A few more thoughts about investing.

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In my recent post about the Twilio announcements I wrote the following:

Reflections on buying stocks
I added some Twilio yesterday and today, at $39.88, $40.85, and $41.40. The price as I write is $41.65, so my original purchases are up 62% since January. I have no hesitation, as you know, to add to my position on the way up, even up 60%. I prefer it. I know that there are people who try to wait for a pullback to buy a little cheaper. I never get the cheapest prices.

I was thinking about it today and I decided the secret of (my) success in stock investing isn’t trying to buy stocks that are a little cheaper, but is trying to buy stocks of companies that are going to be very successful. To buy stocks, not that are a little cheaper than they were, but to buy stocks in great companies. Sure if a stock in a high conviction stock pulls back for no reason I may add to a position if I have the money, but I never wait for a stock to go down before buying it. I’m buying it because I think it’s going to go up, after all.

Since then I gave some more thought about what I wrote. I still hear people say “I had a buy order in at $26.10 but I just missed getting it by 10 cents.” That makes me think about some of my stocks. I started buying Shopify two years ago at about $27. It was first recommended by MF a few dollars below that, and I could have said “I’ll put in an order at $26.10 and see if it moves back and I can save 90 cents.” – and I would have missed getting in. As I write its at 467% of what I paid for it. It’s at $126.00 now. Do you think I care or remember whether I paid $27.00, or $26.75, or whatever?

People get so happy when they save that 90 cents, or 50 cents, or 25 cents, or whatever, and remember it as a success, but they ignore the 100x greater catastrophe of the ones they missed buying by trying to save a dime. And by the way, Shopify rapidly rose 60% from $27 to (drum rolls…) all of $43 (not so high in retrospect, is it?), and I was still buying, just as I was with Twilio.

Or consider some others, like Square, where I started last year at $17.50, and closed yesterday at $51.40. It was up 60% from my first purchase when it was still all the way back at $28.00. Or look at Nutanix, which I started buying near the end of last year at $21.70 and which closed yesterday at $55.50.

That’s how you make money investing, not by saving pennies by buying a stock a little cheaper, or waiting for a downturn so that you can add a little cheaper. The trick is to buy super-stocks and add to them as they prove themselves by going up, unless you have a reason to sell them. Just my opinion.

Saul

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That’s how you make money investing, not by saving pennies by buying a stock a little cheaper, or waiting for a downturn so that you can add a little cheaper. The trick is to buy super-stocks and add to them as they prove themselves by going up, unless you have a reason to sell them. Just my opinion.

I agree, though I think it is a lot more challenging for people that are just starting to invest and constantly have a small stream of new money coming in. Throwing money regularly at Shopify each week since $27 gives you a cost basis in the high 80s or even 90s, which isn’t nearly as good as the individual that can throw a full position at it in the 20s and add a little bit in the 30s/40s with nothing since, without being constrained by monthly inflows. It makes weathering the Citron short attacks and other FUD a lot easier when your cost basis is so much lower. At what point did you stop purchasing more shares of Shopify? For me, its position size shrinks as I continually add more money to my portfolio, so I have no choice but to continue to add at higher prices today if I still believe in the stock’s future. I did add some shares in the $115-$116 range on Monday and Tuesday, doing that instead of today is definitely price anchoring though.

I don’t know the best solution for the monthly inflow problem with where to put new money. To illustrate this problem, if your entire portfolio were cash right now, what would you put the money in today if you had to invest it all? Based on the stocks discussed on the board, would you put money in these at today’s prices, or what allocation and stocks would you pick?:
15% NVDA
15% SHOP
15% SQ
10% ANET
10% MDB
5% AYX
5% NKTR
5% NTNX
5% OKTA
5% PSTG
5% TWLO
5% WIX

Even if you believe in the company long-term, I personally try to save up at least a couple percent of my portfolio at a time in cash before buying anything - as buying opportunities like some of the recent dips happen pretty often. I try to avoid the use of leverage and keep it under 10% of my portfolio - I have used it while waiting for funds to clear and for unprecedented buying opportunities.

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Saul,

I think you illustration makes sense but it is more difficult to apply, though perhaps it ought not to be at higher prices. I, like you, saw the Shopify reccomendation and thought wow good pick. However, for reasons I cannot remember I didn’t buy any and the next time I looked at the stock it was in the forties.

The buy becomes more difficult in as much as the first thought is : idiot you liked the stock and you could have picked some up in the 20’s and now you are going to have to pay 80% more than when you first looked .

Of course 45 say to 126 is an amazing return unless over 12 year period where it is about average for the S&P historically but still difficult to get over the mental miss of the 20 bucks left on the the table originally.

This is despite being in finance for 37 years either working or investing and managing to have almost Saul like returns for the last eight years including a couple of down years in that.

I do want to test my results in a down or sideways market. I got kiiled in 08 like most but also lost money on 07 when most made money. My Chinese foray wasn’t as costly as yours insofar as it was only three stocks.

I suppose the lesson of the Shopify illustration for me is if I find something I really like then buy some regardless.

Thanks for the board.

J

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Saul I strongly agree with your line of thinking. Particularly with your investment style of aiming for growth. I hear people who say they are looking to buy on pullbacks all the time. If you’re not ready to invest at $100 but willing to invest at $90, doesn’t that imply you think there would only be a 10-11% upside? Would you sell once it got to $100 if you bought in at $90? And if you really like a company at $100 wouldn’t you expect it to grow? Any pull back would then likely be at a higher price than $100. Maybe buying a stock off it’s all time high of $140 at $120 feels like more of a bargain, but not when you consider you could have had it at $100.

Only if you’re a trader looking for 20-30% upside does the entry point really matter.

The exercise of thinking about where you would put your money if you went all cash is a good one (particularly if taxes aren’t a concern). I would most likely buy right back into the same companies with some minor tweaks. I do find it harder to sell a stock that has appreciated a lot and is likely overpriced, but I still like the company (ABMD for instance). I guess it comes from my experiences selling out of names like ISRG, AAPL, and HANS/MNST early because they had grown so much.

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I suppose the lesson of the Shopify illustration for me is if I find something I really like then buy some regardless.

Isn’t that the point of all this? I just restarted investing in individual stocks again… I started my picks in early March. My basis in ANET is a lofty $271… bummer at the moment… but I picked a good company at the time I found it. I ain’t sweating that others found it earlier. I still believe that in 5 years ANET at $271 will have been a great investment.

Just my thoughts…
Mark

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Mark,

Just don’t write a covered call to lower your basis and lose all those shares of great company :slight_smile:

Patrick

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Hi Welgard,

I understand where you are coming from. I think that really understanding Saul’s thinking in the start of this thread and then also applying it can be difficult especially psychologically. Perhaps Saul’s experience as a psychiatrist has given him training to help him avoid some of the mental pitfalls that many investors subject themselves to. Now, I’d like to point out a few things about your post that might help how you look at things.

  1. I think it is a lot more challenging for people that are just starting to invest and constantly have a small stream of new money coming in.

Why would this matter? Saul has zero new money coming in. He must sell something to buy a new position or add to an existing one. If you have existing positions then you can sell some or all of one or more of them to add to another one. Plus, your new money can be used on top of that! The trick is deciding which one you like better which should be determined by which one will go better going forward.

  1. Throwing money regularly at Shopify each week since $27 gives you a cost basis in the high 80s or even 90s, which isn’t nearly as good as the individual that can throw a full position at it in the 20s and add a little bit in the 30s/40s with nothing since, without being constrained by monthly inflows. It makes weathering the Citron short attacks and other FUD a lot easier when your cost basis is so much lower.

Cost basis should be completely irrelevant. Except for taxes. Looking at cost basis is a form of anchoring. The price you paid should not matter at all (except for taxes) in making a decision about what to do today. There’s nothing wrong with taking a loss if you think another stock will do better going forward; don’t look back, look only forward. The same is true about buying. I first bought NVDA last year at about $135 per share, after the stock had climbed up from about $20 (up almost 500% from 2 years earlier) and up more than 150% in the one year prior. If I had looked back, I never would have bought. I more SHOP the other day at $118. I bought more NVDA recently at about the current price. Look forward.

  1. To illustrate this problem, if your entire portfolio were cash right now, what would you put the money in today if you had to invest it all?

The answer should be obvious. If you would not put all your cash into your current portfolio’s allocations then why not? If this is not the answer (again not consider capital gains taxes at all) then you don’t have the right allocation and you are probably making an error based on psychology. Each day you can change your portfolio and change your allocations. If you, hypothetically, had all cash and you would not allocate into your current portfolio allocations then there’s something not right about your investing mind. You are anchoring or making decisions based on something other than looking forward and putting the money into the stocks that you think will do the best from TODAY ON.

I hope this helps.

Chris

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Another trick Saul, was to have kept the faith in the first half of October last year and end of March this year; not crystallizing a tax hit and subsequent adverse return price-wise. Not easy, at least for those of us who see a bird in the hand in such circumstances!

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Great post, Chris!

If you would not put all your cash into your current portfolio’s allocations then why not? If this is not the answer…then you don’t have the right allocation and you are probably making an error based on psychology…If you, hypothetically, had all cash and you would not allocate into your current portfolio allocations then there’s something not right about your investing mind.

I still hold many (I’ll call them “legacy stocks”) MF picks from over the past 10 years that I don’t feel strongly about anymore, and therefore probably should just get out of, regardless of current price. There are some that I do still have a high level of confidence in and will continue to hold and invest in at opportune times.

Maybe me thinking about my portfolio this way will get me out of some of the legacy stocks I still hold. I started reading Saul’s board with around 80 stocks, I’m currently down to about 40, I want to get down to around 20, I don’t think I’ll ever be able to get it to 10-15, that’s just me.

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Hi Foodles,

I still hold many (I’ll call them “legacy stocks”) MF picks from over the past 10 years that I don’t feel strongly about anymore, and therefore probably should just get out of, regardless of current price. There are some that I do still have a high level of confidence in and will continue to hold and invest in at opportune times.

Question: the stocks that you still hold…would you buy them today at today’s price? If not, then why do you still keep them???

I started reading Saul’s board with around 80 stocks, I’m currently down to about 40, I want to get down to around 20, I don’t think I’ll ever be able to get it to 10-15, that’s just me.

Yes, when I started following Saul’s board 4 years ago, I had about 50-60 stocks. I now have 8. I won’t go below 8…I prefer 8-12.

Chris

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I still hold many (I’ll call them “legacy stocks”) MF picks from over the past 10 years that I don’t feel strongly about anymore, and therefore probably should just get out of, regardless of current price. There are some that I do still have a high level of confidence in and will continue to hold and invest in at opportune times.

Maybe me thinking about my portfolio this way will get me out of some of the legacy stocks I still hold. I started reading Saul’s board with around 80 stocks, I’m currently down to about 40, I want to get down to around 20, I don’t think I’ll ever be able to get it to 10-15, that’s just me.

I have over 40 stocks myself and would prefer to lower that number. I have a number of longer term positions in blue chips and other stocks which have significant gains. Since my individual stocks are in a taxable account, I prefer not to sell due to capital gains taxes. I have sold quite few stocks when the overall thesis has weakened significantly.

Longer term, I don’t think I’ll ever get down below 20-25. I’m nearing retirement and need the stability of a diversified portolio and a number of blue chip dividend growth stocks balancing out my aggressive growth stocks.

dave

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Question: the stocks that you still hold…would you buy them today at today’s price?

Nope (at least not the majority of them).

If not, then why do you still keep them?!?!?

If I’m honest with myself…price anchoring, I want to sell them at a higher price that they once were at. And the funny thing is I realize how wrong that thinking is, I’m an engineer, am very logical/rational in all other areas of my life, but find it so hard to take the corrective action here.

Thanks for the followup questioning, Chris, if I have time today, I will go through the legacy stocks and get rid of the ones that I don’t have any real reason to be keeping. I’ll bet I can dump at least 10 more immediately.

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If you don’t have Uncertainty and Doubt about the valuation & growth prospects of even a good firm like SHOP, you either have a crystal ball that never fails or are new to tech investing.

Hardware firms there should be even less certainty [and lower valuations].

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Saul,

Thanks for sharing. That is definitely a great piece of wisdom worth remembering by all.

I do have a somewhat related question and am curious to hear your input.
Do you have a price at which the stock is just too expensive? Lets use Shopify as an example in this case. At Friday’s (April 20th) close the stock price is about $126.80 and the current price to sales is currently about 19.9. Lets say you for some reason were not able to add to your position for whatever reason. You currently have a 1% trial size position in SHOP. Given all the knowledge you have today would you still be buying to increase your position to a meaningful stake? In the case in SHOP where would be that hypothetical cutoff point where you would no longer purchase shares? Would your answer change in different macro environments or would macro be irrelevant?

This is just a hypothetical fun question that I am curious to hear your thoughts on how you would set an upper limit on a fast growing potentially unprofitable growth scenario.

Thanks in advance.

Best,
Maraj

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This is just a hypothetical fun question that I am curious to hear your thoughts on how you would set an upper limit on a fast growing potentially unprofitable growth scenario.

Hi Maraj, good question. I think I would set an upper limit on the percentage of my portfolio that the company could have, rather than try to guess a maximum stock price and say that I’d sell out at that price. And if I was slightly uncomfortable, I’d probably slightly decrease the percentage of my portfolio a stock took up.
Hope that helps,
Saul

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Hi Maraj, good question. I think I would set an upper limit on the percentage of my portfolio that the company could have, rather than try to guess a maximum stock price and say that I’d sell out at that price. And if I was slightly uncomfortable, I’d probably slightly decrease the percentage of my portfolio a stock took up.

Thanks for the reply. I guess I was more curious about what your thoughts were to the maximum limits of your valuation stock price being irrelevant. Using SHOP again at 19.9 p/s many people say this is an extremely high valuation including myself. Does this valuation give you any hesitation when building out a position? Would you add to SHOP today at this valuation if you didn’t have a meaningful allocation? If not at what level would you begin to hesitate due to valuation of this type of growth company or do you use different valuation metrics entirely? I am just trying to understand your thinking on valuation of these high growth companies which many would consider scary pricey. No catches I am just genuinely curious as a fellow investor.

Best,
Maraj

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Quote ‘Only if you’re a trader looking for 20-30% upside does the entry point really matter.’

Sorry cannot find out how to use italics.

Not so. An illustration ; I looked at NXP when rule breakers recommended it. It was 24/25 bucks.
It went up then down and I was lucky and bought my position at 16 and change.

I usually put the same amount of money into any new purchase and did this time . I sold the NXP on the news of Qualcomm’s take over @ 104 . The gain was 50% greater due to the entry price.

Given that I own between 10 and 20 stocks at any given time making 50% more money on any investment makes a material difference to my returns . In this case , a very good one for me , it made the difference between making 4 times my money and six times.

However, my miss of Shopify in the early 20’s should not in hindsight have precluded me from buying it in the 40’s , it is just more difficult to do having seen it in the 20’s.

I would add the following. I will always add to positions up or down if I get my comfortable with any investment . Whether I make six times my money or 50% on any investment is immaterial to me .
NXP was one I never added to . I have added to others , IPGP, ANET and MELI are three where I have actually made more money than in NXP but nowhere near the actual percentage return.

Out of the first two due to writing calls. Not smart. The 200 calls in the case of anet and 210 in ipgp’s case.

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Sorry cannot find out how to use italics.

Surround the text in HTML tags like this

Sorry cannot find out how to use italics.

for Bold

Sorry cannot find out how to use italics.

for both, nest them

Sorry cannot find out how to use italics.

Denny Schlesinger

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