Hi Multis
How are you? I hope you are not too troubled by the market conditions for our companies.
I know, it never feels great. But many Multis here went through 2022 and came out better.
Of course, there are also people who left then. They sold at or near the bottom and are still angry with me because they “followed” me. The thing is that they actually didn’t follow me. I didn’t sell in 2022, I bought more. I didn’t go on margin at any time, so I didn’t get margin calls. Multis who did what I did in 2022 were generally happy.
But that happiness is always delayed. That’s how the stock market works.
That also implies that the pain you feel now could go on for quite a bit longer. Will that be weeks, months, or years? Nobody knows.
Look, if you study all big investors ever (and I have done a big part of that), you see two things that stand out in all of them.
1. The emotional impact they experienced during a bad period was low.
2. They stuck to their strategy through thick and thin.
Let me illustrate boght points with arguably the best investor duo ever, Warren Buffett and Charlie Munger.
This quote by Charlie Munger is an illustration of the first point. It’s from a 2009 interview with the BBC.
I think it’s in the nature of long-term shareholding with the normal vicissitudes and and worldly outcomes and in markets that the long-term holder has is quoted value of a stock go down and then by say 50%
You can argue that if you’re not willing to react with equanimity to a market price decline of 50 percent, you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who can be more philosophical about these market fluctuations.
In 1999, Warren Buffett was mocked in the press for underperforming the S&P 500 by 40%. But he stuck to his investing style and beat the S&P 500 by a wide margin every year of the next three years.
The approach we have here at Potential Multibaggers will outperform in bull markets and underperform in bear markets. The highs will be much higher, the lows much lower.
So, you will need equanimity to outperform. That’s easy during good times, of course, although there can be a feeling of FOMO then. But it can feel excruciating during tough times. And with our investments, we are in tough times already. Will the rest of the indexes follow, like in 2022? I don’t know. But I have repeatedly said that this feels a lot like the second half of 2021, when many of our stocks were down comparably to now but the indexes were still at or near all-time highs.
You can do two things to stay calm.
Potential Multibaggers can be a smaller part of your overall portfolio, so the volatility of the total is less. I know there are several Multis who have 50%+ of their portfolio in ETFs, for example, or who also invest in unrelated sectors like oil, or dividend stocks and who keep Potential Multibaggers to, let’s say, 20% of their portfolio. They like the excitement of that part but also or sometimes especially the learning part of Potential Multibaggers. You learn a lot about the future here.
The second thing you can do, is my approach. I have 72.4% of my investments in Potential Multibaggers. What do I do? I sit back, take a coffee or a tea, and relax, realizing that I don’t invest for now but for in 25 years or so and that short-term movements don’t mean too much, as long as the company keeps executing well.
That means that as long as I have great companies, they will outperform. And I also know that probably half of my holdings will not be winners, maybe even more. That’s OK. You can perfectly outperform the market by holding just 3 or 4 winners out of 10. The upside is endless, the downside 100% (which I never had, by the way).
Whatever approach you prefer, let’s agree to have a coffee, a tea, milk, water, or a Coke while reading this Overview Of The Week. I’m drinking a coffee while writing this.
Articles In The Past Weeks
This is the fourth article this week.
In the first article this week, we dissected Kinsale’s earnings and looked if the stock is attractive now. You can read that article here.
The second article was about The Trade Desk. The stock price dove 16% immediately after the earnings but that was just a bit over 4% at the end of the next day. I think the market may have realized the headlines were much worse than the actual numbers suggested. More details here.
I also added to the Forever Portfolio this week. You can find the stock I sold and the additions here.
Memes Of The Week
Let’s start with Elon. He posted this.
I think this is spot-on. It’s too early and too dangerous to give away too much of your personal details to something that looks very fragile when it comes to security. That may change in the future, but for now, safety first.
The next one is about DeepSeek, which was accused by Anthropic of having stolen its data.
Duolingo dropped a lot over the last few months and even more after its earnings. Here’s a meme about that.
Multi bep had a fantastic meme too.
He also posted this one.
Of course, the reason is what happens in Iran. We gotta talk about that later in this Overview Of The Week.
Interesting Podcasts Or Books
This week, I listened to the Intrinsic Value Podcast episode about Constellation Software after the big drop.
The markets in the past week
As you can see, the Russell 2000 dropped the most, by 1.18%. The Nasdaq dropped 0.95% and the S&P 500 dropped by 0.44%.
The Greed & Fear Index remained where it was last week: in Fear, at 43.
Quick Facts
1. Iran: What it means for your portfolio
Potential Multibaggers is not about politics but about investing. The reason I bring this here is that with every war, negativity creeps into the investing world.
On Saturday, the US and Israel launched airstrikes across Iran targeting nuclear sites, military infrastructure, and regime leadership. Trump explicitly called for regime change, and reports confirm that Supreme Leader Khamenei was killed. Iran reacted with missiles and drones hitting US bases across the Gulf: Bahrain, Qatar, UAE, Kuwait, Saudi Arabia and attacked Israel as well.
That’s why the indices already dropped on Friday.
You read everywhere that Iran is closing the Strait of Hormuz. The IRGC broadcast radio messages saying “no ship is allowed to pass,” tankers largely stopped transiting, and three ships were attacked near Oman.
But I want to repeat what I wrote in July.
84% of crude oil passing through Hormuz goes to Asia. China, India, Japan, and South Korea take 69% of it combined. China is Iran’s biggest economic partner overall. India collaborates with Iran on the Chabahar Port project. A sustained blockade doesn’t hurt America or Israel. It destroys Iran’s own allies and suffocates Iran’s economy, since oil and gas exports are its lifeline. This is a good clip about this blockade.
Monday will probably be ugly. Probably the markets will drop, oil will spike and the headlines will be very negative.
But the companies I own don’t change because bombs fall in the Middle East. To put it differently, probably in a year, this will look like noise for long-term investors. Don’t let the headlines scare you.
Don’t believe me? Look at this chart. It’s an overview of geopolitical events and the stock market returns.
You can see that the first month is negative in 53.5% of the cases but anyghing further out looks very healthy.
2. Citrini’s Article: Not Very Ethical
Last week, I commented on the ultrabearish Citrini science fiction story. The stocks mentioned in the article dropped quite a bit.
Billions in market cap disappeared.
This week, it surfaced that the preface about the co-author was changed. This is what I read.
Cosy, two friends brainstorming and a resulting article. Right?
But this is what was initially published on Citrini’s blog.
LOTUS is Lotus Technology Management LP, an investment advisor with $262 million in assets under management.
That “friend” Shah is a fund manager, and on Bloomberg, he acknowledged that he held short positions in the companies that were named in the science fiction story.
Even worse, the acknowledgement also changed, as the same author pointed out. In the first one, it was a collaboration; in the second one, it is just Citrini.
To me, this doesn’t look very ethical. Again, it’s an example of what Charlie Munger has said so often:
To me, this doesn’t look very ethical. Many investors lost their minds and it turns out they were manipulated, as I said immediately when the article came out.
Still, there is a big market for negativity. Just look at the three top-selling Substack bestsellers.
Three doom-and-gloom accounts. That says something about human nature.
People often think that optimism is naive. Optimism sounds like it comes from an untrustworthy salesman. Pessimism sounds smart, even if it’s wrong. Negativity sells. If you know that, you will become a better investor.
I’ve known this for a very long time. Don’t forget that my very first job was as a TV journalist for the local TV station.
When I started Potential Multibaggers, optimism was a very deliberate choice. Optimism usually wins over the long term. Probably, I lose some sales because of that, but as the saying goes, optimism is a moral duty. And I like optimists. They are generally happier.
3. Warner Bros goes to Paramount, not Netflix
This soap could make a good series on Netflix: the bidding war around Warner Bros Discovery. This week, the final curtain seems to have fallen.
So, first, Paramount approached Warner Bros Discovery for a takeover, but Netflix offered a higher amount, and a deal was made.
Paramount then issued a higher offer, raising it from $30 to $31 per share. Netflix offered $83 billion for only the studios and streaming (HBO, Warner Bros. studios), while Paramount offered $111 billion for the entire company. Warner Bros Discovery’s board then declared this a “superior proposal.”
Netflix declined to match and walked away. That means that Netflix gets a $2.8B breakup fee.
OK, this is a simplified version that leaves out the trial and the drama (hence the potential for a series).
What do I think of this? Look at Netflix’s stock over the last 5 days.
Up 26.7%. Crazy.
But I’m on the side of the traders this time. I think Netflix dodges a bullet here. The cable channels are declining every year and Netflix can stay lean and mean and keep its balance sheet clean.
On top of that, Netflix knows that Paramount now has a ton of debt. If there are negotiations for, let’s say, HBO content, Netflix knows Paramount needs the money, so Netflix might get a better deal.
4. Software: Disconnected From Reality
I have already called the anti-AI bubble. As the most important AI companies are private, the market overreacts by selling off all the stocks that might be impacted by AI. This creates opportunities.
In that context, I like this information.
As you can see, software now trades at the valuation of the S&P 500, based on the 12-month forward PE. That’s for the first time since 2015.
Despite this, software’s EPS are expected to outgrow the S&P 500 for the next few years.
Of course, there’s a bearish story attached. There’s always a story if there’s a sell-off or a bubble. Is that story true? Well, sometimes it is and that means you will hear everyone say how they predicted that. But most stories turn out to be false. Nobody talks about those anymore later.
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