Friends,
[Stoffel, here] When people ask where my newfound appreciation for valuation comes from, I often point them towards Shopify.
- I first bought shares for about $4 in 2017.
- By Thanksgiving 2021, it had grown 4,300% and accounted for 19% of my real-life portfolio.
And then the bottom fell out. Shares plunged 85% and my portfolio was badly damaged.
In telling the story of my conversion, I often say:
- In late 2021, Shopify's stock price assumed roughly 90% sales growth for the next 10 years (at a certain free cash flow margin).
- I should have trimmed the position down to a more reasonable 7%.
But that's not a very honest way of looking at it. In reality, I probably would have started trimming in mid-2020. For over 365 days, that would have seemed like a terrible decision.
Here's what it probably would have felt like.
Which brings us back to Shopify today.
The stock has recovered very nicely. But based on my own calculations, revenue needs to grow at about 24% annually...until 2040.
Is that possible? Yes
Is it probable? No
How do I respond? By carefully monitoring the amount I allocate. I still think it's one of the most antifragile businesses out there, but the stock is somewhat fragile -- thanks to the valuation.
As a result, I keep allocation below 5%.
That's the happy Middle Ground I've found over the years. Balancing reasonable skepticism with decades-long optimism. It might not lead to headline-grabbing returns, but it has helped me handily beat the market. Over the long run, that's more than good enough for me.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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P.S. It's Official, we are splitting up our YouTube Channel. Brian Stoffel is starting a new channel that will cover earnings, his portfolio moves, and more. Subscribe to his new channel by clicking here.
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