Bear's Portfolio at the end of August

Investment Analysis Clubs Saul’s Investing Discussions
1

Previous Month Summaries

January: I didn’t start doing this until February
February: http://discussion.fool.com/bears-portfolio-at-the-end-of-februar…
March: http://discussion.fool.com/bears-portfolio-at-the-end-of-march-3…
April: http://discussion.fool.com/bears-portfolio-at-the-end-of-april-3…
May: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-may-3…
June: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-june-…
July: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-july-…

Portfolio Performance


This Month
My Portfolio            +0.54%
S&P                      -0.12%
Nasdaq                  +0.99%
Russell 2000           +1.76%

YTD
My Portfolio            -11.3%
S&P                      +6.21%
Nasdaq                  +4.11%
Russell 2000           +9.41%

In August, I had another “a step forward and a step back” kind of month. XPO appreciated quite a bit, but RUBI took a big hit before I sold it. None of my largest holdings moved forward in meaningful ways; in fact SEDG continued to get cheaper and cheaper. (If it continues down, I will buy more at some point. Tough to resist now!) A few of my smaller holdings appreciated quite a bit, but didn’t change my overall picture too much.

I also sold out of LGIH too early (more on that below), and managed not to get in on the BOFI gains.

Changes this month, and why I made them

This month I sold out of quite a few positions. This wasn’t particularly surprising, as at the end of last month I was spread pretty thin after my top few positions, which reflected my low conviction. My conviction has now grown in several companies which I have added to or initiated positions in. The low conviction companies, I sold. My process was simply asking myself if I could justify selling, and if the answer was yes (whether because I thought the stock price was likely to go down, or just because I felt other stocks were likely to outperform it) I sold.

I also starkly shifted from low PE / low PS companies into high PE / high PS companies. Valuation is a fascinating thing. There are some things I remain convinced are insane bargains. I added to SKX and didn’t sell any SEDG, despite their dwindling share prices and PEs. It’s possible I may have to wait a long time for these shares to come back to where I feel they should be, but I just don’t feel now is the time to sell. The price is too compelling. They are so cheap. It is frustrating when other things are going up to have these as a drag on my portfolio, but I feel that their time could come at any time.

I have stopped shying away from more expensive things, and greatly increased my stakes in SHOP, PAYC, VEEV, and added large positions in CRM, SSNI, and SPLK. This was largely because I began to understand subscription models and deferred revenue and realized that these companies are growing in a sustainable way that actually can contribute to justifying their valuations. These companies are in no way cheap, and I was treading lightly, but now I am jumping in.

This was no small change. The average stock in my portfolio (excluding WATT) had a P/S ratio of 3.5 last month. This month that average PS grew to 5.4. That is a real shift in the types of stocks I’m investing in. This is entirely based on my conviction that these are the companies which will grow the most rapidly and sustainably in the near term. I am becoming even more confident about these companies than SKX or SEDG…my allocations don’t reflect that yet, but they are rapidly moving in that direction.

I sold out of 9 positions during August and only added 4 new ones. So I’m down from 25 positions at the end of July, to 20 positions now.

Sales:

IDTI - As I said on the day I sold, way back on 8/1: I was listening to the conference call and they said that next quarter sales would be down because of a big customer, and I hit “sell” immediately (this was actually my first ever after-hours trade). The word “Infinera” started ringing in my ears. But it’s more than that really. Like many companies these days, IDTI’s spending has just been going crazy. It has increased far faster than gross profit, which has led to decreasing margins. I’m out.

PN - Trimmed 50% on 8/1 when it went up on the new Ebix offer, sold the rest a few days later.

LGIH - I sold way too early, but I have been a little spooked by the monthly numbers lately. Hopefully they’re just noise, but I’d like to see a couple months back up over 400 closings before I consider getting back in.

DY - I sold before earnings came out. Just didn’t know what they were going to say about guidance given the demand uncertainty. Turned out selling was the right move, at least in the short term. I’m happy to be out for now. It’s not bargain basement or anything, and I feel like the recurring revenue companies I’m putting my money with are better bets.

INUV - Had to come to grips with the fact that I don’t understand this business.

RUBI - See INUV.

GDEN - Took profits on my tiny position. Wasn’t something I could get too interested in.

CBM - Like with SCMP before it, I again decided just to stay away from the health care industry.

INFN - Realized I was really only holding because I was hoping that revenues wouldn’t be as bad as expected. Hard to get excited about that. Better places to put money.

Trims:

AMZN - Sold a ton to free up some cash. I absolutely believe they’ll be a long-term, steady winner, but other things are more compelling at present.

Buys:

SSNI - Upon noticing that this little company had become Saul’s 7th largest holding at the end of July, I took a closer look. I really liked what they are doing, and even though the valuation is troubling, the magnitude of the deal with ConEd put me over the top and I bought.

SPLK - Bought after it sold off on phenomenal results. Bert wrote them up and convinced me. Also a David Gardener favorite. I don’t understand their secret sauce, but I like their business model and growth. They also seem near an earnings inflection point.

FB - Some of the proceeds from AMZN went here. Both of these companies will continue to take over the world, but neither is likely to double in mkt cap in the next 2-3 years. Slow and steady…these definitely have a place, but I am keeping them smaller than the huge potential stocks I like most.

CRM - A much larger company than SHOP, PAYC, VEEV, etc., but CRM also trades at a lower PS. Also, while others have been booming this year, CRM has yet to explode. Hopefully that share price reflection of their constant growth and vast potential is on the way soon.

Adds:

AHS - This company seems to be on the right track, profitable, growing, in demand. It also sold off after earnings for no reason I can see, so I stocked up. I like it.

VEEV, SHOP, PAYC - SaaS is the place to be right now. I esp like that PAYC and VEEV are actually profitable, and increasingly growing EPS.

SKX - I continue to build up my position while SKX remains on sale.

SUNW - Phenomenal growth. Probably won’t add much more - a 9% position is pretty large for a microcap like this.

My Current Allocations


Skechers	        SKX	18.5%
Sunworks	        SUNW	9.0%
Solaredge	        SEDG	8.2%
Salesforce	        CRM	8.2%
Shopify	                SHOP	7.2%
Silver Spring Networks	SSNI	6.6%
Paycom	                PAYC	5.2%
AMN Health	        AHS	5.0%
XPO Logistics	        XPO	5.0%
Splunk	                SPLK	4.0%
Mitek Systems	        MITK	4.0%
Veeva Systems	        VEEV	3.5%
Amazon	                AMZN	3.2%
Fitbit	                FIT	2.5%
Facebook	        FB	2.2%
[Stamps.com](http://Stamps.com)	        STMP	2.0%
Energous	        WATT	1.5%
Yelp	                YELP	1.3%
Pandora	                P	1.0%
Perion	                PERI	0.9%
Cash                            1.0%

Random Thoughts and Conclusions

I’m starting to question why my high conviction stocks seem to do worse and my low conviction stocks seem to do better. I’ve even noticed the same for Saul to some extent (INFN, SBNY, SWKS, and SKX have been recent high conviction dogs, although LGIH breaks the mold.)

I’m hoping this is just a timing thing, or a reflection of what Saul calls a “camouflaged bear market.” So hopefully these high conviction holdings are on the verge of taking off.

11 Likes
2

what type of costs do you incur to trade?

3

Sounds like a whirlwind! You do about as much trying in a month as I do in a year. The impression I get is that you’re trading in random noise; not sure I could keep up with it.

Graham

3 Likes
4

Hi Bear, One thing I’d comment on is that you have over 17% in solar stocks, which may turn out to be a great investment, but sounds like a lot to me.

I’m starting to question why high conviction stocks seem to do worse and low conviction stocks seem to do better

Actually, LGIH and AMZN, which are my top two positions, have done great and have been carrying my portfolio lately.

Saul

1 Like
5

Hello Bear…

Thanks for your open and candid efforts to share publicly your trades. You are making a great case study of why one should not “over trade” and chase the next “big” thing…

I hope your investing returns improve. But it is hard for me to believe that you will outperform a broad market index fund over the next 3 years…Want to take up that bet?

6

what type of costs do you incur to trade?

$7 on scottrade and $9 on schwab

7

But it is hard for me to believe that you will outperform a broad market index fund over the next 3 years…Want to take up that bet?

Sure, I’m your huckleberry.

1 Like
8

HI Bear,
Let me start by thanking you. It is fascinating to see how others work through the same issues, questions, etc.

Your post has made me curious, and I think the other questions are along similar veins. What would you say your annual portfolio turnover is? Looking at your monthly post, I noticed that just taking your four new positions and adding up their portfolio percentage I get over 20%. Nothing wrong with these stocks, but if you are turning over your portfolio at let’s say 30% to account for adds, and this is a typical month, you are turning your portfolio over 3 to 4 times a year.

If you recognize this and are okay with it, that’s one thing. I think it is easy to get in a mode that you (me) constantly fiddle with the portfolio. I think that it is very tough to do this and beat the overall market. In my opinion, that is playing in the experts game. The professionals are good at that and they have all the resources and time to be successful at it.

Now since we are on Saul’s board, I will say there exceptions, and it appears that Saul is one where he can compete with the big boys. I will also say that it is hard for me to get a handle on what his true portfolio turnover is. But I can say that he doesn’t appear to start 2 or 3 new positions and have them be very large poaitions in a single month.

Again, not trying to be critical. If you don’t mind, can you comment on your overall portfolio thought process? Do you pay attention to how long you hold your positions? Just interesting to me because I do grapple with these same questions?

Randy

3 Likes
9

Randy,

You bring up some good points. Let me offer some thoughts in response:

What would you say your annual portfolio turnover is? Looking at your monthly post, I noticed that just taking your four new positions and adding up their portfolio percentage I get over 20%. Nothing wrong with these stocks, but if you are turning over your portfolio at let’s say 30% to account for adds, and this is a typical month, you are turning your portfolio over 3 to 4 times a year.

Without calculating it exactly, I do think it may be a little lower than that. In July, for example, I only shed one stock. I added 4 in July, but they only amounted to 6.6% of my portfolio. It’s rare for me to add positions as big as CRM and SSNI in August. This was a month where my thinking shifted quite a bit.

can you comment on your overall portfolio thought process? Do you pay attention to how long you hold your positions?

As I’ve said in my posts, my goal is simply to put my money behind companies where my conviction, and the opportunity I see, is highest. That’s why in August I shifted a lot of my money to companies with recurring revenue and rapid growth. It became clear that, for instance, if SHOP continues growing at near 100% YoY, the very high P/S of 12-13 will in just a few quarters become ~6. Either that, or the shares will appreciate meaningfully (possibly double). That kind of growth is hard to find. And that’s not even to start thinking about what kind of profit they will start generate someday.

But do I have as much confidence in Shopify as Amazon? that the business won’t be disrupted? or face unforseen headwinds? Heck no. Amazon’s moat makes it incredibly more certain. But Amazon is a 360B company, where SHOP is about 1/100th the size. It’s also growing revenue so much quicker. I currently believe SHOP affords the opportunity of the greater possible returns.

I hold both, to diversify, and because I might be wrong, but this is why I shift money around from stock to stock. I pay attention to how many positions I completely exit, or start, and if every month was like August I would agree with you that my portfolio turnover is excessive. But as is, I think I can justify my moves. (at least to myself!)

Thanks for the questions.

Bear

1 Like
10

No problem,
Thanks for the discussion. Interesting, I probably fall too far on the other end of the spectrum and change too slowly.

Good luck!
Randy

11

You are going to lose a lot of money if you keep this up.

The best performing asset class of the last 100 years is the small-cap-value stocks. Its average annual return is about 14%. You are far better off putting your money into an ETF that tracks that segment. IJS is one such ETF.

Your portfolio is -11% YTD. IJS is up 16%. You are 27% behind!

5 Likes
12

" You are going to lose a lot of money if you keep this up.

The best performing asset class of the last 100 years is the small-cap-value stocks. Its average annual return is about 14%. You are far better off putting your money into an ETF that tracks that segment. IJS is one such ETF.

Your portfolio is -11% YTD. IJS is up 16%. You are 27% behind!"

I am not sure that that is fair or accurate. Firstly past performance is absolutely not a guarantee of future success and there is nothing that says that small cap value is the place to be going forward.

Secondly you seem to be implying that anyone that YTD is not up 16% would have been better off in IJS - Saul included.

I think that Bears portfolio is risky and needs fine tuning but I take my hat off to him. By posting his success and mistakes not only do we get to learn but hopefully he is learning as well and with time will refine his process into something more successful. I get the impression that he is young and therefore has many years to refine and improve his technique and see what works and what doesn’t. As long as he is open to new ideas and processes a couple of bad years will not hamper his long term success.

7 Likes
13

I think Bear shows courage and refreshing transparency in his willingness to tell the flat-out truth about his portfolio.

Kudos to you Paul Bryant!

Frank

9 Likes
14

I am not sure that that is fair or accurate. Firstly past performance is absolutely not a guarantee of future success and there is nothing that says that small cap value is the place to be going forward.

100 years of data is not good enough? This is not a stochastic random process. This is not a coin toss where the next one is independent of the previous 100. Past results matter!

He is chasing performance and zigzagging like crazy. You are doing him a dis-service by egging him on and “supporting” him in this journey.

People in their 20’s have no business messing with individual stocks. they have time and can build fantastic wealth by simply investing in some small-cap index.

Those that chase returns of 25% annually, will end up making 6%.

6 Likes
15

You are number Six, I am sure Bear appreciates your concern and passion.

First off no one is “egging him on”. Most have us have expressed concern about his choices and have suggested ways to take a more conservative and safer approach.

That being said what you are suggesting is that anyone that cannot duplicate a 14% return has no place being in stocks and should be blindly pouring money into an index fund just because it has many years of excellent returns.

A middle aged Saul came back from a greater than 50% drop to go on to significantly outperform the market and yes we are not all Saul but if Bear truly learns from his mistakes and truly becomes a better investor because of them I am absolutely sure he can more than overcome a couple of bad years in his young investing life.

Yes if he is not learning and continues to “gamble” then an index approach might be more logical but I think we should give him some leeway and credit.

As to the 100 years of data. While 100 years might be impressive the world changes dramatically with each passing year and the amount of change is exponential. Life did not change much between 1955 and 1975 and yet the change in our lives between 2006 and 2016 is huge. 100 years of back data has little bearing on what will happen going forward and so to suggest that just because an index has delivered 14% returns previously, that it will continue to do so is potentially very misleading.

3 Likes
16

That being said what you are suggesting is that anyone that cannot duplicate a 14% return has no place being in stocks and should be blindly pouring money into an index fund just because it has many years of excellent returns.

I wish people would take a good look at the systemic nature of wealth distribution before coming to conclusions about what to or not to do in the market. I’m NOT taking sides in this debate. The aim of this post is to have Fools rethink their convictions.

I start out from Pareto’s 20-80 observation that 20% of the population owns 80% of the wealth. This observation has been verified in other countries and in other markets. This is the real reason why three out of four mutual funds underperform the market averages. This is a mathematical reality, the proportions can change but the distribution is always uneven, it is always a power law distribution. There are many things in nature that follow the power law distribution like earthquakes, a few large ones and very many small ones.

The second point is that when some investor improves his performance he does it at the expense of others. Stuart Kauffman (and others) have described the environment in which we live as “evolving fitness landscapes” meaning that as we individually improve our fitness we change the shape of the landscape and some of our older skills become less valuable. HFT is one such development, HFTraders learned to squeeze a few pennies out of each trade, changing the shape of the market.

If you accept the above, clearly you have two options to choose from: index funds or self directed investing. What you need to accept is that three out of four self directed investors will underperform the index funds. This is mandated by the power law distribution of wealth.

There is no one perfect answer to this conundrum, the choice depends on your wealth, age, obligations, desires, ambitions, your willingness and ability to take on risk. Please don’t settle on a pat answer, think it through.

To beat the indexes, to belong to the top 20%, you have to have mastered enough investing skills to do so. If you are young, you have time to do so, if you are old, you have less time.

Denny Schlesinger

16 Likes
17

Thanks Frank and Craig. I appreciate the support.

YouAreNumberSix,

Your diligent, unfailing concern for my well-being surpasses all reasonable expectation of dutiful benevolence. I am as grateful for your guidance as for your interest. However, let’s examine your appraisal of my circumstance and see if you err.

  1. Your loving confidence in IJS may be somewhat misplaced. You conveniently point out its superior performance since 1/1/2016. I suggest a different, but equally arbitrary, horizon for the evaluation of this security. On Jul 3, 2014, IJS was at 116.77. Performance since then has been less than 8% total return…less than 4% annualized (this improves only minimally if you add in the small dividend it pays). No investment is perfect through every period in which it can potentially be apprehended.

  2. “People in their 20’s have no business messing with individual stocks.” “Those that chase returns of 25% annually, will end up making 6%.” Allow me nothing in response to these statements other than to humbly posit that the dogma evinced therein requires substantially greater support than you have henceforth provided (ie, none).

  3. It may even be that the reports of my inability to outperform the market are greatly exaggerated. My monthly reports have spanned a period of seven months. In another baseless effort in data cherry-picking, let me refer you to my first ever monthly post, regarding my performance in February of this year. In this I stated that my performance in the first semester of 2015 was a positive 25%, or 50% annualized. I no more expect to achieve that performance regularly than I do my negative performance in later 2015 and in 2016. I propose that the period in which we agree to examine my abilities as an investor must be expanded.

I wish again to express my gratitude for your warm care and ceaseless guidance regarding my investment trajectory.

I remain:

Your obedient servant,
Bear

15 Likes
18

1) Your loving confidence in IJS may be somewhat misplaced. You conveniently point out its superior performance since 1/1/2016. I suggest a different, but equally arbitrary, horizon for the evaluation of this security. On Jul 3, 2014, IJS was at 116.77. Performance since then has been less than 8% total return…less than 4% annualized (this improves only minimally if you add in the small dividend it pays). No investment is perfect through every period in which it can potentially be apprehended.

There are no Klein charts for ETFs but I can calculate the average CAGR at five year intervals using the best fit line which I think is a better reflection of reality than using start and end points which are required for cash flow and accounting:


 **Average CAGR**
 **Dividend included**
**Ticker   15Y     10Y      5Y**
IJS     8.6%    9.6%   14.1%

Denny Schlesinger

3 Likes
19

I did not come up with this idea. here is a Motley Fool article that gives interesting facts:

http://www.fool.com/investing/beginning/investing-strategies…

… at the 12.7% compound average annual return of small-cap stocks, that $10,000 would grow to $361,175 after three decades. Definitely not bad.

That’s 12.7% annual for small caps, covering the period from 1926, including the spectacular collapse of the Great Depression. It gets even better for small-caps-value which is what the IJS tracks. The IJS launched in 2000, so it cannot use the terrific 1990’s to juice the record, but still, it is the best performing asset class since inception in 2000.

If you want to create wealth, you need to look no further. If you just want to play and gamble for the adrenaline rush, that’s a different story.

The point of this is not necessarily to help the original poster. There are hundreds of people reading these posts, 90% will not beat 14% annual returns in their investing life. Many of them will underperform so badly they will kick themselves 20 years from now. If I gave even one young investor a pause, that’s good enough.

Saul is an extreme outlier.

2 Likes
20

I guess I don’t see it as an all or nothing.
Maybe a guy, or girl, could have a set amount (dollar cost averaging) going into a fund such as IJS as well as keeping portfolio of individual companies. As time goes by, can adjust amounts in each, learn from both, and reallocate.

Just a thought.

Kevin

5 Likes