In a recent TV appearance on CNBC, the legendary portfolio manager, Bill Miller, argued in favor of owning shares of Amazon (AMZN) because of the immensity of their “addressable markets.” As contrarian investors, this got us thinking about our three core tenets of investing, what markets we want to address, and how to spot industries which are near what Sir John Templeton called “the point of maximum pessimism.”

In the interview, Miller was referring to how much in goods and services are sold on a retail basis worldwide and how much capacity could exist for cloud computing services. In his view, and in the view of most growth stock investors, it shouldn’t matter what you pay to buy a company growing very fast if their market potential or addressable market seems unlimited. There are some precedents for this logic.

Phillip Morris sold cigarettes and ended up having a world of potential smokers. Coca-Cola sold soda pop and eventually sold it everywhere. Hershey and Mars sold chocolate and put it in forms that addressed markets all over the world. Microsoft and Apple put software into computers that allowed anyone around the world to become productive users of computing capacity. One difference between these companies and Amazon is that they were extremely profitable right from the beginning in their core business and had the ability to raise their prices in the short and long run.

We operate under three core tenets that guide our analysis of addressable markets. First, we believe valuation matters dearly. All the major long-term studies that we have found show that what you pay to participate in a company greatly affects your performance. To us, this means that “addressable markets” are only important if they aren’t well known or understood, and when they are, these bright futures are likely already discounted in the prices you pay today.

Second, we like to own businesses for a long time. We tread very carefully with technology companies because they can address markets much faster than other industries. For us, we prefer markets which take decades to address or a company that can use its organization to address other markets as they come along. Johnson and Johnson (JNJ) is a company which has found new addressable markets over many years.

Third, we need companies to be high quality. Ben Inker, in his study of factors contributing to long-duration alpha, found that strong balance sheets, sustainably high profitability and low earnings variability added to outperformance. Even companies that have great addressable markets stumble. When any great company stumbles, their comeback will be formed around balance sheet strength, free-cash flow generation and the economic needs they meet.

This leads us to the question: Which markets do we want to address in our portfolios over the next ten years? Our regular readers are very aware of the severe shortage of houses in the U.S. versus the number of households being formed. We appear to be in a baby boom among 30-45 year old American women, and the second child could trigger a home buying wave lasting ten years. NVR (NVR) and Lennar (LEN) build homes all over the the country and Home Depot (HD) supplies professional and amateur home builders and fixers alike.

The financial services world has been transformed by technology and is adapting to a cashless world. We believe the cashless world and the household formation by Millennials will give rise to a big jump in loan and investment needs. American Express (AXP) and PayPal (PYPL) meet these needs and our major bank holdings (JPM, BAC and WFC) do as well. Only PayPal, among these shares, trades at an above average price-to-earnings ratio, requiring a growth stock investor’s enthusiasm.

The world has a huge baby-boomer population. As boomers age over the next twenty years, a great many of them will live with chronic illnesses and the looming fear of cancer and cardiovascular disease. We own Amgen (AMGN), Merck (MRK) and Pfizer (PFE), all of whom are working hard to address these markets.

Where are investors the most pessimistic? We believe Sir John Templeton would say it is among the companies being slaughtered by Amazon and Netflix (NFLX) in retail and media. We like the content of Disney (DIS) and Tegna (TGNA) regardless of distribution methodologies.

We hold a small stake in Nordstrom (JWN) and are watching others closely in retail as the carnage continues. Remember what Mr. Templeton said, “If you wait until you can see the light at the end of the tunnel, you are too late.”

Much like Bill Miller, we like to find long-duration addressable markets. We do that only among companies which fit our eight criteria for common stock selection and meet our three core investment tenets. Only the lonely can play.