So I apologize if this is off-topic, but I don’t think so. It goes directly to how we evaluate companies.
Over the last few months I have noticed a consistent lack of satisfaction with company results overall. Bear is (and has been) in higher levels of cash for a while, Saul seems to put the words “mixed results” in more and more of his company summaries, there have been complaints about companies being sold because one parameter or ratio doesn’t meet preconceived notions of greatness.
All of this has led me to try think about what is changing, because it seems to me it is. I have come up with a few potential causes.
1- we have gotten too picky/greedy:
This is self explanatory and one I would guess Saul favors. There are many quarterly ratios that get compared and if only one is down slightly if feels like some people are almost fighting to be the first one out so that they can say, “I’m out!” 20 minutes after an earnings report comes out. I understand that you don’t want to overstay your welcome but sometimes this seems way overdone.
2- the business environment is changing (ie recession and/or the “Covid environment” is receding):
This one is a little more subtle, but is somewhat related to the first. It seems that there is very little discussion on these boards about the macro environment in context with results. Even the greatest companies are affected by the macro environment. In other words, if a recession is coming and growth rates are dropping because businesses are pulling back spending, but the growth is still strong and likely to pick up again once economic growth picks up, do you really want to sell? Maybe, if you really want to try to be nimble, but I am not sure that I would. If the larger business trends stay in tact I am not sure you get in and out to your advantage by trying to predict when a recession will start or end. My favorite holding period is forever ( ha ha, stolen quote)
3- The business world is coming out of a broad sea change. I think this is the most interesting one and probably the most controversial one. Here, I am thinking very broadly. I have been on this board since the early days. Back then, Saul owned stocks like Skecthers, and single family home builders (forget the name) who were carving out market share. These companies were growing 20-30%, made products and had normal margins, it almost seems naive to think about now, but that is the truth. The growth of the cloud and the advent of SAAS software companies to support it has created an opportunity in the investment world. Saul was very early in recognizing this and his amazing results over the last 4-5 years are a testament to this. He found companies growing at huge rates, with growing gross margins, that were selling at cheap prices because they were not yet making money. Salesforce and Amazon were the initiators of all this but then the need for different aspects of this shift has created first movers in multiple spaces. I am sure there are more spaces out there but I am wondering if many of the first movers have been created. The Snowflakes, Cloudflares, and Datadogs have first mover advantages and I would expect them to keep growing and broaden their offerings to to take advantage of this size/first mover advantage. But if the theory is correct, I would expect growth rates to moderate, certainly at much better growth rates than a few years back but maybe the 60-80% growth rates we have seen are unreasonable to expect to continue. As an example, buying Amazon when it was growing at 30-40% for a couple decades turned out to be a pretty good investment and once they got to certain size, other on-line retailers had a tough time competing. They just won by moving into broader and broader categories.
Anyway. There is a lot more here I could say but I’d be curious to hear other opinions. Maybe the world has changed forever, maybe not. To be very clear, I am in no way saying that any of this is dying or in some way related to the dot com type comparisons. I think the world has changed and this area is the future. The question is whether we are moving out of a “startup” phase of this business cycle to the “high growth” phase and that we need to be cognizant of this when looking for the best companies to own.
Sorry for the long post…