When investing is easy and everything goes up (see May of this year and the following month or two), we sometimes forget how hard it can be. We’ve been reminded in August.
To me it’s a reminder how important it is to pick companies with a long term mindset. And I’m thinking specifically of durability/predictability…and which companies’ futures are least variable. I’m famously not a guy who thinks he can predict the future very well. But some companies surely have a higher likelihood of continuing to survive and thrive than others. Amazon probably isn’t going anywhere anytime soon, for instance. And I feel similarly about some SaaS companies, not necessarily because of the SaaS model, but because they are really pretty well tied to the cloud…example: I think Snowflake has an awful lot of sticking power.
But then there’s the short term. To me, this is equally important. Price is one factor that some of us consider, but even more important are growth trends, progress toward profits, customer growth, and a whole lot more.
Actually thinking back to Saul’s criteria for companies to invest in, some relate to the short term and others the long term: How I pick a company to invest in - #21 by PaulWBryant
When concentrating your portfolio (into large positions), I think it’s just critical to take a step back from every company, regardless of how exciting the short term seems, and consider the long term as well. This leads me to avoid companies outside my circle of competence. Some examples:
SMCI - hardware, small gross margin, cyclical? Just not in my wheelhouse.
UPST - There’s a TON outside their control that will decide their destiny. I have no idea what will happen with interest rates, lender sentiment, defaults, etc etc etc.
TMDX - I had a position but there is just so much outside their control, I think.
AEHR - Ok this one I’m not a hard “avoid” with. It’s my 4th largest position currently at just under 7%. But I feel I can’t make it a ton bigger even as the price falls, because I just don’t know what I don’t know here when it comes to semiconductors (specifically silicon carbide) and the market for testing them.
DUOL - Consumer tech has always been fraught. Their growth might currently look like that of some enterprise SaaS companies, but I worry it won’t last, and profitability will elude them. Look at Wix from 5+ years ago (and that actually had business users rather than straight up consumers). Maybe Duolingo will work, but it’s definitely outside my circle of competence.
Knowing what’s in your circle will probably help you predict the long term a little better. The point, to me, is that things outside the circle are REALLY a crap shoot, and that’s not what I want in investing. It’s important to know your limitations.
Hope some found this interesting. This is based on my experience over the last many years, seeing what works and where I’ve been bitten. I’d be interested to know if anyone else has had a different experience.