Saul’s Westport story in OODA loop terms:
O - Observe: Westport is losing money
O - Orient: Westport can’t make money
D - Decide: Sell this loser
A - Act: Place the sell order
Denny Schlesinger
Gosh, it’s so simple! LOL
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Saul, I remember these posts well. If I’m not mistaken, was this where you also published your yearly results for everyone to see. When you posted these, my honest reaction was this guy is fabricating. No way anyone could have those results!
Of course, I took your advice and sold Westport(thank you again), and low and behold found this board some time later.
I’m still not able to fully understand companies financials as well as you do. Still learning. Still very grateful.
Scott
The point of this anecdotal post is what exactly? To gloat? TMF picked a loser… So what? It’s the overall track record that matters. In major league baseball hitters strike out, pitchers walk in the winning run. Humility in all things.
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The point of this anecdotal post is what exactly? To gloat? TMF picked a loser… So what? It’s the overall track record that matters. In major league baseball hitters strike out, pitchers walk in the winning run. Humility in all things.
The point is to look at the company and see if it can make a profit. And find out how much that profit is worth.
It is also warning against price anchoring. If you can’t pick that up, you might want to consider moving to all cash and keep studying until you understand it.
Cheers
Qazulight
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The point of this anecdotal post is what exactly? To gloat?
To teach?
Denny Schlesinger
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The point of this anecdotal post is what exactly? To gloat? TMF picked a loser… So what? It’s the overall track record that matters. In major league baseball hitters strike out, pitchers walk in the winning run. Humility in all things.
The point of this post was to re-visit a situation and some posts from a few years back that apparently provided some of the impetus for the creation of this board…which was sparked by the post linked below from MisterSideshow yesterday as a response in Saul’s monthly summary thread.
http://discussion.fool.com/my-portfolio-at-the-end-of-mar-2018-3…
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I think that your analogy is a great one RoyGeeBiv, the part about the hitter I mean. The point you are inquiring about is also defined by your analogy, with good coaching the number of strikeouts is lessened don’t you think. Don’t get mad at the coach for illustrating things you shouldn’t be doing while teaching you the things that you should be doing.
LF
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I forgot to say “Thanks Saul” for sharing and for teaching, and thanks to all the other sages on this board also.
LF
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The point of this anecdotal post is what exactly? To gloat? TMF picked a loser… So what? It’s the overall track record that matters. In major league baseball hitters strike out, pitchers walk in the winning run. Humility in all things.
I found this Westport post is one of the best to learn why some company cannot be invested in. I saved it so I can read it again in the future as a reminder. If you cannot see the value, at least show a little gratitude not just complaining.
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There’s always someone who picked the winning playoff bracket, but having done so, their methodology is no better than “chance”.
With that in mind, the question of what was there to be learned through this pick would be best addressed by TMF. None of us know the motivation that kept this pick in the portfolio.
Happy Easter!
With that in mind, the question of what was there to be learned through this pick would be best addressed by TMF. None of us know the motivation that kept this pick in the portfolio.
I disagree. Saul’s analysis is a perfect example of how to check for the downside. Why TMF kept it is irrelevant.
BTW, I too followed Westport as at the time I was invested in alternative fuels. The story was compelling but not enough to make me buy WPRT. I’m not sure why not. Saul, by contrast, has a very good analysis to back his decision. I went by instinct, not nearly as good.
Denny Schlesinger
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“None of us know the motivation that kept this pick in the portfolio.”
Precisely. Many of us who owned it new why we bought it: because it was in the SA portfolio. If those of us who owned it didn’t know TMFs motivation for KEEPING it, why would we continue to hold it?
And the WPRT story wasn’t anecdotal. Anecdote can’t be supported by research or facts. I suggest you look at Saul’s monthly summaries since the inception of this board and reconsider.
Cosmid
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I remember the wprt warning and when you were in psix.
Luckily I listened to you and got out
Would Love it if we could compare one of our new companies that’s not yet profitable and show how to differentiate the numbers. Basically simply explain how we see a good company that isn’t yet profitable and it’s road to profitability
Like shop, ayx, etc.
higher growth rate, higher gross margins, fcf, etc.
I still don’t feel like I can understand how to value these companies…
Maybe this is already posted…
I’ll keep reading
Thanks
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Would love it if you could compare one of our new companies that’s not yet profitable to Westport, and show how [it’s different]. Basically simply explain how we see a good company that isn’t yet profitable and it’s road to profitability. Like shop, ayx, etc. Higher growth rate, higher gross margins, fcf, etc.
Great question, MusiCali
First Westport, at the time was losing 106% of revenue. They were making big pieces of machinery (hardware) with 27% gross margin (they kept 27% of what they sold to run the business with, which didn’t come anywhere close) They had no recurring revenue and little in the way of sure orders. They were hoping for 30% revenue growth.
Now Shopify, last year, looking at GAAP, they were losing 6% of revenue (not 106%!!!). They were selling software mostly, and on subscription, with 56% gross margins (they kept 56% of what they sold to run the business with, which came within 6% of covering it according to GAAP). Their subscription revenue was recurring, the revenue they get as a little cut of merchant sales couldn’t be counted as recurring, but in reality most of it is. Their revenue growth was 73% last year. That’s the conservative presentation. In reality (non-GAAP), they actually made a profit of 2% of revenue last year, up from a loss of about 1% of revenue the year before.
Now Alteryx, is an even better story in some ways. Last quarter results they had a GAAP loss of just 5% of revenue (not 106%!!!). They were selling software mostly, and on subscription, with 84% gross margins (they kept 84% of what they sold to run the business with, which came within 5% of covering it according to GAAP). Their subscription revenue was all recurring and they had a net retention rate of 131% (which means last years customers spent 31% more this year than last year, so revenue was up 31% before they even got a single new customer). Their revenue growth was up 55%. Their operating cash flow was 14% of revenue!!! That’s the conservative presentation. In reality (non-GAAP), they actually made a profit of 3.6% of revenue last quarter, up from a loss of about 20% of revenue the year before. Wow, maybe I should go out and buy some more! Oh wait! It’s my biggest position already!
Best,
Saul
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Basically simply explain how we see a good company that isn’t yet profitable and it’s road to profitability
MusiCali, Financial Statements were created to allow owners to manage their business. Investors should know how to read and interpret them. All we need is the Big Picture and that is quite simple. Keeping things simple, we only need to look at two of them,
The Statement of Profit and Loss which shows how the business digests revenue. Very simply
**Concept Dollars Margin**
Revenue 1,000,000 100%
Less Cost of Revenue 700,000 70%
Gross Profit (or loss) 300,000 30% - Gross
Less Operating Expenses 200,000 20%
Operating Profit (or loss) 100,000 10% - Operating
Plus or (Minus) Other Stuff (20,000)
Net Profit (or loss) 80,000 8% - Net
Number of Shares Outstanding 2,000,000
Earnings per Share $0.25
One statement in isolation does not tell you much but if you look at a series of them it’s like looking at a movie, you see where they came from and where they are going. For me the most relevant questions are how much of the revenue gets converted into profit and whether cost and expenses are growing faster or slower than revenue. If you get this far, you already have a passing grade. This information is available in the SEC filings 10-Q (quarterly) and 10-K (annual).
Saul’s analysis of Westport was entirely based on the Statement of Profit and Loss, their costs and expenses were so high that they could never get to profitability. Go back and read his reasoning, it’s a look at a P&L statement and then a look at a series of them with a projection into the future.
The Balance Sheet is a snapshot of the business consisting of three parts
**Assets**
Current assets 2,000,000 - Cash or convertible into cash in one year or less
Fixed assets 8,000,000
Total Assets 10,000,000 - what the business owns
Less **Liabilities**
Current liabilities 3,000,000 - payable within one year
Long Term Liabilities 5,000,000
Total Liabilities 8,000,000 - what the business owes
**Capital** 2,000,000 - the net worth of the business
What to look for is if the assets are real or imaginary (Goodwill) and whether the liabilities are reasonable for the business or is it likely to go bust. Also look for a balance between current assets and current liabilities to asses whether the business will have the funds to pay for expenses. That’s it! There are certain other ratios that are interesting but not too important for investors, we just want to be sure the business will be around another day to do business.
If you master the above you are probably in the top ten or twenty percent of investors ranked by understanding of accounting. If you dig much deeper you are probably wasting your time, we are not running the business!
Denny Schlesinger
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Did nobody notice?
Net Profit (or loss) 80,000 8% - Net
Number of Shares Outstanding 2,000,000
Earnings per Share $0.25 <-- ??? 80,000/2,000,000 = .04!
Denny Schlesinger
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Wow That’s really Awesone Denny
Thank you so much for the lesson.
I will print this out and refer back to it 
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MusiCali, I hope it’s useful for you. I often thank my boss at NCR, Mr. Tulio Hansen, for making me learn accounting. I studied by correspondence with a university extension course. Today you can probably find online courses. But keep it simple!
I used to think that accounting was really boring because I was confusing it with double entry bookkeeping. Accounting is actually very creative and it gives you fantastic insights into how businesses work. That’s what it was designed to do.
Denny Schlesinger
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Thanks Denny for your post, and MusiCali for asking the question. This has helped with my understaning what is important when assessing a company’s financials.
Grateful for all contributors to these boards!
DM
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we are not running the business!
How true . . . Most people think that keeping two sets of books can only mean that the company is doing something shady. In some cases that is most likely true. But the simple fact of the matter is that most large companies and many mid-size companies keep multiple sets of books. The GAAP books and proforma statements are the ones presented to financial institutions and investors not just due to legal requirements (for publicly traded companies) but because they set out the companies financial performance and position in a consistent manner which makes the company understandable to the financial community.
There are generally multiple sets of “books” or internal financial reports which are used by management, industrial engineers, business analysts and a host of others that help improve the operations of the company. They are used to look for production bottlenecks, inefficiencies, waste, etc. These “books” are not revealed to the public. They serve as the basis for resource allocation and internal investments.
Financial analysts would probably make all kinds of erudite “reports” to the investment community if they had access to these books - fortunately for us all, they generally do not get to see them. If you think folks like Andrew Left who fabricate a short thesis on sketchy information are somewhat dishonest with the way the handle information at present, you have know idea of what they might make of the internal documents by cherry picking specific items out of these documents.