I’ve read all the threads on the current state of our investments. I didn’t know which thread seemed appropriate so I decided to start a new one. I don’t really have anything to say that’s new. So this is a reminder that seems to have been overlooked in much of the current discussion. I’ll freely admit that I was one of the members here who was somewhat panicky recently. I’ve calmed down. I’m in the sit tight and wait it out mode at present. Here’s why.
I’ll also interject as an aside that I’m in China right now and my internet connection is really flaky. I’ve got a VPN that’s supposed to be very good here in China. Not true - at least not true for a Windows device.
Anyway, most every thread posted here has focused on “growth” and/or “momentum.” I view those two terms as being very different phenomena, but I’l ignore that for now. I’ll only say that the market has traditionally rewarded growth. I would posit that one of the primary reasons, if not the primary reason for Saul’s long term success has been his laser focus on growth. So focusing on growth is not inappropriate. But it is not the only factor with respect to these investments.
I just wanted to remind folks that there are other very substantive reasons for these particular companies to succeed. And business success is really the key thing for mid to long term investment success. Revenue growth is just a proxy, it’s simple indicator that provides a reasonably reliable measurement of business success.
So a reminder that most of these businesses are unlike any that have come before. We are at a unique point in the evolution of society and business. The current intersection of the high speed internet, big data, cloud, computing performance and the pending explosion of IoT along with 5G put us uniquely on the cusp of the “information age.” People have been talking about this new paradigm for a decade or more now, but it is only recently that related investment opportunities have become available.
Denny often reminds us of the S-curve and how it describes any given product life cycle. But there is another way of looking at it on a more macro level. From my perspective we are close to the beginning of the S-curve as it relates to the information age.
The companies we are invested in are leading the way with respect to exploitation of the information age.
Has anyone ever seen the kinds of margins these companies seem to share? Saul’s been at this with a methodology for a long time. We’re not investing in sneakers anymore. In fact, we’re not investing in any business that sells tangible things (or if they do, it’s only to enable their primary products, it’s not the thrust of their business).
Does anyone recall a considerable number of companies that had net retention rates over 100% for numerous quarters (while retaining huge operating margins)? Does anyone remember investing in companies where each years revenue is virtually guaranteed to at least mirror the current year? Does anyone remember investing in a whole class of businesses with such extraordinary moats, “category crushers” as Saul puts it?
So absolutely, revenue growth is a vitally important indicator of a good investment opportunity. But it’s not the only thing that makes these companies stand out in the marketplace of potential investments. It’s maybe just the first filter.
We have a host of factors that make these companies unique. I’ve become comfortable with the discomfort of the value erosion in my portfolio. I view it as transitory. I am confident that virtually all my investments will return to their prior levels. The only thing that makes me a bit uncomfortable is that some big, mediocre company with very deep pockets buys out some of these smallish companies thereby so diluting the potential that it becomes almost invisible. But even this is mitigated by the fact that it’s extremely unlikely that the majority of these companies get bought out.
Just my way of looking at things. I hope it helps others who are still somewhat panicky.
I know, the next question is along the lines of, “OK Brittle, so when are they going to return to their prior glory?” In other words, a market timing question. Like Saul, or maybe worse than Saul, I’m no good at timing my buys and sells. But if you hold my feet to the fire, I’d venture a guess that it’s unlikely to last so long as a year unless (big caveat here) we go into a recession or the political situation overwhelms everything else. If that’s the case, it will take longer.
