4. They make customers their main goal. By going the extra mile to provide a customer with an experience that is not only good, but remarkable, companies can help enrich their lives beyond the product they offer.

I have spent most of my 44-year career focusing on understanding the role loyalty plays in building great organizations and helping leaders inspire their teams to embrace a life-enriching mission of meaningful service. clients and colleagues. This is the right way, and the best, to earn in business and on the stock market.

Fred reichheld is the creator of the Net Promoter management system and the author of “Winning voluntarily: the unbeatable strategy of loving customers”(With Darci Darnell and Maureen Burns), among other books.

About Virginia Ahn

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