Snowflake and Counter-intuition

Snowflake and Counter-intuition

Morning folks,

A lesson I’m consistently learning is how counterintuitive investing can be. Here are some examples just off the top of my head.

You should probably want stocks to go down

If you’re a retiree or approaching retirement with all your money tied up in the stock market, of course you don’t want to see stocks going down. But the vast majority of investors (at least the majority reading this post) are not at that stage in their lives. They have decades of earning potential ahead of them, and, if they’re following traditional career paths, will be making more money in ten years than they are today. If you’re investing in businesses you love, and intend to continue to do so for many years, why would you want those stocks going up? Why would you want to pay a higher price for something that you’re already committed to buying?

Of course, no one wants to see their portfolio go down. No one likes to see their stocks in the red. But, if you’re dollar-cost averaging, that’s what you should want to see. Especially if they’re going down due to some market-wide selloff.

Taking no risk is the riskiest thing you can do

When I tell people what I do for a living, they assume I must be some crazy risk-taker. However, when I ask them what they do with their savings, they typically say that they are in a savings account. Having money in a savings account is great, but it’s not where you should be putting the money you’re not going to need anytime soon. How are you going to have a comfortable financial future when the money you earn is not deployed to increase your wealth over the long term?

Feeling the need to act is the surest sign you should do nothing

When we panic, we get the overwhelming urge to sell. When we’re feeling greedy, we get the urge to buy. What both of these moments have in common is that we’ve allowed our emotional brain to overtake our rational brain. This is what leads so many investors to lose money. Back in March, when the outbreak of the pandemic had hit markets hard, an investor told me he had sold everything. He made a perfectly reasonable argument as to why: he was going to wait until we saw signs of recovery and buy back in. But, of course, he didn’t reinvest when the market started going up. He was sure there would be another pullback. And he kept thinking that as the market hit new all-time highs over and over again. Not only did he lose money on the way down, but he missed the opportunity on the way up. And he created a big tax event for himself. 

This idea of investing being counterintuitive brings me onto my main point.

I wish Warren Buffett would stay away from stocks for a while!

I’m only half-joking about this.

When companies are about to IPO, you take a long look at them and counterintuitively, you hope the good ones don’t get much coverage. If you’re interested in a business that is about to IPO, you want any hype surrounding that business to be minimal. That way, when the stock does become publicly available, you get the chance to own it at a reasonable price.  

So it was with Snowflake, a data warehousing business that is set to IPO in October. The company was quietly on the radar of plenty of investors already, thanks to its nosebleed growth numbers. Having chatted with some people working in the tech infrastructure space — what Phil Fisher would call “Scuttlebutt” — I’d learned that Snowflake was the data warehousing company that everyone wanted to work with. They were “the best in the business”. So, naturally, you’re hoping to get in under the radar.

Then comes Warren with his $120 billion cash pile and decides he’s going to buy $250 million worth of the stock, along with Salesforce, before it’s even public. Buffett taking an interest in a stock is usually a huge bull signal to investors and typically results in a bump in the stock price when the news hits.

But we can’t even own the stock yet.

Now, Snowflake is suddenly the most anticipated IPO of 2020! Who cares about Airbnb, or Stripe, or Palantir? Buffett, who avoids tech stocks, is buying Snowflake!

Back off Warren. Let the rest of us make some money. Hmpf!