The most important lesson

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. :slight_smile:



I’m afraid there’s a big flaw in this analysis. You’re looking at it in a year when almost every stock in those portfolios went down 60%, 70%, 80%, or 90%.

I suggest you look at this for 2021. On Jan 1, 2021, my top 4 were CRWD, NET, DOCU, and ZM. These four stocks finished the year down 7% on average. My portfolio finished UP 52.6%! I had sold all of these except NET.

Selling is an absolutely crucial part of what we do. This very possibly could be the most important lesson.



Hi silviocast,

thanks for your effort and an interesting experiment.

I noticed this behavior in myself, especially at the beginning of the year. My expectations had simply become too extreme due to the incredible boost for the whole digital sector and the inflated valuations (the „priced for perfection“ thing). Unfortunately, in reality it is extremely difficult to permanently exceed expectations. When it became clear that the economy as a whole was in some trouble and our companies became more reasonably valued, I was able to look at it with a more realistic view again. I also partly agree with you that sometimes a little more patience is required.

The question I ask myself in this context: When is the thesis broken? Is it at the first sign of weakness in the supporting numbers? After two bad quarters or after a disappointing year? In my experience, it’s very rare to have THAT ONE particular point where a story break’s - most of the time it goes in the wrong direction bit by bit. So isn’t it our extreme vigilance that protects us from disasters like Zoom/Upstart/Fastly…?

My conclusion is that it depends very much on which company is involved. Take a company like Crowdstrike, for example, which charges by user - such growth tends to be much more predictable. But it also means that it is important to react early if something goes the wrong way. On the other hand, I think it is ok to give usage based companies like Snowflake/Datadog/MongoDB more freedom. In the case of cyclical companies such as Nvidia, it is nonsense anyway to give too much weight to individual quarters.

Where I disagree with you:

I really don‘t see that - if that was the case, most of the portfolios would be 100% cash right now. When looking at the monthly portfolio reports, even the ones you mentioned, it seems the majority of the companies is still held. The companies missing like Upstart or Amplitude for example, surely have reasons to not being part of a concentrated portfolio anymore.

So why is the impact of changes in the portfolio‘s not visible? I think part of it is exactly that, a lot of the companies are still held. Another part of it is, companies which still execute well like Snowflake, Bill, Datadog, Zscaler, Cloudflare… were also more expensive in the early stages of the decline (we are not the only people recognizing quality). So even if one managed to pick the resilient companies and ditched the weak ones, there is just more room to fall in the short term.

And that‘s where I think this experiment is flawed - it‘s just comparing which companies DECLINED less THIS YEAR. In a period where very few really care about the ability to execute over the long run. But care much more about valuation and short term moves in interest rates.

Everything get‘s thrown out with the bath water… or something like that :wink:

Im sure, over the long term the best companies will be the best investments and that’s why it’s important to make sure we have them.

Jamin Ball wrote something on twitter yesterday which definitely supports that:

„Another interesting data point that struck me while compiling the Clouded Judgment year-end post – looking back at the top 10 multiples from the 2020, 2021, and now 2022 year-end post, there are 5 companies, which appear every 3 years:

Happy new year for you all! :fireworks:


Thanks, Silvio.

I find reviews like these worthwhile mostly as a way to check in on past thoughts. That why I’ve found writing recaps so valuable. One thing I’d note is my “stay put” returns would have been a lot worse if you would have used my October 31 UPST allocation of 24.6%. That’s not meant to make my numbers look any better. It’s only meant to show that endpoints and context always matter in exercises like these. I thought UPST’s thesis was broken, and in all honesty only had that smaller allocation because I had taxable shares I didn’t want to take the hit on (note to self: just take the frikkin’ hit when you no longer want to own the shares at all).

My other observation is a reminder of just how far ahead I let my MNDY allocation get from my conviction due to wanting to stay close to fully invested. It’s by far the worst I’ve ever managed an allocation size and my most expensive lesson ever.


Bear is absolutely right on this.

It’s totally valid to sell a company’s stock if you believe their quarterly performance is unexpectedly out of whack for their valuation…or if a narrative changed drastically…and it’s also perfectly fine to buy back in later if the price of the company falls to a point where your risk/reward calculus makes sense again.

It seems obvious to me (by ‘obvious’, I mean, a big painful lesson I learned from earlier in 2022) that if a company trades at forward NTM 30x P/S multiple and suddenly shows a drop in growth from 60% to 45% and guides for this new trend in the future, then dumping your shares in after hours before the market destroys the company’s stock price further over the next few days is very basic logic. The price is likely to crater until a new valuation multiple matches the new unexpected growth deceleration.

Blaming macro as an excuse to blindly hold is akin to burying your head in the sand - who cares the reason for slowdown?

Follow the numbers - if it becomes clear that NTM 30x P/S doesn’t make sense anymore, and 15x multiple now applies - sell first and can buy back in when the valuation is right.
For example, a couple days ago, I reentered DDOG, CRWD, ZS very near their 52wk lows, as I decided their valuations have largely been derisked enough for their projected growth slowdown - was it really that immoral to have saved myself substantially in the cost basis?

I also think selling by narratives changing, before seeing next quarter numbers, makes sense:

For example, suppose that tomorrow Jay Chaudhry or Slootman resigned for an unknown reason.
Do you want to sit around and wait to find out why this happened to ZS and SNOW? It can be very logical to get out asap, as the probability of future thesis breaking has increased.

Or, a short report comes out and you read it, some of the concerns raised is enough to spook you out- also makes sense to exit.


Bear, this is not an “analysis” by any means. It’s a little exercise that substantiated that – this year – you might have as well held your portfolio unchanged and would have gotten pretty much the same performance. Yes, I could have done this exercise for other years as well and gotten different results, as you pointed out for your 2021.

No doubt. I never said that selling is not important. What I’ve seen this year is that for many of us selling didn’t do any substantial good to the overall performance. This happened to me, that’s why I’m writing about an important lesson that I’ve learned: this year, selling has definitely not been crucial. And this made me think.

The paradox that I find difficult to explain is that all of our companies exceeded expectations, but not enough: the bar seems to be always too high. Not only that, most of them confirmed or increased their yearly guidance. I haven’t seen disasters that would make me run away at full speed. And I frankly don’t believe in the valuation narrative. Why now and not 18-24 months ago? It’s a big mystery to me.

Hard to say. I would try to answer the opposite question: when is the thesis NOT broken? Definitely not when a company grows at 45% instead of 55%; definitely not when they keep adding customers; definitely not when you see operating leverage kicking in and FCF generation; definitely not when top management stays at the helm and keeps executing.

To be sure. This is precisely the point: holding good businesses for the long term also means sometimes being capable of seeing beyond short term imperfections. And understanding the law of large numbers.

Absolutely, stocknovice. My little exercise just took the last available data point (this November’s numbers) vs. a year ago. But I agree that depending on where you start, numbers can be radically different.

I tend to agree with you on this, but the thing is, if valuation really matters, it should have also mattered 2 years ago, or just 18 months ago. But it didn’t. We were all buying SNOW at 100x revenues. And now, at 20x+, people say it’s still expensive. This logic cannot be valid only in bear markets. In general, I do not buy the valuation narrative. If I did, I would never have entered these stocks in the first place.

Hard to say what makes sense. I think we are all trying to give ourselves some benchmarks to base our reasoning off of, but are they correct? On the basis of what? At the end of the day, we all made the same mistakes with Upstart, Zoom and Fastly. But in these cases, it’s been kind of “easy” to see that the thesis had broken. It’s not as easy, to me, when there’s a simple slowdown that can happen for different reasons.

Absolutely agree. But these are “serious”, big reasons, and I have no problem to run away as fast as i can from the company if something like this happens.


I think I wasn’t clear on what I meant. Valuation has always mattered, even during the bubble mania in 2020 to 2021.

Let’s not even look during that period. Let’s look at pre COVID, during 2019.

ZScaler reported earnings result in September 11, 2019 for 32% billings growth. Only one quarter prior, they had reported 55% billings growth.

The stock on Sept 10, was not priced for this unexpectedly huge deceleration! It was overvalued as the market did not think growth would fall off a cliff - the right move on Sept 11, afterhours, was to dump out of ZS immediately upon seeing that print and cut your losses. (The stock price dropped -32% from Sep 10 to Oct 23)

What makes investing hard is you have to determine the cutoffs for yourself, there is no crystal ball on what the market is thinking. You do your best to decide what valuation is appropriate for a certain level of reported growth/profitability, ahead of time, so you know how you should react


Until now it‘s mostly about multiple compression and fear. Everything from bonds to stocks got sold off this year. Such rare events take all companies down, regardless of fundamentals - only possibility to avoid that, is going to cash in December 21. The conclusion to hold on to weak companies like Upstart/Amplitude/… because it didn‘t change a lot THIS YEAR is not logical to me. In fact, I think it is exactly the time where it’s most important to pick the best companies - when else do you have the chance to buy fantastic companies at good prices?

To follow the numbers is the most important factor in finding these companies imo. Im just not good enough in figuring out if CRWD has just a short term issue or if it’s more of a secular slowdown. I think highly of the management, so I still hold a very small position to see how it goes. If this means to trim/sell a little to early in some instances - so be it.



I agree absolutely with Bear on this!

Getting out of stocks like Zoom, Docusign, Upstart, ZoomInfo, and many others when the situation called for it, were absolutely crucial to getting the kind of long term results that I have achieved.

It isn’t just picking the right stocks, but having the courage to change your mind when the evidence points to it, that is the key to successful investing.



If anything, I think your results have shown that active management will be even more crucial in the upcoming recovery.

Let me explain.

Like you, my 1st level thinking from your results is that in this bear market, active management was not rewarded. However, I don’t think we should stop there based on 1 year’s data and conclude a more passive approach would be better.

Yes, regardless of company quality, everything was punished indiscriminately by the bear. However, I think this is actually great going forward! It means we get to buy great companies at similarly beaten down levels to the crap companies. This would leave more runway for stock prices of great companies to recover when the upturn inevitably happens.

To illustrate, let’s say we all agree that at 2021’s ATH, stocks were over-valued across the board. And say we have 2 companies: Weaker Co is fundamentally weaker than Stronger Co. If Weaker Co’s share price had fallen 80% while Stronger Co had fallen 20%, I’d be thinking Weaker Co could deserve a place in my portfolio, simply because it was now much cheaper and had a longer price recovery runway.

On the other hand, Stronger Co’s stock price would have a lot less room to grow before becoming over valued again. The price-quality trade-off for both could make it difficult for me to choose between the two.

But that’s not the situation we have now! Now that both companies have been beaten down to similar levels, what reason do I have to stick with Weaker Co?

I’d want to position my portfolio in the best companies in order to make the most of the recovery! Wouldn’t you?

Follow me @CompoundingCed in Twitter for more sharing.