I’m sure many investors who started earlier this year are feeling pretty down right now. I first started investing in SaaS companies in summer 2019 after a huge multi-year run. As I’m sure many of you remember, a couple weeks later we entered the significant Q4 correction and my stocks kept crashing even after great ERs.
It got to the point where I remember CrowdStrike’s CEO going on CNBC and when asked about his crashing stock price said: “I think Buffett said it best — if somebody bought a stock would they be happy owning it 5 years later if the stock market shut down.” https://ca.finance.yahoo.com/news/crowd-strikes-gives-perfec…. And CrowdStrike may be very strong today but during this time, it seemed like it consistently underperformed the rest of the cohort!
I felt like an idiot for buying in at the top, but I believed in my companies and bought the dip. What was supposed to be a 5-10% correction soon turned into 20%, 30%, even 50% crashes. I made another mistake of buying too much, too quickly so I had to sit through it all. It was especially painful because I had no cushion of gains to fall back on, I was losing all my money. Worse yet, the stocks that I had sold to fund the purchases kept going up!
I first bought Livongo in early Sept at $30 and just a month later, it was at $15 on no news! This was really a formative period for me as an investor. It taught me the importance of discipline. Investing is hard. It’s one thing to say it, but you really have to experience it. If a stock drops 20% right after I bought it, would I be tempted to sell? Or excited to add more?
In hindsight, I felt like I had just invested at the top of a bubble as earnings didn’t matter. Bears came out of the woodwork and said they warned us valuations weren’t sustainable. Remember this article? https://www.barrons.com/articles/soaring-software-stocks-sho…
Sell-side cut their PTs, citing multiple compression of comparables. I still can’t pinpoint a reason for it all. But I stuck with my convictions and continued to add, hoping to wait it out. It wasn’t until 4 months later at the end of December that these companies started to get momentum again.
What seemed so painful turned out to be a gift. CRWD at $50? ZM at $65? LVGO at $15? While multiples are much higher today, great companies always come back eventually. Although there was a bubble in some spec stocks, I don’t think the high-quality hypergrowth cohort was. We had multiple years worth of gains in 2020 and they need time to digest it all.
The fact is that few investors can handle the volatility required for high returns. Stocks that can go up 100% in a month can go down 50% just the same. Picking the right stocks is just half the game, what’s even more important and difficult is developing the right mindset.
I wanted to share that because I think a lot of investors need to hear this right now after what’s been a tough couple months. And what really helped me through that period was being a part of a community like this so appreciate you all.