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Win More By Losing Less (Cestrian Stocks Bulletin #23)

Win More By Losing Less (Cestrian Stocks Bulletin #23)
By Cestrian Capital Research, Inc • Issue #23 • View online
In which no Lambos feature.

Disclaimer: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Nobody Likes A Loser
As you probably know, our line of business is to publish our ideas on stocks. We publish a lot of free stuff, partly for marketing purposes to hawk our pay services, and partly because we lack outside interests and actually like writing about stocks all day long. We find it cathartic. Yes we know that is odd.
Now, the typical approach if you run subscription research services is to market your stuff by saying, hey, here’s three guys, joined our service with only fourteen cents and some old chewing gum in their pockets, a year later, check their Lambos! And have a couple videos of said geniuses affirming that, yes, by joining they have achieved all their hopes and dreams. Kudos to these services. Some of them are actually pretty good and some of those are pretty good consistently.
That’s not this post.
This post is to tell you about a different aspect to investing and trading, one that’s extremely boring but if you do it right sets you up to win. How to win? Lose less.
Easy to say, hard to do.
We won’t bore you with this stuff too much, because, nobody likes a loser and nobody likes to read about losing. Even reading about not-losing isn’t all that exciting. You know any blockbuster movies where the hero just got through the day, not losing? Us neither.
Not losing too much isn’t sufficient. You do have to win some. But not losing too much is necessary in our view. Partly to protect your account balance but mostly to protect your emotional balance. Everybody’s account goes into the red sometimes, the key is to have it not go too red for too long, because then you can’t think straight and you start making all kinds of bad decisions which get you into a doom loop. By which time you are losing so much, you’ve forgotten how to win.
There are many ways to not lose too much. Stop losses of all flavors can help. You probably know all about them. We’ll post a note sometime about different kinds of trading order, because this kind of thing interests us, but it probably doesn’t interest you. Again with the catharsis.
But one way to not lose too much is to actually think about the underlying company itself. Read the numbers. Listen to earnings calls. This isn’t very exciting and it’s time consuming. You can’t make a YouTube video about how you aced listening to an earnings call. But we do this stuff, a lot, like, a lot lot. And when we read the numbers and listen to an earnings call, we put ourselves in the room. We imagine ourselves sat there in the boardroom with the CEO and CFO explaining why this and that happened, why this is up, that is down, etc. And we assume they are, let’s say, putting forward the best interpretation of events. So we think, hm, what if by some chance there’s another interpretation? What if, just maybe, we need to be a little read-between-the-lines here? Downright cynicism is no good, then you would just try to make a living shorting everything, and even if you make some money, this method condemns you to a life of misery where all you hope for all day long is bad news. No thanks. We’re sunny of disposition whilst also being inquiring of mind.
Our pay services are one-to-many. That means, we do the work you don’t have time to. We publish the work. You can factor it into your investing and trading decisions. The longer you’re a member of one of our services, the more you get used to how we think, so you can apply a suitable filter. (We try to publish our own prejudices but being prejudices, we probably don’t recognize them all!).
Here’s a couple losers we dodged recently and where published ahead of time that, in essence, we thought something bad could happen here. Which it then did.
The notes were mercifully short. But they were built upon the experience of investing in cloud software since it was first a thing, back when the Cloudfather Marc Benioff was young, and upon the experiences of meeting with more software companies and sitting in more boardrooms than we could possibly count or remember, for longer than we care to admit is the case. (Sometimes, being old folks is beneficial!)
First up, Splunk (SPLK). Because we’ve seen many, many companies try to “transition to the cloud” and very, very few succeed (you can name them - Adobe, Autodesk, Synopsys, couple others), any company that is diving headlong into that particular abyss, the waters of which feature an unholy admixture of pain across revenue recognition, sales compensation, cashflow, EPS and balance sheet matters, well, we kind of want to dodge that ball. Back in November last year, with tech stocks on a tear, we called “Yikes” on SPLK at $198. The stock sits at $121 right now. Phew.
Not Our First "Transitioning To The Cloud" Rodeo
Not Our First "Transitioning To The Cloud" Rodeo
Second, Okta (OKTA). Two hammer blows ducked. We called nay back in April with the stock at $278, because growth was slowing and the stock looked pricey on its growth metrics vs. the cloud cohort.
Ball One Dodged
Ball One Dodged
We also called “whoa” on the stock before earnings this week; and then during the earnings call, which we live blogged in our members-only chatroom, we said, something is really not right here. And if you listened really carefully you could hear that most likely they had fired the CFO as the lightning rod for a snafu in their $6.5bn acquisition of Auth0. Which we think is a pain point that is going to linger awhile. The stock dropped a little during the earnings call, we put out our members-only note before the open the next day saying, careful here. Stock dropped >10% that day. It’s at $224 right now. Ball, dodged. Phew and double phew.
Ball Two Dodged
Ball Two Dodged
Now nothing is forever and there’s every reason SPLK or OKTA could climb from here. We make no comment on that in this newsletter. But if you can miss a couple vertiginous drops in the names you own or are thinking of owning - you’re set up all the better to win.
That’s enough about losers. We get satisfaction from ducking losers, but like everyone else who isn’t a professional miseryguts short, we love to back winners.
Of which more in the next issue of Cestrian Stocks Bulletin.
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Cestrian Capital Research, Inc - 28 May 2021.
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