On Fastly, and the Art of Selling

[SaulR80683]

On the art of selling

One of the most important points made in the Knowledgebase is not falling in love with a stock, recognizing when the story has changed, admitting to yourself that you may have made a mistake, changing your mind, and getting out.

At the end of September last year, I had a 9% position in Fastly, which was my fourth largest position at the time. Then they suddenly pre-announced horribly bad, shocking, news, and all the problems we had been ignoring or making excuses for suddenly made sense (like lack of new customers, couldn’t get new product out of beta, fired head of Sales and Marketing, lost biggest customer, etc etc). The stock price plummeted and I exited as much as I could in the after-market and pre-market, and all of my position by the next morning, at an average price of about $91.50, and put most of the money into a competitior with an entirely different way of doing business, named Cloudflare, at about $56.50. Many others on the board did the same thing.

Now, thirty-five weeks later, the stock prices have changed places and Fastly is at $54.38 and Cloudflare is at $94.00.

In other words $1000 left in Fastly when I exited, is now, eight months later, worth $594.

And the same $1000 moved into Cloudflare at that time is now worth $1729, just about three times as much. That’s the “opportunity cost” of staying in Fastly and “waiting for it to come back”.

We had to suffer a lot of haranguing from Fastly loyalists, who claimed that Fastly had the better tech, and that we were just using crowd mentality, and group think. They refused to see that whatever kind of “great tech” that Fastly had, Fastly simply didn’t seem to know how to run their business. There were also others on the board who were just slow to act or who had drunk the “hold-forever” Kool-Aid, and stayed in and suffered.

The key to all this is to be willing to change your mind and to admit to yourself that you had been wrong, and move on to something better when appropriate. Don’t hold on thinking "Oh, if I hold on forever, they’ll get their act together and the price will come back. Sure, if you hold for another two or three years the price will probably come back to $90-$93, where you should have sold, but think of the opportunity cost. It’s not a stock, it’s your money, and you could have had it in a rising company all that time instead of riding Fastly down into the $40’s and waiting for a couple of years for it to come back into the 90’s.

And if things change in the future and Fastly gets its act together, you can change your mind again and get back in. No apologies needed, and you’ll have plenty of time to decide.

Best

Saul

Links to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board. (It’s in three parts)

[CMFSoloFool]

Indeed. Price anchoring and falling in love with stocks can be toxic.

I read in some posts here recently, maybe from Paul and others, to pretend you do not own the stock when evaluating it. Few of us pivot as quickly or decisively as Saul, but I admire his ability to relentlessly seek alpha. It may not always work out, at least in the short-term, but he doesn’t shy away from change and making the tough, emotionless calls.

Bravo!

[gwcoble]

Interesting perspective @SaulR80683… IMHO - I think FSLY has a high likelihood of fairing well over the next 3-5 years, and more potential upside right now than NET. But Being in the IT sector myself, I feel a certain level of ownership of FSLY’s business case, and I am happy to be a part owner in the company. I personally plan to hold onto FSLY for a minimum of 5 years, and I have recently moved my portfolio position from 3 to 4% of my total portfolio. With that said, FSLY is one of my ‘riskier’ investments, which I try to maintain only a handful of these. I do feel that FSLY has a BIG opportunity to capture available market share in the next 5 years and I am willing to ride out some volatility because of that. I am going to try real hard not to let emotion drive me to try to time the market… I’ve been investing for 30 years and have found that never works out for me.

[SaulR80683]

I am happy to be a part owner in the company. I personally plan to hold onto FSLY for a minimum of 5 years,

Hi gw, that is very noble of you, and I admire your loyalty and tenacity, but if you have been holding for 9 months or so, at the current price you are down 60% from its 52 week high of $136.50. Since investing gives its awards in cash money rather than in loyalty pins, it doesn’t seem to be paying off for you.

Perhaps you are not aware that in the last six months (two quarters) Fastly only managed to add 11 + 12 = 23 new $100k customers while Cloudflare, its closest competitor, added 92 and 117 for a total of 207. They are adding those new big $100k customers NINE TIMES as fast.

If you are interested in total paying customers, Fastly added 37 and 123 for a total of 160 in six months (no, that’s NOT a misprint!). Do you know of ANY other modern internet company that has added so few total new customers??? In the same time period Cloudflare added one hundred times as many new paying customers. No, NOT one hundred more, but one hundred TIMES.

You might want to think over how you feel about staying forever with Fastly, even though staying in makes you feel loyal.

Best,

Saul

[rbgibbons]

I’m genuinely curious (i.e. I’m not trying to troll…)

I can’t remember exactly, but I think that, like Fastly, you were decisive in selling Shopify when you became concerned about its slowdown. Did that also work out well?

I mean, I know Shopify continued up, but I’m curious what performance difference was. Like, maybe Shopify went up, but the investments you bought with the Shopify cash did even better.

Is that an easy thing for you to figure out?

[Kevin2017]

But I feel your question is not fair. Investing is not science but ‘art’ as the title of this thread suggests. Saul sold many stocks and most are right decisions. But since all decisions are based on limited information, there must be some the results are not ideal. SHOP is definitely one of those. If you look at Saul’s result since sold SHOP, the alternate investment he selected is not much worse than SHOP.

[Wotdabny]

It’s not a stock, it’s your money, and you could have had it in a rising company all that time instead . . . ."

This is the single most valuable piece of investment advice I never got. It is not about the stock, or the company behind the stock. It is about your money. “Where is the best place for it?” is the only question that should be on your mind.

Be loyal to your money. Be a good shepherd to your money. Give your money the best future you can, and your money will be just as loyal to you in that future – not more, and not less.

Companies come and go, thrive and shrink, and your investment dollars will not save them. But you can meet your fiduciary responsibility to yourself and those who will benefit from your investing acumen by being loyal to your money first.

Cheers,
Wot

[SaulR80683]

I can’t remember exactly, but I think that, like Fastly, you were decisive in selling Shopify when you became concerned about its slowdown. Did that also work out well?

I don’t follow all the companies I sell out of, just the ones I’m in, because that’s all that counts (what the companies that I am in do), and I couldn’t possibly follow all the companies I’ve sold out of.

I do know though that Shopify has continued to do extraordinarily well. Did it do better than the stocks I stayed in? I haven’t the slightest idea? However I know that not every decision works out, and this might have been one that didn’t. I make plenty of mistakes! Lots of mistakes! But I try to make the best decisions based on the information that I have at the time, and at the time selling it seemed the best decision to make. And it has never even crossed my mind to buy back in.

And I was up 233% last year without Shopify, and up 1,251% in four years, so again, it doesn’t matter what a stock you are out of does, it only matters what the stocks that you are in do. I’m happy with my results, and don’t see any conceivable way that I could trace the dollars that I reinvested when I sold out of Shopify. Dollars are fungible.

Best,

Saul

[SaulR80683]

“It’s not a stock, it’s your money, and you could have had it in a rising company all that time instead . . . .”

This is the single most valuable piece of investment advice I never got. It is not about the stock, or the company behind the stock. It is about your money. “Where is the best place for it?” is the only question that should be on your mind.

Be loyal to your money. Be a good shepherd to your money. Give your money the best future you can, and your money will be just as loyal to you in that future – not more, and not less.

Companies come and go, thrive and shrink, and your investment dollars will not save them. But you can meet your fiduciary responsibility to yourself and those who will benefit from your investing acumen by being loyal to your money first.

Thanks Wot, you expressed it beautifully!

Saul

[WarmBuffet]

Such an important point.

For me (and maybe for some others?) it’s not the falling in love or admitting you made a mistake that’s difficult. It’s determining when “something has materially changed” with the company.

When one of my holdings drops precipitously as these high growth stocks often do, invariably the media, other posters, “experts”, etc., will always ascribe a reason for the drop. Thankfully, many times it’s easy to tell when it’s not something significant changing with the company. However, with technology stocks where I don’t have a deep “black belt” level understanding of the tech and industry, it can be hard to discern, is it the company or is it business as usual? Is the story is still intact?

That’s why I so deeply appreciate the super granular analysis that many here provide, parsing out the earrings, new customers, growth rates, etc. Always showing their math. It really makes it so much easier to make that call (is the company off track or not).

[thejusticier]

since 2016 ( I think that is when you started to play it?), SHOP is up more than 40X.

It may be true that this could slow down but we don’t really know. Amazon went up more than 3000X in 20 years. But you would never catch those since invariably over 20 years there will be hiccups and bad news on which you would sell out and never look back.

It’s maybe too soon for some to claim that your exit was ‘right’.

But you have your ways.

[draj]

For me (and maybe for some others?) it’s not the falling in love or admitting you made a mistake that’s difficult. It’s determining when “something has materially changed” with the company.

WarmBuffet

IMHO this skill,to be able to discern, in a timely fashion, when something has materially changed, is the most difficult one to master and also the most critical. From this board I have learned how to identify and evaluate a company experiencing hypergrowth, how to quickly build a position, and how to abandon a position when necessary ,quickly, and without regrets. Furthermore I have learned how to be selective and to concentrate on the few best performers to the exclusion of all else.

But picking up on the early clues that something is materially different has been an elusive thing.

I suspect tnat I am not alone in this regard. Doing this successfully requires several things. First and foremost it requires an ability to focus critically on the details and the nuances of the quarterly reports and the conference calls. What has changed from quarter to quarter and what does it portend. ? How credible is the proffered explanation by the CEO for lapses in performance ? Are promises and projections solid enough to be relied on as performance indicators or are we being sold a bill of goods, or will it take forever for a new development to come to fruition?

When will AYX begin to exploit the cloud.?

How long will it take Fastly’s compute-at-edge to be a revenue mainstay?

When will zoom-phone be a substantial contributor to profitability?

Answers to these questions are embedded in the comments offered by the CEO. But one needs to listen carefully.

If you are predisposed to favor a particular company then its easy to be misled by optimistic hyperbole. On the other hand figures don’t lie. Look at the numbers and growth patterns and ignore the extraneous commentary. All the pundits and Cassandras are ,for the most part, just filling print space.

If things have slowed and there is not a credible reason offered, it is time to depart. If the price of a company drops review the performance numbers and ignore the variety of hypotheses and vapor based calculations and projections. IMHO these are all worthless.
Accumulate as much knowledge and experience as you can assimilate and let that be your guide.I think that will serve you better than all the calculations, projections and hypothecations that proliferate.
That is what I have attempted to do. Slowly,slowly I believe I am learning the process.

cheers

draj

[rbgibbons]

But I feel your question is not fair. Investing is not science but ‘art’ as the title of this thread suggests. Saul sold many stocks and most are right decisions. But since all decisions are based on limited information, there must be some the results are not ideal. SHOP is definitely one of those. If you look at Saul’s result since sold SHOP, the alternate investment he selected is not much worse than SHOP.

The reason I think it’s a fair question is because Saul was implying that there’s a general lesson to be learned as a result of his move from Fastly into Cloudflare. But if there actually is a general lesson, one would expect that lesson to be true in more than just one instance.

I think your last sentence is what I was getting at, because I don’t actually know that’s the case. To me, it doesn’t make much sense say “investing is art not science” and use that as a reason to not bother analyzing cases where these rules have worked and haven’t worked. (Or worse, to only examine the cases where the rule has worked and ignore the ones where it hasn’t.)

That said, I think that the rule has mostly been true, but it did make me think of the obvious case where it seemed to not work–Shopify–and that led me to wonder if Saul had done that analysis as well, or was able to easily do it.

Saul: it makes sense to me that it’s basically impossible for you to work that out.

Using your “money is fungible” theory, I guess it’s possible to do a back of the napkin comparison of Shopify to your overall portfolio returns.

You sold Shopify in August 2018, and Shopify closed that August at $144.81, and closed May 2021 at $1,242.87 for a return of 758%.

Based on your monthly summaries, your portfolio returns from August 2018 to the end of May 2021 were (1-0.078)(1+0.284)(1+2.333)*(1+0.041) - 1 = 310.7%.

So, there’s some underperformance relative to Shopify. Any money you’d left in Shopify would be more than double what you ended up with. But, I think it’s unfair to compare a single superstar stock to a portfolio. A single tech stock will generally be more volatile that a portfolio–that’s the whole idea of a portfolio, to reduce volatility and risk.

Also, the greater point that you made is completely valid–it doesn’t matter how well Shopify did. Your portfolio returns were stunningly great, with or without Shopify. So, even if Shopify did outperform, in the bigger picture, it doesn’t actually matter and is nothing but a distraction because your absolute returns are so large.

[buynholdisdead]

The reason I think it’s a fair question is because Saul was implying that there’s a general lesson to be learned as a result of his move from Fastly into Cloudflare. But if there actually is a general lesson, one would expect that lesson to be true in more than just one instance.

I think what you are missing rbgibbons is that Saul has a process and is true to that process. It isn’t important that sometimes the process ends up dumping good stocks at times. What is important is that he sticks to the process and keeps winning. Since the amount of stocks that he has in his portfolio is very few, he can only have what he surmises is the best of the best. Every process has winners and losers. But you want to have one that has more winners. It’s obvious that there are going to always be some stocks that we all wish we had in our portfolio, but as long as we keep looking for the best our portfolios should keep going up. I think being able to let go of stocks that you no longer believe in is one of the most liberating ideas that Saul has bestowed on me.

Andy

[IRdoc]

The stocks you decide to keep matter a lot more than the stocks that you decide to sell.

Sure, it’s nice to look back and see if there is something to be learned about the ones that got away. But the point of doing some work and continuing to follow companies is that you can reduce risk by owning only high conviction investments.

Yes there are some stocks like SHOP that would have beat your portfolio’s returns, or stocks like TWLO, MDB, or NVDA that have done well enough to keep up, but there are also a lot of companies like NTNX, PSTG, PVTL, AYX, and now FSLY that would have been a real drag. I suspect there are more in the last category than the first.

I’m still working on it. I’ve learned to just cut loose companies that I have growing questions about, even if I like their long term prospects, especially when those concerns are about sales performance. But I still struggle with knowing how to handle declining growth when everything else sounds great. SHOP saw growth drop from 75% to 62% at a ~$1B run rate ($245M in revenue) over the course of a year. We just saw CRWD drop from 86% to 70% on $303M in revenue in 2 quarters. CRWD has true subscription revenue, and better profitability/cash flow, but it’s slowing down faster. I’m leaning toward simply reducing exposure, but then again it’s hard to find much to fault with CRWD.

[branmin]

I also sometimes wonder if a few here are truly paying attention or indeed bother to read the knowledgebase at all. We all win some and lose some, much like life. But every single month Saul has stated he makes mistakes. We all do. However, can you learn from those mistakes? The most single and important aspect is in this example of Shopify. So what, I may have made a mistake, but I used the funds elsewhere and really not interested in looking back but looking what I have at present and CAN ALWAYS get back into the same Company again when it suits me.

Simple really( well not really) but seriously, you sold at $150.00 and just watched it go to over $1000.00 and said “if only”(sounds familiar people?) Well, you have three choices with any Company. Get back in regardless of the price if you feel there is a lot more to come, sell regardless, or just stop moaning and get on with it:-))

[Tamhas]

But picking up on the early clues that something is materially different has been an elusive thing.

But, a thing greatly enhanced by following this board. Every earnings report, every piece of news, sliced and diced.

[SaulR80683]

It’s not clear to me what the comments about Shopify has to do with Fastly. At the time we sold out of Fastly we posted a list of about 15 things that had gone wrong with Fastly. It was common sense getting out and many of those problems are still completely there, or have even gotten worse since then.

Here are a couple of quotes from the KnowledgeBase:

“There really are some times when it makes sense to sell a stock. Saying that “it would be better if I held” because at some time in the future the price may go back up up is not valid (it’s silly, even). Just think of a stock that you sold at $200. It dropped to $50. It gradually came back and now, 5 years later, it’s at $220. Would you say it would have been better to have held because it’s now up 10% in 5 years!!! That really is silly. You could have thrown the money at a dartboard of MF recommendations and beat that result by 500%. And could have done lots better than that by intelligent picking…. “

“We all often worry when stocks we have sold go up. I try to ignore them and figure that once they are sold they don’t matter any more. Here’s a great quote from Huddaman:

“I don’t really need to be right for the stocks I sell, I just need to right about the stocks I own.”

Boy! Doesn’t that really say it all! It simply doesn’t matter what happens to a stock after you sell it. You can’t hold all the stocks in the market. Some stocks you don’t hold are going to go up. A lot! So what!!! The only thing that matters is what the stocks that you are holding do!”

The Method we teach on this Board is something that has worked for hundreds of people. I know at least a dozen friends from the board who have quit their jobs and retired young (in their 30’s, 40’s or 50’s), or who are in the process of doing so, because of the Board, and the Method we teach. I have saved emails and posts of appreciation from literally hundreds and hundreds of people thanking me, the Board, and the other serious posters on the board, for having changed their lives (“allowed us to buy the house we always wanted", “allowed me, a divorced mom, to stay at home with my infants and support myself by investing”, “allowed us to send our daughter to the college she wanted to go to”, “allowed us to feel more secure about our future”, “allowed us to take care of our older parents”, "I learned more from the board than from my MBA”, etc, etc).

Someone on this thread made a rather silly comment about Amazon being up some huge amount in twenty years, as if that proved that you should never sell.

Would you want to base your future on a method that you can follow, or take your chances on finding “the next Amazon.” Remember that it doesn’t have a sign on it saying “I’m the One!” It’s just one of ten thousand or so small interesting companies. And then put all your money in that company and then hold no matter how it swings up or down, and base your future on that. Do you realize how small your chances are?

The fact that someone can point to two companies, Amazon and Shopify, that bounced back and continued to grow madly, is irrelevant to the company you are looking at selling today because of bad news and because the picture changed, as hundreds and hundreds of other stocks didn’t bounce back to grow madly.

What are the chances that the company that you are looking at selling because the picture changed will bounce back to become a third Amazon or Shopify??? It’s infinitesimally small !!!

I hope that this helps.

And how to handle the emotions (also from the KnowledgeBase)

I don’t even think about the price I bought the stock. I promise you, I don’t consider it at all probably 95% of the time (especially since most of my portfolio is in IRA’s). I think about a position that I’m considering selling simply as a part of my portfolio.

For example, a hypothetical thought process: …Stock AAA makes up 3.7% of my portfolio. AAA is at a price of $yy. (That’s the price it’s at right now, and there is nothing I can do about it). Its fundamentals and its stock price are both deteriorating, and there is nothing on the horizon that I can see that will magically turn that around anytime soon. Where can I put that 3.7% of my portfolio where it will have a better chance to grow?

As you see, there’s no consideration at all of the price I bought it at. In that thought process, the price I bought it at would be irrelevant.

You need to think of money as fungible, interchangeable. It’s only money. It’s not a share of AAA that you bought at $94, so you have to wait until it gets back to $94 before you sell it, even if it takes five years. (Perhaps to make you feel better, so you won’t feel like you made a mistake when you bought it?) It’s just 3.7% of your portfolio, which as a whole is doing fine. Is there somewhere better you can put that money, that 3.7% of your assets, with a clearer path to a long-term good profit? That’s the question you should be asking yourself!

Best to you all,

Saul

Links to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board. (It’s in three parts)

[draj]

That said, I think that the rule has mostly been true, but it did make me think of the obvious case where it seemed to not work–Shopify–and that led me to wonder if Saul had done that analysis as well, or was able to easily do it.

rbgibbons

It strikes me as fallacious to attempt an analysis of a portfolio management strategy based upon the history of a single stock, Shopify , which in any case represens but a designated fraction of a given portfolio…

Let me offer (an equally fallacious ) counterargument. I bought Shopify at prices around $150 and sold when it moved above $550 basically to move cash into what seemed to me then faster growing stocks. Subsequently in 2020 the market went crazy and the portfolio tripled or thereabouts. So the funds initially invested in Shop were up by some factor of 9 or 10. ergo selling Shop was a good move.

Truly nonsense. Selling Shopify was neither good nor bad nor more nor less profitable. It was part of an overall portfolio management approach and as has been repeated many times on this board if the global portfolio strategy is attaining its objectives that is what matters.

cheers

draj

[thejusticier]

I don’t think you got that point. The point is not that you should never sell.

The point is about what constitutes a trigger to sell. The point is not to hold whatever what but I have never seen you hold anything more than a year or two.

When arguing if you made the right decision to sell FSLY, some just reserves more time to make such a pronouncement one way or the other. They may be wrong. You may be wrong. We will see.