Verified Returns & Risk Management: A Retail Investor’s Imperative

Posted on March 27, 2024June 30, 2026 by io-fund

Last year was a stellar year for investors – in 2023, the Nasdaq 100 rose 54% for its best annual return since 1999, while the S&P 500 gained 24%. The Magnificent 7 were the de facto leaders of this market rally, with the group’s returns averaging 111% for 2023 and accounting for more than 60% of the S&P 500’s annual gain.

This was the opposite of 2022, the only year in history in which Treasury bonds and the S&P 500 both lost 10%. It was a year so rough that it marked the greatest destruction of wealth in modern history with an estimated $57.8 trillion lost across all asset classes combined.

And while 2023’s Big Tech-driven rally looks superb in headlines, a deeper glance shows this was not always the case – especially when accounting for 2022’s steep losses. In fact, on a 3-year cumulative basis, the indexes’ performances make a strong case for investing in indexes over ETFs.

Simply put, allocating only to a leading sector, such as cloud in 2020 and 2021, would lead to significant underperformance through 2022 and 2023, when multiples were cut dramatically as budgets were slashed. Semiconductors underperformed in mid to late 2022, but outperformed significantly in mid to late 2023. It’s these disparities in between different sectors of tech that prove the value of active investing versus passive investing.

Our firm believes that having an actively managed portfolio is where you get the best of both world’s – performance that far exceeds the indexes and ETFs by paying close attention to allocation, (quickly) cutting stocks that do not meet specific criteria, and choosing stocks that have strong, fundamental strength.

The I/O Fund is releasing our official 2023 returns plus our updated cumulative returns next week — so stay tuned to your inbox. Our returns help to prove an actively managed portfolio can exceed all indexes and major ETFs on a cumulative basis (that we are aware of).

However, before we release our returns, we think it’s prudent to discuss the importance of verified returns for retail investors. The I/O Fund goes to great lengths to deliver a rare level of transparency for our Members. This is not about a victory lap; it’s about raising the bar. We do not know of another research site that publishes every single trade in real-time, and then takes this further to have their performance independently verified. We do this because it’s the right thing to do, but there are other reasons putting our best foot forward with verified returns is important for retail investors.

The New Norm of Quant Trading Puts Retail at a Disadvantage

Algorithms account for up to three-quarters of equity trading volume, as hedge funds and investment banks are increasingly turning to algorithms and quant trading systems to outperform benchmarks. Algorithmic trading is one of the primary culprits to the extreme volatility seen in recent years, most notably with the flash crashes and rallies of 2020.

This creates a serious disadvantage for retail investors and those who do not have a team of Python developers to leverage quant systems that trade in the blink of an eye. Ray Dalio, the fund manager for Bridgestone, has openly discussed that the best approach to the modern-day stock market is what he calls “the man and machine.” His firm has 1,500-employees that use computer models to test hypotheses; which is just one of the many advantages hedge funds and institutions have over retailers.

This marked an important turnaround for our firm as we gave up what I would call “retail idealism” which centers around the idea that holding a stock for a long period of time is retail’s only defense. This works during times of economic expansion, but where this can go (horribly) wrong is when a new, more challenging macro changes the outlook for any given company.

For example, in 2022, hundreds of tech stocks finished down 70%, and nearly every tech stock finished down 50%. This includes the indestructible FAANGs, with many falling to trade at historic low valuations. An investor would have to be in denial to focus on the poor performance of an individual company rather than acknowledge something much bigger was going on. 2022 highlighted a crucial yet overlooked point (that we encourage our readers to do): let go of the idea that picking good stocks alone can save a portfolio in the tech industry and to instead fully embrace risk management tools.

2023 reiterated this point very well – although numerous stocks saw face-ripping rallies, such as Nvidia’s 239% rally and Meta’s 156% gain, only a handful outperformed and ended with positive returns on a 2-year basis from 2022 through 2023. Looking at Meta, despite that 156% rally, it ended just 5.2% higher since the start of 2022. Tesla rallied nearly 102% in 2023, but since the start of 2022, returns were (-29.5%). Alphabet’s 2-year return was (-2.6%), even with its 59% rally in 2023.

Risk Management Tools

In April 2022, the I/O Fund stopped relying on stock picks as the primary, offensive measure because this approach simply wasn’t working with the new macro. After partnering with Wealth Umbrella on an automated hedge, the I/O Fund began to boldly hedge up to 100% of our portfolio, at times, and we still continue this approach today.

We pivoted to playing defense rather than offense. Those who watch team sports will understand this transition well, as the strategy changes from attempting to make money (or make a goal) to a strategy that prevents losses (or prevents a goal).

Unlike many other all-tech portfolios and ETFs, we believe a more active stance is necessary for long-term tech investing. We also believe that the easy years of buy and hold are over, marked by the narrow leadership we saw in 2023 where a small number of stocks drove the rally last year. As a result, we rotate our portfolio frequently, raise cash and actively hedge our portfolio with an automated signal.

Real-time trade alerts are sent to our members the minute we decide to buy, sell, trim or add to a stock. For those who may not be aware, this is extremely challengingextremely challenging to do as it combines the two most advanced forms of portfolio management.

One of the most advanced forms of portfolio management is real-time trade alerts. This places immense pressure on a portfolio manager as the stakes are high to record what you do every second in real-time. To voluntarily choose to have the highest level of accountability in retail is nearly unheard of, yet registered fund managers are required to do this and file their stock trades.
Secondly, hedging up to 100% of a portfolio is also a large psychological hurdle, and traditionally a risky one. Markets spend the vast majority of their history in uptrends, for one. Secondly, the amount you can lose on a short is literally infinite, to where one’s downside risk is capped at 0 on the long side. To overcome these hurdles, we have spent considerable resources developing a “man and machine” signal with the help of Wealth Umbrella that is truly state of the art.

It’s only natural for retail services to want to ease the pressure of having to report in real-time. The stakes are much higher when what you do is recorded the minute the action is taken, but overall, having the highest level of accountability possible has made the I/O Fund much sharper investors.

Logging trades in real-time also places immense pressure on the analysts at the I/O Fund, as well, who are not allowed to simply choose a stock but must also determine the allocation for the stock. After recommending a stock, the analysts must help the portfolio manager actively manage the position, which can change at any time.

There is a reason most services do not provide this level of transparency and activity. The more granularity that is offered, the more skill is required. Also, compare this to social media, where some investors will casually claim trades that were not logged in real-time.

Verified Returns

In addition to a lack of risk management tools, I believe a lack of verified returns in the retail space contributes to the losses this investor type experiences. Smart money is careful about who they consider a good investor — they do not take someone’s word they are a good investor; they make the investors or firms they follow prove it. Every single hedge fund must report their returns, which reduces the chances of posturing.

Retail is not offered these checks and balances, and instead, this investor type follows many influencers and research sites who verbally state their performance without proper verification. Across the board, retail is offered a very low amount of accountability – this includes unverified month-end reviews, a list of stock tickers, unchecked screenshots, or other methods that are easy to manipulate. This widespread acceptance of loosely stating a stock performance is odd, to say the least, considering the finance industry is more inclined than any other industry toward deceptive practices.

How the I/O Fund Sets a High Bar for Accountability

Over the past three years, the I/O Fund has invested over $165,000 into accountability and transparency for our members. When we launched in July of 2019, for the first year or so, we used a forum hosted by Tribe for our trade alerts, but by January of 2021, we had migrated to SMS and email tools that were the least likely to experience an outage for our real-time trade alerts. This costs us $30,000 to $40,000 per year, depending on our trading frequency.

In addition to this, we use an auditor from a large firm in San Francisco to mathematically review and verify the performance of our I/O Fund portfolio trading account and crypto account. The process is quite extensive and it takes up to four months to complete. This costs $4,500 per audit and we’ve completed five audits for a total of $22,500 spent on this process. Accountability is expensive but we feel it’s worth it.

Conclusion

I believe real investors take necessary steps to prove their returns, that they accept the pressure that comes with registering trades in real-time and that they do not expect anyone, under any circumstances, to lower their standards and accept an unverified number regarding portfolio performance. Due diligence on stocks requires scrutiny, and this same level of scrutiny should be applied to the company you keep in the finance industry.

To put it simply, the I/O Fund was founded to bring the standards that smart money insists on to the retail investment class. We think retail will be empowered to outperform when their standards are higher on who they follow and what research they read, and when they refuse to accept a lower standard on transparency.

The I/O Fund is wrapping up our annual audit for 2023 this week (you can access our previous audits including here, here, here and here). We look forward to adhering to the high standards that retail investors deserve. You can look forward to our 2023 performance being published shortly.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

Where the I/O Fund Holds Cash When Banks Keeps Failing

Posted on April 20, 2023June 30, 2026 by io-fund

Amidst the growing skepticism in our banking sector, we thought it would be helpful to introduce an alternative way to both protect and diversify one’s assets. The information below discusses a method the I/O Fund uses to hold its cash, which is safer than banks, and yields 4.5% or higher.

The I/O Fund is an actively managed portfolio. We are not financial advisors, rather we discuss openly and in great detail what we are doing with our money through weekly webinars and real-time trade alerts. This has led to 174% better returns compared to Ark and results that are double the Nasdaq in the same time period.

Banks failing presents a new problem for investors, which is where to hold cash. We shared our thoughts on Treasury Direct accounts with our premium members last month, where we explained that opening a TreasuryDirect account allows anyone to directly purchase savings bonds and Treasuries (Notes, Bonds, Bills, TIPS, and FRNs) directly from the U.S. government.

This offers an option that is outside of the banking system, offers a decent yield, and is very liquid. This article is offered as a guide that will walk you through the process of opening a TreasuryDirect account and how it can potentially help secure your cash in these uncertain times.

Below is a brief video clip from our premium webinar. For more detailed information, please reference the article below.

More Concern in the Financial Sector & Why Having a Plan for Cash is Important

The current news cycle and media narrative suggests that it’s just regional banks that are facing challenges due to interest rate risk and depositors withdrawing funds to go to larger "too big to fail" banks. However, taking a closer look at the charts reveals that the situation may be more complex and not limited to just U.S. regional banks.

This is what appears to going on in Financial Sector in the US (XLF), which is comprised of the largest and most recognizable financial institutions in the US.

After breaking down from a bear pennant, we have a clean 5 wave drop from the February high. Until XLF can reclaim the $36 region, which is about 8.5% from current prices, then risk remains high.

International banks like the Royal Bank of Canada ($RY) also are exhibiting similar ugly trends. In fact, warnings are present in most major banks around the world. Here are some quick bullet points:

Japanese banks Mitsubishi UFJ Sumitomo and Mitsui Financial are down 15%-17% since March 9th.
The Commonwealth Bank of Australia is down ~12% since March 14th, and HSBC in England is down ~14% since late February.
Itaú Unibanco, Brazil's top bank, is down ~18% since last November.
Deutsche Bank is down another 21% from it January high, while the largest bank in France, BNP Paribas, is down 14% from its February high.

It appears that the risk doesn’t stop at the regional bank level but is international as well. Global banks are facing significant challenges, and it is unlikely the banking problems are over.

The Royal Bank of Canada ($RY) looks a lot like some of the bigger banks in the US.

An Alternative Solution to Uncertainty: A TreasuryDirect Account for an Extra Layer of Security

To tackle potential issues in the banking sector, we are taking a proactive approach with some of our cash. We are purchasing T-Bills directly from the U.S. government through a TreasuryDirect account, eliminating counter-party risks with banks. If the banking situation deteriorates or becomes systemic, funds in these accounts remain safe and secure.

The Appeal for T-bills vs. Bonds

Investing in four-week T-bills might be the prudent choice in this situation, as they carry no default risk compared to bonds and do not tie up your cash for a long period of time. As an example of what to expect, the four-week Treasury bill rate is around 4.5%, compared to 0.15% last year. This is much higher than the long-term average of 1.22%.

Sign up for I/O Fund's free newsletter with gains of up to 221% – Click hereSign up for I/O Fund's free newsletter with gains of up to 221% – Click hereClick here

It is true that the U.S. government has never defaulted on its federal debt, which includes the umbrella of Treasury bonds, bills, and notes. However, it is also true that countries around the world default on their debt obligations, either partially or entirely, all of the time. We saw Iceland default on their external debt in 2008, and even recently Argentina defaulted on their sovereign debt in 2020 smack dab in the middle of the pandemic. In the event that the U.S. defaults on its debt, it’s speculated that T-bills are safer then bonds because of their shorter-maturity periods, lower interest rate risk, higher liquidity, and general overall market perception.

Opening a TreasuryDirect Account: A Step-by-Step Guide

Here is a link to a video that we gave to our premium subscribers, where I go throguh step-by-step on how to open a TresuryDirect Account.

1. Visit the TreasuryDirect website: Navigate to the official TreasuryDirect website (www.treasurydirect.gov) and click on "Open An Account."

2. Choose account type: Select the appropriate account type (individual, entity, or minor) and fill out the online application form: this essentially like a brokerage account with the government, so you will need your Social Security Number (SSN), email address, and bank account details.

3. Create a password and security questions: Choose a strong password and security questions to ensure the security of your account… this account will hold your cash and security should be prioritized just like your bank account ect.

4. Simply review and submit: Double-check the information you filled-out and submit the account application.

5. Check your email for a confirmation message from TreasuryDirect and follow the instructions to verify your account and email address.

6. Access your account: Use your account number, password, and the one-time passcode sent to your email to log in to your TreasuryDirect account.

7. Purchase bonds and T-bills: Once logged in, navigate to the "BuyDirect" tab and select the desired security type (T-bills, notes, bonds, etc.). Follow the on-screen instructions to complete your purchase.

Lessons from the 2008 Crisis: “History never repeats itself, but it does often rhyme.”

The 2008 financial crisis exposed the banking system's fragile backend to the public in a fast and violent sweep, catching many people unprepared. Most people had no idea what fractional banking was, nor how complex their banks had become. These banks have only grown in size and complexity since.

We rely on banks to store money, but it does come with some risks. When a bank fails, individuals can depend on government-backed insurance (FDIC) to recover their deposits and restore stability in our banking system. However, this process can be lengthy and challenging. As we saw in 2008, no one wants to wait on a Gov’t backed insurance timeline to get money back that they thought was being safely stored in a bank account.

Conclusion:

Considering the current risks within the banking sector, going through the process of opening a TreasuryDirect account offers a safe alternative for people to store their cash in. This guide was written to help you navigate the process of buying Treasury marketable securities and really to show just how simple it is to get started securing your cash with bonds and T-bills. It is important to stay informed and protect what you have worked hard for, we wanted to shine light on something we felt hasn’t gotten enough spotlight in the investment world.

What’s Next:

This Thursday at 4:30 pm Eastern, I will be holding a webinar for premium Tech Insider Network members to discuss how I plan to navigate the broad market, as well as various tech entries including Tesla. We offer trade alerts plus an automated hedging signal. In addition, we are an audited portfolio with 174% better returns than Ark and are results are double the Nasdaq in the same time period.

We identified a strong buy signal in Bitcoin in December, and we also identified Nvidia's (NVDA) bottom in October. Bitcoin is a leading asset YTD in the market, and Nvidia is the leading stock in the S&P 500. We take gains often and we discuss this in our weekly webinars and on our premium site, one of which is scheduled for next Thursday, April 27th.

SIVB: Unintended Consequences

Posted on March 17, 2023June 30, 2026 by io-fund

We thought it may be helpful to our readers to share our initial thoughts after the SIVB bailout. As we write this, CSFB has reported material weakness in its financial reporting so we’ll see if this will create further stress on the financial system.

In response to the SIVB collapse, the Fed had no choice but to take decisive action to further stem deposit outflows and the potential risks to the banking system. The Fed’s response was a comprehensive pledging of cash in exchange for all Treasuries, agency debt and mortgage-backed bonds without any discount being applied to face value. Commentators have described these actions as akin to quantitative easing on demand for the financial system.

Below is a chart of the Fed Funds rate dating back to the 1950s. As recent history shows, the Fed had embarked on a policy of ultra-low interest rates – brought on by the GFC and again by the Covid pandemic – that were unprecedented in scale and duration. This created unintended consequences and fueled asset bubbles and inflationary pressures throughout the economy.

Similarly, as the Fed aggressively raised interest rates in 2022, this has also created unintended consequences. The collapse of SIVB. While SIVB’s demise seems not to pose a systemic financial risk at the moment. Its overnight collapse is a reminder that the banking sector remains vulnerable to sharply rising funding costs after years of operating in a low rate environment.

SIVB’s demise has been well covered in the financial press, we’ll touch upon some salient details. There were red flags, a couple that were somewhat unique to SIVB.

Greg Becker, SIVB’S former CEO, served on the board of the Federal Reserve Bank of San Francisco until the day of the collapse. He had lobbied that that banks of SIVB’s size should not be subject to as much regulation as the mega banks
In 2018, a bipartisan bill was passed that exempted banks with $100 billion to $250 billion in assets – Silicon Valley's size – from requirements that included regular examinations of how they would fare in tough economic times, known as 'stress tests.'. The 2018 law also provided the Fed with more discretion in its bank oversight. The central bank subsequently voted to further reduce regulation for banks the size of Silicon Valley. In October 2019, the Fed voted to effectively reduce the capital those banks had to hold in reserve.
The bank had grown rapidly. Its assets quadrupled in five years to $209 billion, making it the 16th-largest bank in the country. And roughly 94 percent of its deposits were uninsured because they exceeded the Federal Deposit Insurance Corporation's $250,000 insurance cap. That percentage was the second highest among banks with more than $50 billion in assets, according to ratings agency S&P. Signature had the fourth-highest percentage of uninsured deposits – which uncoincidentally also failed. Signature had large exposure to crypto clients.
According to analysis done by UBS. SIVB had 52% of its deposits from venture capital and private equity related businesses and funds. First Republic Bank, another California-based lender that dropped more than 60% in pre-market trading on Monday, only 8% of its deposits to those types of clients.

Ultimately SIVB’s risk management, or the lack-thereof, proved it’s undoing. It’s not uncommon for banks to have unrealized losses due to their bond holdings. According to Bloomberg, US banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity portfolios at the end of last year, according to filings with the FDIC. But SIVB’s investment portfolio had swelled to 57% of its total assets. No other competitor among 74 major US banks had more than 42%. It was this toxic brew of a very large unrealized losses on Treasuries and mortgage bonds combined with a concentrated depositor base that proved fatal.

This was exacerbated by SIVB’s failure to hedge the interest rate risk on these holdings and an upcoming credit downgrade. Once it was made known to the market that SIVB may raise equity to pre-empt the downgrade, this was the catalyst for deposits to be withdrawn which worsened their credit standing. It became a self-fulling prophecy.

So as technology focused investors, how do we assess the current situation?

Let’s start with the macro. I have written extensively on concerns over the broad market from both a technical and macro perspective. The latter namely due to the Fed’s inability to combat super-core inflation and the over-leveraged consumer. I and the rest of the team have been monitoring for further signs of weakness.

Financial Sector Earnings

Within the overall S&P 500 earnings, it is estimated that Technology contributes the most at about 25%, while the second largest is Financials at 19%. The S&P 500’s decline in the SPX has in part been driven by reductions in earnings for the Technology sector. The SIVB fallout could lead to a reduction in earnings estimates across the financial sector. These downgrades can be driven by a number of factors such as lending margins being squeezed as cost of bank deposits are still catching up with rate rises that have already happened, higher regulatory costs and higher loan loss provisions, just to name a few. This could be another headwind for S&P 500 earnings in the future.

Banks are a transmission mechanism for the economy. To the extent that is hindered, there will be a negative trickle down effect for the economy that are yet to be seen. Somewhat ironically, the SIVB collapse may help Fed Chairman Powell’s goal to reduce supercore inflation driven by the sticky services component through aggressive interest rate hikes. Albeit clearly not the way he intended.

Technically, the Financials ETF has broken down.

What will the Fed do in the next meeting?

Given the recent CPI data, the Fed has every justification to continue to raise interest rates, which we discussed here. However, will the SIVB failure give them a reason to pause? The futures market has the odds at a resounding no.

And the reason is that under the headline CPI number, we are seeing the 2nd month in a row of 3 MoM annualized acceleration. If you combine the prior 3 months and annualized them, the number comes out to 4.08%, compared to last month’s reading at 3.4%. Furthermore, energy, goods, core, shelter and services all showed similar accelerations.

How to invest in technology in current environment?

In the public markets, the technology sector was already facing headwinds as higher rates impacted valuation. Meanwhile those with consumer exposed businesses have also had earnings impacted. The SIVB fallout adds additional headwinds. SVB’s demise has revealed the extent of the damage rising interest rates might cause on companies and banks that had grown accustomed to years of cheap money. Startups are especially vulnerable to any systemic drop in confidence, given their reliance on investors’ faith in their long-term potential when profitability might be years away.

Private markets will face a tougher funding environment. There is a talk of ‘day-of-reckoning’ for the private equity/venture capital-funded universe and may force PE funds to mark down private books sooner than they’d like to.

Softbank is a good public and sentiment proxy for the private markets. Before the meltdown, Masayoshi Son’s investment powerhouse — which has poured more than $140 billion into names from WeWork to ByteDance Ltd. and DoorDash Inc. — had already been reeling from the post-pandemic economic downturn.

SoftBank, similarly central to the global VC arena, has lost around 7% or $5 billion of its value since news of SVB’s difficulties emerged. Its credit default swaps are surging for the second straight day, and speculation is growing on what asset sales might be ahead should SoftBank need to help out portfolio companies.

SoftBank sees little impact from SVB’s failure on its portfolio companies, a SoftBank spokesperson said, adding that the company expects no impact on its own finances. Most Vision Fund portfolio companies are cash-rich, the company said during its earnings call last month. However, if we look at the chart, the market disagrees, as it is ~63% off its 2021 high, and only ~32% from testing its COVID low.

Attributes of stocks that we are looking for

This past week, I/O Fund analysts held a webinar that discussed “How to Build a Defensible Tech Portfolio.” Although macro continues to throw curveballs, we believe a defensible portfolio can help alleviate any concerns.

Defensible means the portfolio should be overweight the bottom line. For tech investors, stocks that do not materially cash burn are ideal right now. Per Silicon Valley Bank’s CEO Gregory Becker: “While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”

Per the same Reuters report, Silicon Valley Bank is selling assets to position for higher interest rates and faster cash burn: “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients.”

Elevated cash burn is something the public markets will be very sensitive toward into the foreseeable future. We have found that expanding operating margins and GAAP profitability was rewarded last year, and we believe this is the best way to position for an unpredictable 2023. At the very least, while the FED raises rates, cash burn will continue and we believe it will surprise investors at times just how cash strapped the tech sector truly is. This is why we have built a defensible tech portfolio, as outlined in this webinar here.

SIVB: Unintended Consequences

Posted on March 17, 2023June 30, 2026 by io-fund

SIVB’s demise has been well covered in the financial press, we’ll touch upon some salient details. There were red flags, a couple that were somewhat unique to SIVB.

Greg Becker, SIVB’S former CEO, served on the board of the Federal Reserve Bank of San Francisco until the day of the collapse. He had lobbied that that banks of SIVB’s size should not be subject to as much regulation as the mega banks
In 2018, a bipartisan bill was passed that exempted banks with $100 billion to $250 billion in assets – Silicon Valley's size – from requirements that included regular examinations of how they would fare in tough economic times, known as 'stress tests.'. The 2018 law also provided the Fed with more discretion in its bank oversight. The central bank subsequently voted to further reduce regulation for banks the size of Silicon Valley. In October 2019, the Fed voted to effectively reduce the capital those banks had to hold in reserve.
The bank had grown rapidly. Its assets quadrupled in five years to $209 billion, making it the 16th-largest bank in the country. And roughly 94 percent of its deposits were uninsured because they exceeded the Federal Deposit Insurance Corporation's $250,000 insurance cap. That percentage was the second highest among banks with more than $50 billion in assets, according to ratings agency S&P. Signature had the fourth-highest percentage of uninsured deposits – which uncoincidentally also failed. Signature had large exposure to crypto clients.
According to analysis done by UBS. SIVB had 52% of its deposits from venture capital and private equity related businesses and funds. First Republic Bank, another California-based lender that dropped more than 60% in pre-market trading on Monday, only 8% of its deposits to those types of clients.

So as technology focused investors, how do we assess the current situation?

Financial Sector Earnings

Technically, the Financials ETF has broken down.

What will the Fed do in the next meeting?

How to invest in technology in current environment?

Attributes of stocks that we are looking for

The Importance of Verified Returns and Risk Management for Retail Investors

Posted on March 12, 2023June 30, 2026 by io-fund

2022 was rough — so rough it marks the greatest destruction of wealth in modern history with an estimated $57.8 trillion lost across all asset classes combined.

We’ve been accustomed to believe the inverse correlation to equities and bonds is universal. Since 1998, this relationship has held true, offering investors safety in bear markets with a rotation into bonds. This was not the case in 2022, as heightened inflation brought on a bear market in both asset classes.

According to a write-up by the Syz Group, 2022 smashed many records, including the only year in history in which both the S&P500 and the US 10-year Treasury bonds were down more than 10% each.

Certainly, if smart money struggled this much then so did retail investors. In fact, retail investors typically take the brunt of the losses in the stock market. According to a professor at the University of Oxford, “retail investors will always lose money because they lack the ‘education’ whereas financial professionals are well informed – that’s what they do.”

That’s a hard pill to swallow as retail investor communities swelled to a size not previously seen prior to Covid. Retail investors previously made up 10% to 15% of the market and now make up 25% of the market, according to Bloomberg Intelligence.

Note: For a Limited Time, I/O FundNote: For a Limited Time, I/O Fund is offering a $99/year Premium Newsletter plan that provides one actionable stock tip per month and analysis from a top performing, audited team. Click here for more detailsis offering a $99/year Premium Newsletter plan that provides one actionable stock tip per month and analysis from a top performing, audited team. Click here for more details

This means the retail community was growing at the exact point in history that this investor type was most likely to get hurt in late 2021 and throughout 2022. According to Goldman Sachs, “retail net selling activity has accelerated over the past six months. In aggregate, selling over the past eleven months has completely reversed all the net buying in single stocks from 2019 to 2021.”

According to Goldman Sachs, retail investors have sold 1.5 times the amount accumulated in NDX 100 stocks, which indicates not only a complete reversal, but a complete reversal coupled with a steep loss.

Volatility is Driven by Machines

One of the primary culprits to the extreme volatility seen in recent years is caused by algorithms. Most newer investors envision a stock trading floor where market makers assist in trading stocks. The reality could not be further from the truth. In fact, those pictures of stock traders on the New York Stock Exchange floor are entirely for appearances. To truly envision how the stock market works, a more accurate picture would be of a colocation data center stacked with servers.

It’s true that quantitative easing caused too much liquidity, and in response, there was a knee-jerk reaction to quantitative tightening. However, it’s important to remember that machines were breaking records in both directions at the height of QE, as well.

Here’s an excerpt from an editorial I wrote in 2020 when the market was seeing a record number of limit up and limit down days:

“Nearly a decade ago, there was a flash crash that occurred on May 6, 2010. This “flash crash” caused the Dow Jones to drop 998.5 points (about 9%) within minutes, only to recover a large part of the crash later in the day. According to the Commodity Futures Trading Commission (CFTC), high frequency trading “did not cause the Flash Crash, but contributed to it by demanding immediacy ahead of other market participants.”

Flash crashes and flash rallies of 1000 points are now the new normal with sixteen occurring since March 1st. Four of these historical daily gains were above 9%. Trading curbs, known has circuit breakers, were hit four times last month.”

The editorial also discussed the prevalence of a “man plus machine” approach or woman plus machine:

“During the Q4 2018 sell-off, Guy De Blonay, a fund manager at Jupiter Asset Management stated 80% of the stock market is controlled by machines. In 2017, JP Morgan stated that “fundamental discretionary traders” accounted for only 10 percent of stock trading volume.

Billionaire Steven A Cohen’s hedge fund had to focus more on quant trading in 2017 when it lost money in most of its traditional trading strategies in that year, while its quant investors made money. For example, Steven Cohen’s $12-billion hedge fund, Point 72 Asset Management, is moving about half of its portfolio managers to a “man plus machine” approach.

According to Wells Fargo, robots will replace 200,000 banking jobs over the next 10 years. Citigroup has formed a lab to cross-train traders and developers for machine learning and artificial intelligence. The programming language, Python, is especially in high demand at leading banks, such as JP Morgan and Goldman Sachs.”

This creates a serious disadvantage for retail investors and those who do not have a team of Python developers to leverage quant systems that trade in a blink of an eye. Ray Dalio, the fund manager for Bridgestone, has openly discussed that the best approach to the modern-day stock market is what he calls “the man and machine.” His firm has 1,500-employees that use computer models to test hypotheses; which is just one of the many advantages hedge funds and institutions have over retailers.

According to Dalio, the ideal is to have an algorithm work alongside a portfolio manager for a customized approach to predicting the markets. Although the I/O Fund does not have a team of Python developers, this year we partnered with Vincent Duchaine of WealthUmbrella in order to close the gap between human-driven actions and emotionless machines. This marked an important turnaround for our firm as we gave up what I would call “retail idealism” which centers around the idea that holding a stock for a long period of time is retail’s only defense. This works during times of economic expansion, but where this can go (horribly) wrong is when a new, more challenging macro can change the outlook for any given company.

For example, the cloud sector is a favorite among retail investors yet has not been through a period of quantitative tightening. Most cloud companies were founded in 2010 or later, when funding was easy to secure. It did not matter if these companies were cash efficient or not, as the past decade has been marked with cheap money with over a decade of the Fed Funds rate at or near zero.

For our premium members, I wrote an earnings report in August on two stocks that were brutally beaten up entitled “It’s the Economy Stupid.” The analysis asked an important question: are these stocks down as a result of poor management, something unique in their financial profile — or because a weak economy is simply too hard to contend with?

Although retail investors were busy pointing fingers at specific stocks, if it was the latter, then all consumer stocks would eventually be affected. Fast-forward, and hundreds of tech stocks finished down 70%, and nearly every tech stock finished down 50%. This includes the indestructible FAANGs, with many trading at historic low valuations. In 2022, an investor would have to be in denial to focus on the poor performance of an individual company rather than acknowledge something much bigger was going on.

The point was to encourage our readers to let go of the idea that picking good stocks could save a portfolio in the tech industry and to instead fully embrace risk management tools.

Risk Management Tools

In April of 2022, the I/O Fund stopped relying on stock picks as the primary, offensive measure because this approach simply was not working in the new macro. After partnering with Wealth Umbrella on an automated hedge, the I/O Fund began to boldly hedge up to 100% of our portfolio, at times.

The first four to five months weighed on our returns, yet our portfolio performance in 2022 stands apart from all-tech portfolios that only played offense. In addition to being evident in our soon-to-be published performance results, we also believe the positive effects of this pivot toward playing defense will be seen throughout 2023 and onward.

Unlike many other all-tech portfolios and ETFs, we believe a more active stance is necessary for long-term tech investing. We also believe that the easy years of buy and hold are over, marked by the great growth cycle post-GFC, and that a more active approach will be necessary to survive, and even profit. As a result, we rotate our portfolio frequently, raise cash and actively hedge our portfolio with an automated signal.

In addition to hedging, real-time trade alerts are sent to our members the minute the hedge is on, or is turned off, or when the allocation changes in terms of percentages, such as 25% of our portfolio value, to 50% of our portfolio value, to 75% and so on.

Please reference “The Best of I/O Fund’s Newsletter in 2022” for More Information on Analysis the I/O Fund published last year relating to Technicals and the hedge and a few fundamental calls, as well.

For those who may not be aware, this is extremely challengingextremely challenging to do as it combines the two most advanced forms of portfolio management.

One of the most advanced forms of portfolio management is real-time trade alerts. This places immense pressure on a portfolio manager as the stakes are high to record what you do every second in real-time. To voluntarily choose to have the highest level of accountability in retail is nearly unheard of, yet registered fund managers are required to do this and file their stock trades.
Secondly, hedging up to 100% of a portfolio is also a large psychological hurdle, and traditionally a risky one. Markets spend the vast majority of their history in uptrends, for one. Secondly, the amount you can lose on a short is literally infinite, to where one’s downside risk is capped at 0 on the long side. To overcome these hurdles, we have spent considerable resources developing a “man and machine” signal with the help of Wealth Umbrella that is truly state of the art.

There is a reason most services do provide this level of transparency and activity. The more granularity that is offered, the more skill is required. Also, compare this to social media, where some investors will casually claim trades that were not logged in real-time.

Verified Returns

In addition to a lack of risk management tools, I believe a lack of verified returns in the retail space contributes to the losses this investor type experiences. Smart money is careful about who they consider a good investor — they do not take someone’s word they are a good investor; they make the investors or firms they follow prove it. Every single hedge fund has to report their returns, which reduces the chances of posturing.

How the I/O Fund Sets a High Bar for Accountability

Over the past three years, the I/O Fund has invested over $130,000 into accountability and transparency for our Members. When we launched in July of 2019, for the first year or so, we used a forum hosted by Tribe for our trade alerts, but by January of 2021, we had migrated to SMS and email tools that were the least likely to experience an outage for our real-time trade alerts. This costs us $40,000 per year.

In addition to this, we use an auditor from a large firm in San Francisco to mathematically review and verify the performance of our I/O Fund portfolio trading account and crypto account. The process is quite extensive and it takes up to four months to complete. This costs $4,500 per audit and we’ve completed four audits for a total of $18,000 spent on this process.

Note: For a Limited Time, I/O Fund is offering a $99/year Premium Newsletter plan that provides one actionable stock tip per month and analysis from a top performing, audited team. Click here for more detailsNote: For a Limited Time, I/O Fund is offering a $99/year Premium Newsletter plan that provides one actionable stock tip per month and analysis from a top performing, audited team. Click here for more details

Here are some things we could have done with $130,000 instead of being the only retail site to provide checks and balances to this extent:

Bought two Tesla Model Y SUVs and painted them with our logo (or even three Model Ys with the new tax credit)
Traveled the world for a year, all expenses paid, and instead, sent our members a picture from a Gondola in Venice
Bought a small yacht and sailed the beautiful Bay, and sent our members kitesurfing pictures

Joking aside, accountability is expensive but we feel it’s worth it.

Conclusion

I believe real investors take necessary steps to prove their returns, that they accept the pressure that comes with registering trades in real-time and that they do not expect anyone, under any circumstances, to lower their standards and accept an unverified number in regard to portfolio performance. Due diligence on stocks requires scrutiny, and this same level of scrutiny should be applied to the company you keep in the finance industry.

The I/O Fund is wrapping up our annual audit in the month of March, which is a month earlier than our audits were published in the past (you can access our previous audits including here and here and here). We look forward to adhering to the high standards that retail investors deserve. You can look forward to our 2022 performance being published by the end of this month.

The I/O Fund is a publishing company. The analysis, strategies, reports, activity and all other features of our service is provided for informational and educational purposes only, and should not be construed as personalized investment advice. Hedging is an advanced method of trading stocks, sudden losses can occur, and hedging should only be pursued under the supervision of your personal financial advisor.

1-Year and YTD Audited Returns for 2021

Posted on October 26, 2021June 30, 2026 by io-fund

The market certainly has a way of instilling humility. As the I/O Fund was logging on to the Performance Webinar to present industry-leading returns (and to declare that a Retail Fund was kicking Wall Street butt!), we were simultaneously experiencing our largest AH drop following an earnings report on Snap.

We already had slides prepared to discuss what losses mean for portfolio returns. The first point we had planned to discuss is that all portfolios with sizable returns have losses. Part of our service is to show you that we hold through losses OR we cut them if the story isn’t playing out as we had predicted. We are not only a site that celebrates the wins, but we also show you how we handle our losses.

When we compare our results to institutions who also specialize in tech, we see that the I/O Fund is able to hang with Ark Innovation in the good years and then handily beat Ark Innovation in the drawdowns (at least so far). We have healthy respect for Ark and we certainly admire the bold move ARKK made in highly-shorted Tesla. Morgan Stanley’s Inception Fund has better returns than Ark this year due to their bold move going into Gamestop. This leading fund is now neck-and-neck with I/O Fund.

The I/O Fund’s bold move was placing blockchain assets, such as Bitcoin, Chainlink and Ethereum, into a stock portfolio with a leading allocation (approx. 10%/5%/5%) and then weathering the extreme volatility by adding near bottoms and trimming near tops. We began the process of taking gains in crypto from February through early May. We then began to buy again in the $42,000 – $31,000 region. Blockchain has always had a place in our long-term buy and hold portfolio and we didn’t budge on this even with large drawdowns of 40-50% whether it was 2019, 2020 or 2021.

The semis have held up our portfolio well compared to other high-growth portfolios. Datadog and Asana were also impressive choices. We still have some high fliers that we are hoping end the year strong. These were mentioned in the LTBH Top 10, such as Xpeng, Fubo and Magnite. If two out of three rally, we will be doing well. Our momentum portfolio is finding its wings again with nice gains in Affirm and also AEHR. These last two came in Q3 and are not reflected in the performance below.

We think this proves our fluency with tech and our ability to broadly form a winning portfolio. The issue with most tech ETFs is they are sector-specific whereas blending many tech trends into one portfolio is more advanced and can offer higher returns.

View our Performance Review Webinar here.

Performance Review:

We launched our fund on May 9th, 2020 and our first performance was calculated between May 9th and December 31st of 2020 with returns of 115.5%.

We have two performance letters for you:

Our 1-year returns from May 9th through May 9th were 236%. Please note in the letter below, the accountant preferred to stop the 1-year performance at Friday May 7th, which designates the weekend when the market is closed. It doesn’t make sense to count gains in crypto which is open May 8 and May 9th 2021 but not count stocks. Therefore, performance for our portfolio ended on Friday May 7th since May 9th was a Sunday.

We also did a YTD from January 1st, 2021 through July 31st, 2021 to help provide some color as to how we are performing in a more challenging year for tech stocks. We are hanging with Morgan Stanley right now for top tech fund.

Please note, although we are sharing our performance with you as a courtesy, we own the report and we do not give consent for you to share this publicly. Although we will discuss our final number from time to time, the terms in which we do this are determined by our agreement with the accountant. It’s against trademark and other laws to advertise another firm’s name, such as an accounting firm.

We also don’t share the dollar value in our portfolio, so this has been omitted from the report. However, the performance numbers we show below are a direct screenshot of the report.

For comparison purposes, we do not calculate Total Returns on our account. Rather, this is a performance audit. Total Returns on Ark Innovation may slightly differ due to dividends or management fees being factored in. In the table below, we show you an apples-to-apples on our performance relative to other Funds with no additional income factored in.

The performance reviews take two to three months to complete. Therefore, we are showing you YTD through July 31st and our year-end performance for 2021 will likely come out in March, etcetera.

1-Year Performance:

YTD Performance:

How the I/O Fund Compares:

For comparison purposes, we do not calculate Total Returns on our account. As stated, Total Returns on Ark Innovation may slightly differ due to dividends or management fees being factored in. In the table below, we show you an apples-to-apples on our performance relative to other Funds with no additional income factored in other than stock performance.

“No great thing is accomplished alone.”

We want to stop and thank our Members for believing in a small team of Retailers. When we launched our retail fund, we were admittedly quite nervous as we are all trained to believe that “smart money” knows more than Retail. However, we wanted to set out and test this by forming a small team of experts who care very much about their chosen specialty. As my intro stated, the market knows how to keep you humble, and thus, we will continually strive to improve.

What’s Next for our Website:

We are going to split off Knox’s service to help separate fundamentals from technicals. There will be a Fundamentals chat room and a Technicals chat room on the forum. New prices will go into effect around the first of the year with anyone who subscribed 2019-2021 being locked in at the current rate. In addition to not mixing styles, the new price will also help cover costs for our real-time trade notifications.
We plan to launch a Beginners service to help make investing accessible to more people at a low price (5 stocks for a flat fee, something like that).
We launched YO/LO Fund. Please make sure to read through our Blockchain is Going to Eat the Internet report and we encourage you to keep an open mind as we find a few winners in this space.
We plan to release community moderation where 10 downvotes will cause a post to disappear so hang in there with moderation issues as this will roll out before the end of the year.
We think Q4 will be strong and are positioned accordingly. This could change as the market changes frequently. We will let you know if that’s the case.

3 Different Ways Companies Can Game Their Topline Growth Rates

Posted on September 10, 2021June 30, 2026 by io-fund

Fast-growing, publicly traded companies often desire to report positive news and impressive growth that will please investors and support a higher share price. Due to the embedded flexibility within generally accepted accounting principles (GAAP), some companies take advantage of gray areas in the rules (some just ignore them all!) to showcase their recent performance in a deceptively positive way.

While most companies report honest results, there are bad apples that use accounting tricks to hide the truth and embellish their growth. Because of these bad apples, it is wise to have a healthy dose of skepticism when doing due diligence on fast growing companies. Furthermore, since many early-stage growth companies are not profitable and have negative cashflows, investors often rely on sales to calculate comparable valuation metrics such as Price-to-sales and EV-to-sales multiples.

So how can we gain confidence that a company’s topline growth is genuine? In the discussion that follows, I highlight three key metrics that investors can utilize to quickly uncover common tricks that companies use to cosmetically boost their topline growth rates. I also give an example of how investors can use this information to find high-quality companies to invest in.

3 Accounting Tricks to Boost Sales Growth

1) Pulling forward sales:

One of the most common tricks that companies use to juice their topline growth rates is to pull forward future sales. This is done by recognizing sales that would have occurred in future quarters in the current quarter. While a pull forward in sales increases current quarter revenues (and current quarter growth), it lowers future sales (and future growth). Being able to identify a pull forward in sales can protect you from investing in companies with unsustainable growth rates, which protects your downside.

A recent SEC order against Under Armour helps illustrate how a pull forward in sales can mislead investors and cost them dearly. In May 2021, the SEC fined popular sports apparel maker Under Armour for pulling forward sales between 2015 and 2017 and not disclosing this to investors. According to the SEC's order, “by the second half of 2015, Under Armour's internal revenue and revenue growth forecasts for the third and fourth quarters of 2015 began to indicate shortfalls from analysts' revenue estimates .. for six consecutive quarters beginning in the third quarter of 2015, Under Armour accelerated, or "pulled forward," a total of $408 million in existing orders that customers had requested be shipped in future quarters.” While it is great that the SEC brought this issue to light, it happened years after the fact, and long after investors had suffered steep loses (pictured below).

Unfortunately, waiting for the SEC to uncover management’s tricks would have resulted in losses for investors, as the stock price topped around the time Under Armour started pulling forward sales. In the next section, I discuss a way that investors could have been alerted to Under Armour’s pull forward of sales well before the SEC’s order.

How to spot a pull forward of sales:

Management is not going to tell you that they have pulled forward sales. Rather, they will likely try to disguise the issue. While there is no foolproof way of detecting a pull forward of sales, monitoring the amount of time it takes to collect cash from customers can help investors spot a pull forward in sales. We can proxy customer payment terms by calculating days sales outstanding (DSOs), which is calculated by dividing receivables by quarterly sales and multiplying by the number of days in the quarter. An unexplained rise in DSOs can signal that future sales, which will be repaid in future quarters, were pulled into the current quarter.

Continuing with the Under Armor example, the company’s DSO metric increased nearly 50% between Q3 2015 and Q1 2017 (pictured below). In Q3 2015, customers were paying, on average, 35 days after purchase. Just six quarters later, the company’s DSO metric had increased to 50 days, meaning that customers were taking nearly 50% longer to pay. With the benefit of hindsight, we know that the 50% rise in payment terms was because Under Armour had pulled forward future sales. Two quarter after Under Armour had stopped pulling forward sales, the company’s revenues dropped 4% YOY, and its stock price had more than halved by then.

2) Liquidating deferred revenue:

Another important metric to monitor with growth stocks is deferred revenue. Deferred revenue is a key balance sheet account that a significant amount of fast-growing tech companies report, especially subscription-as-a-service (SaaS) companies. While growth investors often monitor the rate of growth of deferred revenue, few pay attention to the pace of liquidation. Being cognizant of both the growth in deferred revenue and its liquidation rate can improve your understanding of a company’s true growth rate.

For instance, SaaS companies sell software contracts and often get paid upfront but recognize revenue on a ratable basis. The upfront payment of cash but deferral of revenue results in deferred revenue. As the name implies, deferred revenue turns into sales over time. However, investors need to be mindful if deferred revenue is being recognized as sales at an accelerated rate. If deferred revenue is turning into sales faster than prior years, it may signal that recently reported sales growth is unsustainably high.

Ways to identify a liquidation of deferred revenue:

If the balance of deferred revenue is significant, companies will provide information about the balance in the notes to their 10Q and 10K filings. Here is an example of a deferred revenue disclosure from Splunk’s most recent 10K:

In order to measure if deferred revenue is turning into sales faster than last year, we need to divide sales from deferred revenue by beginning deferred revenue. Splunk had a $1 billion and $878 million beginning deferred revenue balance on January 31, 2020 and 2019, respectively. By dividing the $786 million of revenue recognized from deferred revenue by Splunk’s beginning $1 billion deferred revenue balance, we can see that the company recognized 78% of its beginning deferred revenue balance during FY2021, up from 72% in FY2020. The 600bps acceleration in deferred revenue recognition during FY2021 suggests that Splunk had recognized deferred revenue faster than usual. Taking this one step further, Splunk’s FY2021 topline growth rate was somewhat skewed by the acceleration in deferred revenue recognition during the year.

While not all companies report deferred revenue, it is important that investors stay aware of the pace of deferred revenue liquidation for companies that do. There are many different reasons that can cause the pace of deferred revenue recognition to accelerate, such as shorter contract lengths or customer cancellations. Nonetheless, the acceleration in the rate of deferred revenue recognition is ultimately an unsustainable topline benefit. However, the pace of revenue recognition varies per quarter, so it is up to the investor to determine if the change of pace is a concern or not.

3) Excessive unbilled sales:

The final trend I will be discussing is the unique ability for some management teams to report unbilled sales. It may come as a surprise to some investors that companies can accrue sales without ever having to bill or invoice the customer. These types of sales are referred to as “unbilled sales” and are high risk. Since it is easy to grow sales if you don’t have to invoice (and haggle) with customers, unbilled sales can easily be gamed by management to meet near term expectations.

Unbilled sales are usually the result of long-term projects, where sales need to be accrued as work is completed but invoicing is withheld until project milestones. While unbilled sales are GAAP compliant and prevalent throughout the tech industry, they should nonetheless draw a skeptical eye when they suddenly start to surge. Since unbilled sales are driven by management’s judgement of project completion, they can easily be accrued to meet near term expectations.

Ways to identify excessive unbilled sales:

Unbilled sales are not directly disclosed by companies, rather investors must look for its sister account called unbilled receivables. Moreover, not all companies use the same terminology: some companies label unbilled receivables as “contract assets” while others call them “contracts in progress” or “expenditures billable to clients”.

Regardless of the naming convention, it is important to determine if the rise in unbilled sales was excessive. Generally, a sudden change in the level of unbilled sales should make an investor skeptical. For example, Veritone Inc (VERI), a small but fast growing tech company, disclosed that it had $3 million of unbilled receivables in Q2 2020, and then one quarter later, reported $20 million in unbilled receivables as of Q3 2020. Since rising unbilled receivables means that there was a rise in unbilled sales, we can estimate that Veritone accrued ~$17 million in unbilled sales during Q3 2020. We can tell that this was excessive because Veritone only reported $16 million in sales during the quarter. Stated differently, most (if not all) of Veritone’s sales during Q3 2020 were from sales that had yet to be billed to the customer. This is a concerning trend, and suggests that Veritone’s Q3 2020 growth rate may have been inflated from excessive unbilled sales.

There are a plethora of ways that companies can disguise and cosmetically boosts their topline growth rates. While not all companies engage in such tactics, it is wise to remain a bit skeptical when reviewing a company’s strong growth rate, especially if peers are struggling. While I only discussed three different ways that management can temporarily juice sales, these are often the most common and easiest ways to temporarily grow sales. Importantly, these three techniques are allowed under GAAP, due to the inherent flexibility in accounting rules, so investors need to come to their own conclusions if growth is sustainable or not.

How to Use This Information to Buy Better Stocks

We can use the above information to increase our understanding of recently reported growth. A better understanding of how a company is growing sales can improve your batting average by picking higher quality companies. If, for example, DSOs are declining and deferred revenue is growing, then revenue quality is improving. An example of this would be Dynatrace (DT), a software provider that monitors and optimizes multi-cloud environments.

As shown below, Dynatrace recently reported a strong improvement in its cash collections, as three-month DSO dropped from 130 days in calendar-year Q1 2021 to 58 days in Q2 2021. Dynatrace is collecting on its sales 72 days faster than the prior quarter, and 22 days faster than last year. Faster cash collections are a sign of strength, which improves the quality of sales and likely indicates that demand for Dynatrace’s products has been increasing.

On top of the faster collection times, Dynatrace reported an acceleration in sales, which grew 35% YOY in Q2 2021, the fastest YOY growth rate since going public. It is great to see that while the quality of sales has improved, so has the rate of topline growth. An acceleration in sales coupled with an improvement in the quality of sales growth is a bullish signal for Dynatrace and helps support a premium multiple.

Adding to the positives, Dynatrace reported an acceleration in current deferred revenue, which grew 38% YoY to $486 million. Since deferred revenue will turn into sales going forward, the acceleration in deferred revenue implies that Dynatrace’s sales will continue to grow strongly in the near term. It is also great that deferred revenue is growing faster than sales, suggesting that sales may continue to accelerate going forward as deferred revenue turns into sales.

Finally, to be complete, I also looked at Dynatrace’s pace of deferred revenue recognition. Dynatrace has the following disclosure in its most recent 10Q:

By dividing sales from deferred revenue by beginning deferred revenue, I calculated that Dynatrace’s rate of deferred revenue recognition had slightly accelerated from 33% in the prior-year quarter to 36% in the current quarter. This means that Dynatrace is recognizing sales from deferred revenue slightly faster than last year. Had Dynatrace recognized deferred revenue at a similar pace as last year, its quarterly sales would have been ~$16 million lower (~8%). This is slightly unfavorable but needs to be weighed against a significant reduction in DSOs and an acceleration in sales growth. Furthermore, despite the increase in the pace of recognition, deferred revenue growth still outpaced sales growth during the quarter.

In my opinion, the reduction in DSOs and acceleration in deferred revenue growth outweighs the unfavorable acceleration in deferred revenue recognition. The improvement in Dynatrace’s results suggest that the company is outperforming the competition and that demand for its products and services is strong.

In conclusion, monitoring the quality of revenue growth can help investors avoid companies temporarily propping up sales and can also help investors find high-performing companies. Since GAAP is flexible and allows management to utilize the tricks outlined above, it is up to the investor to determine if growth is sustainable or not. Investors who are cognizant of these trends will likely increase their batting average by picking high quality companies, which should lead to better returns in the long run.

Disclosure: Bradley Cipriano owns shares in Dynatrace. Bradley Cipriano and the I/O Fund have no plans to change their respective positions in any of the above mentioned companies within the next 72 hours. The above article expresses the opinions of the author, and the author did not receive compensation from any of the discussed companies. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.