A bit of reassurance

Investment Analysis Clubs Saul’s Investing Discussions
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I thought some of you might be interested in this reminder I put in my 2020 End of the Year post a year ago.

A REMINDER

Please keep remembering how, at the October 2019 bottom, a little over a year ago, all those trolls showed up on our board and were telling us that our “overpriced” stocks would “NEVER see the ridiculous highs of 2019 again,” and asking why didn’t we get smart and sell out and invest in S&P ETF’s. It was pretty scary back then, and even some of our regulars were thinking we might have to wait two years or more before our stocks would regain their highs. It all seems pretty funny now, doesn’t it, when our portfolios are up by 100% or 200% or more this year? [Mine was up 233% in 2020, which is inbetween tripling and quadrupling for the year].

It’s worth keeping that in mind the next time that there is a correction and trolls show up trying to get you to sell out. Because there WILL be corrections, and our companies WILL fall temporarily, and the trolls WILL show up. Remember to pay attention to the company, and how it’s doing, and what its prospects are, rather than the stock price when they are all falling in a “market rotation” or “correction”. Our companies will come back.

Saul

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I am relatively new to the board and this style of investing. This note of reassurance made me feel a lot better.

Fundamentally, nothing has changed with any of our companies. There is no justification for the massive drop in stock price. Days like today remind me that short-term stock price fluctuation does not always correlate with how well the company is actually executing.

Ray

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Saul Rosenthal, you are a gem that I found after juggling between different investment services. I came across this board right at a time when there is blood on the street. After researching much, I like the businesses which meet Saul’s investing criteria.

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Thanks Saul. At the risk of piling on (understand if it gets deleted), this is what has given me perspective during this time: recently I noticed an important milestone in my investing history.

When Covid hit, my portfolio had already started benefitting from the wisdom of this board. Despite that, I was advised, by many well-meaning people, to sell it all and invest in bonds or gold instead. “Why are you in the stock market?” I was frequently asked. “It’s irresponsible,” said some.

With that in mind I added the TLT (iShares 20 Plus Year Treasury Bond ETF) to my watch list, but not my portfolio. I guess I wanted a point of reference. Over the next few months the TLT did indeed rise, about 10%, but meanwhile my portfolio had taken off well past that. As the world grappled with Covid, the TLT sank again, and spent most of the subsequent time 10-20% lower than when I added it to my watchlist.

The milestone in all this is that recently the TLT has risen again…back to the point it was when people were telling me to invest in bonds! Just think: I could have switched to bonds in early 2020, and over 2 years, just barely broken even.

Instead, even with the current bloodbath, my portfolio has tripled. It’s understating things to say this has changed my life. But the most important takeaway, to me at least, is that we’re not really investing in the stock market. That’s far too broad a brush. We are investing in companies that have products people want, are managed well, and in most cases are already making far more money than they are spending trying to grow their market. That’s a pretty small subset.

If one of my stocks was tanking I’d worry about what I don’t know. When they’re all tanking at the same time, the odds of a coincidence are … unlikely. So I have no intention of selling if I can help it.

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It is true that these asset light SaaS stocks are built differently than the traditional capital intensive companies. It is also true that many of these companies have bounced back time and again.
It is also true that many have fantastic growth runways ahead.

However, for what’s it’s worth, I think this time is different. One word: INFLATION, and it’s not transitory, imho. One of the main price drivers over the past few years was the persistent low inflation level of under 2%. Suppose inflation is 6%. In five years, that’s (.94)^5= 0.73, compressing valuation by 27%. This is why we are getting hammered mercilessly and will continue to do so until it falls to a level where they reach “Value” stocks level.

Being an ex-MIer, I’ve seen PS=4 as a low valuation level. Many of the stocks held here, including myself, were typically at 40, 50, 60…

DoesMIWork

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It use to be that “this time is different” was a derogatory term used by shorts waiving their finger at ha idiots for investing in “over valued” non-profitable “trash”. Now the term is used in the opposite manner as after all these years we “idiots” were proved correct every time. So now this time is different.

Inflation is a new issue. We have not seen inflation like this since the late 70s and stocks sucked then. No doubt about it.

At the same time macroeconomic concerns, Fed moves, although creating and contributing to volatility, the worse I can recall being the Chinese trade war during the summer of 2019, in the end, never mattered much, at all.

Our system seems to work. One extreme gets checked by the other. A war with Taiwan and yeah, this time things might be different. But absent that, absent a break down of our society, inflation, althiugh real and although I agree is not transitory, is unlikely to be any different than anything else.

In a free market, players will adjust and do what they always do, and that is make money. The best at making such money are dominant, category killing, hyper-growth, founder lead companies. That is not going to change inflation or no inflation.

Hey, maybe this time gold will outperform, or financials, or industrials…. Except for a quarter or two of sector rotations, I rather doubt that however. Seems more an opportunity to put dollar cost averaging to work. History is so much on our side that the phrase “this time is different” is now used in the opposite connotation of how it use to be used. And even then, absent a 1929, absent investing in gold rush or railroad booms, history was on our side back then as well.

This is the Fool boards. The Fool goes back to the 1990s. Going on 30 years of history. Throughout all the history and ups and downs “this time is different” in any connotation, has never really been true.

But maybe…I’m not buying gold nor financials nor industrials and though I own some crypto I’m no longer finding better risk/reward with crypto.

Look at MELI, SE, SNOWE, NVDA, AMZN, MSFT, Apple if you want to be more conservative with category dominators. Or, as most of us, there are earlier phase category dominators that are not going anywhere. It could be stupid, but I’ve taken to S. Not a recommendation just discussion of you want. Also to NVDA. Thinking hard on UPST again, and so many others we discuss here.

On my forum a great study was linked to regarding Lynch who was one of the finest money managers in history. But OMG! The study found that despite the incredible nearly unprecedented long term returns of Lynch, his customers ended up losing money on average!

Why? They sold in panics and bought back in when things were good. Well, are things different now? Or is it simply the same trap that cost Lynch’s customers to lose money while invested with one of the finest investors in history?

Food for thought anyways.

Tinker

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Most SaaS companies got a Covid tailwind and their growth rates now are way above pre-pandemic times.

If they can sustain those growth rates beyond 2021, then their valuation can be justified.

If they can’t, the punishment will be swift - like Zoom and Docusign.

Many people here would remember that pre covid, best-in-class SaaS trades at 25x NTM revenue. Now they trade like 50x, 60x.

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In my original post on this thread, about a week ago, I quoted what I had written at the end of 2020, to the effect that it’s worth keeping in mind, the next time when there is a correction, that people will show up trying to get you to sell out, and it’s usually right about at the bottom of the correction. I referenced the correction in 2019 when the trolls were saying “You’ll never see the ridiculous August 2019 highs of your overpriced stocks again!” But then, in 2020, many of us between tripled and quadrupled the values of our entire portfolios.

But I reflected to myself at the time a week ago when I posted that that those “Sell-out!” people hadn’t shown up yet. Nobody was saying “Sell out!”

But here they are! Maybe that’s a good sign that we are at or near the bottom. One just said that 6.0% inflation for 5 years would push down valuations by 27% and thus the valuation of our companies would continue to fall to the valuation level of “Value” stocks.

I’m not kidding!!! He actually said that! That companies growing revenue at 50% to 120% would fall to the valuation of Value stocks. Oh well…

Best

Saul

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But here they are! Maybe that’s a good sign that we are at or near the bottom. One just said that 6.0% inflation for 5 years would push down valuations by 27% and thus the valuation of our companies would continue to fall to the valuation level of “Value” stocks.

Using macro economics is an excellent way to make a small fortune out of a large one.

Used macro economics. Planning on retiring at 70 instead of 58.

Your results may vary, but it ain’t likely.

Cheers
Qazulight

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But here they are! Maybe that’s a good sign that we are at or near the bottom.

Hi Saul, first off congrats on your continued success this year.

We certainly may be near a short-term bottom, but I noticed you did reduce [not sellout] of UPST after it had come down from 400 to the ~165 range. That certainly leads one to believe you don’t think we’ll see the highs of UPST again anytime soon.

sold out of UPST a couple weeks before that,
Naj

long ADBE, AVLR, MSFT, CRWD, S, et al.

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Hey Naj,
No one is supposed try to read Saul’s mind, so I offer you my reasons for my UPST changes.

https://discussion.fool.com/4056/upstart-in-my-portjust-notes-35…

It is posted off board because it only hints at Saul type investing, but I also held after others started to sell. I PM’d Saul with something like, “OMG! Glad I did the same thing as you on my own!!!” Since then, many many things have changed and none of them for me relate to not seeing highs anytime soon. It was all because of opportunities in other Saul stocks.

(The post above was also on that board due to the OUTRAGE OVER MF FAILING EVERYONE!!! posts that took over in the last couple months.)

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“One just said that 6.0% inflation for 5 years would push down valuations by 27% and thus the valuation of our companies would continue to fall to the valuation level of “Value” stocks.”

It was just a back-of-the-envelope statement, nothing more. It was to illustrate a point of valuation compression due to non-transitory inflation. MNDY’s report was stellar and rose because of it. Then it got hammered. It’s the valuation effect.

I am with all of you on the SaaS stocks, but I see the field differently, not just from the company up. As an ex-MIer, I saw my treasured MI systems fail miserably. The main reason was that the pendulum shifted from Value to Growth stocks. I believe that non-transitory inflation will cause the pendulum to shift back somewhat. All I’m just saying that the greatest growth of SaaS are behind us b/c of the inflation. This time it will be much harder to bounce back, imho. The overwhelming consensus here that inflation, valuations don’t matter is like how we all behaved before the UPST fiasco. Look what happened. It is not healthy when everyone thinks the same way.

Also, on the same theme on the superiority of SaaS stocks: being so incredibly profitable will ALWAYS invite competition. Look a CRWD. They have ZS, Sentinel, etc. On SQ: there’s PYPL, V, MA , ApplePay, GooglePay, AliPay. PNPL: AFFRM and Afterpay (from SQ). Business collaboration: MNDY, ASAN, TEAM…

On the inability to be replaced: EBAY replaced PYPL. TikTok easily replaced FSLY.

SaaS stocks are not indestructible.

To the guy who told me that my way of thinking macro will make me retire at 70 instead of 58: I have crypto. There’s no need to not lose sleep over me.

DoesMIWork

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The study found that despite the incredible nearly unprecedented long term returns of Lynch, his customers ended up losing money on average!

Why? They sold in panics and bought back in when things were good. Well, are things different now? Or is it simply the same trap that cost Lynch’s customers to lose money while invested with one of the finest investors in history?

Does that just not say it all? If you can lose money with Peter Lynch, you can lose money with Saul. You just have to buy when the stocks are hot and sell when they are low.

For those keeping score at home: that does not mean there is anything wrong wtih the stocks or the “recommended” strategey for buying and selling them. Performance will ebb and flow with the emotions as multipliers expand and contract. But the trend will be prices growing as businesses grow, that’s what gives you the long term results.

Happy Kwanzaa!

R:

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