Why I was wrong to sell TWTR back in April

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I sold my fairly large holding in TWTR back in April. One main reason I gave at the time was the slowing growth:

Lastly, I sold out of Twitter. This was a tough one for me. I was hoping they would have a good Q1 and guide high for Q2. Instead, they are really struggling. Q2 especially is looking dismal. The growth story is just off here, and I’m out until I see signs it might resume.

The problem is, the slowing growth was already priced in when I sold. So the question simply becomes either:

  1. What’s the next catalyst for this company and stock?
    or
  2. Does this company have a greater value than the market is currently assigning to it?

I don’t believe I can reliably answer the first question. It turns out a buyout rumor made Twitter’s stock jump 20% last week. But that’s just one way the stock can be affected short term. A new source of revenue can make sales grow again. The profitability situation could be improved by cost cutting. There’s really no way to predict what will happen out of the many things that could happen. I think trying to answer question number 2 is a lot better way to make money in the stock market. Perhaps I would have had to end up holding Twitter for years before it made a huge move up. And sure, I’d rather the stock price grow at a steady 25% pace instead of, say, being flat for 2 years and then the stock suddenly doubling…but that’s just not how the market works. You just have to put your money where you see value.

And I did believe Twitter was undervalued. I just didn’t have a great idea of what was going to happen next. But I saw massive potential for a company whose market cap was down around 11 or 12B. I looked at FB at 300B or whatever. I agreed that there is a huge difference between the two major social sites. But, I argued, was FB really worth 25-30 Twitters?

I think it’s important to note that this wasn’t a situation like INFN where the market was still expecting a lot of growth, which leaves the company in a precarious position when the earnings are reported. The main reason I actually sold was the already lowered guidance – but that’s exactly the reason it was so cheap: a company like this is going to hit some road bumps as it figures out different ways to make money. I was so focused on the model they had been using and how well it worked for a while, that I couldn’t see that even if they have to pivot completely (which apparently they are having to do), this is still a HUGE opportunity.

Anyway, TWTR is up more than 40% since I sold. But that’s not why I was wrong to sell. I also sold AHGP in April. It just so happens to be up 40% or so too. However, I don’t think I was wrong to sell it. I still don’t know what to think of the company long term. It’s not a product or market I understand, and I am happy not having to follow it. I sold TWTR because I couldn’t see the short term. I sold AHGP because I couldn’t imagine the long term (still can’t).

Long story short, I now see that you simply can’t predict what a stock will do short term. Even a company (rather than its stock) can have short term fluctuations (like SKX for example) that make it unclear what will happen in the short term. But if you believe that:

a) the company is worth more than it’s selling for
and
b) the company will continue to be relevant more and more as the months and years go on

…then you’re probably looking in the right place. Even if you have to hold a while before anything good happens. Twitter didn’t seem like a phenomenal value based on fundamentals, but based on potential it was a steal at < 12B. I knew it, but I let it slip.

The question now is, what kind of a bargain is it at 20B? I will be pondering that the next few days/weeks.

Live and learn,
Bear

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The problem is, the slowing growth was already priced in when I sold. So the question simply becomes either:

1. What’s the next catalyst for this company and stock?
or
2. Does this company have a greater value than the market is currently assigning to it?

Bear, please don’t take this post as a criticism but as a lesson. Please look at this three years TWTR chart

http://softwaretimes.com/pics/twtr-09-28-2016.gif

I don’t know when you bought it but it was either a falling knife or a bear trap at the time. One should simply not buy falling stocks (falling knives) until they base and start to rebound. It could still be a bear trap, one is never entirely safe. But one thing seems clear, you managed to pick a bottom to sell. The literature is full of articles pointing out this kind of capitulation sale. This tells me that the “simple question” you are posing is the wrong question – your trading strategy needs improvement.

Ben Graham said that short term the market is a voting machine and long term it is a weighing machine. The valuation you are trying to deduce takes a long time to get into the stock price. If you like the stock (I don’t happen to like Twitter), put it on your wish list but use technical analysis (TA - voting machine) to trade it.

There is a difficult choice one has to make after one buys a stock, a difficulty that does not exist before you buy it: “to sell or not to sell.” It would seem that your decision to sell came too late, in other words sell sooner or not at all (provided you still like the company and you seem to like Twitter). One of Saul’s criticism of TMF’s 3D printing strategy was not selling.

http://softwaretimes.com/pics/ddd-09-28-2016.gif

It might apply to Skechers as well

http://softwaretimes.com/pics/skx-09-28-2016.gif

Just because you like a company and it’s products is not reason enough to buy the stock but if you do, then TMF’s hold strategy tries to avoid capitulation sales. A novice would be between Saul’s quick trigger and TMF’s slow trigger.

I have two such cases in my portfolio right now CLB and NVO, two great companies. Core Labs (CLB) has been basing for over a year and a half and it is inline with the bottom of the oil cycle. I don’t have a problem holding despite being under water, patience grasshopper!

http://softwaretimes.com/pics/clb-09-28-2016.gif

Novo Nordisk (NVO) is a much more difficult choice, it is a falling knife! Selling now is a 13.5% loss for me. Holding on, who knows? Franky I’m struggling with this one.

http://softwaretimes.com/pics/nvo-09-28-2016.gif

From a TA point of view, there is strong support at 42 (besides that’s the magic number of A Hitchhiker’s Guide to the Galaxy). I should sell if NVO falls below 42. The Klein chart more or less agrees. Once it rebounds, buy it back.

http://invest.kleinnet.com/bmw1/stats16/NVO.html

I hope this helps.

Denny Schlesinger

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A little more about why I like TWTR

I realize I threw off a lot of conclusions about my sale of TWTR without explaining exactly why I like it as an investment. I’ve gone into that more in the past and won’t completely rehash it here, but suffice to say:

Twitter’s 300M monthly/daily/whatever active users are a crazy valuable asset. Many of them are deeply engaged with the platform and tweet several times per day (or more). Many have friends (networks) that use it and make the platform even more sticky. Just to put this in perspective, this is about 1/5 of the size of Facebook’s user base. When you realize that Facebook’s base is close to a quarter of the world’s population, a fifth of that action sounds pretty reasonable. And TWTR isn’t like Trip Advisor or something where you can use it when you need it and then not return to the site for months until you need it again. (TRIP is valued around 10B btw.) No, TWTR users are constantly engaged. Not everyone uses it (yet) – but those who do are hooked.

I sold because I couldn’t see the fundamental justification for its valuation. I’ll even cut myself a little slack because it does seems like shares are being diluted too quickly for comfort. But even so, I never had any fears that the long term value is there – I just thought it could be years before the stock saw significant appreciation.

I now see this the same way I see SKX. It may not jump this quarter or next. But:

  1. the business is solid and growth is there,
  2. and the systemic risks are few,
  3. and the price is cheap.

That’s really all you need to know to hold for the long term. It’s hard to find all that. You can say 1 and 2 about SBUX or UA…but not 3. Not even close. SKX (and TWTR, at least when it was at a mkt cap around 11-12B) were long term bargains. They just don’t come along too often.

SEDG is pretty close to meeting all 3 criteria, but with more risk.

SHOP definitely meets 1 and 2, but isn’t patently cheap. Although I still think it’s a great bargain. It’s in a somewhat different category, like AMZN. But SHOP has more risk than TWTR or SKX just by virtue of size and scope (measured by the business, not the market cap) if nothing else.

Like I said, it’s hard to find stocks that meet all three criteria.

Anyway, these are fairly scattered thoughts but I just wanted to throw them out there.

In which Technical Analysis is utter hogwash

Once it rebounds, buy it back.

Denny, thanks for the reply. You definitely gave me something to think and write about today.

The problem with adding TA to your fundamentals-based (or “quality businesses” -based, if you prefer) investing strategy is that TA doesn’t actually add anything. It doesn’t predict what will happen next. It only tells you about the momentum – which is predictive right up until the moment when it isn’t.

You say to wait until the stock rebounds to buy it back. But just because it rebounded doesn’t tell you anything about where it will go next. Maybe you get in at a “new peak” or whatever. How can TA help with that?

I challenge you to actually use TA to make a series of predictions on individual stocks you feel are appropriate for this board (maybe even Saul stocks) and post them here so we can track your progress.

Bear

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Twitter’s 300M monthly/daily/whatever active users are a crazy valuable asset. Many of them are deeply engaged with the platform and tweet several times per day (or more). Many have friends (networks) that use it and make the platform even more sticky. Just to put this in perspective, this is about 1/5 of the size of Facebook’s user base. When you realize that Facebook’s base is close to a quarter of the world’s population, a fifth of that action sounds pretty reasonable. And TWTR isn’t like Trip Advisor or something where you can use it when you need it and then not return to the site for months until you need it again. (TRIP is valued around 10B btw.) No, TWTR users are constantly engaged. Not everyone uses it (yet) – but those who do are hooked.

Dear Bear,

Do you have any links to cite the level of Twitter user engagement? I use Twitter quite a bit but don’t see it on the level of Facebook. I use it more of a news feed, the discussions I read turn into mostly shouting matches. User growth has been lagging and it seems the way the current platform is it is hard to monetize.

Of course like you mentioned there is still a big user base, 100 M Dailys and 300+ M Monthlies - so there can be many levers that can be tried to spice things up.

I really want to invest in TWTR but I don’t see it, I really don’t. Please enlighten me!

Sincerely,
Charlie

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Charlie,

I completely understand why anyone would pass on this. Warren Buffett absolutely would. There’s no way to know what Twitter is worth, or even what their eventual business model will be. They’ve recently delved into streaming things that have traditionally been on network TV. Will that work out? How will they monetize it? What will their margins be? What will EPS be over the next few years? I have no idea.

Of course Twitter isn’t worth what FB is. Maybe it never will be. Is it even worth 1/5 what FB is? Who knows. But 1/5 would be 70B, which is not extremely close to 12B.

I guess what I’ve been trying to say is that even if there’s no comparison to FB, there’s STILL plenty of room for TWTR to appreciate.

Is TWTR a slam dunk at 20B? Not to me. But it was at 12B.

That was 8B dollars ago. Missed it. But if you think it’s worth 70B, or 40B, there’s still time to buy. That’s what we have to decide now.

Not trying to oversimplify, but it’s a partial information game we’re playing.

Bear

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I sold my TWTR yesterday from $15.07 cost basis. From reports I have heard the bidding process would be perhaps in 30-45 days before any bids come in. I do think it is a valuable property but with it current lack of progress in monetizing it’s platform I question how much bidders will pay. So I took about $8.50 gain and ran. If it should pullback to the $18 area I would revisit the name. A lot can happen in the next 45 days.

Rob

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That was 8B dollars ago. Missed it. But if you think it’s worth 70B, or 40B, there’s still time to buy. That’s what we have to decide now.

Not trying to oversimplify, but it’s a partial information game we’re playing.

Ah, gotcha Paul. I use Twitter quite a bit to follow investment news, sports and other interests so I’m always poking around to see if TWTR was indeed ripe for investing. You are correct at 11-12B it was a good deal, although I’m not sure without the buyout rumors it wouldn’t be near those levels (but then again there does seem to be real interest so that should increase the value of the company).

One risk I think with Twitter is buyout risk! We saw it with LinkedIn. Many bought above levels of the MSFT purchase price. If I am taking a risk on a company like TWTR I want high reward! That can’t happen if TWTR gets bought out at $28.

Sincerely,
Charlie

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I challenge you to actually use TA to make a series of predictions on individual stocks you feel are appropriate for this board (maybe even Saul stocks) and post them here so we can track your progress.

Bear

I decline this challenge because you cannot predict the future.

The problem with adding TA to your fundamentals-based (or “quality businesses” -based, if you prefer) investing strategy is that TA doesn’t actually add anything.

I agree that it does not change the valuation of the stock, that’s a job for fundamental analysis.

It doesn’t predict what will happen next. It only tells you about the momentum – which is predictive right up until the moment when it isn’t.

momentum
noun
1 Physics the quantity of motion of a moving body, measured as a product of its mass and velocity.

Momentum is a poor word to use in this context because prices don’t act like bodies with mass. Price has velocity but no mass although some people like to think that volume acts like mass does.

The intrinsic value of a company and its stock do not change from trade to trade and even if they did, the information would not reach the traders in time to act on it. There is something else creating the wiggles. It’s supply and demand. It’s bid and ask.

I do not subscribe to traditional charting but charts do reveal information about the market if you know how to interpret the charts. I’m not saying it gives you certainty, it surely doesn’t, but it helps to improve the odds.

JP Morgan knew a thing or two about markets and when asked what the market would do he replied: “It will fluctuate.” This is the “Law of Markets.” I have used it to make money in the market. You find a concept you like but which is not making money. It’s best if the concept has little following but sufficient that there is enough volume to act on it. A flatlining stock is perfect for this. The idea is to accumulate shares without investing too much money. The procedure is quite simple and it works best with low prices shares. You buy some shares. If it goes down you buy more, if it goes up you take some profits. Let’s say you bought 1000 shares at a dollar each. If it goes to $1.10 you sell 900 shares ($990) and keep 100 shares almost for free (10¢ each excluding commissions and taxes). Rinse, repeat. I’ve done this with several stocks and one paid off in spades after four and a half years. I started buying KNDI on December 1, 2010 and cashed out on May 13, 2015 for an IRR of 43%. I left over half on the table because I did not cash out at the top. The business still looked like it had tremendous potential but when the rubber hit the pavement it didn’t quite work as expected, time to get out.

This was a case of liking the concept (FA) and then just playing the price. It works because prices fluctuate! But it works best on flat liners that trade in a range and not at all on falling knives.

http://softwaretimes.com/pics/kndi-09-28-2016.gif

October 31, 2010
Investing: Kandi Technologies, Corp. (KNDI)

http://softwaretimes.com/files/investing+kandi+technologi.ht…

You might want to read The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot

https://www.amazon.com/Misbehavior-Markets-Fractal-Financial…

Prices are not as random as people think they are, Mandelbrot says they have memory. BTW, Mandelbrot is one of Nassim Nicholas Taleb’s heroes.

Denny Schlesinger

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Denny,

These two statements are not logically compatible:

…you cannot predict the future.

I’m not saying it gives you certainty, it surely doesn’t, but it helps to improve the odds.

What are we doing if not trying to predict the future? What odds do you want to improve if not the odds that the stocks you pick will do well? We both know you can reliably predict certain things about the future. Examples:

  1. Most days the small cap index will move up or down a greater percentage than the treasury bill rate.

  2. AT&T will be less volatile than Lending Club.

  3. The S&P will do better over the next 30 years than an inverse S&P.

But I don’t think you can predict what a stock will do in the short run. You seem to think you can use TA to tell you when to buy or sell. Care to try? Pick any stock, and make a specific prediction based on TA and we’ll see how it goes. If you can’t do that you’re just a Monday morning quarterback and TA is hogwash, as I said.

Bear

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These two statements are not logically compatible:

…you cannot predict the future.

I’m not saying it gives you certainty, it surely doesn’t, but it helps to improve the odds.

They are perfectly compatible and we use it to run businesses like insurance and gambling casinos. You don’t know when any one will die or when a house will burn down but actuaries can and do compute the odds which work based on the law of large numbers. Granted that looking at charts is less precise than actuarial science but it’s not hogwash. If you’re not interested, just say so.

You seem to think you can use TA to tell you when to buy or sell. Care to try? Pick any stock, and make a specific prediction based on TA and we’ll see how it goes. If you can’t do that you’re just a Monday morning quarterback and TA is hogwash, as I said.

In my first post in this thread I pointed out two of my stocks that are underwater. Cleary I’m not claiming infallibility so don’t say that this is what I claim. As for “you’re just a Monday morning quarterback and TA is hogwash” a little politeness on your part would not hurt. Try it!

Denny Schlesinger

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Denny,

I apologize for being crass. I was impolite. I admit that what started as an ill-conceived crusade against technical analysis (which I will now drop lest I stoke Saul’s ire, although I still think is hogwash until someone shows me otherwise, but everyone is entitled to their opinion) deteriorated into frustration with your reluctance to commit to something concrete. Let me try again to make my point, though this time hopefully more graciously:

If you’re not willing to assert something that it is possible to verify or disprove, please don’t give me advice.

Bear

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Bear:

Apology accepted and I bear no ill feelings about this, one does get a bit hot under the collar from time to time. Thanks.

If you’re not willing to assert something that it is possible to verify or disprove, please don’t give me advice.

I know of no proof that would satisfy your requirement. I’ll certainly respect your wishes about giving advice of this kind. Sorry to have upset you.

Denny Schlesinger

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“The question now is, what kind of a bargain is it at 20B? I will be pondering that the next few days/weeks.”

Well now it is back to 12B. I took advantage of today’s sale and established a position at 17.21. I dont think you can go wrong at this price.

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“Well now it is back to 12B. I took advantage of today’s sale and established a position at 17.21. I dont think you can go wrong at this price.”

What is your basis for stating you don’t think you can go wrong at this price?

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What is your basis for stating you don’t think you can go wrong at this price?

Hi Speedy,
It’s thoughts like that which illustrate the KnowledgeBase Excerpt #4 that I posted a couple of days ago, where I described how investors who were in WPRT at $32 thought it was an incredible bargain at $16, but now it’s at $1.60. It shows how hard it is emotionally to avoid buying and buying all the way down, because it seems so much cheaper than it was when you bought it before.
Saul

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I hear you, Saul.

It isn’t clear to me (maybe there are prior posts by 2020Investor that I missed) whether 2020Investor is adding to a position in TWTR, or initiating a new position. A strict reading of the post suggests it is a new position.

So, basically, I understand what you are saying, Saul. I’m still wondering, though, why 2020Investor seems to think that TWTR’s current price is so compelling. Is it just because the price is so low, and he/she is continuing to buy on the way down, or does he/she have some basis to believe (valid or not) that the company is about to turn around?

I’m curious to hear what 2020Investor has to say about it.