Friends,
We awoke last Friday to a world in digital chaos: people couldn't get money out of banks, TV stations couldn't do live broadcasts, and travelers were stranded at airports worldwide.
While the problem was officially related to Microsoft Windows, the real culprit was a bug within a system update for cybersecurity specialist CrowdStrike -- a stock that all three of us own.
Over the past decade, one of CrowdStrike's keys to success has been its ability to scale. The company's product gets stronger as it gains more clients: the more novel cyberattacks customers experience, the quicker all of the other customers worldwide get instant immunity to such attacks. It's a sneaky network effect that has worked beautifully.
Until it didn't.
There's an underlying lesson that's easy to forget: companies that scale quickly will almost uniformly produce market-smashing results for investors. But there's another side to the coin: you not only scale all of the benefits, but also the risks associated with a service.
In a lot of ways, we experienced the same thing with global supply chains during COVID. Just-in-time manufacturing -- especially from far-flung nations -- was incredibly efficient for Western economies. For decades, it fueled record profits.
Until it didn't.
When there was an obstacle in the way, the fragility that such efficiency creates was laid bare for all to see. We scaled the efficiency of just-in-time manufacturing without remembering the risks that scaled alongside.
Unless you're the CEO of a major corporation, we aren't sure how an individual investor can remedy the global phenomenon. But there are simple things we can do in our own life to ensure we aren't scaling risk to unacceptable levels.
A few that come to mind:
- Keeping an emergency fund: while it's more efficient to invest that cash, the risk of needing it and not having access to it is enormous.
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- Building up reserves for major purchases: as soon as you're within three years of a major purchase (house, college, etc), start pulling money out of the market. You'll miss out on the upside (efficiency), but you'll be capping your downside (risks) as well.
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- Never, ever buy stocks on margin: They can juice returns (efficiency) on the way up, and lead to bankruptcy (risks) on the way down.
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As for CrowdStrike stock itself, we'll give ourselves time to review everything that happened. Only then can we decide from a centered, grounded place that emphasizes taking the long-term view.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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