This interesting week produced several thoughts which I’d like to share with you.
Point 1. This first point may be a little OT but I feel it may be useful to others to mention it.
A number of people have pointed out that a lot of the market’s rise takes place on just a very few days, which makes selling out in order to be cautious, indeed cautious… but severely limiting to your upside.
Well, this week, on Monday, my portfolio dropped 4.6% in one day, which dropped me from up 40.9% to up 34.4%. That could have been really scary and I could have decided to play it cautious and take my profits and get out… Well on Friday, this same week, my portfolio finished up 59.2%. It went from up 34.4% on Monday to up 59.2% on Friday.
If I had been scared out on Monday I would have missed that 18% rise, which added 25 percentage points of gain, well more than a better-than-expected full-year gain for most people who are invested in the averages, just in those four days. That is why I emphasize in the Knowledgebase that I hold money aside for expenses, but aside from that, I stay fully invested.
Point 2. Okta
Back seven or eight weeks ago, when Okta was at $92, it was becoming very clear that what they were doing was much more than single-sign on, and they were introducing product after product. I didn’t really understand what all those products do, not being a techie, but I could sense the excitement about them, and I was adding to my position… At that same time a number of people were pointing out that Okta had the highest EV/S of all our SaaS stocks (except maybe ZS), and they were proudly asserting that they had sold their Okta positions because Okta had climbed too high and was over-valued. Well Okta never experienced any relative weakness at all in those 7-8 weeks, and it closed Friday at $127.31. It’s thus up 38.4% since they noticed that it had climbed too high and was so ’’over-valued.’’
What’s the message? Pay attention to the business, and what it’s doing, not to a single number that tells you it’s ‘’over-valued’’.
Point 3. Mongo versus Elastic
At the end of February I had a 6.8% position in Elastic, and just a 3.5% in Mongo. When all this stuff came out in March about AWS threatening Elastic I reduced my position in Elastic down to 1.1% and built my Mongo up to 6.5%, in effect moving much of my Elastic funds to Mongo. Here’s what I wrote about it in my March summary:
I don’t know yet whether this will turn out to be a mistake or not. But I do know Elastic claims to have a pure open source model, which I have misgivings about. I do know that they have an enormous lock-up expiring in April, and possibly some dilution as well. I do know that they are selling at a very high valuation. I do know that Amazon is attacking them as it attacked Mongo, but in Mongo’s case they could only copy it, while in Elastic’s case, as it is a purer open source model, they could use (some of) Elastic’s own code. …I have clearer stories all around me. Even a couple of new IPO’s soon to happen. I think I took the correct course, and will wait and see. At any rate, Elastic was down 15.2% on the month (its share price dropped from $94.15 to $79.87), and it’s below where I sold it some weeks ago, while almost everything else in my portfolio has gone up. For example, Zscaler, which I added to this month and is now my second largest, was up 42% this month. If Elastic goes way up, so be it, but I probably won’t chase this one.
Now I have 0% in Elastic, and 14% in Mongo. How has it worked out? Let’s see.
Going back exactly three months to March 7th, Elastic was at $84.94. Friday it closed at $81.40, so in three months Elastic is down 4%.
Going back exactly three months to March 7th, Mongo was at $99.46. Friday it closed at $169.97, so in the same three months Mongo is up 71%.
What’s the message? Don’t hang on to the complicated stories where you have a lot of questions. Go for the clearer, cleaner stories, especially when the numbers back it up.
Point 4. Don’t stick with train wrecks hoping that they will come back. Never say ‘’ I won’t sell it down 40%’’.
Here’s an example from an excellent stock analyst who, however, hates to sell when his recommendations are down (but sells out when they have risen ‘’too much’’). Article is called ’’Cloudera’s (CLDR) train wreck. It is a painful saga and a happy ending is not yet in view.’’ The conclusion was ‘’This has, to say the least been a very disheartening experience. Seeing a recommendation lose 70% of its value in a few months is not something that sits well with me. But I have been there before, and these things will happen in the IT space. I will keep my finger on the pulse of this, and hope that the company chooses to be more transparent going forward.’’
Never, never, NEVER, do that!!! Think of the opportunity cost in a market like ours. “Keep my finger on the pulse” of a stock that has gone down 70%, and you are still in it??? No! Redeploy the money!!! (Nutanix is another example which just keeps getting worse). Note that I’m not talking about a down market where everything has gone down. I’m talking about a business execution train wreck of an individual company. Take your lumps and redeploy the money.
Point 5. On mistakes.
Remember, I don’t always get them right either and in my March summary I had an entire section analyzing my mistakes of the first quarter. In fact Point 4 above was about admitting your mistakes and correcting them, as opposed to hoping that somehow in the future they will turn out to not be mistakes.
I hope that this was of help.
Saul
