In this episode of Industry Focus: Tech, we dive into three Motley Fool favorites that have taken a hit over the past few months: Appian (NASDAQ:APPN), Airbnb (NASDAQ:ABNB), and The Trade Desk (NASDAQ:TTD). We unpack the business results for these three companies and discuss why the recent declines are more a reflection of rapid share-price appreciation than anything else.
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This video was recorded on June 25, 2021.
Dylan Lewis: It’s Friday, June 25th, and we’re talking about three stocks down big from their recent highs. I’m your host Dylan Lewis, I’m joined by fool.com’s actionable analyst of accurate asymmetric asset advancement, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: I’m doing great, Dylan. Today was my kids’ first day of summer. I have my fingers crossed that they’re going to be nice and quiet in the room that’s next to me. How are you?
Lewis: I hope that that’s right. You never know, and that’s part of the beauty of the stay-at-home life, the recording at home life, we have been subjected over the last year-and-a-half to all kinds of fun things with our recordings, here in our podcasts or in Motley Fool Live. Thankfully, the garbage trucks that were just emptying out the trash in the alley next to my office have moved. Brian, I hope we have an interruption-free recording session.
Feroldi: Come on, silence gods. Get us through this hour.
Lewis: Today we’re going to be talking about stocks on sale. You can define that a couple of different ways, Brian. Some folks might be looking here for things that trade at relatively low multiples on a valuation basis. We’re going to be focusing this conversation on companies that are down a bit from recent highs and in most cases, double-digit or deep into the double-digit percentages down from their recent highs. I think these are fun shows to do. They’re a little tough, they can become gut-wrenching if you own any of these companies, because it’s easy to look at these types of things as buying opportunities, if you’ve been sitting on the sidelines, it’s a little bit tougher if you own a position in the company and you’ve had to endure a 20% or 30% decline.
Feroldi: I’ll go out and say that all three of the companies that we’re about to talk about are pretty high-quality, and many of our Foolish members own all three of them. In fact, I own two of them and I’m very seriously considering the third. So, to your point, it’s really hard to say what is on sale mean, yes, all three of these companies are down substantially from their highs and that’s how we define on sales. I don’t think you could say with a straight face that any of these stocks are cheap.
Lewis: No, and that’s a good distinction. Cheap tends to imply valuation. We’re looking at the sticker on the rack and saying, this is marked down a little bit from where it once was. I guess it’s cheap on a relative basis and yeah, to reinforce that, Brian, I own one of these, the other two are watch-list stocks for me, so certainly businesses that I’ve been following, are names that are all going to be pretty familiar to Fools. The first one is Appian. Appian shareholders, I think, have probably been feeling a little bit of pain over the last couple of months.
Lewis: Appian, the ticker symbol is APPN. Yeah, the last few months have not been fun. The stock is currently down 42% from its February high earlier this year. That’s painful. On the bright side, if you’ve been a shareholder of this business since day one, you’re currently up 800% since its 2017 IPO, so you’re doing OK depending on your holding period. For those that don’t know, Appian is a software company that is focused on a low code software development platform. Their software allows essentially anybody to develop their own custom-made apps because instead of requiring users to type in lines of code, Appian provides very simple, intuitive flowcharts and drag and drop tools that allow anybody to build a custom app within weeks or months. What’s nice about using Appian software is that once you build it on there, this isn’t like a dumbed-down version of an app. It’s infinitely scalable, it’s replicable, it’s secure, and it runs native on every platform. Appian is one of the leaders in this industry and it’s been growing rapidly for years.
Lewis: Yeah, and for folks that maybe don’t know Appian, but do know the Fool universe well, I liken this company to a Twilio where it is making something very simple and easy for businesses that otherwise they would have to home grow and make themselves.
Feroldi: I think that that’s fair. Again, one of the real keys of this product, as they like to say, you don’t have to be a software developer to write your own custom applications. That’s really appealing to a lot of businesses out there because every business is unique and it’s nice to have homegrown solutions of your software. By making it easier for them to do so, you can make your business more efficient.
Lewis: Yeah, Think about it. If you can make every employee a coder on some level, you’re going to be automating a lot of things. You are going to be making businesses and operations far more efficient than they would be. I’m certainly guilty of that with some of the manual processes that I have with spreadsheets I run, Brian, so who knows, maybe Appian is something I should be looking into.
Feroldi: I’m sure they should, the Foolish should get on that. Now, while the stock price has been all over the map recently, if you look at the company’s recent results, there is a lot to be encouraged about. This company is a Software-as-a-Service company. However, they do generate revenue in two different ways. One is from subscription sales, and that’s made up of both on-premise revenue as well as cloud-based revenue. That’s the revenue that investors should really care about and watch because that’s a pretty high margin. On that front, that revenue grew 26% and during the most recent quarter to about $64 million. The other way this company generates revenue is from professional services, which is a service-based component, where they go on and basically help companies to get the software off their ground with more of a hands-on touch. That’s a low margin revenue, and that figure actually dropped 11% year-over-year to just $25 million. Believe it or not, but that’s OK because Appian has been outsourcing that work to many of its consulting partners. That’s a much more appealing business model because Appian gets to focus on the high-margin recurring revenue and all of the cost of watching that go on other consultant sub-books. When you combine those two together, total revenue only grew 13% to $89 million. But it’s the revenue split between subscription professional services that investors should pay attention to.
Lewis: Brian, you’re talking about how by and large results are pretty solid for the business and about what you’d be expecting. I think the natural question here is, when you see the fundamental business results are pretty strong, what explains the sell-off that investors have seen over the last couple of months?
Feroldi: For reasons that I still quite can’t explain, for whatever reason, about eight months ago, Appian stock just caught the market’s attention. It was right around the time that Slack was getting bought out. When that happened, I think investors must have looked at Appian stock and said, this is next, this is “cheap” by comparison and the valuation multiple just expanded hugely. This is a company that was trading at about 10, 11, 12 times sales, and at its peak just a few months ago, it reached 53 times sales. Even after the recent drop that we’ve seen, which has been pretty substantial, this company still trades at about 29 times sales, which historically is actually still pretty expensive. Now, on a gross profit basis, that’s another metric that you can look at, it’s about 43 times gross profit. That’s also an expensive number. There is no free cash flow and there’s no adjusted earnings to look at, so we can’t use any of those multiples. That’s really the story here, it’s just the valuation went crazy and today it’s less crazy.
Lewis: Yeah. That is one of the hard things to wrap your head around when you see big declines and it’s helpful to take that step back. You mentioned how the company has performed since its IPO. But to double-click into the growth that you mentioned there with the valuation, from the late October of 2020 to mid-February, the stock was up 250%. We saw a huge run with digital transformation businesses in general in 2020. But this was the tail end of 2020 and in almost a nonsensical way, the valuation just exploded for this business. Even after this decline that we’re talking about here, Brian, still up a clean double from where it was in October. So a lot of shareholders are probably still pretty happy with this company. The tough part is if you were one of those folks, you bought a position or maybe your first position sometime in early 2021 around those highs.
Feroldi: Appian is a company you really have to double-click and look at beyond the headline numbers when you’re judging its results. Again, if you just saw a software company trading at 29 times sales, revenue growth was 13%. You’d be like, what gives? There are so many other companies that are growing 40%, 50% out there. How can these things trade at such a high multiple? But again, you really have to look at the cloud in a subscription-based revenue to really judge this company’s performance and on that front, it’s growing in the mid 20s or even in the low 30s. That’s a much more attractive number.
Lewis: Yeah, and that’s a pretty solid clip. I always like to take that step back and say, OK, well, what does this growth rate turn into over a short period of time, you’re going in the mid-20% range. That’s a double every three years in your top-line. Solid growth, it’s certainly going to command a decent premium, and I would not be surprised this is a company that at times finds accelerating growth as they’re able to better tell their story and become a much larger business.
Feroldi: That’s a big part of the thesis for me. They are launching new products. They’re doing a great job of signing up new customers. They’re expanding internationally. I am a shareholder of this business and I’ve been pleasantly surprised by the jump and not as pleasantly happy with the recent decline, but long-term, I think there’s reasons to really like this business.
Lewis: I think we’re going to see a somewhat similar story with our second stock here and that’s Airbnb. Probably the one that people are most familiar with, of the names we’re going to discuss today, but really the name in short-term rentals, this is a marketplace platform connecting homes, rental properties with individuals that are looking for somewhere to stay. A super hot business and one of those, even if you don’t really follow the market back closely, type companies, you probably heard about it when it went public last year. There’s a lot of excitement around this company. It’s currently down about 30% since February highs. Brian, I think a lot of people even just thinking vaguely about what Airbnb does, can connect the dots and say yeah, there was some lumpiness and some difficulties this company ran into in 2020.
Feroldi: Why? Was there something going on in 2020 that would make it hard for this company to grow? Airbnb really came public at a peculiar time in its history. 2020 was an abysmal year for the company in the beginning. If you look at what’s happening today, I know that rentals in the travel market are back in a big way and the company’s business has really picked up. That kind of whipsaw in revenue has definitely impacted the stock price. But it does make looking at the valuation today much more difficult because if you’re looking at the trailing numbers, they look abysmal, you really have to look forward to get any sense of where those companies should be trading.
Lewis: Yeah, and to the company’s benefit, they’re providing both one-year comps and two-year looks on a lot of their metrics to help normalize a little bit for what’s going on. But the growth story of this company, 2018, 40% growth, 2019, 31% growth. Then we saw a pretty decent dip in 2020. Then we captured about 60% of the revenue that they did in the year prior. We’re starting to see some quarterly reports come out for 2021 of course. They are showing some growth, and Q1 revenue was just under $900 million. It did show about 5% growth, which is helpful. You want to be seeing that, I think Brian, for a lot of people, you put 2020 on the side for this business. As you do for most hospitality businesses, most travel businesses, the big concerning thing is loss is really ballooned. That’s something that they are going to be able to hopefully write in the time that comes. But what I think is fascinating is, for as difficult a time as 2020 was for Airbnb, they rebounded shockingly quickly in a lot of ways. I think that they are uniquely positioned in travel and hospitality to benefit from where the world is going. A lot of the trends that are emerging as we’re seeing a little bit more flexible work accommodations. People possibly being a little bit more interested in being in more rural areas for vacations or for multi-week stints rather than in urban areas, there seems to be a lot to like here with the business.
Feroldi: Yeah. I believe that you and I did an S-1 show on this company. When we did we came away and said, there’s a lot to like about this business. To your point, while it’s good to see that the revenue growth was over five%, what really stood out to me was that this company reported gross booking values that were up 52% year-over-year. Yes, that was off a depressed quarter in the year-ago period. However, in Q1 of this year, there were still a lot of lockdown procedures basically everywhere in the United States and globally. But that should give us a really good sense that business is about to rebound sharply. Don’t forget that a lot of people really up their cleaning fees that they charge for this platform as a result of the pandemic. From what I’ve seen, those are still around. That could expand the take rate that this company takes for the foreseeable future.
Lewis: Yeah, and it was encouraging too to see the average daily rates were continuing to grow for the business. That they were up to $160 in the recent quarter, which is up 35% year-over-year. I mentioned some of the trends at play here and the company specifically cited the growth in ADR is attributable to a lot of things brought on by the pandemic, namely flexible work setups, but also more rentals for entire homes, more rentals in non-urban destinations, and more family travel. All of those are generally going to lead to bigger spaces, which can command higher rental rates for the company, which is obviously good for the host and also particularly good for the take rates. One of the other things that I think is pretty encouraging from recent results is that we’re seeing booking windows lengthening for the business. This is basically how far out people are choosing to book a reservation. The further out people are willing to do that, I think that’s in some ways, Brian, a sign of confidence that people can comfortably book travel, book hotels, that thing. In addition to all of the other activities that we’re seeing on the platform, a lot of the more casual travel is starting to return for them.
Feroldi: That’s a big part of their business. To your point, I think that’s really great. Like a lot of other interests, the supply of accommodations is depressed right now. Meanwhile, people are getting back to work and have money to spend and are desperate to really go on vacation for the first time. That I think is going to be a really bullish sign for this company over the next couple of years.
Lewis: I think people are wondering, “Okay, sounds great. Everything that you’ve said so far sounds pretty good, explain the dip.” What we saw in this case is about a 30% dip from those February highs. I think a couple of factors are at play here, Brian, but this is to some extent similar to Appian, a valuation-based correction that we’re seeing in the stock price. I think things to keep in mind is we’re still within the first year of them being a public trade company to consumer brand, recently public, a lot of hype, lot of expectations. This is one of those unicorns that almost everyone knew and we’re pretty familiar with. We also saw the lockup period come for this business. Insiders were finally able to sell shares. Now, there was already a pretty healthy decline happening. I think they’re already down about 20% from highs when that lock-up period expired. But that doesn’t necessarily help things either when the supply of shares winds up being increased. But I think in the valuation discussion, at peak, the shares of Airbnb were up 50% from where they opened on IPO day, less than a year out. They were a multi-bagger on the issuance price, somewhere in the mid-60s. I could see how people with maybe a shorter time-frame, Brian, just decided, “I’m sitting on some pretty healthy short-term gains here. I’m going to take some profits.”
Feroldi: You can’t blame them. To your point, there’s always all kinds of factors, such as the lockup that can really smack around a share price in the short-term. When you combine that with the crazy financial numbers that we’ve seen, it makes sense why Airbnb has traded all over the place. But I got to tell you this is a business that I do not own, but when I think about the next five years, it’s hard enough for me not to be bullish on Airbnb.
Lewis: I know, I’m trying to learn my lesson here from other services that I just really enjoy, but never bought the stock of. I think Netflix is the poster child for this to me. Where it is a business I’ve known about for such a long time. I have been a delighted customer for such [laughs] a long time. I don’t know why I never bought shares. I’m kicking myself daily for not buying shares and trying to learn from that lesson with Airbnb and say, this is a great service, I’ve been using it for, I think over five-years at this point. It’s very unique in what it offers in the hospitality industry. I’ve seen the benefits firsthand. Travelling internationally and being able to use Airbnb is wonderful. Even in a city like D.C, my home city, a lot of the hotels are not particularly near where a lot of my friends live, or where I’ve lived. Being able to have family visit and have them stay nearby rather than have them be downtown near the convention center. Those types of things that Airbnb is able to solve for, offering unique travel experience, all that stuff. It’s hard for the traditional hospitality industry and the incumbents there to really replicate that, Brian.
Feroldi: It really is. One thing that I really like about Airbnb, aside from everything that you just said, and I myself I’m also a happy customer and have been for years, their move into the experiences market just fascinates me. That it can be, “Hey, not only can you use Airbnb to book a stay, you can also book it to book a once in a lifetime experience at your location.” They think that that market could rival their staying business overtime. If that’s true, this company could really go up for a long period of time.
Lewis: It could. I thought, this is a tech player in a legacy industry. Surely, we’re going to be staring at stretch valuations for this company relative to what you’d consider the alternatives and that being maybe Hilton or Marriott, some of the other choices that consumers might be up to make. I was surprised, Brian, in looking at where this thing is priced after this decline. The valuations really aren’t that different from the traditional hoteliers. Hilton is a $34 billion company on trailing sales of $1.3 billion. Their sales got smashed in 2020. Marriott is a $45 billion company on trailing sales of $1.7 billion. Both of those companies have worse gross margins than Airbnb. Both of them suffered much bigger declines in their revenue due to the pandemic. Which to me also says Airbnb is probably a little bit more of a resilient business than the traditional hotels.
Lewis: Yeah, I think that’s exactly right. During the pandemic, Airbnb, while its financials didn’t look great, its market share gains accelerated. That’s a pretty remarkable story to tell. What’s going to happen, I think that Airbnb is going to be in a really good position to capture even more share as we come out of it. Like you, it’s high on my watch list.
Lewis: High on my watch list, unfortunately, I think just dealing with some of the lumps of the first 12 months of being on the market. The difficulty of having its business be squarely affected by the pandemic and investors trying to make sense of that. Just generally, people deciding the gains have been pretty good short-term. Maybe some people are taking profits in addition to more shares being out there. That’s the closest I can get to packaging the story for Airbnb. Not all that different from Appian In some ways. Brian, the third company we are going to be talking about is The Trade Desk. Another very familiar stock for Fools, certainly familiar to me, I’m a shareholder. This is the one of the three that I own, the other being watch-list stocks. Are you a shareholder of The Trade Desk?
Feroldi: Yes, and have been for many years now and it’s been a really great holding.
Lewis: Yeah, it has. There are a lot of people that are sitting on some multi-bagger status, thanks to The Trade Desk.
Feroldi: The Trade Desk, the ticker symbol is TTD. This company is currently down about 21% from its recent high, and that’s not all that bad considering literally just like a week or two ago, it was down 40% or 50%. One other thing that’s worth noting about The Trade Desk is, if you’ve been following this company casually, you might look at its share price today which is about $76, and be scratching your head because in December of last year, this was a $950 per share stock. Don’t be too alarmed at that, just a few days ago, The Trade Desk executed a 10-for-1 stock split that reduced the share price by a factor of 10, but it also increased the number of shares that were out there by a factor of 10. It was a value neutral mark, but if you’re just looking at The Trade Desk share price today, don’t be like, “Wow, is this stock cheap right now.”
Lewis: I’ll say, Brian, as a shareholder, as someone that checks my brokerage account every day, I’d forgotten about the stock split. You get used to it if you sort your brokerage account in a certain way, just knowing where names are going to be. I went down, I scrolled to the bottom and I saw it was 80% or 90% losses in red. For The Trade Desk I was like, “What happened?” I was able to remind myself, “Oh, that’s right. Stock split coming, don’t have to worry too much.” But it’s easy to forget those things in the grand scheme of a diversified portfolio of stocks.
Feroldi: Especially if you are looking at your broker on the day of a stock split, because oftentimes, it takes brokers a day before they get that%age gain right. To your point, you can log in and be like, “Am I down 90% on this stock?” You really have to keep things like that in mind, so it always takes sense to go one step further.
Lewis: Thankfully, they’ve normalized and gotten it to the point where we’re back to the gains being reflected as they would be with my basis, adjusted for stock splits, but it can add a little heartburn for people.
Feroldi: It certainly can. For those that are unfamiliar with The Trade Desk or at least what they do, The Trade Desk operates a Cloud-based ad buying platform that is used by both brands, and ad agencies, to help them create, manage, and advertise digital campaigns. The Trade Desk is focused on a growing niche, in the advertising market called programmatic advertising. Their platform uses big data to place the right ad, in front of the right consumer, on the right device, at the right time. It really helps brands, and ad agencies to get the most out of their advertising dollar. The Trade Desk as a leader in that category, has just grown extremely rapidly over the last few years, and this has been a home run stock for investors. Since its 2016 IPO, this company is up 2,430%, and that’s after including in the recent drop. When you look at the company’s recent results, it makes sense as to why this stock has been so hot. Revenue in the most recent quarter was up 37% to $220 million, while expenses were up across the board. A lot of that was due to stock-based compensation expense. Earnings at this company, adjusted earnings actually grew 56% to $1.41 per share. That’s not new, this company has essentially been profitable, and cash flow positive since it came public. When you combine that with the hypergrowth that’s it’s seen and expanding margins, it’s understandable why the stock has done so well.
Lewis: The thesis is a familiar one really for anyone who owns Facebook or Google — Alphabet, I should say. If you expect more, and more ad dollars to be spent on digital advertising, which I think by and large, that’s where marketers are going. In part because it’s trackable, in part because it works in the ROIs there. This is a very similar play. You’re getting into markets where consumers are spending a lot of time. Marketers have far more insights into the way that people are interacting with their ads. The ROI proves itself out there, and they are a facilitator of so much activity in that space.
Feroldi: Like we’ve seen with COVID, COVID caused so many changes. One of those was really forcing marketers to really wonder about where they’re getting the most bang for their buck with their advertising. Many of them pulled back on their traditional advertising mediums, and were more willing to devote more share to programmatic advertising, because like you said, they could see the ROI. Not only that, but delivering things digitally to consumers makes a whole lot of sense when consumers aren’t going out, and driving around to see billboards, for example. It makes sense to me that this company’s competitive advantage, and market share actually grew as a result of COVID.
Lewis: Brian, let’s talk a little bit about that dip because 40% is pretty sizable. I know it’s not quite at that point anymore, but that is a big haircut, especially for folks that may be a little bit new to the stock, and didn’t enjoy that massive climb that it experienced since it’s IPO.
Feroldi: Yes, a lot of that, just like we saw with Appian, and Airbnb, was surely valuation driven. The Trade Desk price to sales ratio has essentially been expanding since it came public. At one time you could have gotten this thing for under 10 times sales, in 2017. At its peak in December of last year, this company traded at over 65 times sales, which is a nosebleed valuation. Because of the recent drop, this price to sales ratio did fall into the mid-20s, and it’s recovered pretty sharply in the last few weeks. Even today, it’s at 43 times sales. Now that’s price to sales, and because this company has had earnings, there is a P/E ratio to look at. Those numbers were also pretty high though. On a trailing basis, it’s trading at 133 times earnings, and on a forward basis it’s trading at about 110 times earnings, so the market is clearly expecting a lot more growth out of this company.
Lewis: I know that they got caught up a little bit too in the wake of Google, basically saying, “We’re going to limit the ways that people can be tracked on the Internet.” There is a fear for a little while, and this thought that that would have a pretty dramatic effect on advertisers, because anything that gives marketers a better sense of who is seeing an ad, theoretically improves the ROI for that ad. It gives them a more granular look at who they’re surfing stuff up to. But I think my hunch here Brian, is that a lot of those concerns are overblown. In part because the alternative to digital ads is their billboards, their newspapers and you’re going to get a much less granular look at the person who’s reading that, I would think than you would anything into the digital realm.
Feroldi: To your point, that’s something that has come up over and over again with this company on its recent calls, and the CEO and Founder, Jeff Green, is extremely consistent that they’ve known about this for years. They’ve been planning for this for years, and many of the outlets that they use to place ads have nothing to do with cookies. They are ready for this change, and if you look at their numbers, the numbers really back that up. More recently, we’ve seen that Google was just delaying that change out to 2022, 2023, that could be a big reason why the share price has recovered so much just in the last couple of weeks, but longer-term, I think The Trade Desk is well-positioned to thrive even in that world.
Lewis: At the end of the day, I just don’t think digital ad spend’s going anywhere. It’s too effective. We see too many marketing dollars heading there and I think they’re only going to increase overtime. If that’s on your mind with this company, I think you can keep it in mind, but it’s affecting the entire industry and yet more and more dollars still pouring it.
Feroldi: You got it.
Lewis: Brian, we did three similar but slightly different stories here. I think it might be helpful to focus a little bit on some takeaways just for people thinking through dips that they see and being able to identify them as buying opportunities or signs of trouble. Because we look at these three businesses and I say, there’s nothing really here that’s interrupting the thesis for these stocks. There are some changes that they need to endure. There’s the natural balancing act of valuation coming into play a little bit. But how do you differentiate between seeing something down 25% and saying, “I’m actually more interested now,” and then seeing something down 25% and say, “Boy, I’m not going near that thing.”
Feroldi: That’s a really important question that investors need to answer for themselves. Yes, when a stock falls 20%, 30%, 50%, even 70%, that doesn’t necessarily mean that it’s better buy today than it was prior to the enormous fall. I always start by looking at the business and the business results first. That’s exactly what we tried to emphasize in the show. We saw with all three of these companies that the valuation went extremely high and then the evaluation came back to Earth. But if you dig in and look at the actual operating results for the company, there’s reasons to be optimistic on all three of them. Whenever I see a stock that I own fall drastically, I always go back to the most recent business results and ask myself, is the thesis for this company still on track? Does this company still have really good growth prospects? Does this company still have margin potential expansion? Is it profitable? Does it have a strong balance sheet? Does it have a strong competitive advantage? Those are the things that I try and focus on. Conversely, if a company is falling, if its stock has fallen, but it’s really weak competitive advantage, or it’s losing market share, or if its markets are cyclical, or if it’s unprofitable business, those are the type of businesses when I see I’d just say I’m staying away from that stock as it falls because that is a business in trouble, that’s a really key distinction that investors need to make.
Lewis: I find comfort sometimes in just reminding myself that the reason that markets exist, the reason that I have shares to buy is because you have a collection of people with different outlooks, different time horizons, different investment objectives. For someone who looks at the rise of an Airbnb over a relatively short period of time and says, “I’m going to bank those gains.” That’s perfectly fine. They’re sitting in the green if they do that. That’s a different investing outlook than, “I have at my portfolio,” and most Fools have at theirs because we’re more long-term focused on thesis-driven investors. But you have to remind yourself, every time you’re buying shares, it needs someone selling them. They’re not just printing them for you. What you see in terms of shifts with valuation of market, what you see in terms of reactions can often be just because there are certain people who maybe have outsized action in response to any specific news piece and they just have a different way of approaching investing than you do.
Feroldi: That’s a really key point. When Warren Buffett buys shares and when high-frequency traders buy theirs, optically, it looks like they’re doing the exact same thing. They’re both placing an order and putting shares into the portfolio. The only difference between them is the holding period and that is a really, really key distinction between the two. Yes, that’s one reason why I love the Foolish investing philosophy of finding great companies, buying great companies, and holding great companies until they are no longer great. When that is your philosophy and that’s your mindset, when short-term movements come around, you could essentially ignore them and just focus on the business and say to yourself, “Is that thesis for owning this still intact?” If it is, you can ignore the recent drop and even consider buying more, and if it’s not, then you need to reassess and maybe sell into something that’s winning. The mindset that you go into investing is everything.
Lewis: On that, Brian, I think we can close this out with a key reminder, one that I always try to keep in my head and one that I think if we do nothing else with a show like this, I want to remind folks of is we often think about diversification within what you own. It’s helpful to also think about diversification when you buy that thing. We talked about it a lot and it’s worth emphasizing, especially when you see businesses that are high-growth, stretch valuations getting really stretched, then come back down to Earth a little bit. Buying into companies multiple times, not tying your ownership and your cost basis to any one particular moment in time is a way to rest far easier as an investor and a way to approach these things as buying opportunities. Instead of saying, “Oh, boy, I’m sitting that 25% in the red here. Do I really want to own this thing?”
Feroldi: That’s it. One of my favorite investors of all time is a guy named Tom Engle and he calls that exact concept time diversification. Investing in bull markets, investing in bear markets, investing in the same company over different time periods of a different phase of its life, that can lower your risks too.
Lewis: It makes it so much more fun to stare at something that’s [laughs] gone down a little bit and say, “You know what, I’m going by a little bit more. I’ve spent it out over a couple of months.” But you got to have your tricks. You got to set yourself up for success.
Feroldi: Investing is a whole lot more fun when you get excited by declines instead of scared by declines.
Lewis: Isn’t it? Isn’t it, Brian? Well, Brian, thank you as always for hopping on today’s show. Always a pleasure, always nice to head into the weekend after having a conversation with you.
Feroldi: For sure. You have a nice Hawaiian shirt on today, so you are ready to go, Dylan. I love it.
Lewis: I’m steamrolling my way into the weekend. I’m willing to do it fashion-wise.
Feroldi: Love it.
Lewis: Listeners, that’s going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, “Hey,” you can shoot us an email at firstname.lastname@example.org or you can tweet us @MFIndustryFocus. If you’re looking for more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today, and thank you for listening. Until next time, Fool on.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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