Investing is hard. There, I said it. Now I’m going to illustrate.
Upfront, we are gaga over Shopify Inc (TO:SHOP).
As we comb through the Canadian investing landscape, there’s not another company that comes close to matching what’s going on at this still emerging company. That’s right. Emerging.
Even though the company is more than 10 years old and now carries a market capitalization of more than US$15 billion, in a lot of ways the story is just beginning.
Shopify reported earnings last week and the company’s trajectory was on full display. Metrics that demonstrate year-over-year growth of more than 50% are the norm. Again, something that’s unmatched in the Canadian investing landscape.
Yet, unlike past reporting sessions, the stock actually sold off on the back of this report.
It boggles my mind that somebody would read through the release and somehow determine this is a company that should be sold. A move that almost assuredly will be regretted several years from now when this company is worth considerably more.
But this mind-boggling was given some context the day after the report hit when I read through the earnings summary that was cobbled together in the Globe and Mail.
And here’s where the investing-is-hard part comes into play.
From where I sit, Shopify’s quarterly report was awesome. Yes, I’m biased. We recommended Shopify in our flagship, members-only advisory service Stock Advisor Canada in March 2016 and have ridden it to a more than 400% gain. In addition, it’s grown into one of my largest personal positions. Therefore, I tend to view the company with rose-coloured glasses.
The Globe on the other hand took a very different stance. (To be clear, I’m not picking on the Globe. This just serves as a good example to key on.)
Consider the article’s headline: “Expansion costs, slowing growth drive Shopify lower”
Sort of sets the tone, right?
Well the negative undertones were only beginning. The whole piece was peppered with bits that could only leave one with the feeling that there are far better places to invest their hard-earned savings.
Check out the following passages:
The Shopify Inc. growth story sustained a blow on Tuesday after the release of earnings that suggested slower growth and increasing costs to bring and keep merchants on its platform.
The company also suffered from a slowdown in some key growth metrics that investors watch, such as monthly recurring revenue and the volume of money flowing through its retail shops.
Since July 25, Shopify shares are down 20 per cent.
Shopify also saw a continued slowdown in the growth of its gross merchandise volume, or GMV – the total value of orders processed on the platform in the quarter. At US$9.1-billion last quarter, the company’s GMV increased 56 per cent from a year ago, but that growth has been steadily decelerating over the past few quarters, and is down from quarterly highs of 100-per-cent growth as recently as 2016.
Secondary headline: Shopify: Firm eyeing fix for churn rate, Lutke says
On a conference call with analysts Tuesday, Mr. Lutke said he regretted not building a functionality within Shopify to let merchants open multiple stores with one account to let them play around, make mistakes and grow.
Tuesday was a rocky day for Shopify, which had to correct its news release soon after the original was published, helping to drive shares down as much as 10 per cent in premarket trading.
Shopify’s own data policies were brought up on the conference call when an analyst asked how the European Union’s new General Data Protection Regulation might affect the company. “Our merchants’ data has always been their own,” Mr. Lutke said. “The GDPR set of regulations have, if anything, fortified the approach we’ve taken all along.”
See what I mean?
Put that all together and what’s your impression of the company? I doubt it matches my unabashed enthusiasm proclaimed off the top.
Dang brains
What makes all of this so hard is located between our ears.
Yes, when it comes to investing, our brains are the enemy.
Reason being is that we’re programed to weight these negative undertones more heavily than positives. To the point that it can really skew our outlook.
You see, humans evolved to be fearful. We wouldn’t be here if we hadn’t.
Consequently, we react more intensely to negative stimuli than to equally positive ones.
If you really want to get specific, this is all driven by the amygdala which uses about two-thirds of its neurons to look for bad news. In other words, it’s primed to go negative.
Which is why when we read an article like the one referred to above, it’s very easy to go to the dark side, so to speak. Far easier than it is to go the other way.
So you see, given our access to information these days, conflicting messages abound. This is but one example. And because of our brains, we’re more likely to disregard the positives and focus on the negative. It’s why so many are willing to believe that a market crash lurks around every corner when in reality these occasions are rare and the market’s natural trajectory is up.
Heck, it’s also why we rarely hear about good deeds on the local news. Bad news sells.
At the very least, a more balanced approach is warranted.
Foolish Bottom Line
The fact that investing is hard probably doesn’t come as a huge revelation to many of you. The why, however, that underlies this doesn’t get near the attention it deserves.
Most think finance and investing is all about such things as high level math, fancy equations and deep insights into a company’s prospects.
However, the reality is that the more we can balance the positives and negatives, the better off we’ll be as investors. Simple as that. Though rather ironic, control your brain, make more money.
Iain Butler,
CFA Chief Investment Advisor
Motley Fool Canada
Disclosure: Iain Butler owns shares of Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify.