🧠 Focus On These Two Questions
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Friends,
On March 8th of this year, MongoDB reported earnings.
The company — which provides a next-generation database for software developers — saw its stock fall 15% in response to the results.
The culprit: MongoDB has a usage-based model. The more its customers use the database, the more it gets paid. And because MongoDB’s biggest customer base — tech companies — were cutting back on spending, MongoDB’s growth fell sharply over a short time frame.
At that time, we created a YouTube video explaining why we weren’t worried about the company.
The reason for our optimism came from asking ourselves two questions:
- Would demand for MongoDB’s product go up or down over the next decade?
- Does MongoDB have a moat?
The answers came quickly to us.
- Up – The proliferation of data means organizing unstructured bits of information will only become more critical in the years ahead.
- Yes – The switching costs become onerous once a software developer starts using MongoDB’s platform.
Recently, our conviction was rewarded: in just three months, the stock has nearly doubled. Holding through the short-term pain has (so far) proven to be the right move.
That’s not to say that those two questions will always lead to the “right” answer. Many other factors — valuation, execution, competition — all impact whether an investment pays off in the long term.
But we’d argue those two questions carry at least 80% of the freight.
So, the next time a business you own suddenly plunges, ask yourself:
- Is demand for the company’s product going up or down over the next decade?
- Does it have a moat?
Answering those two questions correctly — over a decades-long time horizon — will guide you to the correct answer more often than not.
Wishing you investing success,
– Brian Feroldi, Brian Stoffel, & Brian Withers
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