Influencers and Large Stock Drops

Jason’s Random Words

I've been thinking about social media influencers a lot this week. We have plenty of them in the financial world, and when you have a podcast and a newsletter, growing your social following is supposed to be an important part of the strategy. They call it "the top of the funnel" of customer acquisition. If you're reading this, because you found me, or the podcast, or (heaven forbid) Jeff on Twitter or some other platform, congratulations! You've been acquired!

Maybe you just tripped and fell into the funnel. Well, here you are.

Why have I been thinking about this? Because Jeff and I have spent the past year building our podcast and trying to grow it. And our incentive to grow our followings is to get more of our social followers to listen (and now to read these words) because we love doing it and we think it's great, and, well, maybe we can also make a little money, too.

And that leads me back to something I use a lot in my investing framework: Follow the money, and follow the incentives. Often, where the money goes is tied to where the incentives are. An example of a not-good, very very bad incentive was at Wells Fargo, where a significant incentive for branch-level employees was tied to new accounts. And if you looked further upstream, managers were incentivized for new accounts. So a bunch of people opened fake accounts in real people's names. Wells still hasn't fully recovered from the slap-down its regulators gave it.

Incentives can also work out pretty great, too. I think the incentive to build wealth in a capitalist system such as the United States has generally worked out pretty great for most people. Certainly, owners like us (remember, stock investing makes you an owner!) have won from a system that incentivizes risking capital in commercial enterprise.

The point? As I have been more incentivized to be an "influencer" (and I am not very good at doing the things it takes to build a following) over the past year, I've taken a far more critical eye to who I follow and what they post. There are a lot of empty shells posing as finance experts, just to build a following, make a newsletter, and then harvest subscribers at the advertising farm.

• Everyone can't have a side hustle writing a newsletter or hosting a podcast

• Not everyone can have multiple income streams

• Not everyone can pick the best individual stocks

• Everyone can't get rich young or even get rich period

Lately, it feels a lot more like the commercials for people selling those real estate investing plans that are guaranteed to make you rich. The people selling them generally make a lot more money selling the plan than they made in real estate.

The point? I guess there are two. First, I am getting a lot more cynical. A year of working with Jeff will do that to you. Second, I have spent more time also thinking about knowing my "enough," something I learned from my friend and occasional colleague Brian Stoffel (who is partnered with Brian Feroldi at Long Term Mindset).

What is your enough? How much have you thought about it? I can promise you – I've been there – if you're just pursuing more wealth, you'll never get enough. And you'll end up missing out on the things that probably mattered more while you were spending the weekend building up your social media followers instead of playing with your kids. Not that I've ever done that, of course.

Jason

Jeff’s Random Words

It’s earnings season, and this past week was particularly busy for me as many companies I own or cover reported. I look forward to earnings season. As someone who tries to find the signal through the noise with the companies I own, I love getting an update from the past three months. However, ignoring the noise also gets more challenging when there’s so much happening all at once.

For example, last week I had three companies in my portfolio that saw their stocks fall 20%+ in one day. Fortinet (NASDAQ:FTNT), DigitalOcean (NASDAQ:DOCN), and Lemonade (NASDAQ:LMND) fell by 25%, 25%, and 23%, respectively. This got me thinking about how to react when stocks we own have massive one-day drops. So here are a few thoughts.

First, there’s almost always a catalyst with some legitimacy. In the case of Fortinet, revenue is slowing and management mentioned slowing demand. DigitalOcean wasn’t able to report earnings per share due to an accounting issue they need to resolve, and they’re seeing growth decelerate. Lemonade saw its loss ratio spike. So in summary, some level of sell-off makes sense.

But all companies go through ups and downs, this is why we invest for the long term. Great businesses see their stock price go up and to the right over time, but it’s never a straight path. Sometimes the drawdowns are significant. The question I had this week was why these particular companies' results caused such a sharp fall in the stock price. I think I found the answer in their stock charts. Here’s the performance of these three stocks through August 2 (so before earnings for all three).

As you can see, these stocks have been crushing the market this year. So that means they were priced for perfection, or at least for near perfection. And when that happens, even the slightest earnings blip can cause massive drops. This is a lesson I’ve learned and it helped make this past week less painful.

This is not to say that there won’t be continued headwinds for these businesses in the near term, and it’s not a signal to back up the truck and buy. But this is why Jason and I talk about knowing why you own a company. My reasons for owning these three have not changed, the thesis is intact. One bad week, or earnings report, doesn’t necessarily mean anything is wrong. It gives me things to keep an eye on, but in no way is the thesis broken.

Jeff