I was a happy BABA shareholder until my dog walk

When we got home, I sold every single share

This morning BABA was a 13% position for me and my clients, and I was excited that Geoff Gannon at https://focusedcompounding.com was going to discuss it. While we are both “Deep Value” investors, we invest with different strategies. So I don’t always agree with his priorities or conclusions but I always enjoy listening because I hear new things that challenge my own opinions and processes.

So I took Bella for here walk while I fired up the podcast.

The key point was Geoff pointing out the margin erosion it’s suffered over the last decade. I had known margins had fallen, but viewed it more as a recent one time problem. At that point I realized that during my research I had focused mainly on the last two years and put little thought into those decade long trends other than “Wow, revenue growth is fantastic!”.

When I got home I reviewed the entire decades trends and they matched up to what Geoff said. As BABA adds revenues, they come at significantly worse margins.

At this point I realized my research was incomplete, yet I was holding a 13% position, obviously I needed to be out until I finished my analysis. I was tempted to calculate my basis so I could set the sell price so I wouldn’t lose money, but resisted the temptation to anchor and sold at the market price. Total time from Geoffs thoughts slipping in through my ear-hole to selling everything took about 45 minutes.

Let’s be clear, I’m not selling because I think BABA is a bad value. It’s still very cheap in relation to revenue and profit growth, and probably will offer good returns going forward. But it has significantly more risk than I had been aware of, and until I can understand it’s margin erosion in detail, it’s not own-able for myself and my clients at any price.