Tale of Three Cities and Post Mortem

Is it better to be 1) wrong and move on, 2) right and hang on or 3) wrong and hang on?

Please allow me to explain how the first two are near equal but the latter is the worst outcome possible. This has consequences in how you may invest, linger on failing stocks and how better results are achievable by following this basic principle.

I have opined a few times in the past that I believe Saul’s great results have less to do with his stock picking and more to do with his ability to move on…unemotionally move on. While he may disagree, I can see him trading away from winners from time to time, rejecting clear winners from time to time…yet he still produces spectacular results.

As an illustration, consider my experience with TWLO…first and most importantly, congratulations to the TWLO longs…you done good!..you were right and you hung on. Me?..I was wrong and moved on.

Who did better in their investments???..the answer may surprise at least a few.

From time to time, I like to go back and see what I was thinking and concluding about stock investments (whether long or not) to assess how I was correct/incorrect on assumptions and expectations for a particular stock. IMO, this sharpens future stock analysis by reducing repetitive errors in judgement as the years go on and previous detailed decisions are but a mere blur in time…therefore destined to otherwise repeat faulty logic.

With TWLO’s recent jump, this seemed a good time to review that assessment from 2016 here:

http://discussion.fool.com/twilio-32464129.aspx?sort=whole#32503…

Hey Saul:

I really didn’t care for that secondary because it wasn’t for the benefit of the company…that money essentially given away to insiders. I suppose you could argue otherwise but if I had been a shareholder back then and saw my investment tank from $70…for no benefit to the company I was invested in…that would be a bit irritating and IMO, suggests a loyalty to insiders and not the average shareholder.

But that said, the link I posted from the NPI expressed my gut instinct. Looking at videos of the CEO, just not comforting in terms of eluding conviction and planning and strategy.

The concern about whether there is really a moat or not regarding their technology…I am still not sure what a “supernetwork” is…and this was expressed as their sole moat.

Switching costs do not appear to be as high as we might have thought according to KTCFOol who has worked with Twilio (as you see in that thread). So customers do not seem to be as locked in…although Tinker has made some reasonable counter arguments.

Under any circumstance, I wouldn’t be holding now because I am not sure about that lockup expiration. This is a very volatile stock…and sometimes they make make look you foolish as much or more than intelligent.

Since that post, the stock is up 150%!..I was wrong and moved on. Remember that some folks had bought in at the $60-70 range…those that held are barely up at this moment.

But…I didn’t lose any money and what did I do with what otherwise had been invested in TWLO:

SQ…a bit over a triple.
AAXN…a bit over a triple.

We have all had great investments for sure…but what we also must recognize is that we can’t own every winner. And very importantly…there are in fact many potential winners.

So of the above three options that any of us have, which one statistically would be the worse decision to make:

  1. Wrong and move on…OK, I missed the TWLO 150% rise…but my money was not stagnant and successfully sought opportunity.
  2. Right and hang on…OK…that is you TWLO folks.
  3. Being wrong and hanging on…that would be disaster, money locked out, lost opportunity.

The worst decision by far is the latter…IMO, never ever ride a stock down and hope for recovery. That is lost opportunity. You have seen Saul reverse quickly on NKTR…seems a distant memory…didn’t linger, didn’t cry…just moved on to other opportunities.

I missed TWLO…didn’t hurt me at all…went for other opportunities. Saul hates TDOC…I am now up 150%…so what, Saul has found other opportunities.

But if one rides a DDD down to ashes…that is opportunity lost forever.

So as I review the previous TWLO assessment, there is no question I made the correct decision…because of the three, there was only one that was disaster.

It is hard to imagine that anyone is riding any losses in this amazing market but in case you have a straggler or two, perhaps some reflection of the validity of this observation might be helpful. None master its principle so well as the man who sheppards this board.

Best:
Duma

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It is hard to imagine that anyone is riding any losses in this amazing market but in case you have a straggler or two, perhaps some reflection of the validity of this observation might be helpful. None master its principle so well as the man who sheppards this board.

Duma, I have the unerring ability to sell stragglers just before they break out to the upside!

Denny Schlesinger

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Absolutely superb post Duma. Frankly, these posts that help us consider the “why” and “when” of our decisions are as impactful as any regarding a particular growth opportunity. Thank you.

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If I were an investor who stumbled upon this board for the first time and read
Duma’s description of Saul’s investing style, I would conclude that roughly 90%
of it boils down to price/momentum trading, by looks for stocks that have the best
narrative to support continued price momentum.

Which I cannot criticize since it has produced tremendous results for numerous
people on this board, and is very popular elsewhere (Investors Business Daily, etc).

But one does wonder if these stock prices are rising so fast because they are truly
great companies, or if people think they are truly great companies because the stock
prices are rising so fast? Maybe at the end of the day it doesn’t even really matter.

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  1. Being wrong and hanging on…that would be disaster, money locked out, lost opportunity.

The worst decision by far is the latter…IMO, never ever ride a stock down and hope for recovery. >> That is lost opportunity.

Because someone is probably thinking it, I’m going to share a real example where what you may THINK may end up hurting you in the long run. And you may be thinking, “but it may not ALWAYS be wrong, because I am getting a decent dividend and buying more of cheaper over time.” So here’s your real-world example… feel free to chop it down.

Let’s say you bought a “powerhouse” like Gilead Sciences (GILD) back in 2014 when HCV+HIV sales were going gangbusters. Price then was probably in the $90s up into $100. GILD pays a quarterly dividend, which you reinvest directly into more shares. Said dividend was around .40/share then (so, let’s call it a 1.6% yield) and has since grown to .57/share.

In our example, let’s say you had bought 100 shares at $100, and factor in a $10/share drop per year from 2015 onward just for easy math. So in 2015 you were getting a $160 dividend, and re-buying shares at $100. Likewise in 2016 (.43/share/Q), 2017 (.52/share/Q) and 2018 (.57/share/Q), so it ends up something like this (disclaimer: not using /exact/ math here, so excuse some rounding for brevity):


      Bought     Dividend/Yr  DRiP-added   Total Shares   Total Value
2015  100 @$100  $172         +1.7 sh      101.7          $10,170 (@ $100/sh)
2016             $188         +1.9 sh      103.8          $9,341  (@ $90/sh)
2017             $216         +2.1 sh      106.5          $8,519  (@ $80/sh)
2018             $243         +3.5 sh      110            $7,700  (@ $70/sh)

That looks a little grim… You lost 23% over a 4-year span, and in return you were “paid” 10 shares worth of dividend for your troubles (or $819 in dividends if you took the cash), making your loss closer to 15%, or roughly (-4%) per year.

Now, let’s assume this is in a taxable account so you didn’t want the taxable cash, but you have 20+ years of runway, and believe strongly that this is a keeper that just needs the next new product, so you’re going to let it run. What happens if in, 2019 or 2020, that share price recovered to only $90 and then to $100+ again, with an unlikelihood of there being no dividend increase from what it is today ($0.57/sh/Q)??


      Bought     Dividend/Yr  DRiP-added   Total Shares   Total Value
2015  100 @$100  $172         +1.7 sh      101.7          $10,170 (@ $100/sh)
2016             $188         +1.9 sh      103.79         $9,341  (@ $90/sh)
2017             $216         +2.1 sh      106.5          $8,519  (@ $80/sh)
2018             $243         +3.5 sh      110            $7,700  (@ $70/sh)
2019             $251         +2.8 sh      113            $10,170 (@ $90/sh)  < still $2.28/Yr div
2020             $258         +2.9 sh      116            $10,440 (@ $90/sh)  < still $2.28/Yr div
2021             $265         +2.64 sh     118.6          $11,860 (@ $100/sh) < still $2.28/Yr div
2022             $270         +2.7 sh      121.3          $12,130 (@ $100/sh) < still $2.28/Yr div

Still meh… a 21.3% return over 7 years is probably nothing to cheer about. So let’s keep going another 5 years – increasing the dividend ~5% per year (pretty conservative) and the share price +3% per year since “they now have new management and a new drug pipeline that’s going to right the ship and make unicorns for all”:


      Bought     Dividend/Yr  DRiP-added   Total Shares   Total Value
2015  100 @$100  $172         +1.7 sh      101.7          $10,170 (@ $100/sh)
2016             $188         +1.9 sh      103.79         $9,341  (@ $90/sh)
2017             $216         +2.1 sh      106.5          $8,519  (@ $80/sh)
2018             $243         +3.5 sh      110            $7,700  (@ $70/sh)
2019             $251         +2.8 sh      113            $10,170 (@ $90/sh)  < still $2.28/Yr div
2020             $258         +2.9 sh      116            $10,440 (@ $90/sh)  < still $2.28/Yr div
2021             $265         +2.64 sh     118.6          $11,860 (@ $100/sh) < still $2.28/Yr div
2022             $270         +2.7 sh      121.3          $12,130 (@ $100/sh) < still $2.28/Yr div
2023             $304         +2.95 sh     124.3          $12,803 (@ $103/sh) < $2.40 div
2024             $313         +2.96 sh     127.26         $13,490 (@ $106/sh) < $2.52 div
2025             $337         +3.1 sh      130.4          $14,214 (@ $109/sh) < $2.65 div
2026             $363         +3.2 sh      133.6          $14,963 (@ $112/sh) < $2.78 div
2027             $390         +3.5 sh      137.1          $15,767 (@ $115/sh) < $2.92 div

So after 11 or 12 years, after $3,570 in dividend payments, you ended up with 137 shares of GILD worth close to $16,000, for a rough gain of 58% (just under 5%/year). And that assumes there are no down years in between.

Is there any good reason to keep accumulating something like this, even if you’re just doing it to get the income payouts later in life?? The math is totally not in your favor, but maybe I’m missing something.

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