13 Months on the Board

It’s been 13 months since Saul created this board. Prior to that, I occasionally saw his posts on the Rule Breakers Tesla board, and of course on the infamous WPRT thread on Stock Advisor (which ultimately convinced me to get out of that stock). But I didn’t start paying close attention to Saul’s approach until this board was created.

It’s been an educational year. Saul has been very gracious sharing his thoughts, strategies, philosophy, and moves in his own portfolio. And, of course, it’s attracted a whole community of investors with a large pool of knowledge, wisdom, and experience. There’s no doubt that this board has refined my own investing approach in various ways.

I spent a good part of the time trying to unpick Saul’s clearly effective approach, looking for the secret sauce. That’s one reason I started doing the FAQ – to pull everything together in one place and make it easy to review in a sitting. But while there are a lot of little gems that certainly stand on their own, I’ve come to the conclusion that there is no silver bullet: Saul’s strategy works as a coherent whole, and that’s been a very important realization for me.

I traditionally have not invested in very small companies. They tend to be riskier, and I don’t just mean from a volatility/beta standpoint (I don’t really mind volatility so much). Small companies usually have a limited history, greener management, and can show quick early growth despite a lack of competitive advantage simply because they are so small. Eventually, though, a durable competitive advantage and solid management is needed to maintain growth – and that’s when a lot of companies stumble and find themselves unable to replicate their early success.

I think one of the most controversial aspects of Saul’s approach is his relatively quick trading in and out of companies (at least for those of us who are more used to traditional buy-and-hold), but the more experience I get with Saul’s overall approach, the more I’ve come to conclude that it’s an intrinsic part of his success. Let me first say that I absolutely believe Saul 100% when he says he buys a company with the intent of holding onto it for the long term. That makes sense: he sees a young company with promise and a history of great growth. Why wouldn’t you want to hold onto it for the long term? Saul’s not a trader. But the reality is that, statistically speaking, most of these small companies will ultimately begin to struggle as they grow, and things will only go downhill from there: and within that context, recognizing early signs of trouble and moving capital to another promising company makes perfect sense. These aren’t large, proven companies with wide moats going through a temporary rough patch; many will never meaningfully recover once they begin to struggle.

We’re all aware that there are many different investing styles and many ways to succeed in the market. Saul’s historical performance attests to his success with investing in these small companies; I’m not sure that it would work as well with larger, more established companies, but that isn’t really important: it works well in the niche he’s chosen. I think the important question is whether Saul’s style is compatible with one’s own style and temperament. Personally, I feel more comfortable investing in companies with solid competitive advantages that are likely to compound over time. I like to get to the know them over a period of years, be able to confidently identify when they’re being misjudged by the market, and then take advantage of that to further benefit my portfolio. That’s me. But I think that approach would prove dangerous for these small companies, as most are just too fragile (which is also a great reason be very careful with options around these companies, another frequent source of questions around Saul’s investment style).

Successful investment strategies are more than a few key bullet points, even though we might tend think of them that way (Buffet buys great companies at a fair price and holds them forever – easy peasy). As with so many other things in life, they are more subtle and encompassing than that, which is why we’re not all Buffets. Trying to mix and match what we perceive as the “best” points between multiple strategies may not necessarily lead to a coherent, successful whole. I’ve been lucky to evolve an investing style over time that works for me and my temperament. Studying and following along with some of Saul’s investments over the past year has helped me continue to refine that style, sometimes by realizing what it’s not rather than what it is :wink: It’s been very educational and generated some important insights for me.

So thank you again, Saul, for being so generous. I’ve come to realize that your style isn’t a good fit for me, but you and others here have nevertheless helped me to improve as an investor. I hope the next 13 months proves to be just as educational :wink:



Hi Neil, Thanks so much for all your nice comments, and for all you’ve done to help the board and contribute to it. You have really been a wonder, and I’m glad you feel you’ve gotten a lot from it to. One thing puzzles me though. When described why you had trouble totally following what I was doing you said Saul’s historical performance attests to his success with investing in these small companies; I’m not sure that it would work as well with larger, more established companies, I couldn’t figure this out, as I don’t think of my companies as small companies for the most part, and when I do invest in a small company (i.e. INBK), I only take a tiny position. So I decided to look at the Capitalizations, starting with the biggest positions:

BOFI $1.3 billion.

Okay, I always thought of over a billion as being pretty big (at least a mid cap anyway).

SWKS $15.5 billion
CELG $95.0 billion
SKX $3.1 billion

Well that takes me to over 50% of my portfolio value and it doesn’t look like small companies to me.

AIOCF $0.75 billion

Finally one under a billion.

CRTO $2.3 billion
FB $210.0 billion
WAB $8.1 billion
XPO $2.3 billion
POL $3.3 billion
SYNA $2.9 billion
EPAM $2.2 billion

And that takes me to over 95% of my portfolio value. But there was only one stock with under a billion in these largest 12 positions, which made up the vast majority of my portfolio.

Perhaps you are thinking of something else besides size? I’d guess that most of my stock are RB kind of stocks (although probably larger than the usual RB stock) rather than Stock Advisor type, and that may be what you are referring to. Perhaps you could give it a little thought and explain further. I’m curious

And thanks again for all you have contributed.



Neil, Actually you refer over and over to

…in very small companies…

…simply because they are so small…

… most of these small companies will …

…with investing in these small companies;…

…would prove dangerous for these small companies, as most are…

I really don’t get what you are talking about. All those companies except AIOCF are at least billion dollar companies. Even AIOCF is three quarters of a billion. All except it and BOFI are at least two billion dollar companies. Where are the small companies??? I’m really trying to figure it out.


The traditional definition of a small cap is less than 2 billion.

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Hi Saul,

I usually think of around $2 billion or less as small cap, so you’re right that most of those companies are straddling that definition and might be considered small mid-caps. Maybe “young” or “unproven” might be a better description, though some of those companies have been around for a number of years too.

What I was really thinking is that companies that have smaller revenue or earnings figures obviously have a much lower hurdle to show great growth rate percentage-wise. When sales are very small relative to the addressable market, it’s pretty easy to grow quickly despite competition, negative macro events, suboptimal management, etc – there’s just such a large market to sell into that they can carve out a little niche. It’s even easier when investors are focused on revenue rather than profit, which I think occurs more often with these smaller/younger companies.

Eventually, though, growth becomes harder. The small niche becomes exhausted, competition moves in, larger sales forces or R&D (and more overhead in general) is required, maybe a costly and risky transition. Investors begin paying attention to the bottom line and demanding profitable growth, and so on. If a company doesn’t have a genuine competitive advantage or moat of some kind, as well as a skilled management team to leverage it, they will begin to struggle and growth or margins (or both) will suffer.

Invensense, which you got out of, is a great recent example of the above happening. In the early days, growth was easy; now it’s hard, and margins are badly squeezed. Looking ahead, I think Profire will be another, even setting aside the present issue of oil prices: they have no meaningful advantage and are able to grow only because they’re so small – eventually they’ll run into trouble when they reach a certain size and/or meaningful competition shows up and squeezes them.

So anyway, it’s more that I want to invest in companies that are battle-tested and have a proven competitive advantage so that they’re likely to be able to achieve sustainable and profitable growth over the long term, and I won’t have to worry about whether I’ll have a chair when the music stops. That can happen with a small company (I’m a happy owner of both BOFI and ELLI), but it seems rarer to me, which is why I think I associate small with increased risk.



Hi again Neil, and thanks for your explanation. I guess you are saying that you are most comfortable with very large and conservative stocks, although you are still interested in the things I look for like a good moat, recurrent income and a history of growth. (But then again, you really fought for staying in UBNT , cap of $2.4 billion, when I thought it was risky, and got out.) Everyone has their own comfort zone and I can’t argue with that. I was just puzzled by your recurring use of “small” in referring to my companies, which seem to me to be at least mid-caps compared to the vast majority of stocks out there. Best, Saul

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