My Biggest Misstep This Year: Divested Microsoft Just Before It Popped 15%

I can’t believe it myself. Divesting my stake in Microsoft (MSFT) just a few days before earnings was completely out of character for me, and the market’s “punishment” was immediate.

Microsoft reported a blowout set of results:

• Revenue hit US$90.0 Billion (up 18% YOY).
• Net Income surged to US$35.8 Billion (up 31% YOY).
• Azure cloud revenue accelerated at 43% YoY, officially crossing the US$100 Billion annual run rate for the first time in company history.

While Alphabet (GOOG) also reported a stellar set of results, the difference lies in the free cash flow.

Alphabet spooked investors by dipping into a negative free cash flow, but Microsoft generated a robust ~US$19.6 Billion in Free Cash Flow (FCF) for the quarter – easily absorbing its massive US$35.8 Billion CapEx buildout.

Couple those cash flow numbers with a “lower” forward CapEx guidance of ~US$175 Billion, Wall Street went completely wild, sending the stock up by a more than 15% overnight.

Ouch.

Having recovered from the initial sting, and with more information in hand, the misstep doesn’t feel as bad now.

🎧  Prefer to listen to this analysis while you multitask? Stream the companion audio here, or scroll down to read.

Raising Capital for Opportunity Buys

It started with a simple problem: I wanted to buy more Alphabet (GOOG), Intuitive Surgical (ISRG), and Netflix (NFLX).

All three companies delivered solid operational results, but Wall Street shrugged. I saw that as an opportunity to grab more shares of high-quality compounders at a discount.

However, overall asset allocation discipline comes first. Maintaining a cash buffer of three years’ worth of expenses untouched is part of the larger strategic plan.

Hence, without injecting fresh capital into the portfolio, the only logical way to fund these additions was through rebalancing.

Why Cut Microsoft?

It certainly wasn’t because Microsoft is a bad business or overly expensive. In fact, seeing the long-term value, I had actually increased my stake earlier this year — which made this misstep sting even more.

My decision came down to two key factors:

1. Conviction and Personal Connection: I personally feel a stronger connection to Alphabet, Intuitive, and Netflix. That higher conviction makes it far easier for me to hold onto them through market volatility over a multi-year horizon.
2. A Flawed Short-Term Assumption: Seeing how the market reacted so flatly to Alphabet’s solid numbers, I projected a similar fate for Microsoft. What I failed to account for was Microsoft’s fiscal year-end seasonality, where a surge in annual enterprise renewals reliably delivers peak collections and robust Operating Cash Flow(OCF) in the final quarter.

That second realisation though meant the narrative could easily flip in the next two quarters.

The Seasonal Mirage

The table illustrates how both tech giants experience distinct cash flow cycles driven by their fiscal calendars.

Going into the next two quarters, Microsoft is very likely to see a step-down in OCF following its typical fiscal year-end collection rush.

Furthermore, Microsoft is extending the useful life of its data centers from 15 to 25 years.

While this accounting shift lowers reported forward CapEx by reclassifying finance leases into operating leases, those lease payments now flow directly through operating expenses.

At the same time, its actual infrastructure spending remains relentless, with management guiding 1Q 2027 CapEx to cross US$50 billion.

Between seasonal collection dips, operating lease cash outflows, and heavy infrastructure outlays, Microsoft’s headline FCF could temporarily contract, or even become negative in the next two quarters.

Conversely, Alphabet’s heavy ad-spending fourth quarter could see its FCF bounce back strongly.

The takeaway? Single-quarter cash flow swings are often just seasonal and accounting noise, not a structural decline in business quality.

The Wrong Move That Could Be Right

I definitely made a timing error by acting right before earnings.

To be clear, it’s not about missing the 15% (now 19%) surge in Microsoft’s share price. Short-term price movements are out of my control.

Even if the stock had dropped instead, taking action right before a major catalyst was still a misstep in execution.

There was simply no rush to execute a move based on a multi-year outlook. A little patience would have given me the clarity of the full earnings report to factor into my decision.

Would the ultimate outcome have been different?

Probably not.

And that brings me back to why this move is still the right one for me: conviction and fit.

I can’t explain it objectively, but I simply feel more “connected” to Alphabet, Intuitive, and Netflix.

Investing is about holding on to great companies through volatility. The holding part is especially tough during drawdowns and without that alignment, it will be an uphill battle.

Built to Withstand Mistakes

Seeing Microsoft surge higher certainly felt painful, but the sting didn’t last. Missing the short-term pop doesn’t derail the bigger picture for two simple reasons:

• Alphabet’s Recovery: Sentiment swings both ways. Optimism in tech quickly spread, with Alphabet gaining over 9% in the days following, softening the relative opportunity cost.
• Small Position Size: As one of ten smaller US growth positions in my portfolio, Microsoft’s surge would have barely moved the needle on total returns anyway.

“So disciplined.”

That’s a common comment when people read about how I manage my portfolio. But as this episode shows, I’m just as human as anyone else—prone to impulses and capable of making silly timing calls.

The truth is, I never set out to be a flawless, emotionless execution machine.

My goal is to build a resilient portfolio foundation. So that when these minor missteps happen, I can laugh at my own silliness, learn from them, and keep moving forward.

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