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When growth goes wrong [Members]
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Thanks for this keenly thought through and perceptive piece @TI.
As you allude to, never let a trade become an investment or an investment become a trade.
Just as the secret of contentment is having serenity to accept things that cannot be changed, courage to change things that can, and wisdom to know the difference; so too it’s important, I think, to identify beforehand when an allocation of capital is actually a passive ‘investment’ (i.e. not needing any active risk management) or a ‘trade’, which, in contrast, does.
Growth stocks (esp. early stage and/or pre-profits) have such large:
– dispersion of outcomes;
– volatilities; and,
– drawdowns;
that putting money into any of them is best viewed as a trade, and ought, therefore, to be subject to using some sensible and proven preset rules to scale allocations and to time exits – e.g.:
– the Kelly criterion; and/or,
– something like Richard Dennis’ Turtle Trading Strategy (for initial position sizing & timing, loss limitation, position resizing and exit timing).
IMHO, it can become very dangerous, very quickly to try to rely upon narratives (whether internal or external), intuition or personal (and, therefore, idiosyncratic) judgements on such matters.
@TLI — Thanks, and apologies for the several typos if you read this straightaway on the website. Some typos I just don’t catch until I prepare the email, and that requires publishing on the site first. A 5,000 word article is not easy to keep error-free without any sub-editor! (@TA has me harrumph!)
One question I must ask @TI, Did the process of committing this to print change your thoughts upon your holding? I believe if I took upon such a task it could not help but do so.
A good piece well written as always. Thanks
JimJim
Also any thoughts that you can share@TI on how you went about selecting Adyen initially or creating a shortlist with Adyen on it? There’s a lot of firms out there to choose from, albeit that no 2 sources give the same or consistent information i e.:
– Refinitiv (Thompson-Reuters) gives a figure of 108,790 listed companies in the world in total (no year).
– Exc. ADRs, GDRs, cross-listing and OTC listings; the 200 members of the World Federation of Exchanges tallies up 45,740 unique listed companies (also no year).
– The World Bank puts the number at 45,743 in 2014, falling to 43,248 in 2019.
– The OECD quotes c. 41,000 in 2019.
– Statista gives c. 43,200 in 2019 (up from c. 14,500 in 1974)
– Brimco, apparently quoting the WEF, gives c. 58,200 for Q1 2022.
That’s just listed equity. Statistica quotes 333.34 mm unlisted companies worldwide for 2023 (presumably an estimate). In any event, whatever the measure, it’s a very big ocean indeed to fish in. Even limited to the top 90% of market cap still leaves around 10,000 firms globally. Do you use a stock screener?
Very interesting article that made me review my dabblings with individual stocks, which are similar growth-y tech because I stick with the area I hope to understand (Life Sciences Tools, Genomics). In conclusion, clearly this won’t replace my day job. Buying ARKG when I started in 2019 would have delivered about the same moderate loss by now. (On the other hand, I suppose I’m as “good” as Cathy Woods…)
A few things I noted:
– There are many more duds than good companies. They all talk a good game and it is easy to be taken in by a convincing-sounding narrative. Filtering out the duds has worked quite well.
– The macro conditions (liquidity, rates) and market sentiment matter a lot, probably more than stock selection. Trying to find good companies at a reasonable price meant a drought in the run-up to 2021 because everything looked overpriced. Instead I could have made a small fortune by holding my nose and riding the madness to the bubble peak. No stock picking and no expertise required. ARKG would have done the job.
– But: Timing the exit is hard. I only play when I see something that I think the market is missing, and my entry points have been mostly good. How to decide when to get out? The advice is to “let the winners run”, and run they did up 2x or 3x, until the trend turned and things went pear-shaped. This was in part due to the 2021 market turnaround that also affected the established, profitable but growth-y stocks I kept over that period. And also company-specific problems. How bad can an acquisition be when you essentially get it for free? As it turns out, very bad. The market was right.
– Resisting the urge to short the crap. The shorts I considered are now down 10x or more, but I underestimated how far the bubble would run, and would have lost.
– A stock that’s 60% down from its peak can still drop by 90%. A truism that really hits home when experienced with your own money. This was a special lesson in humility because I knew this company well, did an in-depth analysis and saw a lot of value.
The market drop has been welcome but my picks from summer 2022 have been a mixed bag so far.
DNA: Their core business is going nowhere, I was lucky to offload it at a profit on the AI hype spike.
TXG: Up 60% then came back down again in the last 3 months. This one is a long-term hold for market growth, company’s tech, track record, margins (DYOR etc.)
CDXS: Should have cut losses much earlier, holding until I need the tax loss.
@all — I’m guessing perhaps a 5,000 word article turning on an expensive stock that might well be going wrong hasn’t quite hit the spot, given the lack of comments. 😉 Please do chip in if anything else to add though! 🙂
@JimJim — Thank you. Yes as I wrote the section on growth versus value, it did make me wonder, inevitably, if I overpaid for it. Despite knowing all that stuff very well. We have to beware hindsight bias at all times, however. I have had a couple of stocks better-than-10-bag. I wasn’t questioning growth vs value when reviewing them. 😉
More widely, I’m extremely reluctant to make Moguls a tip-style service for a vast number of reasons, most of which I’d argue are member-orientated. (I think it’s better to learn to fish than to be given a fish for starters, even assuming I am qualified/capable when it comes cooking and handing out fish, which for now we’ll say is moot). But another reason is definitely I’m wary of committing in print and then getting wedded to positions.
We’d need at least 20x as many Mogul members as we currently have for the ‘cost’ of potentially getting stuck in even a single large position due to ‘member peer pressure bias’ to be worth it versus me operating with full flexibility with my portfolio. On current sign-up rates, that’s not going to be a problem for 50 years haha.
So I’d rather continue with full transparency, try to focus on fishing techniques, and not feel that committing to print here is me saying company X is a winner for sure/life/whatnot, for all our sake’s. 🙂
@TLI — That could be a future article, I’m definitely not going to writing another 5,000 word comment here on the subject. 😉
But to answer you briefly, no I don’t use stock screeners. I had some luck with screeners as a base filter when I was more a value/dividend investor many many years ago. I’d possibly use as a first pass if searching, say, UK midcaps for GARP shares. But I think screening for ultra-high growth stocks is laughable to be honest, unless perhaps you’re some sort of quant/AI fund with a vast basket. (Even then, a naive screen will just get you access to the weakest performing cohort of stocks, historically speaking, I’d imagine).
@Sparschwein — Thanks for that long thoughtful comment, this was the sort of reflection I was hoping to provoke with my piece.
I agree with pretty much everything you’ve written. Personally I wouldn’t short anything on valuation grounds. It’s been years since I did short stuff, but when I did I focused on frauds / dodgy management / spivvy stories etc. Valuation can run away from you for many years, and it can also be a self-fulfilling prophecy in some cases, where high valuation begets share issuance that saves a company for example.
You write a lot here about stocks that fall a lot, avoiding duds, timing exits etc.
I totally see where you’re coming from of course. It is the way I tend to think (value roots).
However intellectually I am convinced that trying to bag a handful of winners that run all the way is far more important for a growth investor.
When you look at growth portfolio results over the long-term, there’s invariably just a few stocks that delivered most of the gain. It’s almost like VC-lite investing.
Selling early will hugely cap the gains and the whole reason for investing in growth. Just ask, again, the guy who sold Tesla and missed out on a more-than £400K gain:
https://monevator.com/how-i-lost-436957-trading-tesla-shares/
@TI: Many thanks for sharing your thoughts.
I’d guess that with Monevator readers (this one, by and large, included) probably tending to be at least somewhat inclined towards some form of index tracking strategy; single stock share picking is going to be a minority sport.
Having said that, I also suspect that even the most ardent of advocates for passive investment has, on occasion, likely been tempted to try to choose stocks.
I’m the worst stock picker in the world, albeit based upon very limited attempts.
In March 2008 I bailed on equity trackers, just after Bear Stearns, immediately regretting it.
Whilst not buying fully back into the market again (using trackers) until 2013; in the interim, I managed to make one small sized, but unfortunately spectacularly unsuccessful, foray into the world of trying to pick individual shares.
I’m a Guardianista, but my folks are both Torygraph readers. When I was visiting them in mid 2008 I skimmed the Business and Finance pages of the DT and saw a short piece recommending one ‘New Star Asset Management Plc’.
I’d never heard of it but, IIRC, the piece said it was at £1.35 a share and had been at £4.85 only a year or so before and that the management was on course to turn the business and the share price around.
Being the complete muggings that I was (am?), and without any due diligence at all, I thought to myself, ‘why not take a tiny stake and see what happens?’
I brought in a few days latter: 350 shares at £1.20 each plus HL’s then £14.95 share dealing charge (barely less extortionate now).
The fact that the price had already fallen 15p, or 12%, especially in such a short time, should have been a warning sign in itself.
It was only an extremely small sliver of what I was then sitting on in cash, so I guess that I thought ‘why not?’
Well, management did turn the business around, but just not at all in the way that the DT article intended. Specifically, they crashed the firm straight onto the rocks.
It turned out (which I would and should have known about, had I bothered to do any essential preliminary research) that New Star had borrowed £240m in March 2007 and then used it to pay investors £383m (with its founder pulling £150m out of the business).
New Star’s highly paid fund managers (paid in shares) sold their stakes early, and then handed in their notice to quit in order to go and join the next milk cow.
As a result, the investors in New Star’s various funds began to pull their money out, reducing AUM and hence fee income, leading to yet more ‘star’ fund managers quitting in what soon became a rapid and brutal downward spiral.
The firm then couldn’t pay off its debts as they fell due, leading to it having to sell itself to its lenders for just 2p a share.
I got just £7 back in the end, out of an all in cost basis of £435, so 98% down.
I learnt several valuable lessons:
– Do Your Research. You can never have too much information. It’s better to have more data than you can digest than less data than you need.
– However much or little information you have the market always knows much more.
– Concentration = Risk
– There are no excuses, only processes and outcomes.
– Operational leverage works both ways.
– Share tips in papers are entertainment at best, and mostly marketing puffery for third parties.
– Things can be (and typically are) cheap for a good reason.
– Catching falling knives is generally a really bad idea.
– Whilst you don’t need stop losses for index tracking, you definitely do for investment into individual shares. The market can’t disappear, and it will come back after a fall, but individual companies go bust all the time. Funnily enough, I did actually think about selling out at 90p, at least dimly aware that I had no clue what I was actually doing invested in the share in question, but – based upon neither any reasoning nor any evidence – I felt the price would probably recover to above where I’d brought in. Epic fail there on my part.
Much later, I learned about Bessembinder’s research and how the median portfolio is destined (even before any consideration of costs) to trail the mean of all portfolios, as represented by the market.
@all — Adyen’s 8 November Investor Day referenced in the piece has seemingly gone well, judging by the share price reaction.
You can find the key numbers here:
https://www.adyen.com/press-and-media/adyen-publishes-q3-business-update
As predicted in my piece it has lowered guidance, which looked inevitable and seems sensible and also why not given the shares were in the dumpster anyway.
It says it is slowing hiring going into 2024, which is fine – that was always the plan – but I am a bit troubled it only added 175 FTE in the past quarter. Need to read more around this. If it reflects the business being smaller than it had expected when it first formulated its hiring plans – due to the general slowdown – then fair enough. But I hope it’s not curbing its ambition to help the share price / bow to investors.
I can’t remember if it had a sustainable capital expenditure target before, but that may be reassuring some investors.
Suspect the mere fact that things haven’t got any worse in Q3 (though they haven’t improved either) after the six-month shocker is probably adding fuel to the relief rally.
I will continue to hold for now, but as ever please remember this is NOT a portfolio management type service nor personal financial advice for you, and I may add or reduce anything at anytime as stated in the disclaimer, which anyone thinking about taking action should certainly re-read first. 🙂
Cheers!
Only read this yesterday so took out small position, nice 30% gain this morning, cheers
@CMC — Ah, pleased for you! 🙂 However as I’ve repeatedly stressed I won’t be taking the blame here for anything that goes wrong, I best be careful with the victory laps!
Also, if a 30% gain in a morning is only ‘nice’ in your world maybe you should be writing these articles! 😉 This has been my best morning – investing-wise – of the year by far.
What a fickle fate we active investors face.
Interesting piece on payments and adyen:
https://www.netinterest.co/p/the-capital-cycle-hits-payments?utm_source=post-email-title&publication_id=43559&post_id=138760539&utm_campaign=email-post-title&isFreemail=true&r=2kxl2k&utm_medium=email
@TI – thanks for the insightful comment. It is a good observation that my mindset is more “value” than “growth”. While the only sector where I understand enough to produce the occasional “uncommon insight” is tech/growth. I hadn’t really considered this contradiction.
So, think more like a VC, place more bets, get comfortable writing some (or most) off. The thing is that uncommon insights come with a shelf life: Eventually the thesis starts to play out, the market catches on and it gets priced in. There is no edge any more, unless through a new uncommon insight.
As in your Tesla saga, the uncommon insight had evaporated, it made sense to assume that the opportunities and risks were priced in, and it was rational to either buy the Nasdaq or another stock with a new insight instead.
Ben Carlson @ AWOCS has a pointer to new research on the power laws of equity returns, which very usefully quantises the risks of concentrating your investment into individual shares. He notes that in a new paper (Underperformance of Concentrated Stock Positions), Antti Petajisto from NYU has taken Bessimbinder’s work further by looking at return distribution using shorter time frames and that the big takeaway from this research, to quote from the abstract of the paper, is that: “Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is -7.9%, under performing by 0.82% per year. For stocks that have been among the top 20% of performers over the previous five years, the median ten-year market-adjusted return falls to -17.8%, under performing by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize'”
The research is on SSRN here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122
Nice one pager on Adyen (amongst others) just published (Thursday, 25th April) on this Substack:
https://open.substack.com/pub/qualitystocks/p/one-pager-thursday-from-quality-stocks-f7d
Like London buses, nothing on Adyen for a while, and then two at once. Evidently it’s the Quarterly results effect. This today from Catherine Wood at Ark Invest: “Adyen (ADYEN NV): Shares of Adyen traded down ~15% on Thursday after the company reported earnings for the first quarter of 2024. While total payment volume growth accelerated to 46% year-over-year and beat Wall Street estimates by 6%, net revenue fell short of consensus by 1%. Management noted that the divergence in volume and revenue growth was driven by stronger contribution from larger enterprise customers, whom Adyen typically charges lower fees. Adyen is a global payment facilitator providing back-end financial infrastructure for merchants across many verticals.”
Quality Stocks Substack also mentioned Adyen as an example (under its “How to Estimate the Total Shareholder Return?” piece on 26 May 2024) in its % annualised future returns estimate illustrations (at the foot of the piece) as follows:
“Adyen 14% (19% growth + 0% acquisition + 0.2% margin – 4.0% PE – 1.0% buybacks + 0% dividend)”
Wish I’d brought a couple of shares when the Moguls piece came out 😉 Back then they were at €640, and they’ve since gone up to nearly €1,700 and closed today at €1,180.
And they’ve now done an in-depth Adyen profile – but sadly paywalled:
https://open.substack.com/pub/qualitycompounding/p/is-adyen-an-interesting-stock
From the wires – Adyen’s results just out:
“[Adyen] reported a 26% year-over-year increase in its second quarter net revenues, reaching €475 million. This was in line with consensus estimates and even exceeded Jefferies’ expectations by 2%.
A major driver of this growth was the 45%year-over-year surge in total payment volume (TPV), which totaled €322 billion for the quarter.
Adyen’s solid revenue growth was complemented by a slight sequential improvement in its take rate, a key profitability metric for payment processors. The take rate increased to 14.8 basis points (bps) from 14.7 bps in Q1, surpassing market expectations.
On the earnings front, Adyen’s EBITDA grew by 32% year-over-year to €423 million, with margins improving by 3 percentage points to 46.3%.
This was not only ahead of market expectations but also reflected the company’s efficient cost management, as it managed to keep headcount growth modest with only 26 additional full-time equivalents (FTEs) in Q2, far below the anticipated increase of 199 FTEs.
Regionally, Adyen’s performance varied, with North America and EMEA showing accelerated growth rates of 30% and 25% y/y, respectively.
However, there was a noticeable slowdown in the APAC region, where growth decelerated to 15% y/y, and in LatAm, where growth was a mere 2% y/y.
Despite this, Adyen continued to focus on these regions, securing additional acquiring licenses in key markets such as India and Mexico, which are expected to drive future growth.
“We see IKEA Mexico, Australian MECCA and Belmond Hotels, a LVMH maison, as key wins,” said analysts at Jefferies in a note.
In terms of segment performance, the Digital segment, which accounts for 63% of TPV, saw a robust 49% y/y increase. Unified Commerce, which represents 24% of TPV, grew by 28% y/y, while the Platforms segment outpaced others with a 64% y/y growth, with even more impressive growth of 91% when excluding eBay.
The company expects net revenue growth in the “low-20s” and anticipates a modest improvement in EBITDA margins compared to 2023’s 45.7%.
To achieve these targets, Adyen will need to maintain a net revenue growth rate of 19-23% in the second half of 2024, with EBITDA margins projected to hover around 48%.
Analysts at Jefferies noted that Adyen’s Q2 performance largely met expectations, particularly in terms of its take rate and segmental growth in Digital and Unified Commerce.
“We believe Adyen met expectations with Q2 showing some resilience on take rate and in Digital and Unified Commerce, while Platforms accelerated, albeit ex-eBay growth slowed on tougher comparatives,” the analysts said.”
Adyen tie in with PayPal reported yesterday (lightly edited for brevity): “PayPal announced an expansion of its partnership with Adyen to introduce “Fastlane by PayPal” to Adyen’s enterprise and US marketplace customers. “Fastlane helps shoppers convert more than 80% of the time while reducing time to check out by 32% compared to a traditional guest checkout,” said PayPal. The service allows shoppers to save payment and shipping info. during their first checkout, which is prefilled in future purchases across all merchants using Fastlane. Alex Chriss, President and CEO of PayPal, highlighted Adyen’s enterprise relationships, making it an ideal partner for this initiative. Chriss emphasized this collaboration aligns with PayPal’s strategy to make its services ubiquitous in global commerce. Pieter van der Does, co-founder and co-CEO of Adyen, echoed this sentiment. Following the news, analysts at Mizuho said they see the partnership as a significant step for PayPal, potentially unlocking a $3 trillion total addressable market in e-commerce. Mizuho views the partnership as evidence of Fastlane’s strong product offering, given Adyen’s willingness to collaborate despite being a direct competitor to PayPal’s Braintree. The analysts suggest that this unbundling strategy could lead to a $1.0-1.5 billion lift in transaction margin dollars for PayPal, driving broader adoption and reinforcing PayPal’s position as a comprehensive payments platform.”
Atmos Invest today:
Adyen:
Current PE = 53 / On the dip PE = 31
However,
Current P/FCF = 15 / On the dip P/FCF = 17
So, ‘cheaper’ now at the higher price????
The paradox of growth over value.
Detailed Adyen breakdown just ungated from paywall:
https://open.substack.com/pub/scuttleblurb/p/adyen