Many lessons have been learned in 2022, as Bear wrote in his excellent post a couple of days ago (enriched by all the excellent replies). Some of them are general, meaning they are applicable to all of us, others are personal, and have to do more with the temperament and attitude and emotional apparatus of each of us. I was reflecting on one point in particular. One that I haven’t seen written about on the Board but nonetheless – to me – is a critical one: the urge to drop a company upon the slightest negative (or I should say, not positive enough) piece of news coming out of their quarterly report. This is something that I’ve done a lot, and that I’ve seen many of us do often, over the last year. I think that it’s unnecessary and distracting, and largely driven by emotional reactions to stock price fluctuations.
Sometimes businesses do not create value in a linear fashion, quarter after quarter. Sometimes they have one or two disappointing quarters only to resume clocking in great figures again after them. My feeling is that we often mistake a physiological slowdown for a broken investment thesis. And, mind you, I’m not talking about companies NOT growing or losing customers; I’m talking about companies still growing at high rates and still adding (in some cases) hundreds of customers, but not enough to create a positive surprise. Maybe expectations have gotten unreasonably high, but I believe there’s a huge difference between a business in a crisis (no growth/losing customers and market share), for which the investment thesis is likely broken, and a business not growing as much as expected (but still executing nicely and growing at insane rates). There are many examples of companies that have gone out of favor because they delivered less than ideal numbers, only to get back in favor after a good quarter with a positive surprise. Dropping a company after one (supposedly) bad quarter and buying it back after a good one is not investing, to me. If I spend a lot of time trying to build conviction on a company (and many on this Board do a great job at dissecting business models and addressable markets), why should I jump in and out every quarter, as long as the underlying investment thesis is not impaired? For example, a common thread of the latest earning reports has been the elongated sales cycle, which usually means that numbers that we should have seen in this quarter, we will see in future quarters. Is this bad? Does this justify getting out of a company? I don’t think so. So, yes, our companies are slowing down a little, and some of them are doing this because they are growing larger in size and it’s only natural that they cannot keep growing at the same rates as when they had $100m in revenues. But they are still executing and growing at rates unheard of in any other industry, and sky’s the limit for a bunch of them. This is not a race to try and secure a +20% in the stock price after a good quarterly earnings report, or try to avoid a -20%. This is a mid- to long-term game, at least to me.
So the lesson I have learned this year is to spend a little more time in building conviction, and, once I’ve done that, try to keep my portfolio as steady as possible, with only tactical adjustments to positions (unless, of course, something massive happens and I have to reconsider a particular thesis – but that’s not by any means when a company is growing at 45% instead of 55%).
I’ve done a little fun exercise to give substance to this idea. I’ve taken my portfolio at the end of November 2021 and compared the performance I would have gotten had I not touched it until the end of November 2022, to my actual performance (with a portfolio that I changed substantially over the year, based, as said above, largely on quarterly earnings releases). The difference is minimal (-71.2% vs. -69.5%): both are brutal performances.
And I’ve taken the liberty of doing the same exercise with the portfolios of a few of those who post their monthly reviews regularly on the Board (Saul and Bear, of course, but also Stocknovice, Mekong22, and WSM – the criterion being that I picked the names of those who post consistently their monthly reviews, are regular contributors to the Board, and were there both last November and this November). Since you guys have been so kind to be totally transparent with your performances and portfolio compositions over the months, I thought I’d take a look at what your “unchanged portfolios”’s performances would have been. As a general assumption, I’ve given all portfolios the starting size of $1m, just to make calculations easier. [I’m sure I’ve missed something, but please bear with me, this is just an exercise].
Here are the results:
As you can see, differences are not life-changing. They are a little more pronounced for Stocknovice and Mekong22, but nothing to write home about.
So what’s the point of being so reactive to quarterly figures when at the end of the day the results are not substantially better? As said, in certain cases, where we think the investment thesis is broken, we just have no choice but react, get out, and reallocate the cash. But in most cases, we’d be better off just waiting for the storm to pass (if – I repeat, IF – we still have conviction).
Happy new year to all of you and may 2023 be a year of health, good news, and (massive) portfolio recovery. 
Silvio
