Friends,
Let's do a little thought experiment:
Imagine you buy an expensive vase. You set it on the edge of your coffee table. An hour later, your 6-year old comes home from school and starts playing baseball in the living room. She bumps the table, the vase falls, and shatters to pieces.
Here's the question: Who is to blame for this? Is it you, or your daughter?
Now let's connect this to investing by talking about Axon Enterprise -- maker of police Tasers and body cameras.
Last week, shares of Axon reached an all-time high of $716. That was equivalent to 28 times sales -- triple its long-term average.
Then came news that Axon was cutting ties with a partner (Flock Safety -- an automated license-plate reader) and that analysts were downgrading the stock. Even in the write-up, the analyst noted that the long-term outlook was still very positive for the company.
The result: shares tumbled nearly 30% in just three trading days. Online, retail investors couldn't believe that a simple partner integration issue could cause such a wipeout.
But they were missing the bigger point:
- Axon's valuation made the stock fragile (akin to the vase).
- The Flock news and subsequent downgrade (akin to your daughter) were just the catalyst to reveal this fragility.
None of this means that Axon is or isn't a buy right now. Instead, it points to an even deeper truth: a company and its stock are NOT the same thing.
Of course, there's overlap between the two.
But even the most antifragile company -- with a wide moat, demonstrated optionality, management with skin in the game, and generating tons of cash -- can have a fragile stock if the valuation climbs high enough.
By the same token, even a fragile company can have an antifragile stock -- if the valuation is low enough (Peloton has more than doubled since last summer).
Where you really make your money is by finding antifragile companies that are reasonably valued. And if the valuationn of a stock you own makes it fragile in the short-term, you use the subsequent volatility to add at better value points.
When you can separate the company from the stock, you tilt the scales ever-so-slightly in your long-term favor.
Wishing you continued investing luck,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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