Apologies, I should have added this to my 2022 end of year write-up. However, I was thinking about how much I learned in 2021, even though my returns weren’t as great as I had hoped. I thought it would be important for me to write down what I learned (and in some cases relearned). This is not meant to be about the philosophy of investing, it’s about our companies and getting better. The advice below is written to myself, however, some of it may ring true for others.
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Keep it concentrated - In the first few months of 2021, I held too many stocks. I held 14 in January and 16 in February. I think it was party due to the fact that I was still getting used to the Saul Method and I had come down so far from 30-40 stocks that it made me feel comfortable to hold more than 10. I think this is a mistake. a) it’s hard to keep track of more than 10 or so stocks and b) too many small positions isn’t beneficial if you have strong conviction in your favorites
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Always remember to hold companies that are accelerating or at least maintaining their growth as your highest conviction positions. I kept Crowdstrike as a top pick for a lot of the year even though their growth was slowing. They kept signing new gov’t agreements and the cybersecurity space was getting a ton of attention. However, the reality was growth slowed significantly form the 80’s to the 60’s and Mr. Market rewarded them with a 2% return for the year. One can’t expect a high grower to stay in the 80’s forever but it was clear Crowdstrike wasn’t “surprising” the market with it’s reports whereas Datadog’s accelerating growth and Net’s TAM expansion and steady growth got the market’s attention. Will Crowdstrike re-accelerate and will the market appreciate it’s growing cashing flows? I don’t know, but show me the numbers first, and then I’ll reconsider.
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Keep it SaaS-y I started the year with way too much non-SaaS. It’s been repeated a million times lately but non-SaaS is hard to predict. Consumer facing is unpredictable. Remember to keep it small! Widgets suck -TheStockNovice I won’t apologize for holding Etsy (a 400%+ gain) or Sea Limited (a 400%+ gain). However, I had no business owning so much non-SaaS early in the year (MELI, ROKU, SQ, ETSY, PTON, TTD, FVRR, FUBO). Geez, what was I thinking? Keep at least 70% or more of your portfolio in SaaS or SaaS-adjacent stocks.
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Stay away from murky stories. Lightspeed was case in point. I knew it had a lot of COVID risk as well as acquisition risk. Then came the short attack and I thought it was a great time to up my position from 8% to 12.5%. This turned out to be a big mistake as the growth fell apart and the stock tanked 30% after earnings. Why go to 12.5% on a murky story in the midst of a short attack? There’s no reason for it. A more appropriate position would have been 5-8% going into earnings or better yet, selling, because the story was too complicated and there were other clearer stories to profit from. I hate companies with too many acquisitions, I hate adtech, I hate healthcare, insurance, and I certainly hate any company with high regulatory risk or one who is in the midst of a short-attack.
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Don’t fear the TAM expansion. I cut way back on Cloudflare in Sept as it was getting “overvalued” but I didn’t ask myself Why? Well, it is creating the 4th public cloud, challenging AWS, and generating a ton of innovation in speed and security on the edge. I cut at the wrong time and it cost me. Mr. Market was rewarding Cloudflare while I was calling it overvalued. As Saul Says, “don’t ever sell because a stock goes up.”
-FoolishJeff
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FoolishJeff,
The one concept I have had difficulty with is #5 in trying to compare results from Cloudflare and Crowdstrike. In my opinion both companies had significant possible TAM expansion in 2021. Also, neither company showed any change in revenue based on this TAM expansion. How do you look at the TAM expansion for Crowdstrike vs Cloudflare?
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At the risk of posting on an off topic thread ( and probably taking some shots from those who will disagree), I also take a little issue with your lessons learned. I won’t disagree with most of it because they are fair points and certainly agree with the consensus of the board here, but I do think it is dangerous to learn long term lessons from short term results.
Specifically, it appears you are using the short term stock price movements to determine what mistakes were made. On the surface, that certainly seems fair. After all, stock price increases are definitely what we all want to see. But sometimes the market moves in mysterious ways. As you say, Crowdstrike has definitely slowed down its growth rate, but that is to be expected at some point and if earnings and free cash flow continue to grow rapidly as they are, maybe that is not all bad.
Conversely, Cloudflare revenues haven’t really increased and earnings aren’t dramatically improving because they have many growth irons in the fire. I am good with that, but it feels like with NET, the stock price increase drove the thought process that TAM was increasing around here, not the other way around. It may just be that the market got too excited about net. And that today’s price, which is right where it was before the meteoric rise, is more appropriate than the price from two months ago.
Truthfully, if I took a lesson from NET, it would be that when the price doubles and I really can’t find a good reason why, I should sell part, not try to find a reason to convince myself to stay. But to be clear, I didn’t really sell any either.
In any event, I am really not saying anything about any specific stock. I am saying don’t use very short term price movements to learn long term lessons. Otherwise you might use the last couple of months of price down draft to decide SAAS is a bad place to invest!
And to be very clear, I am definitely not saying that!!!
Randy
Long CRWD and NET (and trying to decide if and when I should start adding to these positions in this crazy market).
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Thanks for the responses. In my opinion, it was pretty clear. Crowdstrike was up 2% last year while NET was up 152%. That is a long enough time frame to make a delineation, in my opinion. It’s also a net difference of 150%, which is a lot if you are holding a Saul Style Portfolio of 10 or so stocks. It wasn’t just “short term price” movements.
-NET was viewed as a company that is building the 4th public cloud and challenging AWS. The IaaS market is roughly 64B and growing, according to Gartner.
-Crowdstrike added new products and expanded it’s TAM but nothing on the scale that NET did. It’s growth also slowed significantly, from the 80’s to the 60’s.
Hindsight is 20/20 but I believe that my #2 is a valid point.
-FoolishJeff, Long NET (9%), Long CRWD (1%)
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Hi Jeff,
Just to clean up the conversation and then hopefully end it.
I was never trying to argue that NET is not better than CRWD. I also wasn’t arguing that your second lesson learned wasn’t correct. I was disagreeing just a bit with the 5th one on TAM. And I am okay with stating that TAM is an important part of the conversation. But it struck a chord with me when you used NET as an example, and said you shouldn’t have sold any when the market took it up because the TAM was expanding.
My perspective was that nobody was really talking about NET’s TAM expanding any more than our other SAAS stocks until it started to sky rocket for no apparent reasons in late August/ early September. Again, from my perspective it felt like everyone was watching this go straight up and was asking why and then decided well, the market has decided that it’s TAM is getting much bigger and the price increase is clearly justified.
Maybe it is just me, but this feels much different than what is normally espoused in this board. There weren’t any quarterly numbers to justify this, no increasing revenue growth, it felt as if the only justification came from the stock price itself. And that my friend, is self-fulling. Similarly, I don’t use the stock price drops in almost all the SAAS companies as evidence that the market now knows they aren’t good companies anymore.
Stock price change should be validation, not cause. Otherwise you end up in a dot com era discussion and just buy what is going up.
And for one year. Yes it is a good time frame and if the company is improving as fast as the stock price, I am all in. If not, you might as well buy AMC, it is up about 1000% in the past year!
JUST KIDDING, please no replies that I am comparing NET to AMC.
Randy
Long NET and CRWD, but no position in AMC.
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