We've been on the journey of building the Intrinsic Value Portfolio for more than 18 months now. And the challenges of building a portfolio publicly have changed over time.

In the beginning, Shawn and I felt almost pressured to invest capital so our portfolio wouldn't sit on 90% cash for months. That's how we ended up averaging down a bit too early on some names – a mistake you'll see in more detail below.

Over time, we allocated more and more capital, and the challenge inverted. Suddenly we had too little capital chasing too many ideas. One could argue that it made us too active at times, selling positions more quickly than we intended to shift capital into another opportunity.

Most of the time, that worked out well. But we also had our fair share of losses. And while it's never fun to look at them, they carry the most important lessons.

So today we'll do exactly that: go through our biggest losers and work out what we can do better next time. Four companies – two we owned and sold at a loss, one we still hold and are underwater on, and one we researched, pitched, and decided against, which turned out to be the best decision of the group.

Let’s dive in!

— Daniel

Before we get into it, a quick note. A lot of what you'll read below came out of conversations with members of our Mastermind Community over the last few months. Getting an outside perspective on your stock ideas helps enormously. It's so easy to get lost in your own biases or an echo chamber. That's especially true for an issue like this one. Spotting a broken thesis in hindsight is easy. Having someone tell you, in real time, that the warning signs you're calling “noise” are not noise is a lot harder.

If you're looking for a group to bounce ideas off of and challenge your thinking, I'd encourage you to apply. Beyond the daily discussions, we hold weekly calls where Shawn, Kyle, and I present stocks or work through our own positions – much like I'm doing here today.

One more thing: our Intrinsic Value Conference in New York City on Saturday the 19th is free to attend for Community members. So this is a particularly good moment to join.

Before we get into the individual companies, I should briefly explain exactly what the Intrinsic Value Portfolio is and how its structure affects how we think about what to buy.

We started this portfolio with 100% in cash and the goal of eventually owning 15-20 companies. That means we call a position around 5% a "full position." At the start, everything below that indicated either that the range of outcomes was much wider than at other companies, or that the three of us didn't fully agree on it. Over time, we noticed that we felt more comfortable sizing up some of the positions. Others increased in size due to the gains we made on them (an episode on our winners was just published).

This slightly shifted the "full position" logic. There are companies below 5% in size that we all agree on and don't see as riskier than the larger positions. They're small for a different reason. Our portfolio doesn't receive any new capital, so positions compete with one another permanently. So what actually shapes the size of a position is the risk and range of outcomes we see for a company, how much the three of us agree on it, and the opportunity cost of not putting that capital somewhere else.

And last but not least, the portfolio with the exact sizes you see here is a paper portfolio. All of the positions are owned through at least one of us in our personal portfolios, but the position sizes can vary (most of the time, we actually have larger positions than in the Intrinsic Value Portfolio). So for all the stocks discussed today, be sure that we lost actual money…

The first two companies are ones where Shawn and I actually had split opinions, and it looks like we would've done better if we had just listened to each other, haha. He was skeptical of PayPal. I was skeptical of Lululemon. We each overrode the other, and both of us were right about the company we didn't want (at least for now).

Lululemon was pitched by Shawn in September of last year. We made our first purchase at about $200 and averaged down about a month later in the $170s. You see a pattern here that will be even more evident when we discuss Adobe – we doubled down too early because these were among our first picks, and we felt the need to deploy capital. We sold the position in June of this year at a ~40% loss.

So what happened?

You can read the in-depth thesis here, but summarized: Lululemon has been the spearhead of the athleisure movement across the U.S. and North America as a whole. They had industry-leading margins and returns on capital, and it seemed like they were to athleisure what Nike has been to running for many decades.

But just like Nike, Lululemon suddenly faced far more competition than expected. Brands like Alo and Vuori gained popularity, and during that time, Lululemon had problems in the C-suite and with its founder, Chip Wilson. He publicly criticized the company's direction.

That was roughly the setup when we bought. Shortly after, Lulu’s CEO was fired, and the company was led by two interim co-CEOs, which certainly made the situation more complicated. The market clearly didn’t like this cascade of changes and challenges. Still, Lulu historically traded at an average P/E in the 50s for many years, so a multiple of 15x could've been seen as a steal. And Shawn was (and is) a major fan of the brand. He could attest that Lulu seems as popular as ever with his friends and at his gym.

As a German, I didn't see the brand even close to as often as Shawn did. And whenever I visited a Lululemon store here (doing some scuttlebutt research), the customers were American or Chinese tourists, and the staff talked to you in English by default. I guess that says something about its popularity with German customers. It also made me wonder how much runway the international growth story really had. To be fair, China was the main driver, and Lulu has been and still is in high demand there.

I have a more structural problem with investments in fashion companies, though. Most of them follow a predictable arc that is close to impossible to get around. A brand starts niche and beloved with exceptional unit economics, then, sooner or later, it starts to go mainstream, at which point the financials look better than ever while the cultural position is already eroding. The people who made the brand desirable stop wearing it precisely because everyone else started. They move on to a new one, and the cycle begins again somewhere else. The mainstream just follows, with a time lag.

The people who made the brand desirable stop wearing it precisely because everyone else started. They start to wear a new one (you could call them trendsetters), and the new cycle begins. The mainstream is simply jumping from one brand to the next with a time lag.

The brands that escape this cycle – Nike, Adidas, the luxury houses – are the exception, and each manages it for different reasons. Although "escape" is doing a lot of work in that sentence, given where Nike is right now. Maybe the more honest version is that these brands are more likely to survive the cycle rather than avoid it.

Long story short, Shawn reached out to me, ready to sell after realizing that Lululemon had started discounting its products at a much higher rate than before. Discounting works beautifully in the short term, but it conditions the customer to wait for the next markdown, chips away at brand value, and is an almost certain path to long-term problems.

Shawn had been clear from the beginning that discounting was one of the thesis-breakers. So when we saw it, we acted and sold the position. Having a precise thesis is important, but having an equally precise list of thesis-breakers is one of the most useful tools in investing. It doesn’t mean you will always nail the best moment to sell, but it reduces the chance of getting stuck in an investment for no reason other than false pride or biases.

The importance of that also showed in our next case.

I covered PayPal a little more than a year ago. Since then, the stock is down 12%. That doesn't sound dramatic, and certainly not like a stock that belongs in a conversation about our biggest losers. But we unfortunately lost more than just 12%. The loss in our portfolio was closer to 30%.

The reason is the timing of our sale, which raises a bigger question about when you should sell. But let's start with what happened.

I went into my research a year ago expecting to confirm that PayPal was a slowly decaying business and brand. Instead, I liked the new CEO, the vision, and the initiatives he started. Coupled with a massive buyback program and a double-digit free cash flow yield, it felt like an interesting opportunity.

Branded checkout – the core product – wasn't growing fast, but it was stable. Venmo and Buy Now Pay Later (BNPL) grew a lot. And an ads business was being built by Mark Grether, who had created Uber's billion-dollar ad business and worked on Amazon's before that. Things looked like they were working, and the numbers were going in the right direction. Add the agentic commerce deals with OpenAI and Perplexity, and the stock reacted very positively.

That was around Q3 of last year. The yellow flags started between Q3 and Q4.

The first was communication. The C-suite suddenly stopped talking about many of the initiatives they had previously announced with quite some enthusiasm – all while the leaders of those units continued to provide promising updates. It got even weirder when the CFO gave what felt like half a dozen back-to-back interviews explaining how difficult the macro environment was. That seemed like a tell, especially since competitors weren't reporting the same problems.

But I wanted to wait at least until the Q4 numbers. Up to that point, not a single metric I was watching showed any signs of deterioration. Quite the opposite. And selling because of some CFO interviews seemed like a major overreaction.

Well, Q4 came, and not only were the numbers disappointing, but Alex Chriss, the CEO, was fired. That was a clear thesis-breaker. The only way to stay in was to bet on what I had considered the margin-of-safety scenario – PayPal was so cheap that they would either become even more of a share cannibal or get bought out.

It appears the latter might happen soon. Stripe and Advent offered to buy PayPal for $60 a share. The stock is already trading at these levels, and PayPal declined the offer. Perhaps a new one will come in at a higher price. Knowing this, and considering it was always the way out, you might argue we shouldn't have sold.

But this is where opportunity cost comes into play. We could’ve made our PayPal returns look much better by holding on longer and going for the buyout – losing 10% sounds much better than 30%. However, the PayPal capital went into Amazon in the $190s. Amazon became a 10% position and quickly returned 40%, making up for all PayPal losses and then some.

Ultimately, I didn't want to be trapped in a gamble on being acquired while the thesis had broken down. Which, once again, leads us to the next stock…

One difference between Adobe, PayPal, and Lululemon is that Adobe is still in our portfolio. And the reason for that is, well, all the other differences between those companies. Adobe is a much higher-quality business with a much stronger competitive position.

PayPal and Lululemon both operated in highly competitive fields. Adobe has dominated the creative field for decades. The market argues that might change now because of AI, and on that basis the stock was sent down 60% over the last five years. We have been down as much as 40%. The recent run-up recovered some of that, though, bringing us to -25%. Not a reason for celebration, but we'll take it for now.

In this case, a look at our buys tells you the biggest mistake we made here – we doubled down way too quickly. We started the position at $380 per share and four times between $380 and $315.

This goes back to our portfolio setup mentioned in the beginning. This project started with an empty portfolio, 100% in cash, and the rule of only adding companies we covered on the show. That put a lot of pressure on us because a portfolio sitting at 80% cash for months understandably raised some questions among you. So we tended to double down too quickly on the companies we liked. It worked out with Google, which returned 100% for us and has been the biggest position from the start, but it hurt us with Adobe.

We've discussed Adobe multiple times on the show and in the newsletter, so if you want the full qualitative thesis, I'd point you back to those. Here I want to focus on the stock action and why we decided to hold on.

A quick look at the fundamentals shows that margins, returns on capital, and revenue growth are still intact. What changed is the multiple, from 22 to 11, which alone explains the decline. It's also why the comparison to our other losses doesn't hold. If you overlay revenue growth on Lululemon's or PayPal's charts, the correlation is quite obvious. For Adobe, that correlation doesn't exist – 10% annual growth over four years while the stock fell 60%. Over long horizons, revenue growth explains most of a stock's return; over a single year, the multiple does. Adobe's rerating proves that point.

What the market fears, though, is that current revenue growth is unsustainable in the age of AI. So the question is whether the market’s fear is right.

The bull argument is that Adobe's revenue comes from enterprise customers who need deterministic control over creative output, whereas generative AI is probabilistic by construction. My worry is about everyone who isn't a Hollywood studio or major enterprise. Ad agencies don't have the same attachment to controlled craft, and if AI can do the job for a fraction of the cost, I assume they'll use it sooner or later.

That said, Shawn recently met the creative director of an ad agency who told him they use ChatGPT for mock-ups, but brands still require the final designs to be run through Adobe software. Which is a reasonable description of how this could go – AI takes on the brainstorming work, but the finishing still happens in Adobe.

And while I've become increasingly cautious about investing in companies facing terminal risk from AI, Adobe has a major distribution advantage. Even if AI use only becomes more common, a likely scenario is that much of that use will still happen within the Adobe ecosystem.

Time will tell. One thing I can't let slide, though, especially since it's been a major part of what went wrong with both PayPal and Lululemon, is Adobe's C-suite. The CEO announced his departure without a named successor, and the CFO followed weeks later. That might explain why neither has bought stock over the past few quarters, but it's still a yellow flag I find hard to ignore.

Alright, let’s turn to the company that actually taught me the most. Fortunately, we didn’t even need to lose money to learn that lesson.

The Trade Desk was pitched by Shawn in August of last year. Just one day after the episode dropped, the stock fell 40% in a single session after earnings. Today, it's down more than 90% from its highs. Honestly, this feels like a somewhat surreal experience. The Trade Desk was seen as one of the highest-quality companies in the U.S., trading at triple-digit multiples for quite some time, and then it suddenly collapsed completely.

It's fair to say that that collapse has left an impression on us. We decided against owning The Trade Desk, but only partly because of valuation, which already seemed much more reasonable at the time of the pitch. The main reason was that we just couldn't figure out how exactly The Trade Desk was operating and what made it so special compared to competitors.

In a presentation to our Mastermind group, I recently called this the illusion of understanding. It sounds fancier than it actually is. All I'm saying is that there's a bias toward believing you understand something better than you do, as long as the direction of the stock (and, to some extent, the fundamentals) seems to prove it. Once that changes, you realize how little you actually understood.

When The Trade Desk was growing 30% year over year with exceptional margins, everyone was copying the same narrative – that they were the unbiased and important alternative to the walled gardens like Google, Amazon, and Meta. But as soon as the numbers stopped supporting the thesis, very few people could still explain where the advantage of The Trade Desk actually was. The story had been doing a lot of the work that deep understanding is supposed to.

So whenever I invest in a company now, I run a simple test. I imagine growth or margins would come in well below expectations next quarter. Could I come up with the reasons for why that could happen today? If not, I likely don’t understand well enough what drives revenue and margins in the first place.

Let me give you an example with the companies we discussed today. For Lululemon, things are quite straightforward. If revenue is lower, Lululemon will have sold less clothing. That can be due either to customers going to competitors like Alo or Vuori, or to macro – the customer being weaker than expected overall. Both of those you can quickly check.

With PayPal, it's a step more complicated, but you can still get there. If growth or margins slow, the first place to look is branded checkout. And if branded checkout slowed, it would once again be competition or macro. Harder to pin down than Lululemon, but there's enough data to reach a reasonable conclusion.

For The Trade Desk, it’s a lot more difficult. Yes, you can look at the volume of competitors and overall ad budgets. But pinpointing the reason is much tougher, especially over the long run. Is it just a bad quarter? Or is the value proposition of its ad algorithm and its neutral position simply less important than it was a couple of years ago? We couldn't tell you which, and that's a good sign not to buy a stock.

Don't get me wrong, there are people in the industry who can answer that, and I’m not saying The Trade Desk can’t be a good investment here; Shawn and I simply aren't among those people. Sometimes you just have to trust your gut when a business sits outside what you actually know.

I did see an interesting comment on The Trade Desk, though, arguing that the best investments are the ones that feel uncomfortable to make. There's some truth to that, but I think the use case is different. Howard Marks is famous for saying:

However, that quote is about the public perception of a stock and how it should affect your decision-making. Being uncomfortable because the market hates a company is often exactly the signal you want. But that's a completely different thing from being uncomfortable because you can't explain what you own. Discomfort with sentiment can be a good sign, while discomfort with the business model is more of a stop sign.

Let me briefly reflect on and summarize the patterns we've seen in the companies discussed today.

In every case where the thesis broke, management played a crucial role. Lululemon's founder went public against his own board, the CEO left, and the company spent months under two interim co-CEOs who lacked the long-term vision needed to resist short-term fixes like discounting. PayPal fired Alex Chriss, arguably ending prematurely the very vision that got me excited about the company in the first place. And Adobe's CEO announced his exit without a successor, with the CFO following just weeks later.

What makes that hard to act on is the timing. In each case, the trouble at the top showed up before the numbers materially deteriorated. So at the moment you notice it, the financials still look fine, and selling feels like an overreaction to gossip.

That’s why our reactions were different all three times. We sold Lululemon only after the CEO had already left and the co-CEOs were in place. Primarily because the thesis wasn’t tied as strongly to who leads the company. That was different for PayPal, which is why we sold it immediately after Alex Chriss was fired.

And we still hold Adobe, despite management walking out the door, because the management transition seems much more natural here. The CEO, Shantanu Narayen, served for 18 years and will stay involved until a successor is named.

Which brings me back to being prepared and having a list of thesis-breakers. Define upfront the point at which your thesis is broken, and you sell. Otherwise, you'll find reasons to justify the changes again and again.

There's an often-used analogy with a frog in water. If you put a frog in cold water and slowly turn up the temperature until it boils, the frog will die even if it is physically able to jump out of the water at any time. Because the adjustment is gradual, it never feels the need to jump out – until it's sitting in boiling water and it's too late.

I guess the lesson here is not to be the frog… And with that highly philosophical end, let me just tell you that we have also just published an episode on our biggest winners. Just so you don’t get the feeling that we have no clue what we are doing here.

To listen to our discussion of this episode, or for more company Deep Dives, check out our podcast here.

Updates on our Intrinsic Value Portfolio below 👇

To discuss stocks daily with Shawn, Kyle, Daniel, and all Intrinsic Value Mastermind Members, apply here.

"In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten.”

— Peter Lynch

📺 WATCH: Aswath Damodaran on Leopold Aschenbrenner’s Hedge Fund Collapse

🎧 LISTEN: William Green and Victor Haghanu discussing Risk, Ruin, Reinvention, and Resilience

📖 READ: The Best Way to Sell a Concentrated Position by Nick Maggiulli

You can also read our archive of past Intrinsic Value breakdowns, in case you’ve missed any, here — we’ve covered companies ranging from Alphabet to FICO, Transdigm, Lululemon, PayPal, DoorDash, Crocs, LVMH, Uber, and more!

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