It's been one heck of an eight-year bull market. Many professional investors, such as Oaktree's Howard Marks, are cautioning that the market has gotten ahead of itself and that stocks are overpriced. Others fear that we're due for an all-out correction, similar to the economic recession in 2008.
I'll be the first to say that I'm not worried about any of the possibilities listed above. I view stocks as long-term investments in progressive and disruptive companies that are introducing new forms of value to the world and generating profits for years for their shareholders. There will be bumps along the way, but The Motley Fool's long-term approach has served me well, and led me to companies that have provided multibagger returns. That includes investing in Baidu in 2008, Netflix in 2009, and several other recommendations I've publicly made on Fool.com.
Of course, investing in great companies doesn't mean I never sell.
Selling is a personal decision that should never be taken lightly. But I'm a believer in cutting out the losers of your portfolio so that you can reallocate the funds to more promising opportunities. That occasionally means parting ways with companies that no longer meet your investing thesis.
All of that said, I'll use this article to highlight two of my personal mistakes that I'm cutting ties with. Here are the reasons that I sold Stratasys (NASDAQ: SSYS) and LendingClub (NYSE: LC) earlier this month.
Several years back, several of us at the Motley Fool (myself included) saw a growing potential for 3D printing to disrupt the manufacturing industry. Rapid prototyping would improve the time-to-market for new products, and manufacturers could save lots of money by holding significantly less inventory. Stratasys was one of our favorite picks in the industry, and received multiple recommendations in our Foolish services.
But to put it bluntly, I'm losing faith in Stratasys' addressable market potential. The industries that Stratasys has focused on are becoming less interested in their 3D-printed products.
Budget cuts and compressed timetables are shifting engineers from 3D prototyping to virtual prototyping. In the virtual world, companies can use computer simulations to adequately predict performance, which speeds the time-to-market of new products. From there, they can even upload the designs to autonomous robots in flexible manufacturing facilities to make the final versions. Companies like Flex, Inc. (NASDAQ: FLEX) are fulfilling the needs of customers at all points of the value chain -- from design and testing to scaling and manufacturing. This is quickly making 3D prototyping of actual parts obsolete.
Even worse, the company's most lucrative customers could soon see their overall market begin to contract. Several of Statasys' largest customers are automakers, specifically Toyota and BMW. Auto sales are hitting peak demand and could very well experience a cyclical downturn. But highly engineered luxury vehicles (which previously needed 3D printed prototypes in their design) could also soon be competing against autonomous fleets of self-driving cars. Autonomous fleets have much higher utilization, which means there are fewer units sold and less of a need to design new parts using Stratasys' 3D printing and modeling.
We also never saw the consumer market come to fruition. Stratasys paid more than $400 million four years ago to acquire MakerBot, which it believed would be a slam-dunk for consumers to 3D print products directly in their homes. That proved to be a terrible decision, as anemic revenue forced Stratasys to write down the goodwill from the MakerBot acquisition on multiple occasions. Management lit our shareholder capital on fire, and never did find a profitable way to enter the consumer market.
Lastly, the competition has more than heated up. HP (NYSE: HPQ) jumped head-first into the industry, offering a 3D printer that was 10 times faster than previous technologies. The company's reorganization (splitting the enterprise and consumer segments) allowed HP to better focus and allocate capital toward growing its fledgling 3D printing business. It's bad news to see large profit-hungry competitors encroaching on your home turf.
Despite all of these long-term hurricane-force headwinds, Stratasys's stock has still risen more than 40% thus far in 2017. I'm not as bullish about its future as I once was, and think it's time to look to print profits elsewhere.
It should come as no surprise that there's big money in banking. A few years back, I took a speculative bet on LendingClub, an online peer-to-peer lending platform. The idea was that by using finely turned algorithms to manage risk, LendingClub could efficiently match lenders with borrowers and capture a small fee from each transaction.
The concept was novel and disruptive. But the execution was an absolute disaster.
The company's visionary CEO and founder, Renaud Laplanche -- who was considered by most to be the brains of the operation -- was forced to resign last year after making a personal loan that violated the company's disclosure policy. It was also found that the dates on a group of already-sold loans had been altered to match the requirements of a loan investor.
Does that sound like the kind of company that you would want to invest in? Similar to Wells Fargo creating phantom loans for customers this past year, it sounded like poor internal controls -- which weren't able to keep bad employee and/or management behavior in check.
I should have seen this as a huge red flag last year and immediately gotten out. But I foolishly (small "f") held on, even though the plot got even worse. Laplanche has now founded a new company called Upgrade, which will compete directly with Lending Club. And the larger banks are beginning to experiment with peer-to-peer lending platforms as a way to control costs.
These recent chapters in the Lending Club story don't seem to be setting the scene for a happy ending. Even today, management is still compensated on revenue and EBITDA growth, while there is no incentive tied to the actual quality or default rates of the loans themselves. It seems like LendingClub is much more interested in boosting transaction volumes, rather than in maximizing loan quality for its customers.
If they're simply serving as a middleman for those transactions, I'm not convinced LendingClub will ultimately be any better than the larger banks. I no longer see a clear path for it to succeed, and think it's time to deposit my hard-earned cash somewhere else.
Learn from your mistakes
One of the biggest advantages of our Motley Fool community is in learning from each others' mistakes. No one in the investing world picks right 100% of the time. But by correcting our errors and avoiding making them again, we have a better chance of instead allocating to great companies.
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