My answer to 'Question for the Board'

My thoughts. Take them for what they are worth.

Has anyone held stocks that have fallen 30-50% over several quarters and then reaped the gains? I ask because in the past, even great multi-baggers like Starbucks and Netflix have underperformed the S&P indexes over extended periods.

Everyone remembers the rare exceptions like Netflix and Starbucks that came back big. But how about the hundreds that didn’t come back at all. Like Westport for instance, that the Fool loved, and that starred in a lot of their bulk advertisements (and that I became famous for warning against and infuriating all the loyal Westport investors). It was in 2013, I think, and it was over $30. When it got Down to $25 they thought it was a bargain and bought more, at $20 they “loaded up the truck,” at $15 they “doubled down,”… all the way down. It’s now at about $1.50 six years later.

And others that didn’t dry up like that but have been dead money for years. Like Chipotle Mexica Grill. Their troubles were supposed to be very temporary too, as I’m sure you remember. Well, it’s four and a half years and they are still not back to where they were in Sept of 2014. Anyone who held has had dead money for all that time while we have been making money hand over fist.

Coming to Nutanix we have identified several reasons - complexity, poor sales execution etc. They are all valid and the stock may take a while to recover. The general consensus seems to be to sell Nutanix and buy other better executing/growing companies like ZS, TWLO, MDB, TTD etc. But those stocks may also hit a speed bump? Most of us felt Nutanix had the best chance for multiple expansion till last week.

Remember that we thought Nutanix had a great chance of multiple expansion because they had already sold off while everything else was going up. And why did they sell off so greatly even before this sell-off. It’s easy to forget but they sold off even before this huge additional sell-off because this wasn’t a simple picture like Zscaler or Twilio, or Alteryx, or Trade Desk even then (I’d exclude MDB from that comparison) . They were even then having all sorts of problems because of trying to change from a hardware company to a software company to a SaaS company all at once, with revenues apparently falling and huge quarterly losses.

And now, in the middle of it all they are having sales problems too, which they should have seen coming six months ago but ignored, and don’t forget the complexity issue. A few months ago we must have had threads 50 to 100 posts long trying to figure out what Nutanix does. And most of us could never figure it out. If you don’t think that that makes the sales cycle longer, maybe you are not thinking about the upper management of non-tech companies that have to okay the sales.

Thus the chance of Twilio or Zscaler or Alteryx having this kind of melt down are about as close to ZERO as you can get. They are roaring along at 50% to 70% growth. That’s nothing like where Nutanix was even before the latest train wreck.

Thus to me, the idea of staying in Nutanix and “HOPING” that they can fix it all in a year or so, because you hate to admit you had been wrong… (you weren’t wrong, there was no way to foresee this latest disaster)… or because you don’t want to take a loss (Wow, with all our gains, taking a loss seems wonderful to me)… seems very misguided to me (I was going to say “insane”, but I decided to soften it). I’m not saying that they will go to near zero like Westport, but I certainly think they might well take two to four years to come back to their high, like Chipotle. I can sure find better places for MY money in the meanwhile, and if I change my mind I can always buy back in.

Feel free to ignore everything I wrote if you want to.

Saul

115 Likes

Everyone remembers the rare exceptions like Netflix and Starbucks that came back big. But how about the hundreds that didn’t come back at all. Like Westport for instance, that the Fool loved, and that starred in a lot of their bulk advertisements (and that I became famous for warning against and infuriating all the loyal Westport investors). It was in 2013, I think, and it was over $30. When it got Down to $25 they thought it was a bargain and bought more, at $20 they “loaded up the truck,” at $15 they “doubled down,”… all the way down. It’s now at about $1.50 six years later.

On the boards, Saul is our very own Warren Buffett. To use one of my favorite Warren quotes on the subject: “To our experience turnarounds usually don’t turn.” [that’s paraphrased]

Jeb
Explorer Supernaut
You can see all my holdings here: https://discussion.fool.com/profile/TMFJebbo/info.aspx

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Saul et al. I wanted to chime in here. I think this Question is a really good one and has brought out what I would call investing logical fallacies. I think these fallacies do more to impact your returns than if you are good or bad at reading a balance sheet. Your mindset, biases or whatever you want to call it are your most important skill in investing.

Let’s take them one by one.

  1. The, “I’m going to hang on until I have a profit” fallacy. There are so many things wrong with this one. First off, your money should be invested in what you think has the best chance of earning you money. Second, the “price” isn’t as important as the business opportunity.

  2. The , “This is a multi-bagger for me and I don’t want to sell it” Or the, "I love this stock ". You should care about what your overall portfolio’s return not if a particular stock is a multibagger or not. Be dispassionate, when the opportunity changes then it is time to move on. Your thinking should almost never be, well this stock has earned me 1000% so I’m going to hold it. Your thinking should be, what is this stock going to earn me in the future.

  3. The, " I haven’t lost money so I’ll just keep it " . Your decision to buy or sell should be based on what the company is doing , rarely on what the stock is doing.

  4. The, “it is only a small part of my portfolio so I’ll just keep it”. No, you should be ruthless, every dollar counts. The difference between 10% return and 12% return over 30 years is 17x vs 29X. Compound interest is our friend. Use it.

  5. The, " I’m playing with the house’s money " All the money is your money, invest in what you think is going to be bigger and more profitable in the future. As soon as a dollar is gained consider it yours.

The Fool preaches a buy and hold philosophy which is great when you are trying to get thousands and thousands of people to be individual stock investors. Most people out there are just going to buy what the Fool says. If TMF can get them to just hold their stocks then they are going to most likely beat the S&P by a couple of percentage points. Over 30 years they are going to have way more money than if they did index investing. We are doing something different, We are going for 20% + gains (hopefully more) which is going to mean 250x + gains over 30 years instead of the 17-30x gains. To do that you are going that we need to constantly guard against the logical fallacies. See Tinker’s , Saul’s and some of the other posts for good thought processes about if you should sell, hold, or buy more.

best,
E

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The Fool preaches a buy and hold philosophy which is great when you are trying to get thousands and thousands of people to be individual stock investors. Most people out there are just going to buy what the Fool says. If TMF can get them to just hold their stocks then they are going to most likely beat the S&P by a couple of percentage points. Over 30 years they are going to have way more money than if they did index investing. We are doing something different, We are going for 20% + gains (hopefully more) which is going to mean 250x + gains over 30 years instead of the 17-30x gains. To do that you are going that we need to constantly guard against the logical fallacies. See Tinker’s , Saul’s and some of the other posts for good thought processes about if you should sell, hold, or buy more.

The button only works once, but I hit recommend 3 times just in principle. This is it. Well said, Ethan.

Bear

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Ethan I usually just hit he rec button so as not to clutter the board with a number of, “I agree” posts. But I had to do it this time.
I so much agree with this. I have failed with all these issues over the years. Most recently with INFN. I bought every time it crashed and ended up averaging 8 percent per year over 8 years by selling on the small rises, before I finally threw in the towel. So even though I made money on the investment I could have done so much better if I had just moved that money out of INFN and into something performing better soon after the company began to struggle.
That is only the most recent example, I could give many more spanning decades.
I have learned to become more nimble, and it is paying off.
Mike

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Everyone remembers the rare exceptions like Netflix and Starbucks that came back big. But how about the hundreds that didn’t come back at all. … On the boards, Saul is our very own Warren Buffett. To use one of my favorite Warren quotes on the subject: “To our experience turnarounds usually don’t turn.”

Thanks Jeb, I love the Buffet quote/paraphrase.

Saul

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Ethan,

Great post…I’ve fallen victim to these fallacies in my young investing journey. I’ll add another “I hold it because it pays a dividend”. Did this with KMI for the past 3 years while also buying into the “its cheap relative to its peers” narrative.

There is nothing wrong with holding a stock and going the DRIP route. But in the context of my portfolio, holding KMI amounted to a huge opportunity cost. Especially considering I was invested in SHOP and TTD at the same time.

-Dan

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…what I would call investing logical fallacies. I think these fallacies do more to impact your returns than if you are good or bad at reading a balance sheet. Your mindset, biases or whatever you want to call it are your most important skill in investing.

Ethan, That was a great post. I’m going to see if I can get it included on our side panel.
Best,
Saul

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Totally agree Saul. I gave Ethan off-board props for that one ---- but adding it to our side section would be great.

The Fool preaches a buy and hold philosophy which is great when you are trying to get thousands and thousands of people to be individual stock investors. Most people out there are just going to buy what the Fool says. If TMF can get them to just hold their stocks then they are going to most likely beat the S&P by a couple of percentage points. Over 30 years they are going to have way more money than if they did index investing. We are doing something different, We are going for 20% + gains (hopefully more) which is going to mean 250x + gains over 30 years instead of the 17-30x gains. To do that you are going that we need to constantly guard against the logical fallacies. See Tinker’s , Saul’s and some of the other posts for good thought processes about if you should sell, hold, or buy more.

So very very true. MF can’t pitch this route to newer investors as there is definitely more work in what we do. MF would scare folks away w this route. But for those of us w passion around this type of investment strategy (and passion for far superior returns :wink: ) make time to do this extra work. Instead, MF is left to pitch buy and hold ---- sounds negative yet I get why they do it that way. And as Ethan aptly posts, those buy and hold/non passive fund/ETF investors will beat the market and have outsized returns over the longer run. Just not 20%+ per annum gains.

4) The, “it is only a small part of my portfolio so I’ll just keep it”. No, you should be ruthless, every dollar counts. The difference between 10% return and 12% return over 30 years is 17x vs 29X. Compound interest is our friend. Use it.

I know Ethan spoke on this point re: equities one holds yet I also thought of this in % cash you should be holding. Ethan and I exchanged offboard posts on this and as you all know, there is no silver bullet answer to this for all investors. I typically range from 10-15% cash ---- while currently sitting somewhat north of 21.7%…given recent run-ups. Note, I’m up 25.0% YTD ---- best start to the year I’ve ever had…frankly i’d have been jazzed to have had 25% for the year! But heck, opportunity knocks, let’s keep going!

Anyway, bottom line, on the cash front, for all, I believe cash should be treated the same way as Ethan’s point of holding onto specific equities and/or inconsequential equities for too long. Gotta do what you think is best for your investment style/strategy. For me, I may hold a bit longer on my 21.7% cash ---- but ready to pounce as opportunities appear.

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Here’s one way in which everyone can win from either their action (sell) or inaction (hold) regarding NTNX. Take some really good notes on what decision you are making right now, the effective arguments that persuaded you, and your emotions and thoughts as you made the decision. Then come back and look at your results 6 months, 1 year, and 2 years later. How do your thoughts shift over time? Was it a good decision 6 months out but a terrible decision 1 year later? You might be surprised with what you learn.

Here’s why…

Saul brings up CMG, and this company is near and dear to my heart. I ate at my first Chipotle in January of 2004 in Minneapolis. (the only way I can remember this is that a day or two later the infamous Janet Jackson wardrobe malfunction occurred during the half time of the Super Bowl that year). I thought Chipotle was great food and a great customer experience. 4 years later as a part of one of the Fool premium services, I bought CMG and held and held. As you know, that was a great time to buy. I ended up trouncing the S&P500 by 587% with that purchase in 2008!

So fast forward to 2014/15, where CMG was at their peak, right as growth started to slow and right as the Norovirus panic occurred. I held and held and held, gnashing my teeth all the way down. My gains took more than a 50% haircut during this time period, ouch!

In October of 2017 there were fierce debates on the premium boards about what to do with CMG. Smorg, TomE, and Bear all hotly debated the topic. So what did I eventually do? I sold CMG and wrote down why I made the decision. I’m glad I took some notes on my decision making process because its its amazing how quick I forget the factors that went into it.

At the peak of CMG exuberance, even though growth started to slow, I figured the CMG experience could easily be ported over to other concepts and become a smash success.

Some of you may remember…
Shophouse
Pizzeria Locale
Tasty Made

What happened to those? They all failed, none of them panned out, none of them became the next big thing. The Norovirus and E. Coli panic hit social media, forever scarring the “Food With Integrity” mantra preached by Chipotle. Food quality suffered as Chipotle added additional food processing techniques that fast food restaurants used to provide a safer experience. Chipotle tried to eventually innovate by adding Queso to the menu, which initially flopped wildly. My conclusion at the time? I had gone from 8 years of totally trusting and believing in their management, who had done an amazing job, to watching them bumble and fumble their way through a 2-3 year period where I completely lost trust in their ability to perform near anything - a shocking turn!

So I sold CMG. I had been reading about SHOP at the time and decided to buy. I sat and watched.

Was my decision good or bad?
Should be easy right? Not so fast! Since that time CMG has roughly doubled from 303 to 611, a 101% gain! SHOP has gained 97%, from 97 to 191. The S&P500, however, only grew 10% during this time frame.

How did CMG turn it around? They canned their CEO, brought in the former head of Taco Bell, and trounced the market since. (really the CEO of Taco Bell??, that would have been considered ANATHEMA to the CMG community just a few years earlier, Taco Bell was the exact OPPOSITE of the healthy, food-with-integrity mantra of CMG.) While I had figured that CMG would be forced to replace their founder/CEO eventually if things didnt turn around, I couldn’t count on that! I made the best decision I could make at the time. CMG is a much different company now, which a different focus, but now becoming successful in their own right.

My conclusion: Investing can be hard! Learn from your big emotional decisions like this one. Understand your investing style and how each buy and sell fits into that. Write down some of your decisions and evaluate them over time. For me, this one purchase may have been a wash…but learning a new investing style - from long term buy and hold, to Saul’s modified buy and hold - has been invaluable. I’ve gained far more from this experience in knowledge and experience than I ever did from the dollar value to my bank account.

What am I going to do with my NTNX shares? Heh, good question. I’m still evaluating.

-AJ

36 Likes

. . . and if I change my mind I can always buy back in.

Pretty much says it all. I am confident that Nutanix will recover. They still pretty much own the HCI space and when it comes to product cycles they continue to innovate. They may get bought out. So the question in my mind is not if, but when they recover. I don’t plan to wait it out, could take 3 or 4 quarters. I’m not out now, but I will be soon. And I maintain the option of buying back in later.

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One of the biggest things I learned from Saul is that I will flush a stock like a dead goldfish if it strays too far into the red. “Why not?”, I tell my friends when raving about Saul, there are 10-11 other stocks I that are climbing the green right now. One of course must do diligence and stay aware.

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On the boards, Saul is our very own Warren Buffett. To use one of my favorite Warren quotes on the subject: “To our experience turnarounds usually don’t turn.” [that’s paraphrased]

“Chainsaw Al” died a month ago. He was a turnaround specialist. I bought Sunbeam but he didn’t turn it around! :frowning:

Albert John Dunlap (July 26, 1937 – January 25, 2019) was an American corporate executive.[2][3] He was known at the peak of his career as a turnaround management specialist via mass layoffs, which earned him the nicknames “Chainsaw Al” and “Rambo in Pinstripes”, after he posed for a photo wearing an ammo belt across his chest.[4] It was later discovered that his reputed turnarounds were elaborate frauds and his career was ended after he engineered a massive accounting scandal at Sunbeam Products, now a division of Newell Brands, that forced the company into bankruptcy.[5] Dunlap is on the lists of “Worst CEOs of All Time” published by several business publications.[6][7] Fast Company noted that Dunlap “might score impressively on the Corporate Psychopathy checklist”[8][9] and in an interview, Dunlap freely admitted to possessing many of the traits of a psychopath, but considered them positive traits such as leadership and decisiveness.[10] He was a major benefactor of Florida State University.

https://en.wikipedia.org/wiki/Albert_J._Dunlap

To be worth holding, the stock has to outperform all the other stocks you have or might buy. How likely is that?

Denny Schlesinger

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CMG has roughly doubled from 303 to 611, a 101% gain! SHOP has gained 97%, from 97 to 191. The S&P500, however, only grew 10% during this time frame.

I was going to post something like this but you beat me to it. It’s only dead money over that period if you still had the opportunity to sell it at the peak which is never possible once it has already taken the hit. All that matters is what you think this company and it’s valuation can realistically do going forward compared to you other investment alternatives.

I haven’t sold any of my large NTNX position yet simply because I haven’t had a chance to evaluate things fully yet. There is no rush. It’s not likely to to drop further significantly over the next few days or even weeks. Nor are my alternatives likely to rise dramatically (save for Okta which announces this week). I’m not simply “hoping” that the stock recovers, etc as some folks on this board have suggested must be the reason someone wouldn’t move on immediately. I just need to spend a little time weighing my options which I haven’t had yet.

I admire Saul’s ability to make quick decisions and he is usual right and probably will be in this case.

Off the top of my head, we have a large company in a great space with revenues much higher than most of the other companies we follow, still growing, and suddenly with a valuation much lower than most of those other companies we follow.

It just doesn’t feel like as easy a decision as many here feel. And the good news is it doesn’t have to be an immediate one. I very well may conclude that I should reduce and reallocate some of those funds, but it also wouldn’t surprise me if NTNX beat most other SaaS companies over the next year or two even without a buyout.

If I come to any startling realizations once I’ve dug deeper and given some thought, this will be the first place I share them.

I don’t blame anyone for cutting their losses and moving on. Just for me, it’s not a simple decision today.

-mekong

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Great pair of threads. I’ve learned a lot from the different perspectives.

I’m also not as agile as Saul nor as LTBH as TMF1000, but I have had a almost continuous position in NFLX since 2003 and have a lot of faith in it.

I am concerned about the unknown unknowns in the relatively new SaaS sector. Its looking fantastic right now, but I’m moving in relatively slowly and am at around 20% (counting TTD and SHOP). For those of us newer to this, the speed of migration is also an aspect of investing temperament.

I feel that I’m willing to take heavier risks that most investors, but what I’m doing is nothing in comparison to Saul.

Thanks Saul and the many others with great and Motley contributions here!

Enjoy,
Brian

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Great discussion in both threads. Nutanix SW portion was growing at 50% and that was the main reason that got us excited in the stock. While zs, twlo, ayz, ttd maybe simpler, there maybe landmines in those businesses that we don’t know of. Perhaps a competitor or a technology change? If any of those companies guide lower within the next year would we take the hit and move on and invest in something else? I realize it is a hypothetical. But the chances of a fast growing company faltering is quite real - some recover and march on while others wind up in the dust.

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I’m sure everyone remembers when TWLO got hammered when Uber announced they were spending too much money with them and we going to go in house.

You need to look at these things on a case by case basis. Tom

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Ethan, Thanks for putting those in clear words. I have been guilty of many of those in the past. It is a good reminder to be careful and not to repeat the same mistakes.

Dear Saul,

Thanks for all the great contributions and thoughts on this board. I owned KMI a few years ago or so when it dropped precipitously. I held the stock, bought a lot after the 50% or so drop and then sold it all after it went back up. I am not sure if that really counts though as this all took place in a number of months. I guess that was more a special opportunity…

Best,
Tom
(Top three holdings: SHOP, TTD and MELI)

Hi Saul,

You have been the greatest knowledge provider on this board as recommended by so many people on my thread. As a young and eager investor, there’s nothing more in this world than the desire to learn and discuss your knowledge with you.

I did post a stock recommendation which is NMI holding inc on my Thread. But many people doubted my recommendation. I want to be able to hone my investment skills with you as I believe you genuinely want to help people to be successful.

My method is very similar to your method in terms of looking for that super high growth in Revenue, Gross profit margin, return on equity and so on. The only difference is that he doesn’t care if the company’s current year EPS is negative and I do. Currently, I only invest in companies with at least 1 year of positive EPS.

For my choice NMI holding is similar to what you suggests:

2014 revenue 19 millions
2015 revenue 53 millions
2016 revenue 123 Millions
2017 revenue 182 millions
2018 revenue 275 millions

As we can see, the revenue year by year is much more than 50% increase required.

Its gross profit year by year is even more impressive:

2014 19 millions
2015 52 millions
2016 121 millions
2017 177 millions
2018 269 millions

That’s an overly impressive gross margin of over 90%.

It’s EPS is also impressive over the 5 years from making losses to now positive for the past 2 years. This is the reason on which I say it shares can easily increase to 120 dollars easily from the current price of 28 dollars.

In terms of dollar cost retention rate, I don’t have a clue how this is worked out. Can you please provide the right method to calculate the dollar cost retention rate and please comment on this post in regards to your method analysis. I am also trying to learn and this board will be the perfect place to do so. Thank you.

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