February 16, 2025 • 1hr 12min

TIP699: Unlocking High-Growth Investments w/ Jason Donville and Jesse Gamble

We Study Billionaires - The Investor’s Podcast Network

Jason Donville and Jesse Gamble are successful growth investors who have consistently beaten the S&P 500 since 2008 through their firm Donville Kent Asset Management. They've refined their investment process over the years, evolving from using metrics like the PEG ratio to focusing on return on equity and now the Rule of 40 to identify high-potential growth companies.

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Key Takeaways

Investment Philosophy: Focus on both growth and value, with emphasis on companies that can compound returns over long periods
Rule of 40: Key metric used to evaluate businesses by combining revenue growth and profit margins
Market Cap Sweet Spot: Best opportunities found in companies between $350M-$2.5B market cap in Canada ($3-4B in US)
Position Sizing: Start with small "toe-hold" positions (0.5-1%) and increase over time as conviction grows
AI Impact: Already improving business efficiencies and margins across sectors, particularly in tech
Interest Rates: Structural factors like demographics and productivity gains likely to keep rates lower long-term
Cash on Sidelines: Record levels in money market funds ($7T) likely to gradually flow back into equities

Introduction

Jason Donville and Jesse Gamble are successful growth investors who have consistently beaten the S&P 500 since 2008 through their firm Donville Kent Asset Management. They've refined their investment process over the years, evolving from using metrics like the PEG ratio to focusing on return on equity and now the Rule of 40 to identify high-potential growth companies.

Topics Discussed

Growth and Value Framework (2:42)

The guests explain their approach to finding companies that offer both growth and value:

Use a systematic ranking system to compare companies on metrics like revenue growth, earnings growth, and valuation
Look for companies growing at least 15% annually
Compare valuations relative to their universe of stocks rather than absolute metrics
"We're trying to optimize... we're only trying to own the best 10 to 15 [companies]" - Jesse Gamble

Evolution of Investment Strategy (4:34)

Jason Donville describes how their investment approach has evolved over time:

Lynch Ratio: Initially focused on companies growing faster than their PE ratio
Return on Equity: Shifted to emphasizing consistently high ROE (20%+)
Rule of 40: Now primarily use combination of revenue growth plus margins
Current focus on companies with minimum 15% growth due to opportunities in tech sector

Maintaining Focus During Market Stress (10:48)

The guests discuss their concept of "yarak" - staying alert and ready regardless of market conditions:

Important to stay engaged during both good and bad markets
Bear markets create opportunities for spectacular rebounds
Continuous engagement helps maintain focus despite emotional challenges
"Don't turn away from the screen... when it turns, if you're on top of what's good at that turning point, you will make a fortune" - Jason Donville

Portfolio Management and Position Sizing (40:49)

Their approach to building positions and managing portfolio concentration:

Start with small "toe-hold" positions of 0.5-1%
Gradually increase position size as conviction grows through due diligence
Top 10-12 names typically comprise 80-85% of the fund
Maintain a "farm team" of smaller positions that could grow into core holdings

Valuation Framework (43:12)

How they determine when valuations become excessive:

Use relative valuation rankings within their universe
25x earnings generally considered expensive for Canadian stocks
Higher multiples acceptable for US stocks given quality
Consider growth rates and margin stability when evaluating multiples

AI Impact on Business Fundamentals (56:47)

Their perspective on how AI is transforming businesses:

Already improving efficiencies and enabling scaling
Present in most software solutions across industries
Particularly impactful in healthcare, security, and lending
Creating competitive advantages for tech-savvy companies
"75% of multi-baggers come from the tech sector... because the growth comes from the new things" - Jason Donville

Interest Rates and Market Outlook (56:16)

Analysis of structural factors affecting interest rates:

Demographics are deflationary (population growth slowing)
AI and productivity gains are deflationary
Historical interest rates averaged 1-2% over 300 years
Don't expect return to 1970s-style high rates

Cash on Sidelines (1:04:21)

Discussion of record levels of cash in money market funds:

$7 trillion in money market funds as of November 2023
Similar patterns seen after 2000 and 2008 crashes
Money typically returns to market gradually as confidence returns
Bank customers across all segments holding record cash levels

Conclusion

Jason Donville and Jesse Gamble present a compelling investment approach focused on identifying high-quality growth companies at reasonable valuations. Their evolution to using the Rule of 40 as a key metric, combined with their disciplined position sizing and long-term perspective, has helped them generate strong returns over multiple market cycles. Their insights on AI's impact on business fundamentals and the structural factors affecting interest rates provide valuable context for investors navigating today's market environment.

For investors interested in following their approach, key lessons include: