What I Learned Last Bear Market
The market is heading back to stupid levels, with stocks going on crazy runs. I’ve seen a lot of people say everyone is making the same mistakes as the last bull run, so as an investor who made a ton of mistakes during that bull run, I thought I’d share what I’ve learned.
My mistakes came in 3 forms: the business itself, the valuation and the psychology of my investing. Let’s dive in.
What to Watch in the Business
Ultimately, I don’t want to own businesses that are:
- Poor operators
- Questionable business models
By poor operators – I mean businesses that struggle to execute. My main example of this is Peloton. It’s easy to forget all of the mess around Peloton, but you could see a wave of problems here. From Tread + recalls to material weakness in internal controls to questionable acquisitions… all of these screamed poor operations… and I held through this all and still do today. When you get sign after sign of trouble during a short time period… probably don’t hold a high valuation stock through that.
Peloton is a bit of a two for one… because not only did it have poor operations, it also had a questionable business model. In theory, it made sense to view it as a subscription business, with limited churn and in theory a negative customer acquisition cost (gross margin less marketing), but in practice that wasn’t remotely close to true. Price was already high (leading to price cuts), while gross margin was negative…. The business model was questionable. Another example of missing on the business model was Stitchfix. They had a relatively low valuation, but a tough business model to execute on. It took too many leaps to get to enough profitability for that many steps. The fewer the leaps and the more options available to a profitable end goal is what we are chasing after.
What to Watch In Your Mind
The other part that I learned was really about myself. I’m a contrarian, but that can cause me to do some stupid stuff. From Peloton to Stitchfix, I never truly loved the businesses or business models but everyone else hated them and I thought they were interesting. Interesting doesn’t mean invest!
One of the other key learnings that I had was to be very careful when you believe a paradigm shift is coming. I believed that COVID shifted us dramatically to be a much more online society, which was true… until it wasn’t. Some things changed, the levels of work from home, etc… shifted dramatically, but have slowly regressed. Paradigm shifts are very rare, don’t invest like they will happen, at best, invest like they might happen. Proceed with risk in mind.
What to Watch in Valuation
When something randomly doubles without much of a reason, it might be time to trim some. I don’t like to time the market, but losing money is more painful than making it.
I wouldn’t recommend sitting on cash or anything like that her, but if you can’t find any valuations you like, maybe it is time to sit your money in an all weather fund or something like that. I personally like to follow the price to sales of less than 10, but that is more of a general rule than an all encompassing rule. For instance – if Spotify ever gets up to 10 price to sales ratio… I should sell it all given their margin profile! It is a sliding scale you need to watch. No magic answers here, but something I definitely watch now and something I wish I washed a little closer historically.
Wrap It Up
So I messed a lot of things up last time. I don’t think I’m doing quite as bad now, but I could step back a few years from now and realize I’m just as dumb now as I was then. Hopefully though, I’m making different mistakes and ideally you can learn from mine. Here is to a highly profitable 2024!
