The Motley Fool Discussion Boards

Previous Page

Investment Analysis Clubs / Saul’s Investing Discussions

URL:  https://boards.fool.com/not-knowing-who-to-reply-to-i-picked-saul39s-34322942.aspx

Subject:  Re: Earnings season Date:  10/19/2019  12:58 AM
Author:  brittlerock Number:  60733 of 67543

Not knowing who to reply to, I picked Saul's post . . . I spent a few hours contemplating whether to reply at all, the whole thread is pretty much OT for the board, but many long time and well respected members posted. I'm long time and, well you can decide if I have your respect, probably more for some and less for others . . .

Here's some comments I culled from the thread:

"Look what the market is offering you for pennies on the dollar!" sounds like something a snake-oil salesman would say, and it's the kind of thing that people bristle at, especially those who see us as lunatics and read this board just to shake their heads at us. - Bear

Just remember: “The market can stay irrational longer than you can stay solvent.” (Attributed to John Maynard Keynes) - Jeff

Pendulums swing both ways. I don’t think there was enough questioning of the pendulum swing straight up to nose bleed highs back in June/July. - Tryingmybest

The market is assuming the long-term hyper-growth will be hitting a wall. That current estimates (always conservative) are too high. That even category killing SaaS disruptive companies will slow to just above average growth and will face more competition. - Tinker

That even category killing SaaS disruptive companies will slow to just above average growth and will face more competition. That is clearly what the market is assuming across the board for the most part. - Dreamer

While people on this board maintain a focus on the business growth prospect of these companies (which is important), Mr. Market simply thinks that the same growth rate should be priced differently. Given that the broader economy has been slowing down (OT I know), it may simply take a long time for the animal spirit to return the tech sector. - bashuzi

Relax. This is a really bad correction for our companies' stocks but the companies aren't going away. Their stock price going down doesn't mean they are having any company specific problems at all. Forget about it over the weekend, and have a good weekend. - Saul

I will admit, not all that long ago when this downturn started to take hold, I was one who was near panic. I never got crazy and just went to cash. I decided then to ride it out. That's still my decision, but even as the erosion continues I'm actually more sanguine now than I was then. Here's why.

There are numerous reasons to just settle down and bear with it. Let's start with this is not the first time this has happened. At different times on different threads we've discussed 2000, 2008 and even 1929. If you look at the world-wide markets you'll be hard pressed to find any that are up. OK, I didn't do a longitudinal study (I'm still in China, unwilling to spend days at it), I just glanced at recent indices, all in the red (with the exception of Japan, less than 1% green). Yes, enterprise IT is really taking it on the chin, but it's not alone. There appears to be an irrational "exit to safety" whatever that means across the board. But, if I recall correctly, even gold was down. In any case, my point is that the market always recovers and gains new highs - eventually (recessions typically last 18 months).

But, let me put a finer point on it. During recoveries, the market always rewards growth. Don't believe me? Look at Saul's well documented performance over his investing career. I'm not sure why Saul decided to invest in growth stocks in the first place. Maybe he studied market proclivities for a while, maybe he was prescient or at least intuitive (is there a difference?). But for whatever reasons that's been his well rewarded investment style for something like 40 years or more (I think). Yes, Buffet has been enormously successful as a slow and steady value investor. But the dynamic growth along with the wealth of information we are experiencing now with these investments simply were not available to him when he started out. Would his style have been different under different circumstances? Who knows?

Let's take a closer look at the common traits of the particular companies most of us are invested in. First and foremost, they are at the forefront of the information/data "revolution." There have been a few true economic paradigm shifts over time. The "agrarian age", the "age of colonization", the "industrial revolution" and now the "information age" (did I miss one?). Those who recognized what was going on and postured themselves to benefit were inevitably richly rewarded in comparison to those who did not. And also of importance, in each case, the benefits came at a greatly accelerated pace in comparison to the prior paradigm shift.

But at a much more detailed level, all these companies are experiencing incredible revenue growth with spectacular margins and carry little or no debt. All these companies offer imperative, well protected products that do exactly what companies demand from their IT organizations. As I mentioned in a previous post, there are three things demanded of IT: Keep the ship afloat, reduce cost, reduce risk. Management of massive quantities of data is now an essential ingredient to keeping the ship afloat.

All of these companies are "disruptors". I'll spare you the litany of how each addresses their customer's needs. You should know that already. But in every case the old guard has been caught off guard and now is faced with the standard dilemma of how to move forward while maintaining their cash cow. Even with the history of companies that once ruled which have since gone out of business, or if still in business have been relegated to the role of just one of the pack commodity provider status it is astonishing that this is a dilemma for executive management. The handwriting is on the wall in big, bold, red letters. Yet, that this is a dilemma is a reality.

Will the growth rates be sustained forever? Of course not. But in most cases the companies we're invested in along with their most significant competitors have barely scratched the surface of their TAM - and in all cases, the TAM is also growing. And for the most part, these particular companies are the creme de la creme of the crop. Don't take my word for it. Look at Gartner, Forrester, etc. Forever is a very long time. But years is not an unreasonable time frame in which to expect continued growth at a torrid pace assuming management doesn't screw it up (big assumption, I admit).

These are not the characteristics of "momentum" stocks. These are fundamentals.

Can our disruptors be disrupted? Well, the very nature of disruption drives me to answer "yes". But, most of us are invested in a number of companies rather than just 2 or 3. The odds of all or even most of them getting disrupted are infinitesimally low. Nobody bats 1000 when it comes to investing. I expect a few to sour over time. I also expect to be nimble enough and emotionally disengaged enough to exit when the fundamentals turn and then get worse over time. That's an entirely different situation than what has occurred since last July.

Finally, I'll just quote Saul once again . . .

Relax. This is a really bad correction for our companies' stocks but the companies aren't going away. Their stock price going down doesn't mean they are having any company specific problems at all. Forget about it over the weekend, and have a good weekend. - Saul
Copyright 1996-2020 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us