Thread by Brian Feroldi
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- Jul 3, 2022
- #Investment #Stockmarket
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I’ve bought dozens of bad stocks that lost me money
Here are 8 unforgettable failures (and the painful lesson that I learned the hard way):🤦♂️
Here are 8 unforgettable failures (and the painful lesson that I learned the hard way):🤦♂️
IBM - $IBM
Remember when Warren Buffett bet big on IBM?
I did too
I set up a bullish options position on $IBM at $200 because it was:
✅An iconic brand
✅Had Buffett’s approval
✅Cheap!
Remember when Warren Buffett bet big on IBM?
I did too
I set up a bullish options position on $IBM at $200 because it was:
✅An iconic brand
✅Had Buffett’s approval
✅Cheap!
Yet, $IBM did nothing but go down, down, down….
Why? Its core business was being disrupted by the cloud!
I ended up losing a bundle WITH LEVERAGE
Lesson: 1) Avoid leverage and 2) "Cheap” stocks can get cheaper if the company’s moat is disappearing
Why? Its core business was being disrupted by the cloud!
I ended up losing a bundle WITH LEVERAGE
Lesson: 1) Avoid leverage and 2) "Cheap” stocks can get cheaper if the company’s moat is disappearing
3D System - $DDD
In the early 2010s, 3D printing was all the rage
3D Systems was a top dog & first mover and its business & stock were doing incredibly well
I bought into the hype
In the early 2010s, 3D printing was all the rage
3D Systems was a top dog & first mover and its business & stock were doing incredibly well
I bought into the hype
The bubble soon burst...
3D System’s growth started to slow and the stock went down, down, down...
I didn't fully understand the hype cycle, which ended up costing me a bundle
Lesson: The hype cycle is real. Study it!
3D System’s growth started to slow and the stock went down, down, down...
I didn't fully understand the hype cycle, which ended up costing me a bundle
Lesson: The hype cycle is real. Study it!
Portfolio Recovery - $PRAA
PRAA is a debt collector. It buys distressed debt for pennies and then collects.
At the time, it checked a lot of boxes:
✅Founder-run
✅Profitable
✅High growth
Lots to like and I thought the growth was sustainable…
PRAA is a debt collector. It buys distressed debt for pennies and then collects.
At the time, it checked a lot of boxes:
✅Founder-run
✅Profitable
✅High growth
Lots to like and I thought the growth was sustainable…
It wasn't
PRAA depended on the continual supply of new, cheap debt to buy. That was a factor beyond management’s control
Debt markets dried up. Growth slowed. The stock fell hard. I sold at a loss
Lesson: Be wary of companies who rely heavily on outside forces
PRAA depended on the continual supply of new, cheap debt to buy. That was a factor beyond management’s control
Debt markets dried up. Growth slowed. The stock fell hard. I sold at a loss
Lesson: Be wary of companies who rely heavily on outside forces
CorEnergy - $CORR
CORR is an energy finance company
It buys mission-critical assets from energy companies and then leased them back.
Profits were sent to shareholders as big dividends.
✅No operating risk
✅Huge dividend
✅Good valuation
"How can I lose?" I thought
CORR is an energy finance company
It buys mission-critical assets from energy companies and then leased them back.
Profits were sent to shareholders as big dividends.
✅No operating risk
✅Huge dividend
✅Good valuation
"How can I lose?" I thought
Well, I lost
The business model fell apart when energy prices collapsed
CorEnergy’s CUSTOMERS got crushed by the falling energy prices and couldn't pay
Profits collapsed. The dividend & stock got crushed.
Lesson: A company’s financials are only as healthy as its customers
The business model fell apart when energy prices collapsed
CorEnergy’s CUSTOMERS got crushed by the falling energy prices and couldn't pay
Profits collapsed. The dividend & stock got crushed.
Lesson: A company’s financials are only as healthy as its customers
GrubHub - $GRUB
Food delivery is in a bull market. GrubHub was the early market leader.
✅Founder-led
✅Profitable
✅High growth
✅Network effect moat! (or so I thought)
Lots to like, so I paid a premium to become a shareholder
Food delivery is in a bull market. GrubHub was the early market leader.
✅Founder-led
✅Profitable
✅High growth
✅Network effect moat! (or so I thought)
Lots to like, so I paid a premium to become a shareholder
It turns out that GrubHub’s moat wasn’t wide at all
UberEats and DoorDash stole TONS of market share
GrubHub started spending heavily on marketing. Profits evaporated. The stock got crushed.
I sold at a big loss
Lesson: Not all network effects are created equally
UberEats and DoorDash stole TONS of market share
GrubHub started spending heavily on marketing. Profits evaporated. The stock got crushed.
I sold at a big loss
Lesson: Not all network effects are created equally
Under Armour - $UA
UA checked ALL of the boxes…
✅ High growth
✅ Profits
✅ Great brand
✅ Huge TAM
✅ Founder led
I really thought it was the next Nike
UA checked ALL of the boxes…
✅ High growth
✅ Profits
✅ Great brand
✅ Huge TAM
✅ Founder led
I really thought it was the next Nike
It wasn’t
Kevin Plank (CEO/Founder) became hugely distracted by side projects
The culture went downhill and problems appeared
UA chased growth by selling in discount stores. That killed the brand allure
Lesson: If the moat is brand, and management starts to dilute it, exit
Kevin Plank (CEO/Founder) became hugely distracted by side projects
The culture went downhill and problems appeared
UA chased growth by selling in discount stores. That killed the brand allure
Lesson: If the moat is brand, and management starts to dilute it, exit
Gilead Sciences - $GILD
Gilead's growth SKYROCKETED in 2012 after it launched a cure for Hepatitis C
Revenue + profits were exploding, yet it was only trading for ~11x earnings
High growth + profits + very cheap stock!
I bought a bunch
Gilead's growth SKYROCKETED in 2012 after it launched a cure for Hepatitis C
Revenue + profits were exploding, yet it was only trading for ~11x earnings
High growth + profits + very cheap stock!
I bought a bunch
The stock stagnated and then went down, down, down...
Why? Revenue from its Hepatitis C business WASN'T SUSTAINABLE
Competition soon entered and quickly drove down prices
Revenue + profits stagnated. The stock fell.
The market understood this. I didn’t.
Why? Revenue from its Hepatitis C business WASN'T SUSTAINABLE
Competition soon entered and quickly drove down prices
Revenue + profits stagnated. The stock fell.
The market understood this. I didn’t.
This is why the P/E ratio can be SO deceiving
If the "E" isn't sustainable -- or is artificially inflated -- then the P/E ratio is a mirage
(This is why $COIN's P/E ratio is useless)
Lesson: If the P/E ratio looks "ridiculously cheap", there's probably a good reason
If the "E" isn't sustainable -- or is artificially inflated -- then the P/E ratio is a mirage
(This is why $COIN's P/E ratio is useless)
Lesson: If the P/E ratio looks "ridiculously cheap", there's probably a good reason
RPX Corp - $RPXC
RPX bought patents and then sold them as a subscription service
It was an innovative business model and had lots of big tech companies as customers
It was growing fast and a new way to invest in intellectual property.
I bought it soon after the IPO
RPX bought patents and then sold them as a subscription service
It was an innovative business model and had lots of big tech companies as customers
It was growing fast and a new way to invest in intellectual property.
I bought it soon after the IPO
Growth slowed right after I bought
Why? The company had already captured the lions’ share of its market opportunity BEFORE it came public
Growth rates slowed. The stock fell hard
Lesson: Companies choose WHEN they IPO. Be wary & don’t assume that high growth is here to stay
Why? The company had already captured the lions’ share of its market opportunity BEFORE it came public
Growth rates slowed. The stock fell hard
Lesson: Companies choose WHEN they IPO. Be wary & don’t assume that high growth is here to stay
Here's the good news:
My #1 biggest winner of all time — $TSLA — has made me more than ALL of these losers lost COMBINED
That’s how investing in stocks works!
You just need a few big winners to do very, very well
My #1 biggest winner of all time — $TSLA — has made me more than ALL of these losers lost COMBINED
That’s how investing in stocks works!
You just need a few big winners to do very, very well
I have a free newsletter that teaches readers how to think long-term
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Interested? Sign up here: mindset.brianferoldi.com
Each Wednesday I share:
▪️One simple financial graphic
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▪️One Twitter thread
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Interested? Sign up here: mindset.brianferoldi.com
I can all but guarantee that some stocks that I own today are going to lose me a bunch of money
I'm OK with that because I'm ready, willing, and able to accept those losses and learn as I go
Investing is a never-ending journey of learning & discovery
I'm OK with that because I'm ready, willing, and able to accept those losses and learn as I go
Investing is a never-ending journey of learning & discovery
Summary:
1: “Cheap” stocks can get cheaper
2: Study the hype cycle
3: Watch for outside forces
4: Think about customer health
5: Not all network effects are created equally
6: Watch for brand dilution
7: The P/E ratio doesn't always work
8: Companies choose when they IPO
1: “Cheap” stocks can get cheaper
2: Study the hype cycle
3: Watch for outside forces
4: Think about customer health
5: Not all network effects are created equally
6: Watch for brand dilution
7: The P/E ratio doesn't always work
8: Companies choose when they IPO
