“The time to buy is when there's blood in the streets, even if the blood is your own.”
- Baron Rothschild
As you likely know already, today, Crowdstrike deployed a software update that resulted in major IT system outages globally.
The Crowdstrike software update caused computer crashes across industries, including airlines, banks, and other major institutions comprising societal infrastructure at global scale.
Here's what Crowdstrike's CEO George Kurtz had to say on the incident:
"CrowdStrike is actively working with customers impacted by a defect found in a single content update for Windows hosts. Mac and Linux hosts are not impacted. This is not a security incident or cyberattack. The issue has been identified, isolated and a fix has been deployed. We refer customers to the support portal for the latest updates and will continue to provide complete and continuous updates on our website. We further recommend organizations ensure they’re communicating with CrowdStrike representatives through official channels. Our team is fully mobilized to ensure the security and stability of CrowdStrike customers."
- George Kurtz
I believe there are two lenses through which to look at the Crowdstrike incident:
- Warren Buffett's Great Investments, many of which were bought on the heels of scandals or major setbacks. For instance, American Express was bought in the wake of the Salad Oil Scandal. Washington Post was accumulated during an extraordinarily tumultuous time for the company from 1972 to 1975. Apple was bought during a time when the company was seen as a commodity hardware product whose margins would be destroyed by competition.
- The Boeing Ethiopia Crash of 2019. At first, the crash seemed like a minor hiccup for the business, if a tragic loss of life. Over time, however, it was determined that the cause was Boeing's negligence in pursuit of profits (it chose to not include a necessary safety feature redundancy in its 737 MAX planes, which contributed significantly to the Boeing Ethiopia crash in 2019). The company was forced to pay $2.5B in damages for 157 lives lost, and Boeing has not recovered since this incident (there have been many subsequent issues, to be sure).
So this is where we're at today: a crossroads.
On the one hand, great investment opportunities present themselves during crises or major setbacks for individual companies.
"A great investment opportunity arises when a marvelous business encounters a one-time, huge, but solvable problem."
-Warren Buffett
On the other hand, Crowdstrike's liability costs are currently entirely unknown. In some sense, they could be massive. Outages kill people. When power goes down in certain regions of the world, hospitals lose vital tools that save lives. Police cannot respond to violent crimes occuring. System outages indeed kill. They should be taken very seriously.
There's presently no way to know exactly what the costs will be for Crowdstrike in light of these realities.
All of this being said, in the LAS community recently, I shared my thinking on portfolio concentration. Today, while I personally own Crowdstrike, I am entirely unperturbed by the selloff created by the aforementioned unknown liability.
Why?
Because I am well-diversified.
In this vein, here's what I shared with the LAS community recently:
"Lastly, I subscribe to a Peter Lynch-style of investing where concentration is unnecessary. From 1977 to 1989, Mr. Lynch generated 29% annualized returns owning 1K+ stocks at times, while Mr. Buffett generated about 17-18% returns.
Concentration can be convenient in that you don’t need to think about many companies, and it can yield great results, but I do not believe it’s necessary, and, when managing $100M to $1B+, I do not believe it’s prudent. Investors should do the work to find a basket of equally attractive risk/return setups, and allow evolution (survival of the fittest within the portfolio) to do its work, i.e., let winners win and become concentrated positions and allow the laggards to lag and become less concentrated. This is the most sustainable (works for decades), prudent (doesn’t involve potential for catastrophic loss of capital) methodology for investing that’s also scalable (can be used for assets under management at $100M-$1B and beyond)."
Scroll down a bit more and click on the multi-color button to get access for free.
Disclosures:
L.A. Stevens has not rated Crowdstrike.
