I’d like to thank Saul for this post, as I wholeheartedly agree. Pardon me as I ramble a bit…
I am a pretty lazy investor, that tends to move in and out slower than most here. Hell, it used to take me 2-3 weeks to digest earnings reports and conf calls, back when I had a 9-to-5. This is why I used to use the Fool advisory services heavily for decades, to save time plus allow me to learn. Then I found El Dorado here, as Saul had an investment thesis that gave me a better framework over the financials of the hypergrowth companies I focus upon. One of his valuable lessons was to focus on ACTUALS not DREAMS.
And now, I fully track every motion of these companies. I build up conviction, and it typically takes something big to get that conviction to waver (unless I see a crack in mgmt, then my loss of conviction is instant). I don’t really care what the market thinks about these companies day to day - hedge funds and most of retail are like consumer fashionistas, in that they ride trends (commodities anyone? crypto? how about SPACs? those were huge for a lot of 2021…), and freak out easily.
I focus on what I can control – my conviction. I watch the financials, which gives me the ongoing performance of the company, and the earnings call to hear mgmt walk through it. I look at other things too between those earnings calls, like the product cadence, the platform’s potential, investor conferences, and outside info on the competitive space or industry trends. Those are equally important, IMHO.
I feel we’re currently in a very reactionary market that is building into a coiled spring (you can see it on massive up days — market just wants some good news to come rushing back into growth, then panic and exit again). When will the tide rebound enough to bring me back to all-time high? I don’t know - but I believe it ultimately will if I stick to the hypergrowth investment thesis.
But I feel this hyper-reactionary market is taking a toll on this community. (Well, that and 10000 posts on Upstart a month… heh)
I feel that expectations in and of themselves are not the problem. I don’t really set exact numbers myself, only trend expecations, as I prefer to look at ACTUAL EXECTION and carry out the trends over them. Saul does this on taped together pages of graph paper! It is good to understand the trends over key financials and KPIs, and then, going forward where you want them to fall. I do that part mentally, and some write it down.
The issue seems to be in using those expectation too exactly, as rails for initiating an immediate reaction. But I think it important that if you are comparing execution to expectations in order to make immediate decisions, make sure they are YOUR expectations or the COMPANY’S, not the market’s or the whisper or the street’s or an internet post from others.
I also don’t give much importance to muted fiscal year guidance given in Q1 – except how it sits over the trends seen in the actuals being reported. There is often nuance to the numbers, as Snowflake just proved, and Datadog last year. Immediate reactions miss this. I think listening to the call is a must.
NUANCE: Snowflake’s “miss” at top line can be thought of as a seasonal ebb and flow of usage, plus a minor impact of a performance improvement test. As for their “massive deceleration” in guidance, as mentioned before, it is an intentional performance improvement. (Adding in the $160M impact from that means they just gave NEARLY the same guide as last year, +79-81% vs +81-84% a year ago.). I myself look at last year’s guide and comparing that to reality it landed at, then apply that lens to this year’s guide.
These are companies that are executing day in and day out, that live and breath their industry. The nuance from mgmt is critical to fully understand the company, and your conviction. Where I really took hold of Saul’s rules is in finding the best companies, then trusting them to execute (trust but verify). But know that hiccups are inevitable! You cannot hold a company for a year without encountering one or two. If you are going to react to hiccups that lead to one or two of the KPIs underwhelming, understand that you have a much shorter-term focus than most of the members here, or are being way more strict than most.
I believe this is the crux of Saul’s post.
NUANCE: For instance, Bill had a negative move in op margin over last 2Q, and, last Q, an alarming shift in cashflow margins to the negative. This Q, we could watch that profitability shift reverse, and it is back on trend, swinging positive on op margin and moving cash flow back towards positive. This hiccup is explained in hindsight by a bit of turmoil as they folded in 2 near simultaneous acquisitions. I was starting a position during this turmoil instead of panicing out.
The MARKET is immediate in reacting to the initial numbers without any nuance. Trying to beat the herd at quick motions is, IMHO, a letting emotions win. You may be right a few times, but ultimately seems a losing game. Why trust the market’s first reaction to be making the right call instead of your conviction? The market makes terrible calls all the time. (The goal is to make fewer.) I think the market is doing it now.
We’ve had a lot of success here in hypergrowth investing and Saul’s rules set in the knowledge base for isolating category crushing COMPANIES. What the market thinks of that company at any moment (in the stock price) can be entirely divorced from execution.
There is nothing wrong with quick moves, and sure, there are companies that warrant it at times (looking at you Fastly). But at least be informed and make those moves on YOUR terms, not the markets. As the Hitchhiker’s Guide to the Galaxy said: Don’t panic.
Don’t fall into the fallacy that you can beat the high-speed algos on speed. You can’t. Embrace the nuance. One of the big lessons from the Fool was that TIME is your greatest advantage over the big boys. I think that still applies to Saul’s methods.