🧠 Focus On These Two Questions

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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:

  1. Would demand for MongoDB’s product go up or down over the next decade?
  2. 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:

  1. Is demand for the company’s product going up or down over the next decade?
  2. 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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