a little perspective

Gauchorico and I sat down and created a little model about what happens if growth stocks fall further and stay at depressed valuations for the next two years. Based on that work I sent an email to my family which I thought could be helpful for some of you here.

The market has been a pretty unfriendly place these last few weeks. My portfolio is down right around 20% from its all time high with some of my some positions down close to 30%. This has happened a number of times in the past 4 years and each time people think the sky is falling for growth stocks. I sat down and modeled out how our companies would do if valuations fell an additional 30% from here, and stayed at lower levels than they have been. That would be an approximate 50% drop in valuation from the high. Below is a table that shows percentage appreciation assuming these companies continue to grow with some minor deceleration in year 2.

        Growth assumption        price appreciation
          1 year     2 year      1 year     2 year
DDOG        65%      55%         11.6%      73%
ZM          50%      40%         21.5%      76%
CRWD        80%      70%         22.2%      108%
NET         50%      50%         1.6%       52%
DOCU        55%      45%         0.7%       55%
LSPD        100%     50%         37%        105%
ZS          55%      50%         2.5%       53%
TWLO        60%      45%         10.8%      60.7%

The revenue growth assumptions I used are fair but not overly conservative. I think there is a chance that many of the companies grow faster than what I assumed. All these companies have been doing incredibly well and are dominating their respective industries. I’m sure that over the course of two years some of them will falter and some will do better but despite the general panic in the market I still think they are all good investments even if we see a further 30% drop. The beauty of the growth stocks is they can grow past valuation changes relatively rapidly.

If we model another 50% drop from the already 20-30% drop we have had then all the stocks are down about 20% in one year and then by year two are making 10-50%.

I know this is simplistic and could be made much more complicated but the general point remains. Buy the best!



Nice job Ethan! I’m curious how you modelled this. Did you use a type of “EV valuation over revenue” type of assessment? If so, was type of multiples were assumed? Thanks for doing this!

In my family, I’m considered the “investing expert” (I know, I know but “in the land of the blind, the one-eyed man is king”). When my family and friends come to me for advice, I do my best to channel Saul: Only buy the best, pay attention to the business fundamentals and business health: look at revenue growth, recurring revenue, profit margin, strong management, improving business metrics, size of the TAM, strong competitive advantage, etc., and don’t (necessarily) pay attention to localized market movements; you’re in it for the long term, until the company’s story changes, then decide to sell, buy more, etc.

So in light of the recent market behavior, I am getting questions like
• What’s happening?
• When will it end?
• What’s happening with our stocks?
• Why don’t we sell our SaaS stocks and do what the money managers are doing and rotate over to travel, leisure, and industrials?
• And, importantly, what should we do now?

Below are my answers. Would love to hear other’s feedback.

What’s happening is fairly straight forward: our companies have run up quite a bit since March ’20 and now there is a textbook rotation to “re-open” stocks: travel, leisure, industrials, etc… Money managers are rotating away from the biggest winners in their portfolios to take advantage of lower prices elsewhere. In general, a pull back of 20% to 40% is not uncommon, in fact, it happens about once per year.
When will it end? No one knows the actual date, but the rotation will end when economy reaches its expansion limit, when the yield on the 10-year Treasury stops rising and the Federal Reserve hikes rates from near-zero levels. But some of this action is absolutely crazy and irrational. Examples
• Look at Footlocker: they reported an absolute terrible quarter, with really no future. Guess what, they rallied because they are considered a “re-open” play.
• United Airlines(UA) announced a significant share count increase (up to 37 million shares!) What happened? The stock rallies on that news. Why? Because they are considered a re-open play.
• Contrast UA announcing a stock issuance and getting a positive pop with Roku when they announced a $1B stock issuance: Roku got hammered.

So what’s happening with our stocks?
We all know about DDOG and NET; both had really strong quarters and both their share prices dropped after announcing, and another ~25% or so since then. Saul pointed out that even the analysts raised NET’s price targets about 17%, and that was before this recent market correction.
ZM had a nice quarter, and was up about 10% during the day of their announcement, and about another 10% in AH, only to be down about 25% since Tuesday…
CRWD: CRWD is down almost 25% since Tuesday. They report Tuesday, March 16, 2021 and I have no doubt CRWD will
• Blow their revenue number out of the water
• Report strong customer growth
• Report strong recurring revenue growth
• Report strong gross margin…
but could still drop. (aside: CRWD is interesting, in that, it’s shed so much recently that I could see a pop with a really strong outlook, but who knows in this crazy bizarre market, where substandard businesses are popping because they are considered “re-open” stocks.)

And a number of other our companies have a similar story: they are getting hammered in the market despite their strong and growing business, firing on all cylinders.

Why don’t we sell our SaaS stocks and do what the money managers are doing and rotate over to travel, leisure, and industrials?
Short answer: because they aren’t strong businesses compared to our companies and we don’t know when the rotation back will start. IMO, it’s better to be invested in strong companies, and just ride it out. No one can accurately time the market, so why try?
What about hotels and cruise lines: very slim margin, infrastructure heavy, slow revenue growth, if any at all.
Restaurants? Similar: brick and mortar, razor thin margins, high labor costs, etc.
Airlines? Same: Terrible margins, huge infrastructure costs, regulation dependencies, strong oversight, dependent on oil prices, etc.
Could some of these companies rise in the coming months? Yes, in fact we are already seeing it. But you’re in it for the long term; eventually these companies will “regress to the mean” and their share price will more accurately reflect the health and strength of their business.

The strongest companies always come back and push higher. No way to gage how long it will take, but companies that provide products and services that other companies need (products and services that save other companies money, time, make them more productive and lucrative, and/or protect them) will persevere and continue to do well, despite how the market reacts to them in the near term.

What should we do now? Simply put, hold on, if you are able and have the stomach for it. If you are investing on a regular cadence, continue to invest in the best companies (as we’ve defined), the category crushers that dominate their respective segments. Remember, Saul was down ~60% in 2008. This relatively modest 20%-30% pull back is child’s play compared to that. If you don’t like the volatility, there’s a broad market index fund or ETF with your name on it that will let you sleep at night, but will likely not provide the long term gains a portfolio of strong companies that are firing on all cylinders.

I welcome feedback.


Thanks Ethan, this is very helpful !

I also believe that you have taken a very conservative approach. This is why:

  1. The money flowing out on growth stock, if at least partially re-invested. Right now, it is being re-invested in cyclicals & raw materials (value stocks). While some of these stocks might present big upside opportunity, most of them don’t, for the exact reason why we are invested in growth stock: they do not grow fast. Coming out of a pandemic or potential inflation doesn’t change that - it just gives them some tailwind. But even tailwinds cannot make a stone move fast :slight_smile:
  2. Right now there are tremendous amounts of saving accumulated during covid by individuals. Of course, people are going to splurge (me included, despite the fact that I just started investing and bought mostly in Jan, so you can imagine the state of my portfolio right now …). On the short-term that might mean some inflation, but it is not sustainable in the long-term.

As such, while it is highly possible that we see more correction on our growth companies, I feel it will not take 2 years for most people to see very positive returns again; unless you started investing at the top (which I did) and you don’t plan on adding regularly, in which case it might.

Again thank you for the helpful write-up!
LONG: SHOP, CRWD, NET, DDOG, NIO, LSPD, DOCU, SE, ROKU, PINS, TSLA, SKLZ, ZM & MNGI in that order (after last weeks slaughter)


I’ve had this question by email a few times and by Gary.
" Did you use a type of “EV valuation over revenue” type of assessment? If so, was type of multiples were assumed? Thanks for doing this!"

We used EV/S on a TTM basis for all the companies except ZM and LSPD as they both have serious step ups in revenue. For ZM and LSPD’s revenue we took summed the last 3 quarters, divided by 3 and multiplied by 4 to account for the large jump in revenue from the pandemic for zm and acquisitions for LSPD. Neither is perfect but we believed that gave a more honest picture.

We then multiplied the current revenue * the (1+growth) rates in the post to get revenue 1 year out. 2 years out we did (1+2nd year growth rate) * the 1 year out revenue.

For the forecast drop we multiplied a further drop of 30% by (1-30%)*current EV and (1-50%) for a 50% drop.

Finally to get price appreciation we took the discounted EV/S (30% drop and 50% drop) * Revenue / Shares outstanding to get the price. Sales cancels out of the EV/S, and EV = price * shares - net cash. So shares cancel out leaving you with the price.

clear as mud?

or in english… we assumed a lower ev/s in the future and figured out price from that.



Thanks both for the heartening posts. They make a lot of sense and help me keep my focus.

Question spawned by Ethan’s post: It’s pretty easy to find websites and brokerage accounts that take a ticker symbol and give you a chart of price, earnings by quarter and rolling earnings per share. Then you can see what a “normal” PE range is for that company and see when it is excessive in either direction.

Do you know of a site where we can see a similar chart with revenues and price/revenues indicators? Something like that over time would help us to identify periods where the P/S ratios are lower or higher than “usual” for our companies.


Where did you accumulate most of these stocks? I started aggressively buying last fall so don’t know what this means for me? I can see if you bought in March/April this is nothing compared to the gains, but I’m in a different boat I think?

Everyone is in the same boat if we believe in Saul’s investing thesis and only invest our money in the “best” companies. Ethan just modeled two years, but most of the companies we’re investing in won’t stop hyper-growth after two years. There are many many years’ more growth ahead of us.



This calculation assumes from current prices. So you would need to take those percentage gains and multiply from the current price to see what the price of the stock would be. You can compare that price to what you bought at.

However I think that is the wrong way to think about it. What you want to think about is if the stocks are worth owning NOW. As long as these companies remain dominate and growing…the answer is yes. The future of these stocks is what matters. You can’t do anything about the past except harvest losses if they are in a taxable account. See the knowledge base about investing fallacies. It is a good read (we are approaching some hubris here because I wrote it…ahahha)

Basically we were trying to show with math what Saul and all us have been saying. You can outgrow a big drop in stock price. And, prices are starting to look pretty good even if the stocks drop A LOT in the future.



I’m also reminded of a Morgan Housel article from a few years back. The Tyranny of the Calendar.


Just did a quick look back…yes…painful past few weeks as my port balance keeps going the wrong direction, BUT…if I go back and start measuring from 1/1/20 I’m still up 102%. Those are still extraordinary gains.

Perspecitve indeed.


I could look and say my portfolio is back down (on a percentage basis) to where it was 4-5 months ago. No big deal.

Or, my portfolio is down 2x its total initial value from when I moved all the way over to individual stocks about 5 years ago.

On the bright side, that’s because the whole port was up 8x in that time… so now it’s “only” up 600% or so…

I think Brian Feroldi posted or retweeted yesterday, when in doubt, zoom out…


I started investing outside of SPX in Oct 2019, “discovered” this board in May/Jun 2020, and began applying Saul principles later in 2020 to about half of my direct holdings (my 401k is ETFs only so a pain). The other half are “forever” holds.

Between taxable account and Roth IRAs we are -25.9% off the ATH a couple weeks ago.

Does it feel like a big hit in the stomach? Sure! But here is a perspective:

Since March 6, 2020:
SPY +28% and some trifling dividends
Taxable account +81% as of this moment even though plenty was added after May 2020.
Roth IRA started and filled at high summer 2020 prices is up 62%!
Roth IRA started recently is flat.

I am lazy to calculate the 401k growth ETF returns but they, too, are far ahead of SPY.

Basically, we need to crash like it is 2000 from ATH to get back to SPY assuming the latter stays flat.

I do have a friend who started in Aug 2020 and it is not easy but gotta hold what you think are the best companies and add whenever possible. Added to my wife’s Roth IRA today and bought BAND, eyeing a few others.

I don’t have stomach to play games with JPM and Exxon and mall REITs and the like.

Psychologically, I am far more comfortable taking March 2020 and March 2021 (ha, what happened to March is great for stocks, lol!) with companies I believe in than I used to be when holding SPX and felt at the mercy of everybody and their uncle as it was in December 2018. The big headache I get is in terms of finding more to invest at a time I had not planned to; I have felt no impulse to sell. I do re-allocate from lower conviction to higher conviction. But so far only 1 position was moved (NVTA into BAND and NARI). I just think all my other positions are strong.

Thank you that helped calm me down :slight_smile: