A success story?

Investment Analysis Clubs Saul’s Investing Discussions
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A couple weeks ago, after seeing growth more-or-less stall at a tech company I owned (that isn’t followed here on this board), I decided to part with my shares and move that capital to another tech company that I thought had a lot more promise (Criteo, which Anirban championed here). Before this board, that is probably not something I would have done – I wouldn’t have paid as much attention to the short-term growth rates of my holdings, instead focusing on the longer-term story, and I probably would have stuck with the company anyway and given it time to pull itself out of its slump. I’ve had a good ride with it, seeing almost a double since I first bought it 2 years ago, and I’d generally be inclined to give management the benefit of the doubt.

Well today they announced a big restructuring, reduced guidance, and will be laying off 5% of their staff. The stock is down about 8% after hours as I write this. Criteo, on the other hand, is already up 5% for me on that purchase alone (and up 11.5% for me overall since I started buying last month – thanks Anirban and Saul!). Nothing can be judged by what happens over such a short period, of course, but I’m happy with the move and I think strategically it was the right thing to do. Now that capital is in a company that – while younger and probably riskier from an all-out-collapse point of view – is nevertheless very well positioned for future growth IMHO, rather than in a company that was mature and whose best days might just be behind it.

It has always struck me how Saul manages to get out just in time with companies that later go on to struggle, and I’ve usually just attributed it to having a good nose for the market that I don’t possess – in other words, not something readily teachable. But with hindsight, I feel like I might have gotten out just in time with this one, though of course I had no idea this was going to happen. But incorporating Saul’s approach into my evaluation of the company is what led me to my decision.

Anyway, it’s just one data point, but one that I do find encouraging as someone who is always trying to learn and improve. So thanks to everyone on these boards who works for the collective betterment of the group. And thanks, Saul, for being so patient and persistent :wink:

Neil

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It has always struck me how Saul manages to get out just in time with companies that later go on to struggle, and I’ve usually just attributed it to having a good nose for the market that I don’t possess – in other words, not something readily teachable. But with hindsight, I feel like I might have gotten out just in time with this one, though of course I had no idea this was going to happen. But incorporating Saul’s approach into my evaluation of the company is what led me to my decision.

Thanks Neil, but I don’t have any magic. The companies, and the stock, often give a feeling that something is wrong. But sometimes I’ve gotten out and they’ve ignored me totally and done just fine. I really don’t worry about those. All my decisions can’t be right, and as long as the stocks I’m in are doing well, I’m content.

Saul

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Neil,

I too have become more critical of my positions and more diligent about re-evaluating my long term thesis in light of each quarterly report. Kudos to Saul, Anirban, Gauchochris, you, and others here for providing a sort of blueprint to do a relatively quick quarterly checkup.

With that in mind, are you still in UBNT? It was one of my largest positions at the beginning of the year, but I have since trimmed it down to medium size due to the lack of catalysts. My position is still a good size because the valuation has become very reasonable and it won’t take much to move the needle from here. What are your thoughts?

Sameer

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Hi Sameer,

With that in mind, are you still in UBNT?

No, I closed out my position in early February. It finally sunk in that it just doesn’t matter if UBNT goes on to recover and be successful if I have other places for my capital that I think will also be very successful and without all the risk of a turn-around.

I think one of the things that has led to mistakes for me in the past was a tendency to consider an investment in terms of “will it make me lots of money” (or beat the market, or return 30% annualized, or whatever other hurdle/benchmark you’re using), as if it’s a binary choice to buy or not. But in many cases, I think the correct answer is that it might (perhaps even likely will!), but there are better places for my capital when considering overall risk/reward. If UBNT was the only company available to me and my choice was to buy it or sit in cash, I’d buy it. But it’s not my only choice.

I also think that trying to run a more focused or concentrated portfolio helps avoid the trap of feeling like you need to own everything that sounds like it could make money, which in reality just waters down your best ideas with more mediocre ones. When you’re more concentrated, the trade-offs are clearer – especially if you don’t have new money coming in and have to sell or trim something to buy or add something else. I still wouldn’t call my portfolio focused, but it’s much better than it was, and I’d like to say that I’ve started thinking more in those terms.

In economics, there’s something called “sunk costs” – money already spent, or effort already expended. It’s gone and there’s no getting it back, so the theory says that it should be irrelevant to a rational person when making future decisions (such as whether to continue with the endeavor on which we’ve spent money and expended effort). If you’re not getting any benefit from going to the gym, then it shouldn’t matter that you just spent $500 on a year-long membership three months ago: you should stop going. Of course, we know that humans don’t really behave that way – the money doesn’t “feel” wasted until we make that decision to stop going, even though the poor financial decision was really made three months ago and is well in the past; so we feel bad about the $500 when we quit. And I think that applies to investing as well. We expend effort and build up a lot of knowledge around a company over the years we own it, we invest our capital in it, and we ourselves become invested in the future story and returns that we expect from that business as we’ve come to envision it. Combined with something else called the “endowment effect,” in which humans tend to value what they already possess more than equivalent items that they don’t possess, I think it leads to a sense that we’re kind of throwing away a lot of value when we sell and move into a new company, even when that new company likely provides a better risk/reward trade-off for our portfolio.

Anyway, I’m just beginning to realize how may own investing decisions are likely impacted by these very natural biases and behaviors. And we can’t do anything to get rid of them, but we can be aware of them and try to recognize when we’re being influenced by them.

So long story short: I’m no longer in UBNT.

Neil

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Congrats and well done Neil!

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The sunk cost analogy is very interesting. I need to reconsider my position in light of this tendency. Thanks Neil.

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