Friends,
In hindsight, my (Stoffel, here) naivete was almost comical. It was early 2015, and I was putting a good chunk of my portfolio into GoPro.
My reasons:
- Sales were growing rapidly (up 42%), and gross margin was expanding.
- The company had lots of cash, no debt, and was spitting out free cash flow.
- It was a founder-led business, and the founder owned TONS of stock.
Despite checking a lot of boxes, it ended up being one of my worst investments ever, falling 70% before I sold out. (It's currently down another 90% from that point!)
But it wasn't a total loss. I paired what I learned from GoPro with some of my other worst investments. And when I did, they all shared two important traits:
- Total Addressable Market: In most cases, I didn't consider that a company could already be pushing up against the limits of its addressable market. While GoPro cameras were popular, it turns out that not everyone considered them a "must-have" gadget.
- Moat: More importantly, in every single one of my losers, I had overestimated the strength of the company's moat. Even if a company has a huge addressable market, investors won't be winners unless the company has a sustainable competitive advantage.
The only advantage GoPro really had was brand value...which turned out to be a fake moat, not a real one.
At the end of the day, it turned out most people didn't care if GoPro or their iPhone recorded their adventures. Choosing an iPhone made more sense: you could do 1,000 other things with it that weren't possible with GoPro.
If we could go back and tell our younger selves just one thing, it would be this: spend most of your time researching if a company has a moat.
As long-term investors, nothing has helped us accumulate more wealth than investing in wide-moat businesses.
Want to know how to spot the five types of moats (and avoid the fake ones)?
Join us next Tuesday, July 1st, for a free webinar.
We'll share everything we've learned about spotting real moats (and fake ones).
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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