Simple, Authentic Stories

Hey Fools,

Short version: This is a long post (12-page Word doc) about the importance of Story to not just investing - but being human. It makes the case that the simpler it is to understand a company’s mission, and the deeper the connection between CEO/Management to the mission, the more likely the stock is to outperform. This is not meant to be a substitute for our method but a complement or even just another angle to view it from. Sorry I don’t have time to cut it but I gotta get back to work-work.

Okay, onto business…

A confession: I’m a simple man. I won’t bore you with the stuff I boo-hoo-hoo about to the shrink. I’ll just say that for way too long I mistook simplicity for stupidity. This was a very costly error that I have only recently corrected. And this correction has been critical to my success as an investor and happiness as a fella. And I think this is essential to our board.

As you probably know by now, I’m sort of the board’s resident Story/Character Analyst who is big into the intangibles of investing. I don’t do math. At all. I can’t even do division. For me it’s called “long” division because it will take me so long to get the correct answer, I’ll forget what I was dividing. No joke, my mom was once summoned by my Jr. High School math teacher, Mr. Garfinkel, who was enraged because on a geometry test, I named angles, Ned, Philbert and Joaquin. The correct answers were more like acute, obtuse, etc.

But while math is critical to investing it really is just another way to tell the Story. The other is Story in the classic sense – with a hero, quest, etc.

Before we dig into how this affects our stocks, I think it’s worthwhile, or at least interesting, to look at how critical Story is not just to investing but being human …

In 2002, the biologist E.O. Wilson wrote an article called, “The Power of Story.” You can read it here…

In it he writes,

“Storytelling is not something we just happen to do. It is something we virtually have to do if we want to remember anything at all.” Over the past three decades, cognitive psychology has emerged as a promising arena for understanding how we perceive, remember, and feel about the world around us. Researchers have learned that stories–both the ones stored in our memories and those we generate as we interact with the world–are essential to each of these aspects of learning.

In other words, we are so bombarded with sensory information - sights, sounds, smells, feelings, etc. that if we could not form narratives, we literally could not make sense of or navigate reality.

You’re walking down a deserted street late at night. And you see a towering figure walking towards you. He seems animated – and upset. Your mind floods with stories. “Who is this guy? Is he angry? Delusional?” And you start telling stories about the future. “If I walk past him will he take a swing at me? Try to rob me?” You lay out your options with stories - of crossing the street, walking past him, turning around, running for dear life, etc. And in these stories your mind - at warp speed - makes decisions about which story you want to play out. Reality, of course, doesn’t always go according to your script but that’s a whole other issue. (** See postscript for more on this) Point here is you need story to survive, to function and just to stay sane.

This goes beyond the individual. In the mega bestseller Sapiens, A Brief History of Humankind author Yuval Hariri makes the convincing case that, in essence, things like nations, companies and marriages are not even real things. They are stories we agree to live by. I love my wife. But this thing we call a “marriage” is not a real thing – not a tangible, objective fact - beyond the story we tell about how we came to be married and what the word even means to us. It’s agreed to by documents filed with the State. But at any minute, if one of us says we are actually no longer married, then docs are filed and poof! we are no longer married. Our marriage is a story we all (Daniel, Karen, our daughter, family and the State) agree is real.

To repeat for clarity and emphasis: Stories are ****ing essential.

So, what is a Story?

I’m going to keep this crazy simple and all this will be very familiar to anyone who has studied the craft. Just know that a simple story does NOT mean it lacks depth or complexity within the frame. I think it’s the exact opposite. The frame helps us analyze the content much more effectively.

When you tell a story you basically just do this: ask a dramatic question then answer it.

These are dramatic questions: “Will Hamlet kill the king?” “Will Noah and Allie wind up together?”(Shut up, you cried at the Notebook too) “Will Walter White provide for his family?” A story can end happily, sadly or a mixture of both. For example, the hero wins but pays a very high price, or loses but finds a new perspective on life, etc. In fiction, the resolution of the story gives us insight into life. Because X happened, it means Y.

The reason we love Sports is they are perfectly told stories – the dramatic question is Will our team win? Popular genres – romance, cop/killer, legal, medical all have inherently simple questions. Will the lovers stay together, cop catch the killer, lawyer win the case, doctor cure the illness. Human beings love cleanly asked and clearly answered dramatic questions.

Think of a well-told story as being like a train track. A story is either on track or off track. If right at this very second, you feel this post will not help you make money and that I’m rambling incoherently, you will quit reading, annoyed. If you do think it will help you make money, you’ll read to the end. Here on this board we use “OT” as in off topic. If someone is blathering about anything that doesn’t help us find the stocks most likely make us a fortune, they are off topic.

In story, we use “off track”. When Spielberg adapted the novel “Jaws” he cut a love triangle story between Matt Hooper and Chief Brody’s wife because he only cared about tracking this question: Will Chief Brody kill the shark? This story: will Chief Brody kill the shark? is MUCH easier to track and gain insight from than: Will Chief Brody kill the shark AND save his marriage?

A well-told story has a clear "Object of Desire.” This is an object – which can be an action, feeling or physical object – the hero must acquire to fulfill a need. A hero may need to find happiness, love, a missing artifact or person. Great storytellers do two things with this: make it clear and make you care, deeply, about what will happen. A key reason “Breaking Bad” was so successful is the head writer, Vince Gilligan, worked so hard to make you feel Walter’s pain and regret. He could have been a great man. But now he’s going to not only die – but leave his family basically destitute. For my taste Breaking Bad is a better overall TV series than the Sopranos because Breaking Bad stayed on track from start to finish while Sopranos had some ludicrous off-track storylines such as “Johnny Cakes.”

So, to sum up this ultra-basic intro. There are three components of a well-told story: Hero, Object of Desire, Quest. We settle and in and find meaning in a story when we know what it’s about and, within reason, how it will end – happy (hero acquires object), sad (hero fails to acquire object), mixed (Hero acquires object but pays a high price or hero fails to acquire object but gains something profound in the quest.) We know that for Jaws to end in a satisfying way Chief Brody will have to kill the shark or give up due to death, injury, etc.

One more critical thing about Stories. In a great story there is always (at least in my research) a tight alignment between Storyteller, hero and quest. Storytelling is a deeply personal, revealing art. The stories you tell (and love) – how they feel and end – reveal a lot about who you are.

I love the novel and film, A Clockwork Orange. (Don’t judge!) The novel makes the case that it’s better to have a world with evil men in it, then a world with gutless weaklings who are forced to be “good.” This idea was critically important – and deeply troubling - to the author, Anthony Burgess who was a devout Christian. Basically, the novel says, “I’m glad Adam and Eve bit the apple because I’d rather live in a world where humans can make art than frolicking all day in their birthday suits. This somehow helps give me a sense of peace that evil exists.)

When a Story is told by an author with a specific passion for that story – it is always a more compelling story. Every time I study the biography of a storyteller, in all media, I have found a tight alignment between storyteller and master work. Think of your own life. You have probably had defining experiences – a loved one passes, parents split up, you were faced with a life and death situation. When you tell essential stories, you become fully invested. You remember more details – sometimes every last detail. You get emotional as you talk. You feel it. These stories are much more compelling to experience than stories about your busy ride home in traffic.***

One last thing on how just plain cool Story is. And then we’ll get to some specific stocks in the Sauliverse.

We are all, on some level, alone. So, one reason we love stories so much – and can’t stop consuming them in once-unimaginable quantities – is that something genuinely magical happens to ease our loneliness. The storyteller becomes the character when he writes and so does the audience while watching/reading the story. When Rocky actually goes the distance and screams for Adrian grown muscle men don’t burst into tears merely because they love Rocky. They burst into tears because the film instills the idea that one can be redeemed. If Rocky can take that beat and still remain standing, he is no longer a bum from the neighborhood. Stallone fans love Stallone because he makes them feel inspired.

Now onto the red meat of how this affects investing.

I am certain that the simpler and more authentic the story, the more likely the stock is to be successful. This is NOT to say anyone else is wrong or that there are not massive opportunities in complexity. Some companies have more complex missions. And some investors are brilliant enough to analyze those stories, find the hidden value and profit. Some stories have complex storylines – Moby Dick is not just about a guy chasing a whale, it’s about another guy watching a guy chase a whale. And this added layer of depth enriches the story. But again, I am a simple man and I tend to prefer simpler stories with single storylines as well as simpler investments.

So, what is the simplest story of a stock? Warren Buffet once talked about how he wants to own the tollbooth on the only road into town. If 1000 cars day roll in, and the toll is $5 we can safely say the tollbooth will earn $5,000 a day, 30 days a month for a total of $160,000 a month. Hahaha. Just kidding. I know it’s $140,000 a month. This is a simple story. The easier it is to understand the story the easier it is to analyze the possible outcomes/endings.

The post linked below is the one that converted me fully from lurker to fundamentalist Saulinian. It’s to your right and labeled, “Why it Really is Different”. The actual post is more colorfully named…

Oh! This time it’s different???…

Saul writes,

We are investing in a new model of enterprise: year after year very high growth, very high gross margin companies, whose revenue is almost all recurring, and largely locked in, and whose dollar-based net retention rates are greater than one, meaning that last years customers buy more this year than last year instead of having an attrition rate. I’ve never seen companies like this before. Have you?

When I first read this sentence, I was so excited I almost made an explosive bowel movement. I’m not kidding. More nobly, it was as if the Heavens opened up, a chorus of angels burst into song, a radiant light of purest love flowed down and I was Scrooge McDucking nude through a sea of gold.

Let me be clear. In my house, when the name Saul Rosenthal is uttered everyone is commanded to leap up and shriek with tears of infinite joy, “May Fate Itself Bless this Wonderful Man, his family and all who aid him!”

That italicized sentence right there is Narrative Investing Perfection. And I would add/clarify that our companies are closely monitoring every single thing their customers do - seeing what works, fixing what doesn’t, addressing needs and strengthening their offering.

Put yourself in the shoes of a competitor (Antagonist/Villain) trying to talk an executive into defeating our hero, Alteryx. How do they make a better product when Alteryx has so much better information? How do they talk management of a client out of using Alteryx? How much time will it take to install the new software and get everyone up to speed on it? Their product would not just have to be better but much, much better.

Think of companies that have to bring people back – EVERY DAY. I laugh out loud at Taco Bell ads. They have to come up with some ludicrous new thing every week. “Check out our new Heart Exploding Nacho Chalupa Waffle Chicken Sticks!” I actually almost feel bad for the people who have to spend their lives thinking that nonsense up. It feels stressful. A great stock story literally feels lighter. Again, this is not to say YUM! is a bad investment.

It’s just not for me when the story Saul tells above is so much stronger.

So, it’s like this:

If company A (Hero) can do X (Quest) they will make big money (Object of Desire).

You probably have all heard Peter Lynch’s term, “Diworsification.” This is, for example, when Buffet’s toll booth operator decides he will sell hot dogs and life insurance to people coming through. It’s the exact same thing as Spielberg cutting the love triangle storyline in JAWS.

I have spent my entire life writing stories, studying stories and spending time with other storytellers in all media. I can’t tell you how many times I have seen someone’s career take off – or fail – based on the simplicity and clarity of their stories. Recently I was at the opening of a friend’s musical. This was a big deal for him. The story was killing it, entirely on track through the first act. The audience was with him. A hit musical would change his life. Then, in Act Two, the story went bonkers – totally off track. The audience deflated and shifted in their seats. The critics all noticed and thrashed him for it – essentially killing his dream. Resurrecting a musical with bad reviews is virtually impossible.

Analyzing numbers is critical to understanding what’s happened in the past. And can help tell what will happen in the future. And I get the argument that stories told with numbers may be closer to Objective Truth than stories about people and intangible things like branding. Stories told with numbers may cover more ground. For example, if Data Dog has X, Y and Z numbers it’s pretty dang safe to say the product, management, etc. are all fantastic. But I will argue that seeing a beautifully told story, in the traditional sense, playing out is one that will likely lead to better numbers in the future. This is why I love Stitch Fix much more than others do here. The story’s beautiful and I expect one day, it to lead to the numbers demanded here.

Now back to that tight alignment between storyteller/mission/reader-audience. In investing this is more along-the-lines of CEO/Corporate Mission/Fellow humans. I like to see a CEO who cares deeply about the mission, can inspire workers, partners, prospects, clients and investors, etc. I feel more confident about the future if I believe the Mission is authentically inspired. This is why so many investors prefer companies run by founders.

CrowdStrike’s George Kurtz has been in the computer security business for his entire life. He’s a slick salesman with a passion for race car driving. His product is called Falcon - named after the fastest mammal on the planet. Falcons can swoop in and take out predators. For me this is an absolutely perfect alignment between hero and quest. And every decent person on the planet despises people who break into computers, steal and sow chaos.

Consider Coupa. The company’s mission is to help companies manage spending. The CEO, Rob Bernshteyn did not found the company but he was brought in early. Bernshteyn came to America as a child from Russia. His parents had no money. And he literally had to scrounge for used furniture with his dad. He put himself through college by building a paper route then a collectibles business. And ultimately earned an MBA from Harvard. I love the alignment there. That’s the right hero for the quest. This man knows the value of protecting what you have in a way few others ever could. I do, though, hate the name, Coupa. It’s some sort of goofy acronym that Bernshteyn has to waste time explaining on interviews. And I have no doubt this is not helpful to salesmen. Important point here – we’re trying to invest in the very best of the best. Coupa has a multibillion-dollar valuation. Obviously, the name is not that big of a deal as many people are buying and using the product. But still, and this is really important - notice how no one seems to give a flying cr*p about Coupa here? Surely our lack of enthusiasm/interest bears some relationship to the ability of the company to get to 100B.

Ever wonder why everyone lost their mind about Zoom? Why? Is it really that we think Zoom at its valuation is such a better investment than Coupa at its valuation? Or is it something about the name “Zoom” and the role it’s fulfilling at this emotionally charged time? Interesting, isn’t it?

For me this is why I’d give Coupa a 4 out of 5 on conviction. I think there is real business value in a name. And again, CrowdStrike – crowd sourcing information and striking back at adversaries is narrative magnificence. Kurtz is a better storyteller than Bernshteyn, though Bernshteyn is a rock solid CEO.

Think of Narrative sort of like a clear bowl. It’s not really THE thing itself. In this metaphor the thing itself is the gumbo – the meat, sauce, spices, textures, smells, soul of the cook. Without the bowl, the gumbo is ladled out all over the floor. Narrative is the framework for investing but still the story must include elite elements – products, services, etc.

Think of this sort of like wanting to invest in a Mexican restaurant by a Mexican chef who comes from a family of Chefs specializing in a specific style of cooking that comes from their homeland.

And don’t poo-poo or look down on simple stories as being shallow or stupid or even crassly commercial. Hamlet is about a prince trying to kill a king, and The Godfather is about a family trying to retain power. Crazy simple stories. Yet both are among the most brilliant, important and emotionally complex stories ever told.

Here’s how this has played out recently for me where the rubber meets the road in SIDville …

Let’s look at a stock in our universe that has not performed as well as others lately. Before I get into this please know I am not being disrespectful to anyone, bragging, trolling, etc. I know there are ELITE investors – much smarter and more talented than I am – that understand this stock and I hope you all make a fortune on it. But for me, I don’t get it. The company is Roku. Here’s how I look at it from a Narrative Investing perspective.

First of all, I have no clue what Roku means, though I like the short, memorable name.

If you go to their site at Roku.Com - you’ll find the first link on top reads, “How it Works.”

My first thought is oh (expletive for poopy doo doo). If it’s a consumer facing company and you have to explain it to our nation of people who really, if you think about it, don’t know how to sit, stand, sleep or chew food correctly - that’s worrisome. I get the gist. You plug a stick in, and it makes it simpler to watch apps. But now TVs come with those same apps built in. Okay, fine, maybe Roku’s experience is better. Maybe they make it easier and have better choices.

They have something called, “Philo” - no clue what that is. I guess it’s an exclusive TV network only available on Roku. I’m assuming it’s a competitor to Hulu/Netflix/Disney+ though it sounds like a philosophy network. I assume it’s free with my Roku stick.

For me as a consumer, the big attraction with Roku (Apple TV, Amazon Fire, etc) is the possibility of using them to get rid of my cable company. I get excited when I see that on the site, under “How it Works” - is a link called, “How to cut the Cord” ……

I HATE MY CABLE COMPANY – Comcast – which loves to run up my bill without telling me every chance they get. I’m convinced they deliberately make the entire thing as complex as possible in order to bully/sucker me into paying for tons of stuff I don’t want. And in Chicago they have virtually no competition.

Okay, Roku – this is great! Help me cut the cord and I’m in. But this is where the story becomes no just bad but laugh-out-loud funny. This page has a photo of a woman holding up an iPad and her cable bill. And it has a long list of things to do - “Get organized, come prepared, explore other options.” WTF is happening here? I just want to cancel cable, switch to Roku and eek out some dignity before I croak. It goes on to tell me when I call I must be “confident, prepare for push-back and remember the savings.” Holy Moses. This is like preparing to tell a child the kitty died.

Then the story goes completely off the rails. Down the page it says, “What equipment do I need to cut the cord?” And the answer begins with “All you need is a high-speed internet connection…” WHAT THE HAIRY MONKEY GIBLETS?! I just had to practically hire a life coach to cut off the cable company! And after all this I’m not really cutting the cord, I’m only trimming the cord? Come on. .

This is a back-of-the-napkin analysis of the Narrative framework. Roku manufactures sticks/players, aggregates and/or buys content, AND they bought a competitor to The Trade Desk to sell ads. So, they’re in manufacturing, content aggregation/promotion and advertising. No way. Actually no ****ing way. This is a terrible story. This is the tollbooth operator selling hot dogs and insurance.

Compare this story to Netflix. Netflix buys/produces content, posts it and gets people to subscribe on every kind of device, around the world. Founder/CEO Reed Hastings has been telling the exact same story since inception. Even when he had to deal with physical disks he made explicitly clear the company was about delivering FLIX on the NET. Get it? NET. FLIX. Netflix! They don’t make hardware, have no theme parks, sports channels, video games, porn. They don’t even do major licensing yet. They add content and sell subs. And every time they add content - the service gets better. And every time they add a subscriber, it’s on more person, or family, that will talk about their shows to future subs. Beautiful.

Netflix has grown into a $190B market cap. And along the way they defeated or held off arguably the most terrifying competition (antagonist/villains) in business history: Blockbuster, Wal-Mart, Google/YouTube, Amazon, HBO/Time Warner, CBS, NBC, and now Disney. And really, they compete against video games, social media and anything that pulls audience attention. I am betting they will end up a trillion-dollar company. The focus and storytelling is just too killer. And note also another layer here for me as an investor. I’m into storytelling, so Netflix is particularly well-aligned with me. I’m trying to find a cool way to put this connection between investor/stock – cementing? Bonding? An underrated threat to making big money is simply being scared out of the pick. Inevitably the world will try to terrorize us into selling. For me, not only knowing – but, forgive me, FEELING, the tight alignment between CEO/MISSION/ME keeps me from running scared when times get dark. And this is a good place to transition from Simplicity to Authenticity…

Like Eric Yuan founding Zoom to revolutionize video conferencing, Data Dog’s Co-Founder and CEO, Olivier Pomel and his partner had a vision for revolutionizing how companies monitor their essential technology. Here’s how Data Dog lays out their mission:

Datadog is the essential monitoring platform for cloud applications. We bring together data from servers, containers, databases, and third-party services to make your stack entirely observable. These capabilities help DevOps teams avoid downtime, resolve performance issues, and ensure customers are getting the best user experience.

I know less about tech than I do math. But I get that description.

And this is why I value guys like Muji so much. For me the recipe for success is Narrative Excellence + Red Meat Understanding of Technology = $$$.

I find watching CEOs invaluable. It’s an incredible advantage over past generations of investors to be able to watch videos of management over years discussing their companies. Check out Pomel…

Fireside Chat with Olivier Pomel

His story is basically that he was working as a computer engineer with his co-founder at a company that did educational software and he saw massive - and destructive - tension between teams in development and teams in operations. He wanted them to work together. Note the term, “Dev-ops” which I believe is a term these guys coined. They are based in NYC and also have a passion for the NY tech scene. For me, I find him entirely credible, his conviction legit and I even find him a bit intimidating. And like Reed Hastings at Netflix and Jeff Green at Trade Desk, Pomel’s last company (though he didn’t run it) wound up selling for meaningful money. I like past success. I’d much rather Bill Belichik coach my new football team than any other coach.

Pomel’s the co-founder. He’s passionate. And he’s clearly got a dominant command of the industry, his customer’s needs, company and mission. Now when getting into all this intangible stuff, like anything else it’s easy to go too far and overrate the importance of nonsense. And because I am killing it lately I can literally feel arrogance and laziness trying to creep in.

But let me take you a little bit into the weeds on this, with humility and the understanding I may be talking nonsense here. But I don’t think I am. When I read through all the reviews of DataDog on Glassdoor I found very intense opinions. Haters say the culture is toxic, white male/Asian bro culture and they frequently complain about impossible sales goals. Fans of the company love it and say things like “If you can’t take the heat stay out of the kitchen.” This feels like an edgy culture in hypergrowth mode.

What irks me about this is they have this cute name, purple color and adorable logo featuring “Bits” the little doggy with some tech info in his cute little puppy mouth. This feels fake to me based on Pomel’s hard energy and these reviews. I like the authenticity of CrowdStrike’s branding much better.

We don’t yet know if Data Dog has the ability to transition from a radical upstart to an established company. And the culture will play a role in that. Is this relevant info? I really don’t know.

And I just want to take a parting shot at my favorite whipping Boy – Jack Dorsey of Square/Twitter. The guy is incredible. And I think both companies still have home run potential. But no way I am ever – not now, not never – investing in a hero on two missions. It’s literally the exact same thing as investing in both Rocky’s quest to go the distance AND his attempt to open his own chain of pet shops. The man loves pets every bit as much as he loves boxing – probably even more! He loves candy-colored parakeets, turtles and Butkus. TWTR and SQ have no doubt made people money and may yet 10x. But not for me.

I know nothing about Elastic (literally nothing) but avoided it specifically because I just don’t get it. And it seems like others have trouble explaining the whole enchilada. Again, may be an amazing company and the complex story is a plus in that it’s hiding value. When folks came at Saul hard on this I believe he was simply picking better stories and so far has been right. If the story’s hard for folks here to fully and quickly grasp it’s hard for prospects and investors as well. So it gets a lesser valuation.

Along these lines I remain a fanatic Trade Desk/Stitch Fix fan but won’t harp on these hear as they’ve been discussed. For me I believe the story will result in the high numbers this savage board demands.

And it’s why I don’t invest in anything health care related. Multiphase drug trials, the human body, government regulators – nope. That’s a motherlode of complexity/powerful antagonists.

And I also hate the story of any Chinese stock. The government (antagonist/villain) can literally just swoop in and take my investment? A culture prone to far more corruption than America? GTFOH. Luckin Coffee was a non-starter for me, thank goodness. To me investing in China is like investing in Rocky’s quest to go the distance even though Apollo Creed could, if he wants, bring an AR-15 into the ring. Nope.

The bottom line - simple, authentic narratives make the strongest investments.

If you look at the companies driving Saul’s - and most people’s performance you find - ZM, OKTA, AYX, CRWD and COUP - which are all simple, authentic stories. What Yuan, McKinnon, Stoeker, Kurtz and Bernshteyn are trying to do is pretty straight-forward. And it’s relatively easy to quantify where they are heading.

Okay, I hope you found this useful and worthy of consideration as one important factor in your investing. And please note that because I’m satirical, aggressive and a good storyteller my posts may present a higher risk of emotion trumping logic.

Fool On,

Broadway Dan

P.S. - ** This asterisk was from part about how the stories we tell in our minds about the future – our expectations - don’t often play out in reality. I will return to this topic in a future post, because it is in these moments, when expectations clash with reality, that we discover the true nature of the leaders of our companies. True character is revealed by how people handle difficult even impossible choices. I believe Saul has been touching on this with analyzing our companies’ response to the pandemic. Some are pulling back others putting foot on the gas pedal. This shows us who they really are in a way that nothing else could.

*** This asterisk relates to the part about how our defining experiences make better stories. Recently the noted financial writer – who I’m a huge fan of – Morgan Housel told a very moving story on the Collaborative Fund blog…

The Three Sides of Risk…

FWIW, though I love his writing and explorations of the psychology of investing I find his work too often focuses on our hidden biases, the difficulty of investing, etc. Had I followed his stylings my portfolio would be at best half of what it is thx to the Fool and this board. But it’s very moving to see why he is so risk averse.

P.S.S. – Because I can’t shut up. I checked out DynaTrace – a competitor to DataDog - as it is highly recc’d by a great Fool and new real life pal o’ mine, Phoolio18. This may be silly of me, but I notice the CEO, John Van Siclen, prior to joining the company was doing something in Clean Energy. He seems like a very bright, charismatic, intelligent successful guy. He has run other tech companies and was even once captain of the Princeton hockey team. This is an elite man. And he seems very nice. And he’s been at DynaTrace for 11 years. It’s a very good story but not as good as Pomel’s. Or even say Bernshteyn’s. This admittedly may be some weak sauce to ding DynaTrace for this, but we can’t invest in every company in the market and must have strict criteria that we stick to. I want my CEOs to feel their very existence and meaning of their lives depends on the success of their company. The Trade Desk’s Jeff Green has spent his life in advertising, sold a software company that dealt with advertising and is an evangelical for the cause of improving advertising. He’s a man on a mission and I believe in the mission.


His product is called Falcon - named after the fastest mammal on the planet.

  1. Quibbling!
  2. Falling with Style, isn’t the same as self-propulsion. (Also quibbling.)

Wikipedia: “Roku was founded in October 2002 by ReplayTV founder Anthony Wood. Roku (?) means “six” in the Japanese language, to represent the fact that Roku is the sixth company Wood started.”

Roku is a great name, but stumbled upon.

rgds, Bill


You probably have all heard Peter Lynch’s term, “Diworsification.” This is, for example, when Buffet’s toll booth operator decides he will sell hot dogs and life insurance to people coming through.

That’s not diworsification. It’s business expansion, and it’s often a good thing. Like when Comcast added internet and telephone services to its cable TV service. Like when Amazon decided to sell more than just books online. And especially when Amazon decided to sell some of it’s 11-months out of the year unused server capacity.

Diworsification is completely different. Diworsification is adding stocks with similar correlations to the stocks you already own, which doesn’t diversify you from risk. They don’t have to be competitors, like Intel and AMD; it could be like owning both Ford and Michelin - both stocks will track how the auto industry as a whole is doing and so you’re not really diversifying.

Some people here have talked about owning both Fastly and Cloudfare. That may or may not be diworsification. If the intent is to capture an industry trend without necessarily knowing which of the dominant 2 or 3 players will win out, then spreading investment dollars across the likely winners is a reasonable strategy. OTOH, both stocks will be impacted if overall internet traffic declines, or changes its usage profile, or if a disruptive competitor comes in. Perhaps the difference is whether you treat owning both Fastly and Cloudfare as two separate investments, or as a combined CDN investment, which would be measured in terms of investment percentage size. 15% of each would be diworsification, 5% of each not.

As for stories, it seems obvious that companies need Mission Statements, not just for investors but for their own internal guidance. In the 1990’s most people thought of Amazon as an online bookseller, but their stated Mission Statement, even back in 1995, was: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.” So, when they expanded from books to just about everything else, it was part of their vision, certainly not diworsification.

That said, one has to be careful of putting too much emphasis on a company’s story. The term “Story Stock,” btw, isn’t quite the same thing as being discussed here - the typical definition of Story Stock is a company that’s in the news and has a lot of hype around its future (see for instance). As used by BroadwayDan, a company’s story doesn’t require that the story be in the news.

Still, there are plenty of companies with good stories that fail. A company needs execution abilities, which is why Gartner’s “Magic Quadrant” analysis has both “Completeness of Vision” as well as “Ability to Execute” for its two axes.

Let’s look at BroadwayDan’s take on Roku’s story. While I agree with him that’s Roku not a great investment, I disagree with his reasoning. Roku isn’t about literally “cutting the cord.” Let’s start with Roku’s Mission Statement: “We connect users to the streaming content they love, enable content publishers to build and monetize large audiences, and provide advertisers with unique capabilities to engage consumers. We believe all TV content will be available through streaming.” ( )

So right there they have limited themselves to “TV.” They’re excluding mobile. It would be like Amazon stating they wanted to be the best place to buy books and exclude everything else one could buy. It would be like Reed Hastings naming his company “DVDFlix” instead of “NetFlix,” or years later trying the split the company in two (Opps, he did try that, which was a disaster from which they recovered).

That said, Roku’s story isn’t dependent on “cord cutting,” but on providing streaming to TVs. Yet, the real growth for steaming content isn’t to TVs. Even when we had 2 TVs in our house, my adult son would watch everything on his laptop. The problem with Roku’s story isn’t that cutting the cord from cable TV is hard (it isn’t), it’s that the growth in viewing mechanisms isn’t on TVs.

Has anyone noticed that YouTube is getting more serious about advertising lately? If you don’t want ads, you have to pay Google for such an account. They didn’t do this at first, when they were building the business, but now they’re so dominant they can monetize things more. YouTube knows what you watch - that’s how they build that recommended list of other things to watch, but they also use that technology to help advertisers reach people more likely to be interested in what they’re selling. Powerful stuff, but Google’s so big it has to do great things just to survive.

As for whether someone was captain of the hockey team or not, well, that’s not my style at all. I don’t put much faith in such stories when doing my investing.



I didn’t realize the term “diworsification” as Peter Lynch used it was purely about building one’s portfolio. I stand corrected there. Thank you.

Still, the more important point here than proper use of the term is whether or not a company is laser focused and is or is not expanding business units wisely. A restaurant adding a musical act may be damaging the experience and hurting business or that act could bring in tons of business. If it adds a business line that hurts business and muddies the story, I’m fine calling that “diworsification.”

My key point is the simpler the mission, the more likely the company is to succeed. I agree 100% that Salesforce, Microsoft, Amazon, etc. have shown an incredible ability to expand wisely. I think we’d agree that expanding product lines is something that ideally comes after a successfully executed strategy, a la Amazon with books - then add other things, rather than do too many things simultaneously.

I appreciate your clarifying the difference between how I’m using the term story and how it’s traditionally used. I’m not remotely talking about newsworthiness or the famous car company’s CEO and his antics. A great Story as I’m using the term is one that is simple to see how Company X earns and protects massive profits. And again I like to see a tight alignment between the CEO and the mission. But in the tollbooth example, yes the operator must show up for work daily and collect the tolls or the Story is worthless.

As far as Roku - I didn’t mean to imply the company’s all about cord cutting. My point is again, simply, that Netflix has a simpler mission. And for that reason alone likely to be a better investment. I doubt Roku ever reaches Netflix’s heights. They need to build gadgets, a platform, aggregate content and sell ads. I like the mission you laid out there though for its greater coherence. My bad on not giving them the respect they deserve. But I stand by my key point though that if you need to explain to customers what it is, this is problematic. No one has ever had an iota of confusion about what Netflix is or how to use it.

To the other poster’s point, as far as naming a company after the CEO’s sixth business, I don’t like it. It’s like Lew Cyrne naming his company New Relic. It’s self-involved. A great brand name should inspire prospects/customers and at least make it clear what the thing does. Again, I fully realize many brilliant people think this stuff is irrelevant or close enough to irrelevance as to be unworthy of discussion. And I do think Roku sounds cool and is short and memorable.

Lastly, as for the CEO being captain of the ice hockey team at Princeton - that’s impressive. That’s an indication of strong leadership skills. It’s ONE piece of data about the most important person in the company. It’s not a story. You can say that what an older man did in college is not relevant. But again, this is nitpicking. The bigger point is that the biography of the leader is relevant. I’m basically just saying the same thing here that David Gardner’s been passionate about for years - invest in founder-led companies. I’m just putting a little meat on that bone.

Bottom line - I am noticing an interesting relationship between a well-told Story as it’s traditionally defined and the performance of our best picks. Simplicity, clarity and concision are relevant factors fueling Saul’s success.



I think this is what I’m trying to say, in case anyone’s interested, is in this ballpark.

Henry Mintzberg, a finance professor at McGill University once wrote,

“While hard data may inform the intellect, it is largely soft data that generates wisdom. They may be difficult to ‘analyze’, but they are indispensable for ‘synthesis’ - the key to strategy making” and also said, “We’ve become prisoners of measurement: audits, league tables, targets. It just destroys creativity. Look, I’m not opposed to measuring things that can be measured - I’m opposed to letting those things drive everything else out … What would happen if we started from the premise that we can’t measure what matters and go from there? Then, instead of measurement, we’d have to use something very scary; it’s called judgement.”

He is talking about this from the standpoint of executives but I think it’s relevant to investors.


I didn’t realize the term “diworsification” as Peter Lynch used it was purely about building one’s portfolio. I stand corrected there. Thank you.

It doesn’t. I have a copy of “One Up on Wall Street”, written by Lynch. “Diworsification” is a play on the “diversification” ideas of the era. He is talking about companies who do acquisitions of companies outside of their core competencies, in attempts to become conglomerates with the same magic as their original area of success.

From page 146, “Every second decade the corporations seem to alternate between rampant diworsification (when billions are spent on exciting acquisitions) and rampant restructuring (when those no longer exciting acquisitions are sold off for less than their original purchase price). The same thing happens to people and their sailboats”.

The only folks who get rich are those owning the companies the wannabe conglomerate overpaid to get.

He also gave examples of good strategic acquisitions that complement and help the original business (synergy), and contrasted them to companies who bought businesses in unrelated areas and tried to make them work.


BroadwayDan, I appreciate your response, but I do have to take issue with this claim, as I think it’s central to our disagreement:

My point is again, simply, that Netflix has a simpler mission. And for that reason alone likely to be a better investment.

Actually, Roku’s is simpler. NetFlix had gummied up their statements over the years. In 2011, Reed Hastings expressed it in 4 parts:

• Becoming the best global entertainment distribution service
• Licensing entertainment content around the world
• Creating markets that are accessible to filmmakers
• Helping content creators around the world to find a global audience

Whereas Roku’s is a much simpler “provide all TV content via streaming.”

The difference is, as I tried to express, is that NetFlix’s mission isn’t self-limiting and can tap into growth markets. It rode DVDs, then Blu-Rays, and then streaming. It provided other company’s content and now it makes its own content. It doesn’t matter if you’re on a TV, web site or mobile phone. It doesn’t even matter anymore if you have a live internet connection, thanks to downloading ahead of time. The optionality is huge, their business model is simple (pay per month all you can watch).

Roku is much more self-limiting. TVs - not web, not mobile. Replace linear TV. Make money off devices and/or ads. There’s no new growth market, just a replacement of an existing market - and Roku won’t be the only alternative to linear TV.

So, I will still disagree that simplicity is important. What’s more important is what market(s) they’re tapping into.

I think we’d agree that expanding product lines is something that ideally comes after a successfully executed strategy…

Well, let’s look at MongoDB, a once-popular company here. They actually started out by calling themselves “10gen” with a Platform As A Service (PaaS) product. They couldn’t find a suitable document-oriented database for that product and so starting writing one themselves. They then pivoted to just doing that DB product after realizing the market for that was much larger and perhaps easier in which to get a foothold. So, their change in product didn’t come after initial success elsewhere. Their success was in recognizing where the opportunities were.

Theodore Levitt’s seminal book “Marketing Myopia” (1960) says that businesses should focus on their customers’ needs, not specific products nor technologies. Levitt is responsible for the “Buggy Whip” analogy (since then replaced with Clayton Christensen’s “Disruption.”) As an example here, when Apple moved from home computers to music players many people doubted their ability to be successful. (… ). Well, that led to the iPhone, which as we all know is a handheld computer married with a phone. Ironically, it was then that Apple Computer became just Apple (Beatles agreeing to legal terms). While it can be argued that Apple was successful in its initial market of home computers and laptops, the company almost went bankrupt in the late 1990’s (saved by Bill Gates, who needed a competitor around for anti-trust issues), so it was the iPod that saved the company and then the iPhone that made it the gigantic success we know today. Apple still makes home computers and laptops, but it ain’t their most profitable business.

Back to the point, I think you’ll have a hard time finding Apple’s Mission Statement in any sort of simple, coherent fashion (eg… ).

And finally:
But in the tollbooth example, yes the operator must show up for work daily and collect the tolls or the Story is worthless.

I didn’t want to get into this, but tollbooth operators are so last-century (fitting Buffett to a “T”). Toll booths don’t have operators anymore.



I’m not interested in clogging up the board arguing w you.If my ideas don’t work for you hopefully they helped you clarify your own position. I will not respond further.



It doesn’t. I have a copy of “One Up on Wall Street”, written by Lynch. “Diworsification” is a play on the “diversification” ideas of the era. He is talking about companies who do acquisitions of companies outside of their core competencies, in attempts to become conglomerates with the same magic as their original area of success.

It’s been a long time since I read that book and I no longer have a copy. As I remembered it was about poorly though out M&A but I didn’t have the book to check. Google only brought up articles that said it was poor portfolio diversification. I started to doubt my memory. Thanks for reassuring me that I’m not yet losing my mind! :wink:

Denny Schlesinger

Amazing read! Thank you!

This is a back-of-the-napkin analysis of the Narrative framework. Roku manufactures sticks/players, aggregates and/or buys content, AND they bought a competitor to The Trade Desk to sell ads. So, they’re in manufacturing, content aggregation/promotion and advertising. No way. Actually no ****ing way. This is a terrible story. This is the tollbooth operator selling hot dogs and insurance.

Holly crap, you said in one paragraph what I have been trying to express in a whole thread over at the premium board for Roku! (Of course I already know what you mean while my thread is more about trying to understand why I came to this conclusion.)

The thing is, it is the story I craved when I wrote this:

An attempt at a summary

Again, the key missing thing for me here is the 5-10 year thesis. Right now, Roku feels to me like a company that was an early mover and should have captured a huge market share by offering a platform-as-a-portal at a time when that was needed to get in to homes. Like AOL sending DVDs to everyone. Today though…?

- As a software platform, they primarily have a grip on some 2nd tier American suppliers (with a finger or two in Europe). They face some daunting competition and the large brands already build their own in-house quality offerings. To succeed on the world stage on this front they need to be such a clear winner that users force manufacturers to ship with Roku’s OS installed. This is not going to happen in my opinion as these players have already invested in their own and Roku predated their efforts but couldn’t win their way in (or even to become exclusive with the ones they did)

- On the hardware side I already made my feelings clear. Hardware isn’t in a thesis I can get behind. [one-time sales isn’t interesting to me.]

- On the content front there seems to be some really good stuff for cord cutters. This seems to be where they shine as an offering. However, this really only becomes interesting if they can get on all the other platforms (like Crave in Canada has done) so they can get more users in. This is the only way they make recurring revenue, I think? I can’t see how only being accessible through their own devices and operating system will allow them to massively scale to the world.

…In other words, if my points are at all based in reality. They are essentially shooting themselves in the foot by trying to be all of these things at once…?

So, what direction are they going to push in. Will they evolve? Do they need to? If they just continue as they are now, without any course change, how do they get to profitability? How do they leverage these areas to scale revenues without scaling costs?

I later realized that one of the biggest Telcoms, Telus, is starting to shift focus to their digital platform and you can now actually pay for Netflix through them and use their digital box to watch it. They have billboards announcing this. Even AmazonPrime seems to be heading this way as, unlike in the US, watching Mr Robot season 4 requires an add-on subscription. We also have Crave, owned by another Telcom Bell Media that streams a ton of TV and has add-on subscriptions for HBO and the like. On my AppleTV I can get apps that a provider-billed subscription to stream live and on-demand. These are just a subset of larger companies moving in to direct competition with Roku.

I just don’t get where Roku fits in the future. Please, tell me a story of a future where it does, so I can understand.

What I wrote above already nods at Diworsification - in my opinion, “Diworsification” isn’t only for acquisitions. It can be for opening new areas of business that distract or take away from the whole either through poor execution or over-extending or simply going in a bad, more complex, direction - …but Roku is now making a soundbar with a Roku device embeded too. I hear they have audio experience as a company, but that doesn’t make it better. Seems like reaching for ideas to me. Shouldn’t they be focusing on the part of their business that can scale and turn a profit? The hardware side of this story, in a future where I don’t see us needing hardware to do what Roku does, combined with this being a 15 year old company…I couldn’t get behind it. I feel like a major change in course would be needed to fit any story I could theorize about.

I hope this post doesn’t side track the thread. When Roku was mentioned in the original post it just struck me as a situation where the story was driving my decision to invest. Love of story attracted me to a career in film, so to say it is important to me would be an understatement.


Ok, folks, here is my very basic take on Roku thesis.

  1. Roku strives to become THE PLATFORM for streamed TV. As we know from other industries - this is a winner-takes-all situation as all content providers will strive to be included in the platform. And users will prefer Roku because they will be able to get all the content they want - both paid + free content.

  2. The more users they have the stronger platform will be - better terms with content providers, higher margins, higher growth, stickiness etc. Hence they subsidize hardware. The data shows that as of now Roku is Nr. 1 in the US, hence Bear and others said that Roku has already won this race to become the main platform for TV streaming content (at least in the US). Theoretically, due to platform “virtuos circle” mechanism they should be increasing their lead in next quarters (Amazon is Nr. 2 in the US) and we should watch for this.

  3. Roku goes for international expansion in order to become THE (main) PLATFORM for GLOBALLY distributed TV streaming content. This is a logical step in their model. I see progress in Canada, not sure about Brasil (if we have data) and Britain is early.

  4. I am long Roku, although my conviction at the moment is not so strong like for our main companies (DDOG, CRWD, ZM, AYX). However, if we want to think big - if Roku will become in 5-7 years the main global TV streaming platform - we can easily imagine 100-150b market cap. So, the potential is there - if they will be successful with international expansion and continue to dominate US.

  5. On Smorgasbord’s comment that growth is in mobile and not CTV - Beth thinks in an opposite way: “Any weakness in Roku’s price will likely be temporary, considering its financials and positioning. Although you could argue this is the case for many advertising companies, connected TV ads are in a growth trend while mobile is reaching saturation.”

  6. Margins trend is worrying.

Remaining long Roku and watching how the thesis unfolds.


Okay, so I worry about using the word “platform” here, versus just “OS” because a platform infers a certain amount of virtuous spiralling revenue without much cost-spiralling, at least, to me.

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Roku is probably best considered as an aggregator, rather than an OS or a platform. If it was an OS, it would be managing all of the tv’s functions (sound settings, picture settings, etc.). If it was a platform, it would have the spiraling revenue as rtichy mentioned.

It is more of an aggregator - a one stop shop for streaming and a place where all the streaming services can be seen. Amazon, Ebay, Etsy, Pinterest, and even the ol’ yellow pages are all aggregators. Roku is in this category.

Here’s the bull and bear for Roku as I see it…


-Already on 1/3 of TVs.
-$210 billion in TV advertising is going to shift to streaming TV as audiences shift to streaming TV.
-Roku will continue to gain market share and be known as the best streaming aggregator. It will maintain its dominant position and capture at large portion of CTV advertising revenue.
-Bull bonus: Subscription services will reach saturation and eventually offer ad supported models driving more revenue to Roku.
-The Roku channel will continue to gain viewership and will be one of the most successful streaming channels.


-Roku will lose out to Amazon, Google, Apple, and possibly other streaming aggregators in terms of market share. Alexa functionality could be the key tipping point in Amazon’s favor. International expansion will not go in Roku’s favor.
-Roku will not derive enough revenue from advertising to make a profit, partly because most of the streaming is done over subscription services that don’t contribute ad revenue to Roku.
-Roku will be squeezed between its partnerships with TV makers and streamers and will not have the power to negotiate favorable deals.

I’m in the bull camp on this one. My biggest worry is Amazon eventually dominating with Alexa. Roku will never have the voice capability of Amazon.


LearningInvestOr, yes, but how?

You did the famous South Park underpants-stealing-gnomes plan:
1. Collect underpants
2. …
3. Profit

Roku will never have the voice capability of Amazon.

And in fact, they are being sued over the voice functionality they do have right now. (Discussed this past week on the premium board for ROKU.)

btw, I think ROKU does have an OS for the 1/3 of smart TVs that feature it. And it is the OS for its own devices, but most of us are, at best, sanguine about the separate-device-sale prospects.

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This has become a ROKU thread, so maybe you could move the discussion to a thread with Roku in the name so people who are looking for Roku would find it.