A Prominent Opposing Mirror

All high growth investors, and just about everyone else on The Fool, are familiar with Saul and his great discussion board. Saul is the Champion of growth investing with an unwavering growth investment commitment and the portfolio to back it up: he walks the walk. His Knowledge Base is chock full of his investing philosophy and strategies and many, many devotees and followers have benefited from his leadership - me included. Guy is a legend!

As the sell-off has morphed into a sort of perpetual slow Bear Market grinding machine that now threatens recession - a lot of investors who have held on - hunkered down as it were, are wondering what to do now. The options are limited: sell now and take huge losses…or…continue to Hunker Down and wait on the eventual turn around. But…Saul has an opposite on the far bank - a different venue than the Fool who champions Value - and his commitment to his philosophy and strategies is every bit as committed as Saul is to his.

As I have mentioned before, my wife and I each have a portfolio: mine exclusive to growth and hers exclusive to dividend paying outfits. We engineered it that way, first to build an income stream beyond a number of business interests we have and then to focus on growth for obvious reasons. I built a large portion of her portfolio early-on before she took complete control over it. And just as I follow a number of subscription services for growth - she follows several dividend company true believers. One of them is named Rida Morwa who can be found on Seeking Alpha.

Rida has a service called High Dividend Opportunities and has a pretty large following of just over 89,000 investors. (Thats a lot!) Occasionally my wife brings an article he has written to my attention and thats what happened this weekend. The article is titled: I Hope the Market Crashes Even Deeper, for Your Sake. Now…just because I am a growth guy and Mr Morwa is a Income guy doesn’t mean I can’t learn something from him. Overall, although I disagree with some of his basic investing thesis, I find him to be a decent enough writer and overall a pretty intelligent guy. We just live on different sides of the investing lake - thats all.

In the public article that my wife pointed out - he says this:

“Value is set to trounce Growth for the next two decades.” Keeping in mind that Rida is a dedicated Income investor to the exclusion of all else - and, that this article is shilling for new subscribers to his service - I took it with a grain of salt.

Here is the complete article:

https://seekingalpha.com/article/4513416-i-hope-the-market-c…

But…the All-Too-Lovely wanted to discuss it so we did. Now…truth be told, I don’t win many discussions with the wife for two very good reasons: 1) The woman just dazzles me…still…after all these years and I am good with whatever she wants; and 2) I do not, as a rule, like sleeping on the couch. Being a creature of habit and all. But in this discussion, I did point out that the Morwa guy, as far as I know, does not have a market predicting crystal ball and that it’s unlikely that anyone could accurately forecast the market a year from now - much less a couple of decades. More to the point, the run up in our growth account over the last 4-5 years has been so powerfully multiplicitous that currently being down 25-30% or so is actually pretty meaningless.

But then Rida gets to the point of why he thinks Value Income folks do better than us growth types:

"Over the years, I would hear people brag about their big unrealized gains. I would ask, “Are you selling?” They would reply, “Of course not!” Then the bubble pops and those unrealized gains slip away like fog in the morning sun.

All along, I’ve continued to get my dividends and reinvest them. Sure, that big number in my portfolio varies every day just like for everyone else. Yet my dividends grow. Whether the market is green or red, my income keeps climbing.

I enjoy it when investors flock to Growth and allow me to see lower P/E multiples on Value names, it gives me bigger yields to capture."

Now…I don’t know about you, but other than monthly updates I don’t find myself doing a lot of bragging to folks about gains. And, to be frank, there is a reason for that: Karma. But I do find myself wondering if Rida is right. Right?

The bottom line truth is that if you are a new investor that piled into all the high growth names late last year - then this sell-off has been something of a Waterloo. Hasn’t it? I saw one post on a Fool Board that was titled something like: What is the Fool doing to us? The poster went on to blame the market downturn and his losses on the Fool - never acknowledging that neither David nor Tom came to his house and pulled the trigger on his purchases. Sad really. However:

If you are a LTBH investor whose portfolio goes back years and years - then while your gains have been eroded you still have some cushion in your portfolio and the losses - while still painful, are perhaps tolerable. Or something like that. But there is a huge flaw in Rida Morwa’s argument, to wit:

If you haven’t just been strapped into the roller coaster and riding the roller coaster up and down but have been taking some profits along the way - then honestly, you are then not just better off over the last several years in the bottom line performance of your growth portfolio; but have been, in reality, at warp profit speed. That is the hole in Rida Morwa’s logic. Well that and the gaping hole in his unknowable assertion that Value will ‘trounce’ growth for decades to come. I mean, it’s not that it won’t or can’t; but rather, that it’s impossible to know. And that leads me back to Saul.

Saul says that he stays 100% invested but does take out his living expenses which seems naturally logical to me. Which also means that over the years he has not been 100% on the LTBH Express roller coaster - except for whatever core allocations he has in his portfolio. Which brings up another point:

What is the difference between Saul taking out living expenses as opposed to using TBs for profit that is thereafter being compounded by being reinvested consistently? While I am not smart enough know the actual answer to that - I’m sure its around somewhere.

Currently the Portfolio Roster looks like this:

A) STARTERS

  1. DDOG

  2. SNOW

  3. BILL

  4. ZS

  5. S

B) The Bench

  1. CRWD

  2. MELI

  3. MDB

  4. Cash on Hand - Holding while waiting for TB opportunities as well as looking at adding another Scout Team position. Maybe two - dunno, maybe.

Lastly this from a really smart guy, Andres Cardinel:

"The S&P 500 has been down for 7 weeks in a row, which is quite exceptional from a historical point of view. There is one occurrence of 8 down weeks in a row in 2001 and another one in 1970 before that. This is just another data point among many others showing that we are in an exceptionally challenging environment for stocks.

On the positive side, sentiment is already at extreme levels where we typically see rebounds in the market, and growth stocks showed some incipient signs of relative strength during the week. Some kind of rebound, even if it is temporary, seems probable in the short term."

And this:

"All growth stocks - good and bad - have been declining sharply for more than a year now. Many of these companies are currently trading at historically attractive valuations, even lower than in prior bear markets.

Company-specific risk is always elevated in these kinds of stocks, but a diversified portfolio of high-quality growth stocks will most probably deliver outstanding growth in sales and earnings over the long term, with or without a recession in the short term.

Patience and conviction will be required, but this is an excellent setup for superior returns over multiple years."

All the Best,

16 Likes

From Uncle Warren’s 1992 letter…

But how, you will ask, does one decide what’s “attractive”?
In answering this question, most analysts feel they must choose
between two approaches customarily thought to be in opposition:
“value” and “growth.” Indeed, many investment professionals see
any mixing of the two terms as a form of intellectual cross-
dressing.

We view that as fuzzy thinking (in which, it must be
confessed, I myself engaged some years ago). In our opinion, the
two approaches are joined at the hip: Growth is always a component
in the calculation of value, constituting a variable whose
importance can range from negligible to enormous and whose impact
can be negative as well as positive.

In addition, we think the very term “value investing” is
redundant. What is “investing” if it is not the act of seeking
value at least sufficient to justify the amount paid? Consciously
paying more for a stock than its calculated value - in the hope
that it can soon be sold for a still-higher price - should be
labeled speculation (which is neither illegal, immoral nor - in our
view - financially fattening).

Whether appropriate or not, the term “value investing” is
widely used. Typically, it connotes the purchase of stocks having
attributes such as a low ratio of price to book value, a low price-
earnings ratio, or a high dividend yield. Unfortunately, such
characteristics, even if they appear in combination, are far from
determinative as to whether an investor is indeed buying something
for what it is worth and is therefore truly operating on the
principle of obtaining value in his investments. Correspondingly,
opposite characteristics - a high ratio of price to book value, a
high price-earnings ratio, and a low dividend yield - are in no way
inconsistent with a “value” purchase.

Similarly, business growth, per se, tells us little about
value. It’s true that growth often has a positive impact on value,
sometimes one of spectacular proportions. But such an effect is
far from certain. For example, investors have regularly poured
money into the domestic airline business to finance profitless (or
worse) growth. For these investors, it would have been far better
if Orville had failed to get off the ground at Kitty Hawk: The more
the industry has grown, the worse the disaster for owners.

Growth benefits investors only when the business in point can
invest at incremental returns that are enticing - in other words,
only when each dollar used to finance the growth creates over a
dollar of long-term market value. In the case of a low-return
business requiring incremental funds, growth hurts the investor.

8 Likes

Hi Ears:

“For example, investors have regularly poured
money into the domestic airline business to finance profitless (or
worse) growth. For these investors, it would have been far better
if Orville had failed to get off the ground at Kitty Hawk: The more
the industry has grown, the worse the disaster for owners.”

Back in the day, I knew some retired professional athletes, one of which mentioned over lunch one day that he was investing in a new airline: Jet Blue. I was tempted I suppose but I could never figure out how a company that had to spend millions of dollars on airplanes, maintenance, fuel costs, labor, Gate Fees, etc…could make money flying people around for a couple of hundred bucks pop. Haven’t looked lately but maybe Jet Blue has made folks rich - but I tend to doubt it.

“Growth benefits investors only when the business in point can
invest at incremental returns that are enticing - in other words,
only when each dollar used to finance the growth creates over a
dollar of long-term market value. In the case of a low-return
business requiring incremental funds, growth hurts the investor.”

This is true for longer term investments - however, it omits, avoids, and perhaps dismisses the power of sentiment in the markets. While lots of high powered companies look messy just now - they only look messy because at one point they were sky high and running on fumes. Those investors who took profits along they way made out like bandits. As Saul says, Intelligent Stock Picking works; although, I have always had problems with the intelligent part of it all.

Take the Saul related portfolios that have gained 5-6 times in value over the last 3-5 years. The companies that brought us those returns haven’t suddenly become deadbeat dads - in fact, many were always deadbeat dads it just took a change in market sentiment from frothy enthusiasm to woeful haplessness to expose them.

All just my humble opinion.

All the Best,

2 Likes