Nothing But Net

"Even the best stocks can go wrong, and the only thing you can do is prepare for setbacks." This book teaches you how to navigate the unpredictable world of tech stock investing while focusing on the long-term game.

1. Prepare for setbacks in the unpredictable stock market

Investing in stocks can be volatile, especially with high-profile companies like Amazon, Google, or Netflix. Even these giants have suffered significant stock corrections at times, underscoring the unpredictability of the market. For instance, Netflix saw a massive 40% correction in 2018 when its subscriber numbers fell short of Wall Street predictions.

External factors can also rattle stock prices beyond a company’s control. Amazon faced challenges during President Trump’s trade war with China in 2018, leading to a one-third drop in its value despite having no internal issues. These examples illustrate how even dependable stocks can face downturns.

Mark Mahaney emphasizes that no stock investment comes with guarantees. Even experts, like Mahaney himself, have made missteps, such as his 2017 recommendation to invest in Blue Apron stock, which eventually dropped 93%. The critical takeaway: anticipate setbacks and have strategies to manage them.

Examples

• Netflix's 40% loss in 2018 due to missing subscriber targets.
• Amazon's valuation hit in 2018 from external political and global economic events.
• Blue Apron’s rapid decline despite initial expert recommendations.

2. Long-term strategies trump short-term trading

Short-term trading or “playing quarters” might seem tempting due to rapid profits, but it often leads to frustration. Mark Mahaney advises against this approach since predicting quarter-to-quarter stock movements can be incredibly difficult. Short-term volatility is both random and often misleading.

For example, Snapchat experienced a sudden 10% dip in its stock price in March 2019 despite showing promising revenue trends. Events like these are impossible to predict and show short-term fluctuations don’t often reflect the company’s overall value.

Instead, long-term investing in solid companies with clear fundamentals provides far better results. Holding Amazon stock between 2015 and 2018 would have yielded a 386% return, compared to potentially losing money during that period’s down quarters. Patience and consistency can pay off far more than gambling on short-term shifts.

Examples

• Snapchat’s unexpected 10% correction in 2019 despite growth indicators.
• Amazon’s 386% overall growth from 2015–2018 compared to short-term trade losses.
• Mahaney’s consistent emphasis on the futility of short-term plays in tech investing.

3. Focus on companies with at least 20% revenue growth

Companies demonstrating consistent revenue growth of 20% or more become attractive investment options. Sustained growth reflects quality and resilience, making it a key metric to consider when evaluating stocks. For example, Netflix maintained long revenue and subscriber growth, which made it a more compelling investment than eBay, whose stock price plateaued for over a decade.

This growth often accompanies successful business decisions known as growth curve initiatives (GCIs), like new launches or geographic expansions. Netflix’s ventures into online streaming and international markets exemplify well-executed GCIs, translating into soaring stock prices.

Being consistent for five to six quarters with 20% growth indicates resilience and potential longevity. This success also helps identify innovative companies likely to excel further over time.

Examples

• Netflix’s strong subscriber and revenue growth versus eBay’s stagnation.
• Netflix’s implementation of GCIs like streaming and international expansion.
• The importance of identifying companies with at least five consecutive strong quarters.

4. Product innovation drives revenue growth

Product innovation remains a foundation for strong financial performance in tech companies. Companies like Apple release products such as new iPhones yearly, keeping customers engaged and creating repeatable success. Likewise, Amazon’s innovations like the Kindle have expanded its market presence.

Investors benefit directly from these innovations, as they can see the tangible value and growing buzz around the product. Companies that bring fresh, exciting products to the table often generate additional revenue streams while strengthening existing ones.

Mahaney notes that innovations are critical indicators when evaluating a stock’s growth. Innovative companies are likelier to maintain or gain competitive advantages over time, making them valuable investments in the tech space.

Examples

• Apple’s yearly iPhone releases fostering customer excitement.
• Amazon’s launch of the Kindle as a technological game-changer.
• Netflix’s groundbreaking entry into the streaming market.

5. Total addressable market (TAM) predicts potential success

The size of a company’s TAM indicates how far it can grow. A larger TAM opens doors to premium growth opportunities, and companies with substantial global expansion tend to perform better over time. Netflix leveraged TAM when it transitioned from DVD rentals to global streaming services, capturing a worldwide audience.

Expanding TAM often helps firms scale up and develop competitive moats. Bigger players with significant TAM can dominate rivals by appealing to more consumers. Companies like Google demonstrated this early on by succeeding across international markets from the start.

Businesses with a significant TAM often attract larger investments, as their scaling abilities tend to predict long-term growth. TAM can influence how a company positions itself in its industry and grabs opportunities to expand further.

Examples

• Netflix’s TAM growing with its switch to streaming and global markets.
• Google’s immediate global success thanks to international scalability.
• TAM-driven opportunities leading to eventual market domination.

6. Customer-focus beats investor-focus for long-term growth

A customer-first approach yields better long-term outcomes than prioritizing immediate gains for investors. Amazon benefitted from this strategy when it launched Prime in 2005. Though this move cost profits initially, focusing on customer value helped Amazon overtake eBay in online retail.

By putting customers first, Amazon created lasting relationships and loyalty, which fueled continued growth and expansion. On the other hand, eBay stagnated as it failed to adopt a customer-centric philosophy. Amazon’s efforts also exemplify the broader benefit of long-term strategies over short-term concerns.

Customer-centric companies stand out in a competitive market, reinforcing investor confidence. Their commitment to user satisfaction often translates into more sustainable long-term outcomes.

Examples

• Amazon’s prioritized Prime to benefit customers despite investor concerns.
• eBay’s decline tied to its less customer-focused approach.
• Companies with strong customer focus often outperform competitors.

7. Great leadership propels great companies

A strong management team is the backbone of any successful tech company. Mahaney suggests identifying founder-led organizations or those with a proven track record of smart decision-making. Leaders who are innovative, customer-driven, and have the ability to steer through challenges tend to run better companies.

Amazon, once again, is a standout example. Under Jeff Bezos, the company established a culture of innovation and customer obsession, laying the groundwork for years of success. Similarly, CEOs of top-tier tech firms like Apple, Google, and Tesla have played critical roles in driving their companies forward.

Interestingly, Mahaney notes a quirky correlation—many excellent tech CEOs have attended the Burning Man festival, known for creativity and outside-the-box thinking. While this might be coincidental, it underscores how visionary leadership often aligns with unconventional inspiration.

Examples

• Jeff Bezos’s leadership establishing Amazon’s innovative ethos.
• Burning Man attendees like Elon Musk (Tesla) or Sergey Brin (Google).
• Founder-led firms often introducing transformative ideas.

8. Logical thinking over perfect math when assessing valuations

Valuation frameworks are often ambiguous, and investors must view them with caution rather than relying on them. Instead of aiming for precision, assess whether a valuation makes sense within the company’s context. Look at whether the earnings have long-term potential or whether they reflect temporary struggles tied to investments.

Companies like Netflix and Amazon had very high price-to-earnings multiples but proved to be excellent investments due to their sustained growth patterns. On the other hand, guessing future valuations can lead to disappointment when disruptions occur, such as during COVID-19. Logical assessments win over overcomplicated methodologies.

Ultimately, apply a broad lens when considering valuations. Avoid getting caught in exact numbers, and instead ask yourself whether the investment opportunity feels reasonable under today’s circumstances.

Examples

• The unpredictability of valuations during the 2020 pandemic.
• Netflix’s strong future growth despite its high initial price-to-earnings ratio.
• Logical decision-making tools outperform overcomplicated analyses.

9. Avoid trends like meme stocks and day trading

Avoid the excitement of day trading or trendy meme stocks that capture public attention but often lack strong financial backbones. Stocks like Gamestop spiked by 1,900% in 2021, only to drop rapidly by 90% a month later. Quick profits come with high risks.

These strategies may seem attractive but are more like gambling than investing. Instead, focus on research-driven, informed decisions. Look for companies with strong fundamentals that demonstrate ongoing growth and potential.

Mahaney encourages new investors, especially those who entered the market during COVID, to focus on steady, reliable investment methods. Building confidence as an investor means making smart, well-researched choices rather than betting on the short-lived hype.

Examples

• Gamestop’s dramatic rise and crash in early 2021.
• Avoiding memes in favor of research-based decisions.
• Focusing on fundamentals for better long-term rewards.

Takeaways

1. Stick to a long-term investment approach; avoid the temptation of quick wins in day trading or trends.
2. Focus on companies with sustained growth, a customer-first approach, and innovative leadership for better returns.
3. Develop logical, research-backed investing habits instead of relying on predictions or speculative forecasts.