Early 4-week summary for the faint-hearted

[SaulR80683]

Early 4-week summary for the faint-hearted

I hear a lot of noise about selling out into cash, people panicking about a possible downturn etc. I thought a bit of calming down would be worthwhile. Has everyone forgotten February already? If I had sold out at the mid-week low on Feb 8th, at the peak of that panic, I would have “saved” my year-to-date profit which was, on that date, almost 6%. And here we are, six weeks later, and I’m looking at about 33% instead.

First of all, this isn’t supposed to happen! When the markets head down our overpriced stocks are supposed to head down further and faster. Well let’s look at what actually happened (using my Jan and Feb closing dates):

The S&P had a great January, up 7%. However, in February it was down, and in the last four weeks it’s down another 5.8%. And year to date, it’s down 3.6%.

The Russell had a good January, up 4.3%. However, in February it was down, and in the last four weeks it’s down another 2.5%. And year to date, it’s down 2.1%.

The IJS Value, etc… year to date it’s down 3.5%

And if you want to throw the Dow in, it’s down 4.8%

Okay, I had a great January too, greater in fact, up 17%. However, in February I was up 4.3% while the indexes were all down, and in the last four weeks I’m up another 11% or so, while the indexes are all down. And year to date, I’m up about 33%, while the indexes are all down.

And there’s nothing special about me, what I’m doing, or my portfolio. I’m sure that most of you who have been investing in the stocks we follow are in the same range, plus or minus depending on which stocks you have, and in what proportions.

[And for a more insane comparison, the S&P is up about 15% since Jan 2017 (last year was a great year for everyone), while most of us are up in the range of 120% to 150% in the same time.]

Now are you sure you want to abandon our overpriced and dangerous companies in a panic and go into cash? Just wondering?..What companies? Let’s look at some of the companies our board is following, and how they’ve done in these past four terrible weeks, while the market has been falling, and looking at them even after the bad week they’ve just had.

Arista is up 7.4% in 4 weeks…
Alteryx is up 5.8% in 4 weeks, and up 38% if you look back 6 weeks.
Nutanix is up 40.2% in 4 weeks, and up 58% if you look back 6 weeks.
Shopify is up 3.3% in 4 weeks, and up 18.5% if you look back 6 weeks.
Square is up 15.4% in 4 weeks, and up 31% if you look back 6 weeks.
And Twilio is up an amazing 63% if you look back 6 weeks.
etc

Okay, I think you get the point. These dangerous stocks, that some have referred to as “Saul stocks” while pitying us, and predicting that they would fall faster and further when the market pulled back, are rising while the indexes are falling, and falling is what the indexes have done last two months. Why? What’s going on? Well first of all, second of all, and third of all, we are invested in great companies that are disrupting important markets, growing like mad, and most have recurring income.

Now I’m in no way offering an opinion about whether or not we will have a recession or a bear market starting tomorrow. I’m just saying don’t go panic because we’ve had a few bad days. Keep the cash aside that you’ll think you’ll need, and add a little more to that, and then go out and find the best companies you can to invest in, and stick with them until either there story deteriorates, or you find a better place for your money.

Best to you all,

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

[RaptorD2]

Well said, Saul.

I would also like to add a small reminder. As we all know, some day even our favorites will take a dip; it’s inevitable. But lest we be considering switching part of our ports to large-cap ‘stalwart’ stocks, it would pay to study what happens when any recession, major dip, whateveryoucallit, reverses. Small-cap stocks regain their former highs much more quickly than large-caps. For reference, the outgoing president of AAII (and others) has/have written in detail about the phenomena on the AAII website recently, and in his new book “Level 3 Investing.” Yes, conservative old AAII now recommends a majority of small-cap stocks in all portfolios.

When you add in that if many of one’s holdings are fast-grower disrupters, any “dip-and-return” for these stocks should be among the stocks with the shortest turnaround times of any market segment.

Personally I think many who think this bull has gone on too long, have overlooked the fact that every economic power on the planet chipped in for QE that totalled in the trillions of dollars during the last recession. Yes, it was 10 years ago that it started. But the affects are still with us now and will be around for another 5 years, maybe another 10 in my opinion. QE could not have been engineered any better for equity investors who invest through the US markets, even if that were not the intention.

There are always things to be concerned about, things to watch for. We all know there is no shortage of macro concerns right now. But there has never in my lifetime been more positives for investors in such a short time frame.

Even those who have been paralyzed on the sidelines due to post-recession fear are surely realizing this reality by now. Of course hindsight is 20/20, blah, blah, blah, but many of you who have been fully invested for the last decade didn’t consider any fear after a major recession to be the major question for investors. It wasn’t a question of ‘to invest or not to invest’. For those who remained focused on which companies were engineering all these “game changers” we still hear about on a daily basis, and are starting to see come to market, and how they did it, are now far ahead of the pack. I see no reason for that to change. If you disagree, I remain open to all ideas, so please fire away.

Dan

Serious Disclosure & Warning: I am Long Optimism

[fish13]

Hey Saul (& others feel free to chime in),

I have a question about your allocations and portfolio management. You noted you are up 11% this month. Conversely, I am down about 1% on the month. Granted our portfolios differ but there is a decent overlap. It got me thinking about allocations in particular.

So the question is: do you have a process for your allocations and would you be kind enough to share it if you do?

In my own portfolio I don’t really have a process. It is more just based on conviction at that current time. However, this gets me a little in trouble because, of course, my conviction is subconsciously swayed by the recent past performance of the stock. I try to not go above 25% for an allocation and then just base the rest of my allocations per my conviction level.

In the knowledge base there is a ton about stock selection and the underlying philosophy surround modified buy and hold but I am just trying to get more clarity around the specifics of your thought process.

For instance, are allocations more intuition based? Is there more weight to companies with recurring revenue? More weight on revenue growth? Any valuation considerations? Do you have an anchor like 20% that you won’t go over and then the rest are based on just general conviction levels? A combination of it all?

I have just been in awe of the accuracy of your portfolio management. It seems every time you trim, the stock takes a breather and every time you keeping buying (@ AYX), the stock takes off.

I’m sure your intuition has been built up over the years and there are certain intangible things that go into your decisions, but I am just very interested. It seems like there is a lot of agreement in general on this board about the stocks that are deemed “worthy” but the allocations, of course, vary greatly.

Thanks so much in advance and thanks for bearing with my long-winded question.

Very best,
Fish

[earslookin]

These dangerous stocks, that some have referred to as “Saul stocks” while pitying us,
and predicting that they would fall faster and further when the market pulled back, are
rising while the indexes are falling…

This is a classic example of small sample bias and recency bias. The implication is that
these stocks are safe or less volatile because they happened to have performed well in
the last six weeks.

Let’s look at the same companies in a different six week period. During the first six weeks
of 2016, Arista was down 28% and Shopify was down 25%. The S&P500 was down 9%.

What’s truly dangerous is to be unaware of your bias when you make investing decisions.

Ears

[HeartMD]

Ears,

I don’t think that was his point…some random 6 week period of analysis. We could do that forever. He could’ve just mentioned their performance over the last 12 months, even more impressive IMO but again, not the point. The point was to not freak out. A few down days but the stocks we own are good, if not great, companies being well run and disrupting markets all the while growing at incredible rates. So what he’s really saying is, “we are in this for the long run, don’t let a few bad days get to you.” He can correct me if I’m wrong, but that’s what I got from the post. Recency bias has no role in that analysis. Sure, we all succumb to it, especially after a good month or even a few. Like Saul I’m up about 32% but I was up 40 just a week or so ago. So if I’m succumbing to recency bias I’d be moaning about my losses this past week, after all, it is more “recent.” Anyway, I get what you are saying but I just didn’t see this as a "look here at these last 6 weeks!” post.

MC

[SaulR80683]

So the question is: do you have a process for your allocations and would you be kind enough to share it if you do? In my own portfolio I don’t really have a process. It is more just based on conviction at that current time. However, this gets me a little in trouble because, of course, my conviction is subconsciously swayed by the recent past performance of the stock. I try to not go above 25% for an allocation and then just base the rest of my allocations per my conviction level.

In the knowledge base there is a ton about stock selection and the underlying philosophy surround modified buy and hold but I am just trying to get more clarity around the specifics of your thought process. For instance, are allocations more intuition based? Is there more weight to companies with recurring revenue? More weight on revenue growth? Any valuation considerations? Do you have an anchor like 20% that you won’t go over and then the rest are based on just general conviction levels? A combination of it all?

I have just been in awe of the accuracy of your portfolio management. It seems every time you trim, the stock takes a breather and every time you keeping buying (@ AYX), the stock takes off. I’m sure your intuition has been built up over the years and there are certain intangible things that go into your decisions, but I am just very interested. It seems like there is a lot of agreement in general on this board about the stocks that are deemed “worthy” but the allocations, of course, vary greatly. Thanks so much in advance and thanks for bearing with my long-winded question.

Hi Fish, That is a great question, but I’m sorry that I don’t have clear-cut answers. I don’t have numerical ways of deciding size allocations. I never particularly look at EV/S ratios that some people swear by, for instance. I do look at rate of growth as a good indicator of how much a company’s products are in demand. Also dollar-based retention rate is useful. I didn’t stay in MIME, for instance because I thought that a 111% score didn’t show a huge potential for growth, compared to other companies with 120% to 135%. Part of the reason I reduced my position in HUBS was that in the CC they said The dollar-based retention rate was over 100%, and I think the full year was over 100% too. That wasn’t very exciting to me. I recently learned about Net Promoter Scores and some of our companies have very high ones, meaning that customers really like their products. I do look for recurring income, as you suggested, having had bad experiences with companies that sold pieces of hardware to a limited number of big companies. I still worry about Arista but it has grown big by price appreciation in spite of my worries. I also get out of a company if I lose confidence in it. I have an advantage in doing that, as I have no external income so I always have to sell somethings for cash to live on, and I have to choose something to sell if I want to buy something. That gives me an advantage over people who can keep adding money and don’t sell and end up with a lot of garbage around the edges of their portfolios.

Hope that helps,

Saul

[SaulR80683]

And as Raptor Dan wrote on another thread

But if growing revenue by 50-60-70% isn’t some kind of indication of whose product is in demand, then what is?

Saul

[SaulR80683]

This is a classic example of small sample bias and recency bias. The implication is that
these stocks are safe or less volatile because they happened to have performed well in
the last six weeks. Let’s look at the same companies in a different six week period. During the first six weeks of 2016, Arista was down 28% and Shopify was down 25%. The S&P500 was down 9%.

Hi Ears,

Talking about small sample bias! You picked just two stocks that were down in the first six weeks of 2016 out of my whole portfolio, to use for your example. THAT’s small sample bias! My portfolio as a whole was up 6% in those first six weeks, while the S&P was down 9% (you said, I didn’t check), proving my point that we are invested in strong companies, we were ahead of the S&P by 15% even in those first six weeks that YOU chose, and that people shouldn’t panic.

You also ignored this from my post:

And… the S&P is up about 15% since Jan 2017… while most of us are up… 120% to 150% in the same time. How do you figure that as small sample bias or recency bias? Again my point was that we are invested in strong companies, not the averages, and you shouldn’t panic at a few down days.

Saul

[earslookin]

Hi Saul,

Talking about small sample bias! You picked just two stocks that were down in the first six
weeks of 2016 out of my whole portfolio, to use for your example. THAT’s small sample bias! My
portfolio as a whole was up 6% in those first six weeks, while the S&P was down 9% (you said, I
didn’t check), proving my point that we are invested in strong companies, we were ahead of the S&P
by 15% even in those first six weeks that YOU chose, and that people shouldn’t panic.

Here is what you said in February 2016:

I don’t have to tell you that we have been in a major correction. I think I read that early
January was the worst start of a year on record. I finished January at 90.9% of what I started the
year with, while the S&P was at 95.5%, and the Russell 2000 Small Cap Index was at 91.1%.

Early February got even worse and Feb 11th was my personal bottom when I hit 80.5% of what I started
the year with.

Feb 11th was six weeks into the year. Looks like you were down 19.5%.

And… the S&P is up about 15% since Jan 2017… while most of us are up… 120% to 150% in the
same time. How do you figure that as small sample bias or recency bias?

In the stock market, fifteen months is too small a sample. I suspect that you and many that follow
this board will find that hard to believe.

Again my point was that we are invested in strong companies, not the averages, and you shouldn’t
panic at a few down days.

I agree with your point that you shouldn’t panic. However, you also implied that your stocks
were safe or non-volatile. There’s not enough evidence to support that claim.

Thanks,
Ears

[volfan84]

An aspect of both the early February dip and this one from the past week is that neither had anything to do with earnings news directly. Fear of potential future earnings hits played some role, certainly but no actual earnings news.

Also, the Facebook news had a non-negligible impact on at least the S&P and probably the NASDAQ, as well. I don’t think many folks here have overly large allocations of Facebook stock. There could be a slight hit to some of “our” largest holdings of Facebook’s capex has to be decreased…but I would think that impact will be minor.

Next “earnings season” looks to be cranking up right after mid-April. If prices stay depressed until then, there may be some great opportunities for prices to get boosted again by actual results.

[fish13]

Thanks Saul, that helps a lot.

It seems to me your secret is adaptability. After all, investing is art and science. If it were solely science, then everybody would be a quant and there would be no inefficiency in the market.

With that said, I will try to look at portfolio management through more of these metrics like retention rates rather than a gut feeling. I think I was erring too far on the side of art.

Very best,
Fish

[SaulR80683]

Thanks Saul, that helps a lot. It seems to me your secret is adaptability. After all, investing is art and science. If it were solely science, then everybody would be a quant and there would be no inefficiency in the market. With that said, I will try to look at portfolio management through more of these metrics like retention rates rather than a gut feeling. I think I was erring too far on the side of art.

Hi again Fish, I use a lot of gut feeling too. Especially on deciding to reduce a position.
Saul

[tamhas]

Some people have smarter guts, apparently …