Finding balance

Sometimes a company is hyped so much that almost every post or comment is overwhelmingly positive, and everything is so bullish that arguably the downside risk is overlooked or consensus expectations become too high. And then, for one reason or another, when that company’s fortunes are perceived to have changed after a quarter or more, everything becomes polarised - between those either now bearish or those still bought into the company. Everything is characterised as black and white, bull or bear, but the truth is invariably in between, with many shades of grey. And what is often missing, is balance.

This is a phenomenon we have seen with multiple companies over just the last year, the latest being Upstart. This is not meant to be a criticism of any single person, I am as vulnerable as anyone else to this way of thinking; it is human nature. Although I am using one or two examples to demonstrate my point.

I think this is what I was trying to express with my pre-earnings (for Upstart) thread (I struggle with Twitter as a platform, as with 280 characters it is hard to have much context, so will try and add where it’s lacking): (…)

"Take $LSPD. In Q1 they reported organic GTV growth of 91%, including hospitality +380% YoY. This lapped Apr-Jun 20 – the height of lockdown. The stock bid up. In Q2 lapping non-lockdown summer 20, GTV organic growth ‘slowed’ to +39%, the stock sold off. Why? Uncertainty…
Perhaps investors interpreted organic growth as underlying growth & the consequent sell off was equally exaggerated. The truth is invariably in between, with organic revenue growth +58% in Q2 driven by ARPU +17% QoQ. $UPST reports next Thursday – is it set up for a similar fate?
$UPST has grown like a weed – but what is the underlying growth rate? For anyone modelling their next 4 quarters what macro assumptions are you using & what is your starting point? In the Q2 call management said their macro assumptions are static in their Q3 & FY guide.
In Q1 $UPST beat guidance by 5% & in Q2 by 25% - how much Q2 outperformance was driven by macro factors with loans +69% QoQ or by conversion rate (22 to 24%), funnel efficiency & new wins? Underlying growth is unclear in predicting a Q3 similar beat. What is the market assuming?"

Here, I was asking whether we have enough understanding of its Q2 outperformance and the split to necessarily expect a 25%+ guidance beat in Q3. Should we ever assume a beat of that sort.

“Where does $UPST +60% QoQ growth moderate at? For comp $LC loan originations were up +63% QoQ in Q1, +84% in Q2, +14% in Q3. Customer Bank (a partner of $UPST) consumer loans were flat Q2-3 I expect $UPST to blowout Q3 but that’s the risk (if they don’t) – isn’t the market too?”

I’d seen Lending Club’s loan originations being up +14% QoQ interpreted bullishly for Upstart, from this I was implying that if there is any linkage, then LC loans (and implicitly Upstart’s) were slowing dramatically QoQ (if anything).

(Now I’ve seen a few times the point that Upstart originations grew slower than Lending Club in Q3 and that this is a negative point on its Q3 execution. However Upstart originations grew slower on a QoQ basis than Lending Club in Q1 and Q2 as well, and Q3 was actually respectively an outperformance for Upstart compared to Q1&2. Are we being balanced in using this comparison pre and post Q3?)

“Upstart’s underlying growth is more unpredictable at this point than eg $Net or $Ddog but cognisant of this risk, I like it enough long term to go into earnings overweight.”

I’ve already covered that one off with an entire post but suffice to say not everything is black and white, and that we can be a long term shareholder and hold shares while cognisant of a ‘risk-on’ environment.

Indeed when the shares were $350 plus I raised my concern that the risk-reward was skewed, or ‘risk on’, and I was told that the risk-reward was still ‘very favourable’. The logic was reasonable, (and the noise played into that too for me, despite being aware of it). Now the share price is down 70% the same investors are saying that the risk reward is now less favourable. Again the logic is reasonable with context.

While I understand the sentiment above, ‘if you liked it at $400 you should like it at $130’ is also a valid statement, if you believe the story or the company has not fundamentally changed in Q3. If you believe that it has changed, that’s a valid opinion too. It is entirely subjective, but it feels like this is often presented as objective, as black and white. Are we being balanced? Or are we overlooking what ‘risk reward’ actually is.

Investing is a game of probability after all, you can be ‘right’ for the wrong reasons, ‘wrong’ for the right reasons, and a mix of the two. So ‘right and wrong’ is really a blurred concept in investing and it causes much of the polarisation over certain stocks. If we were to loosely/blasphemously analogise it to a game of poker (Texas Hold’em), say you have a 10 of hearts in your hand, there’s 3 hearts on the table with only ‘the river’ to come, heads-up, you’re facing an all-in bet - do you call? It depends. It is a game of probability, there are a variety of factors to consider and lots of unknowns in this scenario, your circumstances and risk appetite being just two, there’s not a pre-defined ‘right or wrong’, black or white, and everyone will see it differently. ‘We need more information’ - sure, but don’t we in investing too.

When we use hindsight, price action and a selective time-frame to substantiate our objective point, this can sometimes feel a bit disingenuous and/or pejorative (at least to me). Even if it provides dramatic effect. We can cherry pick price action to support almost any narrative. And it can ignore the probabilistic nature of investing and that there is no one single ‘right’ way to do it or to make a decision. Everything exists in balance.

So for stocks I’m invested in I actively try to find out the bear theses, in the hope that I will understand the risks better and to find a more balanced view, or otherwise a make my thesis stronger. This particular bear thesis for Upstart is very good and balanced (and written by someone far more industry qualified to cover the company than I am, for one):

(Note that this was written when the share price was $120, after it went up to $400 with the actual revenue far beyond the expectations baked therein, and now back down. The bear was not ‘wrong’ just because the stock went up as the bull is not necessarily ‘wrong’ as it goes down).

Whether or not Upstart executed in Q3 (and to what expectations) really is subjective. For some it did, for others it didn’t. That’s fine, it is up to the individual to decide, & we’ve seen this reflected both ways by the very many posts about it over the past month or so. I myself have probably only added to the noise too in trying to articulate myself here.

Investing is subjective, there is risk and opportunity to every company on this board and perhaps if we are introspective and balanced in what those are, that can only help us as a group to mitigate the risk on the way up and the fall out that we’ve seen repeatedly on the way down (if it comes to that). There are many ways to invest, there is no right or wrong, only risk and reward. The bull and the bear can co-exist in finding balance.