Hello all,Encouraged by TMB to post more, I realized that the real reason for not writing is probably because I am an introvert and writing on public boards makes me feel... uneasy. The second language thing is an excuse. I do have to look for words once in a while, but Google is there to help. I also watch the show "Elementary" and Sherlock has a very rich vocabulary, so I'm used to look for the meaning of a few words every episode. Anyway, I will try to post more often and wanted to just present myself and explain a bit how I invest. (Ok, I wrote that I'm an introvert and now I want to talk about me? This doesn't make sense, I'll have to discuss this with my shrink...)I already mentioned that I invest in companies that have success but what does it mean exactly? Well, after "a few" mediocre years, I tried to understand what make stock prices go up. I guess I already knew it but revenue growth came up on top of the list and Amazon was a good model for that. I then look at other numbers, like debt and cash flow.Of course, that's the past. The future of the company is obviously critical, but that's the tough part. I try to see the potential, the TAM, etc. Valuation matters to me. The main ratio I look at is Enterprise Value to Gross Profit, or EV/GP. I then compare that ratio to the growth rate. The higher the growth, the higher the ratio I'm willing to pay. For example, I have a small position in Sea (SE). I have EV/GP at 73 (!), but with growth over 100% and from what I read still room to grow, I'm in.I mentioned momentum. I used to be patient and tell myself that I'm holding a solid company and if the shares are going down, the market is crazy and it's giving me a chance to buy more at a better price. Sometimes it worked, but other times the market remained crazy long enough to give time to that great company to become not so great anymore.So now I'm less patient and tend to go with the flow. The gains tend to come by sequence. The shares will go nowhere or down for months (like cannabis right now), then they double in a few months. I'm okay with not getting all of that double if it allows me to avoid the -40% that preceded it. Momentum also explains my position in SE.I think that's about it. It's not perfect and I'm always trying to improve the process, but this is an approach that fits my personality. And this should help understand what I dare write in the future. Jordrok
"Valuation matters to me. The main ratio I look at is Enterprise Value to Gross Profit, or EV/GP. I then compare that ratio to the growth rate. The higher the growth, the higher the ratio I'm willing to pay. For example, I have a small position in Sea (SE). I have EV/GP at 73 (!), but with growth over 100% and from what I read still room to grow, I'm in."Thanks for posting, keep it coming!Looks like many of us have experimented with a variation of this. I divide the gross profit growth rate by the same multiple you use. I think most do the opposite.There is a fundamental problem with using any valuation metric for SaaS and the then there is the tactical issue of how to use it.I will start from the latter.SIMPLE USE:The original PEG ratio had 1 as fair value. I also use 1 as fair value. Because for me the growth is the numerator, values above 1 are "cheaper" and below 1 are "pricier."Using the ratio in this fashion has, however, proven worthless in 2020-21. The worst example for me was BAND. I first looked at it in late summer 2020 because of TMF rec. I listened to calls and followed reports. Finally, when the market was very hot in February, I sold (I forgot what) and put the money in BAND. I was finally won over by the combo of accelerating growth (which I doubted) and very low growth adjusted valuation.Well, BAND got crushed completely. I had it in the 170-150 range but it had gone to nearly 200 previously. It went down to mid-110s and bounced to 130s, I added at 128. Was around that range for a while and when I saw that others started to recover while BAND kept struggling, I sold at 128. So I pulled the added money at no loss.Since then the expensive stocks have recovered and posted new ATHs. BAND is at 105.97!!!On the plus side, this metric did ring the alarm bell on two companies I did have: TTD and AI. However, it was a better version of the metric that offered a decent signal.HISTORY-INFORMED GROWTH-ADJUSTED VALUATION:What I also did 1 year ago or so was to think of a baseline. With valuations pointing towards a possible bubble, it made sense to me to put to numbers the Fool "disconnected from reality" principle. Not that they have used it lately, but I assume it was coined after the debacle of 2000 when TMF nearly went under.So what constitutes normal valuation? Someone with software skills may be able to do this right. I did it a simpleton. I took the closing quarter growth adjusted valuation, so March 30, June 30, Sep 30, Dec 30 give or take a day. I did this over 10 quarters ending with Q1 2020.PROS:--Now I could have a good baseline. I no longer had to just look at below or above 1. I could also and primarily look at each company vs itself. The fact that the valuation is growth adjusted allowed for consistency.CONS:--Only half or so of the companies of interest to me had 10 quarters preceding Q2 2020.--The metric is great per se but it measures "waterfalls" on a river. What if this year the river has way more water than it used to have? Suddenly, all waterfalls have a lot more water to them. Context rules and context is not captured by the valuation metric. That would require also introducing an average based on the relevant index fund which is WCLD. The problem is that to make it work you need to waste time finding all the growth rates, populating Excel, and then getting the average for the index. I lost my Valuation Matrix to a BitLocker caused Windows crash. I had not backed it up.However, TTD looked insanely expensive in early 2021. I was dumb not to sell. I did sell eventually anyway but at 500 instead of 900. There were lots and lots of expectations for 2021 and when Q1 was nowhere good enough despite the headline numbers, I finally sold. Here is an example of what I reconstructed:MDB growth adjusted per quarter 8x Pre Covid: 3.6, 3.2, 1.4, 1.7, 1.7, 1.7, 1.5, 2.26.Q 2 2020 was 1.05, its priciest yet. Then 1. Then that's all I have left as data.So MDB's pre-Covid baseline can be placed at 1.5 give or take 0.25. I suppose that it is pretty expensive still after its jump last week. I only had it in later 2020, pulling after a quick 90% gain. SHOP: 1.5, 1.35, 1.9, 1.2, 1, 1, 0.75, 0.8 so increasingly pricier pre Covid.Then 0.9, 0.9, 0.73, on Mar 12, 2021 was 1 and on Aug 30 was 0.75.So for SHOP, again, one may want to be less mathematical and more contextual and just call 1 the baseline just as 1.5 would be the baseline for MDB. So what? Well, a "fair" price for SHOP today would entail a 25-30% drop from current stock price.Now, what do we do with stocks that have close to no pre-Covid history?DDOG: 2, 2.2, 3, then suddenly: 1.1, 0.9, 0.8, was 1.07 on March 12 2021, and on Aug 30 is 0.84.And therefore the question is always the same, the facts are easy to collect here, but then what about the interpretation?A/ We (SaaS) are all in a bubble. Totally plausible but if so, a blow off top should be obvious by which I mean a bigger deal than what we saw in Jan-Feb 2021. Much bigger. If that happens, I am selling 2/3s of everything.B/ We are not in a bubble BUT rather:1/ Market has dramatically re-priced the risk involved in SaaS due to the latter's triumph in Covid times. This justifies higher prices.2/ Objective pull of revenues, not necessarily as extreme as ZM in 2020 but found all over the place.C/ The entire market is a bubble. See A/ plus market ratios depend on the metric and for every Big Name that spells doom there is a Big Name that offers another metric showing normal prices when you adjust for money supply. Shiller himself said in Dec 2020 that the very low interest rates justify the market level.Btw, be very afraid of random folks using history as a guide to stock market situations. It is far harder than they think and, as always, when the Big Crash comes, it will surprise the vast majority of people, including the pundits and the talking heads. I am afraid that I will have to endure a massive crash, whether 2022 or 2032 but as a general rule of thumb I will worry when CNBC trumpets a new era for the stock market, not when everyone is overpaying for puts. THE BIG PROBLEMALL VALUATION METRICS ASSUME WE ARE VALUE INVESTORS fighting the market and the efficient markets hypothesis. BUY CHEAP, SELL HIGH, MARKET HAS MIS-PRICED OUR DARLINGS. Sure, market under and overshoots and people like Beth Kindig and muji offer us product insights that may be early for the general market.BUT ON THE WHOLE WE WIN BY BUYING THE BEST RACE CAR AND HIRING THE BEST DRIVER. You don't win the Baja 1000 in a Baja Bug with yourself as the driver. You buy all the top trophy trucks and all the top drivers. Same analogy with Formula 1 if that is more like your thing. WE WIN BUY PAYING MARKET PRICE FOR THE BEST HORSES, TROPHY TRUCKS, OR RACE CARS NOT BY BEING CHEAP. We don't claim to know better than the market, we just don't buy the entire market.In conclusion, I have found valuation metric like the one discussed useful as a minor gauge of the state of things when:1/ A stock is way off its historical average (but this only applies to a few companies of those discussed, all newer ones have only known the rising tide). 2/ A stock is way off the 1. For example, NET is around 0.5 right now. This either means they are quietly setting the stage for conquering the world, or it means it has become a sort of meme stock or cybersecurity "play" due for a halving of the stock price. Again, of AMZN is the grand daddy of all growth stocks, then one never sells on valuation alone. All stocks will crash with the next Big One, but the best will recover earliest and most.
Oh, and I forgot another tactical problem:Say, UI Path has 74% Gaap gross margin but 88% non-Gaap. So which one counts for calculating growth adjusted valuation?All in all, I have redirected my attention to the questions:--Why this stock that I like is cheaper than the other stocks I like? Is there a problem I don't see?--Why is this stock that I don't like so pricey? Where am I wrong?So this is flipping traditional reasoning on its head.EXCEPTIONS:New IPOs and SPACS: I would give it a minimum of 2 ERs and preferably 4 before assuming any type of math is really useful.For example, U is the only SaaS I have owned and followed that has stayed nicely above IPO price at all times. Looks like everyone got this right. On the other hand, AI was insanely overpriced and SNOW may or may not beat SPY on its 1 year as a public company, currently running neck and neck with 2 weeks to go!
Thanks for the reply, you are giving me a lot to think about.The original PEG ratio had 1 as fair value. I also use 1 as fair value. Because for me the growth is the numerator, values above 1 are "cheaper" and below 1 are "pricier."Same for me so the higher that ratio is, the better. The other way around, we just get fractions...I tried to find what a fair ratio would be for G/(EV/GP) (Gotta find a shortcut for that ratio...). I looked at companies in different industries to guesstimate what the net margin would be for different gross margins. I ended with about 2 as fair value. More for some industries, less for others.Since I'm usually investing in high growth companies, knowing that growth will slow down, I decided to use a G/(EV/GP) ratio of 4 as a reasonable margin of safety. This of course stops me from investing in the most popular stocks and I am constantly questioning this. For example, as mentioned I invested in SE when my ratio was at 2.4, so well below 4. The reasons were that almost everybody thinks SE will grow fast for many years and the momentum was positive. So I try to keep an open mind about valuation. It's just one information point I consider.I also remind myself that Warren Buffett himself went from buying mediocre companies with super low ratios to saying that it's better to buy a wonderful business at a fair price.HISTORY-INFORMED GROWTH-ADJUSTED VALUATION:This looks like an interesting idea. Weather or not it proves useful, I hope you'll report back when... Ok, this is an example of a sentence for which I can't say correctly what I want. I'm close but I've been changing it for 5 minutes and I'm losing it! So... Tell us how it goes? I see it worked well for TTD and AI, and I'm curious to see what the rate of success is with more companies.I'm not familiar with BAND but it will be interesting to follow to see if it goes above or below the baseline you calculated. It is a good example of a stock going down despite the company doing well. Maybe someone has an explanation?BUT ON THE WHOLE WE WIN BY BUYING THE BEST RACE CAR AND HIRING THE BEST DRIVER. You don't win the Baja 1000 in a Baja Bug with yourself as the driver. You buy all the top trophy trucks and all the top drivers. Same analogy with Formula 1 if that is more like your thing.Take a Red Bull and put Max Verstappen in it to win. I can accept that. Obviously, if we could buy that combination at a lower price, we would make more money. I think that in the short term, we can find mispriced companies, but there is a reason for it. Maybe the company failed to reach the analysts target, or management gave a disappointing outlook, etc. Sometimes, the company is just too small to be noticed or bought buy the big players and I think we can find interesting opportunities this way.If we care at all about valuation, at what point do we go from "I'm buying at a high ratio because it's a great company" to "This is just too much even for this great company"? All I can say is, investing is hard!
Say, UI Path has 74% Gaap gross margin but 88% non-Gaap. So which one counts for calculating growth adjusted valuation?GAAP rules are not always logical, so I guess I would use the number that makes more sense. In doubt, I would take the lower number to play it safe.--Why this stock that I like is cheaper than the other stocks I like? Is there a problem I don't see?--Why is this stock that I don't like so pricey? Where am I wrong?Good questions. If you find out the answer, you will become the richest person in the galaxy.But perhaps it's just a market thing. We have millions of participants using different strategies. Some think short term, others long term. Some use fondamental analysis, others use technical and some use both. Some buy what goes up, others what goes down.
Thanks for playing:)I am not going to worry much about valuations until the monetary background remains as is.However, I want to create a simple matrix for how to react to backdrop changes.Saul's board is killing it for 3 reasons:1/ Monetary backdrop; 2/ Riding a secular trend;3/ Choosing well within that trend.Monetary realities can last far longer than an investor can wait to be right again. Just ask value investors waiting for the Big Crash and Ultimate Demise of growth since like 2012. There is a possibility growth investors are next in line to be in that position. But I am too tired now. I will get to this at some point!What I do know is that IF the context changes (as opposed to talking heads and pundits proclaiming it changed already) those who do not switch gears will be in for potentially many years of great pain. Because if that happens, we will not crash just 30% and recover in 3-6 months. I don't think there is high probability for that, but I think I need to set some rules for myself to be ready.
Saul's board is killing it for 3 reasons:1/ Monetary backdrop;2/ Riding a secular trend;3/ Choosing well within that trend.That sounds quite confident and authoritative. While each of those statements has some truth to it in a vacuum, from my perspective you have the order of the effects exactly wrong. I'd consider them this way:3/ Choosing well within that trend.You've just described the entire market in one sentence. Anyone investing in anything is trying to choose well within a trend. The only differences are individual selections of choice and trend. As investors, we have 100% control over this and should spend the large majority of our time in this area. And I think most posters around these parts do an excellent job of discussing what they choose and why.2/ Riding a secular trend.Well, sure. Which trend do you want to ride? Crypto? EV? Lumber (that sure was trendy for a while)? Gold? Software? A mix of trends? While we can't control where trends go, we can certainly try to focus on those moving in a positive direction.1/ Monetary backdrop.There's always a monetary backdrop, and it is almost always noise. In fact, too many investors let it become a distraction or excuse that clouds their investment process. If the Fed (or whoever the flavor of the week happens to be) is making things so easy, why are so many investors still trailing the market? Monetary backdrop doesn't make our investment decisions. We do and no one else.As the risk of sounding curt, this is just another thread trying to find a math formula for the nuances of valuation and investing. If one existed, someone much smarter than us would have found it by now. The best we can do is play the hand we are dealt. We are only limiting ourselves by paying too much attention to what's happening at other tables.
"a math formula"If you look above in the thread, you will see that I am not looking for a math formula but on the contrary drew an analogy with how you win a race."That sounds quite confident and authoritative."Yes, it is largely a statement of fact :) Not much to argue about here. "The best we can do is play the hand we are dealt. We are only limiting ourselves by paying too much attention to what's happening at other tables."Yes. But why would you assume I am limiting myself or paying too much attention? I am 100% invested in high growth and have been since late 2019, including in March 2020 and March-May 2021. You are confusing the daily macro talk on TV and forums with the point I am bringing here. The point is to be self-reflexive rather than too certain that one has nailed a formula that will always work, irrespective of context. The context changes might happen once every 10 or 30 years so it is not something one wants to lose sleep over, I agree. It is still important to be cognizant of the fact and have an idea of what might indicate a paradigm shift. Let's not forget that Saul sold internet in 2000 and sold quite a bit in Feb 2020. The question is whether there is something other than gut feel that one might go by, a metric that can be used to verify the state of the thesis just as is done for individual companies. For the record, I don't see tectonic shifts ahead, but I don't want to a priori rule the possibility either.As with every theory or hypothesis, one needs to be able to falsify it. Otherwise, it is a belief system. Progress is made by finding the limits of a theory and the conditions under which it no longer holds rather than continuously looking for further support.
Saul's board is killing it for 3 reasons:1/ Monetary backdrop;2/ Riding a secular trend;3/ Choosing well within that trend. Yes, it is largely a statement of fact :) Not much to argue about here.And this is where I disagree. There’s nothing factual at all about that statement. It is simply your opinion. And to be clear, my response had nothing to do with the wording in any of those variables. It was the order in which you listed their impact on returns, which is certainly up for discussion. My experience at the Fool puts the order the exact opposite of how you have it ranked. And that is not just Saul’s returns, but any of the more established names. The Fool is littered with successful investors of all styles from the Gardners to Saul to the Mechanical Investing gang to the posters at the Berkshire Hathaway board. Having read them all, I can tell you each of the thought processes they have so thoroughly detailed over the years flows more 3/, 2/, 1/. If we focus on “choosing well,” the rest tends to take care of itself. For the record, I don't see tectonic shifts ahead, but I don't want to a priori rule the possibility either.I don’t believe anyone is ruling this out. Having lived through dot-com and every drawdown since myself, I know I’m certainly not. In fact, I can 99.99% guarantee another is coming at some point. Kudos to you for acknowledging this risk and trying to plan for it. That and the fact you are writing so much down puts you well ahead of the curve. At the same time, all the investors above have not only planned for such downturns but navigated them, survived and thrived on the other side. Fortunately for us, most if not all of them wrote about it in real time so the rest of us could follow along and learn. It’s all there for the searching. And I’m sure none are ruling the next one out. You are confusing the daily macro talk on TV and forums with the point I am bringing here. The point is to be self-reflexive rather than too certain that one has nailed a formula that will always work, irrespective of context.I agree on being self-reflective, and these boards are a great place to do it. If I am confusing things, it is only because I am misunderstanding your ranking above. You listed the factor we have least control over #1 and the one we have most control over #3. And the way it’s worded suggests these investors have mostly lucked out because of monetary backdrop. I believe that is inaccurate and possibly misleading to anyone following along. You can call it “theory” or “belief system” or whatever you want, but a major part of the Fool’s success has been the power of the crowd in teaching each other to choose well. This is just another one of the good discussions to be had along the way.
Thanks for playing along. I don’t see much of actual disagreement, so a couple brief notes:"And the way it’s worded suggests these investors have mostly lucked out because of monetary backdrop. I believe that is inaccurate and possibly misleading to anyone following along."I now see why you reacted as you did. As you said, being cognizant of the hand dealt. Luck cannot lead to lasting success, which is what Saul’s forum has had. "You listed the factor we have least control over #1 and the one we have most control over #3." I surely agree that we can only control 2, which is the most obvious, and 3, which is where the Board excels. With respect to 1, you are suggesting that if we choose a good enough vessel with a good enough captain, we do not need to worry too much about the body of water we have to navigate. As you say, there is lots to this line of thought, but I think that extraordinary results require all three components. On a tactical note, #3, I finally built my own matrix, which distills chiefly Saul principles into a 2-page template. This is to be used for my indirect holdings which are half of my direct ones (unfortunately, I have to swim with ETFs in my 401k which is partly why I feel I need to keep an eye on the waves). So, yes, #3 is what I am focused on. The other half are TMF LTBH like SHOP, MELI, SQ etc. Not Ford!I may throw my PATH matrix out here to see what you and others think. Do feel free to take me to task for anything you see or don’t see in there :) Your feedback will be greatly appreciated.
Please share the two page template.
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |