How I Invest!

How I Invest!

There have been a number of recent threads about how I invest, mostly started by relatively new members on the board, and upset by my lack of attention to valuation metrics. For more information on how I invest, in addition to the Knowledgebase I’d strongly recommend the following links on the side panel:

How I Pick a Company to Invest In – This is a very explicit description of what I look for.

Why My Investing Criteria Have Changed

Why it Really is Different (SaaS/sub software)

While I upset some people because I don’t use EV/S and other valuation metrics, I must be doing something right as my portfolio currently up 163.0% ytd. To clarify, that is at more than two and a half times what it started the year at, hopefully approaching a triple (in eight and a half months).

And lest you think it’s just a lucky short term phenomenon, in 2017, 2018, 2019, my portfolio was up 84.2%, 71.4%, 28.4% and now 163.0%, so far this year. That compounds to up 966% in three years and eight and a half months. That’s 1066% of what it started with, more than a ten-bagger on the whole thing, even though, (gasp!)… I don’t pay attention to “valuation” and EV/S, but pay attention to what the company is doing instead.

Best

Saul

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Well okay, Saul, but you have some basis for comparing companies and their stocks, if not “absolute” then relative to each other, right? Maybe you could be more descriptive of how that aspect plays into your allocations?

You have a list of companies at any point in time that are your highest confidence companies. At that point, the relative confidence has to be reconciled with the stock prices, in some way.

Thanks,

  • (Another) Rob

For example: You know something is wildly overvalued when you see it, like SNOW even though Snowflake is growing tremendously.

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You have a list of companies at any point in time that are your highest confidence companies. At that point, the relative confidence has to be reconciled with the stock prices, in some way.

I can’t speak for others but I would think that if a company is of high(est) conviction and it keeps putting up numbers then its a buy, unless one already owns a full position.

I have greater difficulty establishing conviction in a timely fashion and so I frequently end up buying late. This tends to reduce rates of return.

I don’t think that one does better by following a formulaic approach. Rather its experiential. One has to learn to discern a company’s competitive position in its universe and to accurately interpret remarks in the quarterly presentations. Not always easy to do.

For example I misread the Q1 remarks in the transcript for AYX and lost an opportunity to sell at the best time. I made a bunch of other misjudgements. One has to live and learn. That goes even for us old folks.

cheers

arnie

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You have a list of companies at any point in time that are your highest confidence companies. At that point, the relative confidence has to be reconciled with the stock prices, in some way.

Geez rtichy, you didn’t read what I said, you didn’t follow the link to how I choose a stock, and you still JUST DON’T GET IT!

My confidence in a company has nothing to do with stock price, it has to do with company performance. Read that again! Nothing to do with stock price! It’s company performance!

For example I took my main position in Zoom in the $70s, but I still added a little in the $270’s, and it’s now in the $400s. My comment about SNOW was an oddball occurrence of something being “just plain silly”. It has nothing to do with my usual investing. The last time anyone could find me refusing a stock because of “just plain silly” was over 20 years ago!!!

Saul

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Well okay, Saul, but you have some basis for comparing companies and their stocks, if not “absolute” then relative to each other, right? Maybe you could be more descriptive of how that aspect plays into your allocations?

You are asking portfolio management questions. Portfolio management discussions are against the rules of this board. However, do as Saul suggests and read the posts linked to the right sidebar and especially focus on “How I pick a company to invest in” and Knowledge Base “Part 2” you will be able to learn the answers to your questions and a whole lot more.

Lee

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I don’t think that one does better by following a formulaic approach. Rather its experiential. One has to learn to discern a company’s competitive position in its universe and to accurately interpret remarks in the quarterly presentations. Not always easy to do.

Thank you, draj!

Please stop and read that again. Slowly. This comment summarizes just about every single valuation thread we have ever had on this board. Every one of these discussions is just another effort to find some neat and tidy formula for a suitable buy price in high growth stocks. There is none. The best growth companies are almost always valued somewhere between expensive and nosebleed. It is often impossible to own or add to these names if you are not willing to cross the expensive line. You can lament that fact all you want. The market simply doesn’t care.

It is up to each one of us to find our line. You are either willing to buy a company – notice I didn’t say stock – at its current price or not. Saul referred to his cut off line as the “silly” level. I’d say mine has become “at least one step beyond the first max number that pops in my head”. Others might use different descriptions, but the point is none of them are likely to be exact or measurable.

Anyone whose line is “slam dunk cheap yet I’ll still make enormous returns” will almost certainly be left standing on the sidelines or end up in the wrong companies. Repeatedly going down P/S or EV/S rabbit holes isn’t going to change any of that. This is not meant to be a personal or disparaging comment to anyone. It is simply pointing out the hard truth about the price of admission in this part of the market. You either pay it or you don’t.

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Saul you are under no compulsion to explain yourself. Others who just don’t get it. Read again. Saul added Zm at 270, something very few are able to understand or prepared to commit. This does come under portfolio management though. However, ask yourselves why he did this and why he continues to shatter expectations. Because he adds to his high conviction Companies into what he sees will happen down the road until it starts to get congested. I added to Zm this year at every opportunity and into the low 300’s.

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Longtime grateful lurker here. Finally feel that I might have something to add…

While we’re talking of ZM, I’d like to suggest that anyone trying to figure out how Saul “values” these hyper-growth companies go back through his early comments on Zoom and chart his journey from putting the stock in the silly box to making it a portfolio star. It was incredibly instructive to me to see his thinking evolve in real time.

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Saul added Zm at 270

By owning ZM right now, you are suggesting you would buy it right here because it is among your best ideas. Cost basis is good for discussion but irrelevant for future performance of your portfolio.

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Draj,
I frequently end up buying late

I have never, not once bought a piece of a company when the stock price was at it’s nadir. Nevertheless, my overall performance over the last 4 - 5 years has far exceeded my expectations. Even this year when I got totally spooked by the potential economic damage of the pandemic and sold everything to cash only to buy back in a few weeks later, I am up over 65%.

I would contend that there is no such thing as “buying late”. You either buy or you don’t. If you decide to buy, then you do it when you do it. In that none of us are VCs (an assumption), we all but “late” compared to those who bought in before the company went public. So all of us that buy on the open market actually buy “late.” Some of us are later than others.

Like you, I am one of the “old folks”. And yes, I am still learning. The way I look at it is this: I’ve got no new money coming into my investment portfolio. All I can do is move money around. When I want to buy, I also have to consider what I want to sell. Sometimes that’s not a very hard decision. In fact, sometimes the sale comes ahead of the buy (i.e., AYX earlier this year). But most the time, the question that you must ask yourself is whether this new investment (or additional investment) exceeds your expectations of the status quo. I often conclude that doing nothing is the best decision for the here and now. That doesn’t mean I’m always correct, it just means given the available facts and data at a specific point in time my judgment is to just leave things alone.

Given that this is how I evaluate the positions in my portfolio, right now I have a dilemma. Zoom has grown to be a 28% position. Normally I won’t allow any one company to exceed 20% of my portfolio. But if I sell some of my Zoom position in order to reduce the impact of a swing in Zoom’s stock price where should I invest the money?

I guess it boils down to stop beating yourself up for the decisions you didn’t make sooner. So what? I can tell you in no uncertain terms that since I’ve been aggressively investing in growth stocks my performance has consistently exceeded my expectations. There’s other folks who follow this board that are doing a lot better than me. I don’t care. It’s not a competition.

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There is one acronym that is more likely to guarantee inferior returns than any other I’ve ever come across. It first came to my attention from a Seeking Alpha author who is up a bit more than 8% this year despite owning Peloton. Lord knows what his return would be without that stock.

GARV. Growth at Reasonable Value. Shall we name a few from Talend to Nutanix to Pure Storage to Cloudera to New Relic to even Alteryx recently. Hey, let’s talk Slack and Elastic…for some reason they have both underperformed for longer than a year creating GARVs for all the value investors (hmmm…in the midst of a historic WFH bull market Slack is down 30%! Not just underperforming but substantially down! But it’s cheap…sigh…pound head against wall). Nvidia only crashes 2 years ago after hitting what were considered absurd low valuation. I had sold it out in the $300s at what was near it’s very top. All the triple + I made in Nvidia happened when it was “outrageously” overvalued.

It was only after it became cheaper GARVed that money was lost in droves on it.

Funny how the same thing happened with Arista. More than a triple there when it defied valuation logic for years. Then when value investors came upon it…stymied. No money there in years.

Why? S curves and business fundamentals changes for the worse. I’m real time we saw this happening.

Why is it people prefer to buy a declining or maturing business at a GARV price rather than a spectacular one in its prime is beyond me!

That is, and you know it when you see it, the price is just “silly”. Snowflake $90 billion. Don’t need a sound track for that. Speaks for itself.

Tinker

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Hey there !

I’ll post this just to add another another way to invest to the overall mix.

Should I find a company (by looking about or listening or an “idea area”) that looks interesting for me, I’ll do some research on it. If I like what I see, I’ll buy it. I don’t follow any investing “rules” that are bantered about. I own 22 companies at present having started my investing journey during the early 1970’s.

And now to my point - I do not have a stock portfolio that is anywhere evenly distributed among the 22 companies. I don’t figure how much percentage any company makes up my port. If it is a winner and I have money I’ll buy more. Just because a company makes up more than X% doesn’t mean that I need to sell some of it just to “balance” the percentages … heck! If it doing that well, I’ll buy some more. Of the 22 current companies, only 2 are losing at this time and one is a company that I recently bought … it is still a good company and I won’t sell because it will continue its long term growth and become profitable for me.

That’s my “system” and I’m sticking to it.

Best to all,
Rich (haywool) totally unbalanced and profitable beyond my expectations.

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I would contend that there is no such thing as “buying late”. You either buy or you don’t. If you decide to buy, then you do it when you do it. In that none of us are VCs (an assumption), we all but “late” compared to those who bought in before the company went public. So all of us that buy on the open market actually buy “late.” Some of us are later than others.

brittlerock

You are correct of course, and your comments, particularly the one above, are worth saving for future reference.

Too much energy is expended on regrets. One just has to stop repeating old mistakes and decide things on the basis of current circumstances.

I think Saul puts in squarely in several of his tutorials. What has past is no longer actionable and in the future the difference will not be material.

cheers

arnie

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Ok, I think it’s time to end this thread. It’s gotten into portfolio management.

Clearly a lot of us here like to seek cohesive stories – it’s part of what interests us in learning about exciting companies. We want to know exactly what Saul does and why, and we want basically a formula. We want to know how it works. But I think we need to be open to a little ambiguity.

I believe Saul when he says he doesn’t calculate EV/S and try to time entry and exit points. I would guess that he knows (within error bars) the approximate market cap of his companies. That’s just a data point, a fact. And of course he knows how much revenue they bring in. Those are the components of PS ratio, whether you calculate it or not.

My belief is that Saul just considers these facts like any other fact – facts about financial results, or even facts about the movement in the stock price. Maybe he occasionally thinks to himself, “Wow, Datadog has become a $25 billion company – good for them!” Or maybe he doesn’t – I don’t know, I’m just thinking for myself! I don’t have to know his formula because he probably doesn’t have one – it’s not about formulas (see Stocknovice’s last post). But he saw SNOW was debuting at $60 billion plus and thought, “Wow, kind of silly. I’d rather just keep what I have.”

I don’t even know if I’m correct about any of this. I just think that we all need to realize, this is as much an art as a science. We’re not always going to agree. Saul may be the greatest investor here, but he isn’t perfect. Let’s all try not to copy his moves or even his exact style, but rather, based on what we can understand about what has worked for him, let’s each develop a style that works for us.

Is that enough? I hope so. Let’s end this thread and get back to discussing individual stocks. We can even bring up data points about them that not every person here cares about. :slight_smile:

Bear
Assistant Board Manager

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