A question for Dreamer, if he's still there

[buynholdisdead]

There are many successful growth investors on this board (Saul included) who will sell a holding when they think it has gotten too high

Jeb,
I think there are successful growth investors on this board that do sell when they think a stock has gotten to high. But I have never seen Saul do that since he has started investing in SaaS type stocks. He bought ZM and DataDog when both were highly valued. He sold others when he saw the growth slowing (Shop) or when he thought they were losing customers (TWLO).

Back when he first started this board it was all about Peg, he even came up with a value metric that we all followed. It was called 1YPEG. Back in that time he did think about value and he followed more of a Garp type investing. But then he pivoted to SaaS and since then he really hasn’t thought about a stock being to high because of the Growth and Gross Margins.

I have thought about this a lot Jeb, and over the last 5 years SaaS stocks have been booming, and Growth stocks have been the vogue. This is not normally the case. Usually Value stocks win out over Growth stock. In fact, if you listen to the Value investors you will hear them expecting it to change back to Value investing. Just recently, people on this board were really scared that their stocks were dropping to much. But Saul was calm because he surmised that the growth of these stocks would continue to climb. Eventually these stocks will have their run and at that time I believe Saul will pivot, when value stocks do come back, and go back to a more 1YPEG type investing. But while SaaS stocks are booming, its make Hay while the sun is still shining

Andy

[buynholdisdead]

If those investors never thought about price, what would be the motivation for their sells?

Sorry about that Jeb, I should have answered your question. I am really not interested in following investors on this board, other then Saul. Not because I do not think they are really fine investors, they just haven’t the track record that Saul has through all the recessions. Until you have invested through a recession I do not believe you will know really how you will react. Anyone that went through the 2007-2009 recession and was excited coming out, well that is someone I can respect.

Andy

[XMFSwift]

Fools:

I find that there is too much focus on terminology here. Here is my port:

ABMD; AMZN; AYX; CRWD; CWBHF; DDOG; DOCU; ESTC; GH; MA; MDB; NVCR; NVTA; OKTA; ROKU; SHOP; SMAR; TDOC; TEAM; TEN; TTD; TVTY; TWLO, ZM, ZS.

I bought each of these positions on the basis of the belief that the market mis-priced the shares in my favor. Call it value investing if you like, but it applies to each one of the stock categories above, i.e. hyper grow tech (SaaS, i.e. “Saul Stocks”), Titan Tech (AMZN, SHOP kinda & TEAM kinda), FinTech (MA), BioTech (NVTA, NVTA, NVCR, GH, TDOC kinda), Special Situations (TEN, TVTY), and Cannabis (CWBHF).

I don’t buy the whole value vs. growth blah, blah…The goal is to buy shares at a price below what we believe the market will offer sometime in the future and sell them when we believe the price of the stock has peaked. If you watch buys and sells of Saul (via his monthly portfolio reports), you can get a pretty good idea about what criteria he uses to achieve impressive results in this endevour.

Here is my advice to folks who come to this board: stick to Saul stocks or offer up new stocks that you believe fit in the parameters that are well defined by Saul on the right side of this board. Do not try to make simple “over-valuation” arguments based on traditional valuation metrics. Don’t continue to try to make the case for stocks that have been discussed and dismissed as outside the criteria. If you read the case for “Why this time is different,” (and related posts written by Saul) and followed to the T by Saul since it was posted, then you have a good set of criteria to follow when evaluating companies that you want to propose for new consideration on this discussion board.

I have brought several deep dives to this board (e.g., GWRE, ZUO, NVTA, WIX) that after good discussions were determined to not fit the criteria, for various reason, for “Saul Stocks” discussed here. I don’t come back to this board and continue to argue for why those stocks are better than those Saul has invested in. I let it go here and if I have more to say about those companies I talk about them on other boards (there is a board in Fooldom for pretty much anything you want to talk about with regards to investing). Hell, I own TEN (Tenneco) a profitable company that was offered up to all you investors for roughly a $600M Market Cap (under $8 per share) in Aug on revenues of roughly $11.7B. Compare that to AYX’s market cap, revenue and earnings! But I don’t talk about that here, because TEN is about as far outside the criteria (Rev growth, margins, anyone!?!) of a Saul stock as any on the market. TEN is seriously way off topic for this board (so don’t even think about asking me about it here). LOL. In other words, this board has a clear purpose and a well articulated set of criteria of what is acceptable to discuss on it. If I brought TEN here to discuss, I would be doing nothing but antagonizing the generous host of this board and all the people who come here to discuss hyper growth stocks that are largely captured in the secular paradigm shift in software from an on-premise/license model to a cloud based/subscription model. Andreessen was right: software is eating the world. (BTW AYX is a top 3 holding for me, TEN a very small position–but I couldn’t resist what Mr. Market offered me… :).

My thoughts on how to keep the peace on this board:

1. Internalize the most fundamental investment criteria of this board by reading all the docs posted on the right side of this board. Avoid any discussions of stocks that fall outside those criteria.

2. Discuss current stocks in Saul’s portfolio, or offer up other equities that you feel fall within the well defined investment criteria (see docs on right side panel). Do the work to make a solid, detailed case and be ready to answer tough questions.

3. Don’t…Don’t ever criticize other points of view…always keep conversations focused on facts and data–in any discussion there is your view and my view, its the facts that should help us find a common understanding. Focus on the facts, be curious about the other’s point of view, ask more questions than you make statements. Try to be more interested than interesting…

4. Avoid loaded words that come across as an attack. We are all adults on this board. You know what those words are and when you are writing them. If you are feeling agitated as you draft a post, walk away from what you wrote for at least 30 minutes (go outside and get some fresh air!), come back and read it and then decide if you want to put it on the board. Use the “grandma test:” would your grandma be proud of you if she read what you wrote on this board? Hahaha!

5. If you find yourself in a conversation that is growing increasingly heated about “valuation,” STOP. Re-read the philosophy of this board and re-consider posting your counter point. Outside of the trolls and one liners, this “valuation” discussion/argument/debate line wastes the most space on this board. Recognize when the discussion has played out and transitioned from fact sharing to an attempt to “win” with your point of view. When you get into the “I’m determined to win this discussion mode,” it is definitely time to move on…If you feel you must have the last word, you have definitely entered the “wasting other peoples’ time” space. Please don’t waste other peoples’ time. None of us really care if you get the last word or not…Especially if you are arguing about something that falls outside of the parameters of this board.

6. Keep an open mind and a sense of gratitude. I know I am a better investor now then I was before this board started. My financial bottom line, as reflected in my investing results has improved as well. If you feel the same way, say it often, and reflect it in the tenor of your posts. If you are unhappy with your results or the types of posts here on this board, find other TMF boards that are more aligned with your style of investing and philosophy. There are many terrific boards in the TMF Universe–NPI, Angels Fear to Tread, Portfolio Management are just a few. (If you are a premium service subscriber there are even more options available to you). Let’s not wear down or burn out the gooses that lay the golden eggs with low ROI E (energy) squabbles on “Saul’s Investment Discussions” Board.

7. Finally, remember, it takes all types of voices to create great music–to allow creativity and value to emerge. If you doubt this: check this out, as an example: https://www.youtube.com/watch?v=4xjPODksI08

Peace all, Swift…
P.S. I own shares in all stocks mentioned, except ZUO, WIX & GWRE
As Bob Dylan once said: “Don’t follow leaders, watch yer parking meters…”

[captainccs]

If those investors never thought about price, what would be the motivation for their sells?

A change for the worse in the company’s story would be one prime reason for selling, realizing one made a mistake is another. How can one not think about price, but it is a secondary consideration.

A better way of framing the price issue is to first determine if you are looking at the stock from a value or a growth point of view. A value investor would compare the price with his intrinsic value estimate to make a trading decision. A growth investor puts less attention on the elusive intrinsic value that is easy enough to calculate for bonds but is far more difficult to calculate for stocks, specially growth stocks that have more dynamic inputs. In other words, the growth investor pays more attention to the dynamic inputs like growth rates, customer churn, dollar retention rates and other inputs that have no place in simple discounted cash flow calculation.

The growth investor puts more emphasis on the business model than on the elusive intrinsic value. Actually even Buffett thinks price is secondary. If I’m not mistaken he says that it is better to buy a good company at a lousy price than to buy a lousy company at a good price. I’m not sure what the exact quote is.

Denny Schlesinger

[SaulR80683]

My son came in to visit yesterday afternoon and we all went out in the evening so I’m sorry that I haven’t been here to respond.

Andy is correct. I don’t consider value metrics when I buy. I consider the company and whether I want to be a share holder. I NEVER sell out of a position because the price has gone up. Never! If the rising price has made the position too big I may trim down to a 18% position or whatever, but usually I BUY when the price goes up. For an example Shopify. I initially bought about $27.50. After a couple of months it was up about 70% at $46 or something. While the cautious were selling out and “taking profits” and thinking overvalued, I bought a bunch more. Eventually sold out after a couple of years at $144. So instead of a small profit I made a quintuple. I tried pointing this out when I said you’ll never make a quadruple on a stock if you sell out when you have a 20% gain because you think it’s now too expensive.

Someone spoke about DDOG opening up at $37 so $40 wasn’t much. It hit $40 the first day but after a day or so was at $34 to $28 where it stayed, moving in a range, until earnings. My average price was about $31 which wasn’t very hard to do at all. So the current price is up 31% from where I bought. I added a small amount around $40 AFTER the rise.

I’ve written in my end of the month: Do you think I care, or even remember, if I bought Twilio (for example) at $25.90, $25.70, or $25.50, now that it’s a quadruple and its price is $106.98? Think about that for a moment! The decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” If you have a stock that you want to buy because you believe it will triple or quadruple, and then you put in a buy order for it 25 cents, or 50 cents, or even a couple of dollars below the market, and hope that it will FALL to your price, you are out of your mind! But that’s just my opinion.

As far a Datadog, I took a position because it is growing at a huge rate, 88%, is up to breakeven net revenue even growing at 88%, it’s cash flow positive, it got to the point it is with a cumulative burn of only $30 million from it’s origin, it can be installed in minutes, people love it, it has no support revenue because it doesn’t need to go out and teach people how to use it, it’s intuitive, as someone stated it spreads virally, it doesn’t keep everything in separate silos but its’ all integrated and can be seen on one screen, it’s building new products that people adopt, it has one of the highest dollar-based retention rates around, etc etc. EV/S just doesn’t even enter my evaluation.

Saul

[PaulWBryant]

Saul,

I was actually thinking Andy’s growth and value dichotomy was a false one. Of course you look for great growth companies, but you still allocate more to the ones you feel have the greatest potential for appreciation. And you have Datadog as a top 3 allocation.

Chris asks some good questions, and I would love to hear your thoughts regarding his DDOG estimates, especially on the point in bold below. Here’s what he said:

I think what Dreamer and Bear and Jeb and I are wondering is how much money can be made. We are trying to get quantitative to test whether it actually makes sense to own DDOG. Perhaps you are using a gut feeling and intuition to arrive at a decision? The reasons you mentioned are all important but what price is too much (in your own mind) to own DDOG…at what point is it better to reallocate to another stock? Another question that I would ask is in looking at my calculations, do you find anything that you would change to arrive at a higher CAGR than 15% over the next 5 years?

Thanks!

Bear

[Texmex]

Not because I do not think they are really fine investors, they just haven’t the track record that Saul has through all the recessions. Until you have invested through a recession I do not believe you will know really how you will react. Anyone that went through the 2007-2009 recession and was excited coming out, well that is someone I can respect.

Back in 2000-02 or 2008-09 Saul was invested in growth but used to pay attention to earnings and p/e as I understand. So, just because he has been successful in past recessions does not mean that SAAS stocks will do well in a recession. Past recessions have show that high growth names with no earnings do poorly in a recession while value stocks do better. Take Ebay. Back in 2000 it had a P/s of 60, had earnings, cash flow, high gross margins. Yet in the 1999-2000 Nasdaq collapse it fell 77% and its P/S dropped to 3. Here is the interesting fact. The stock valuation dropped despite revenue growing at high rates in 2000-03. The market simply soured on high valuations. It took many years before the stock recaptured its past peak level and by that time the p/s had settled down to a much lower level. So, it is quite possible that in a recession a Datadog may put up 30+% rev growth but still see its p/s drop drastically. There is also no guarantee that a recession will be short lived and that DDOG p/s will quickly bounce back to 40. Even a hint of a possible 2020 recession sent our SAAS stocks down earlier this year even as the SP 500 kept hitting ATH. Now, the recession fear has receded (as per popular press) and our stocks seem to be making a slow come back. But I continue to be fully invested in SAAS for 2 reasons - 1. I cannot predict when a recession will truly come; 2. Even if it comes I do not know how long it will last.

[XMFJebbo]

Thanks Andy. I think this thread has had some good information in it.

He sold others when he saw the growth slowing (Shop) or when he thought they were losing customers (TWLO).

Sure he did, and others often do the same thing. I know I may think “OK…P/S of 24…growth rate of 75%…I can go for that.” However when sales slow, there is customer attrition, or the losses widen, we think “I am not going to pay 24 P/S for 40% growth!” And that is a valuation judgement.

When we decide to put our money on another horse, that is a valuation judgement.

I apologize if this has taken us into the weeds of semantics, but that is the way I see it. I won’t post again on this, but thanks all for chiming in.

Jeb

[SaulR80683]

in looking at my calculations, do you find anything that you would change to arrive at a higher CAGR than 15% (for Datadog) over the next 5 years?

Bear and Chris,

There are all kinds of assumptions included in that which I don’t make, including whether I will still be in it it five years (normally I exit when the story has changed). However if I can make 50% in the first year (already have 31% in a month and a half), and 40% in the second year, and exit half way through the third year (typical pattern for me) at up another 20% compounded, I’ll be very happy (that put’s me at two and a half times what I started with in two and a half years).

I simply don’t even think in the terms that you are asking.

As far as answering Dreamer’s questions, he was asking why would you invest in Datadog when Elastic was at half the evaluation? I answered that of course Elastic was at half the evaluation. It was growing 30% less per year and falling, while DDOG was accelerating. Elastic was losing more money each quarter and had large negative cash flow and growing losses, while DDOG was positive and growing. Of course Datadog was valued twice as high! Why wouldn’t it be. That’s a whole different question I was asking than your valuation question. You guys try to quantify all these things with all kinds of formulas and tables. I just figure that as long as DDOG is a great company, it will remain “overvalued”.

Saul

[SaulR80683]

but you still allocate more to the ones you feel have the greatest potential for appreciation. And you have Datadog as a top 3 allocation.

Actually that’s not my criteria. It’s not the ones that have the greatest potential for appreciation, but the ones I currently have most confidence in that I have the largest positions in. My three largest now are Alteryx, Datadog and Okta. In other words not the ones which MAY go up the most, but those I’m most confident will do well. (Sometimes I’m wrong and I reduce or get out.)

Saul

[mekong22]

So, it is quite possible that in a recession a Datadog may put up 30+% rev growth but still see its p/s drop drastically.

Recession or no recession, if Datadog’s revenue growth drops to 30% in the next couple of years, the p/s will contract dramatically and, in that situation, would probably not turn out to be a good investment at today’s prices.

On the other hand, I am betting that, even if there is a recession in the next couple of years, DDOG can continue to grow at least 50-60%+/year. It’s hard to imagine that any of our SaaS companies will be impacted as much by a recession as Ebay or retail companies, from a business perspective.

A recession may cause the SaaS companies’ multiples to contract further, but that’s a short term situation as long as the businesses perform and keep growing at a high clip, they’ll find themselves off the voting machine and back on the weighing machine before too long.

-mekong

[branmin]

Bear and Chris,

There are all kinds of assumptions included in that which I don’t make, including whether I will still be in it it five years (normally I exit when the story has changed). However if I can make 50% in the first year (already have 31% in a month and a half), and 40% in the second year, and exit half way through the third year (typical pattern for me) at up another 20% compounded, I’ll be very happy (that put’s me at two and a half times what I started with in two and a half years).

I simply don’t even think in the terms that you are asking.

As far as answering Dreamer’s questions, he was asking why would you invest in Datadog when Elastic was at half the evaluation? I answered that of course Elastic was at half the evaluation. It was growing 30% less per year and falling, while DDOG was accelerating. Elastic was losing more money each quarter and had large negative cash flow and growing losses, while DDOG was positive and growing. Of course Datadog was valued twice as high! Why wouldn’t it be. That’s a whole different question I was asking than your valuation question. You guys try to quantify all these things with all kinds of formulas and tables. I just figure that as long as DDOG is a great company, it will remain “overvalued”.

THERE IS SO MUCH WRITTEN IN THESE FEW LINES AND THE SIMPLICITY OF SAUL’S FOLLOW UP POST THAT IF ONE ACTUALLY UNDERSTANDS IT, YOU WILL HAVE LEARNT MORE IN THESE FEW SENTENCES THAN SOME PEOPLE DO IN A LIFETIME OF INVESTING. YES I’M SHOUTING. HALLELUJAH!

[captainccs]

in looking at my calculations, do you find anything that you would change to arrive at a higher CAGR than 15% (for Datadog) over the next 5 years?

The question implies that the five year calculation is the proper method of evaluating investing in DDOG. Saul points that out: “There are all kinds of assumptions included in that which I don’t make, including whether I will still be in it it five years (normally I exit when the story has changed).”

In an earlier post I commented that static methods are not the best way to evaluate growth stocks. If you are watching the evolution of a technology along its “S” curve then you exit no later that when there is a certain market penetration, in other words, well before the technology nears high market penetration because there is no more market left for fast growth.

The difference between the two methods of evaluating investments, growth vs. value, is that value investors will, almost invariably, consider the growth valuation to be extreme. NASDAQ is often referred to as “tech heavy” while the S&P 500 is supposed to be a cross section of all industry. I know the comparison is NOT perfectly accurate but looking at a 48 year chart comparing the two indexes clearly backs my argument

https://softwaretimes.com/pics/nasdaq-spx-11-16-2019.gif

That is not to say that you can buy stocks at any price. Had you bought a NASDAX index in 2000 it would have taken 15 years to break even. There is an argument no one has brought up and that is that the biggest risk is not volatility but stocks that don’t bounce back. I’ve been through two major busts, 2000 and 2008. In 2000 Global Crossing, GlobalStar, and a bunch of other companies went bankrupt. In 2008 it was mostly financials that failed. Had you avoided these companies, it would not have taken you 15 years to break even. That’s why, in my opinion, understanding the business model is so important. Another way to protect yourself is what Saul does, as soon as he sees weakness he sells. Don’t fall in love with your stocks, they don’t love you back, they don’t even know you exist and if they did, they wouldn’t care anyway.

The difference between an entrepreneur and an investor is that the entrepreneur must love his business, not so the investor. When you own a business you can’t flip it at the click of a mouse. But there is no reason to have a fixed five year outlook on a growth stock, just watch it develop and act accordingly.

Denny Schlesinger

[PaulWBryant]

me: but you still allocate more to the ones you feel have the greatest potential for appreciation. And you have Datadog as a top 3 allocation.

Saul: Actually that’s not my criteria. It’s not the ones that have the greatest potential for appreciation, but the ones I currently have most confidence in that I have the largest positions in.

And then Branmin quoted something else you said and really drove it home for me: I just figure that as long as DDOG is a great company, it will remain “overvalued”.

Wow, that’s it. I think I finally just got it. You see these companies as future behemoths, and I just see them as good businesses with a great business model (SaaS), but not necessarily future $100 billion companies or really anything of the sort. Just solid software businesses that happen to benefit from the SaaS model.

I don’t know if you’re expecting too much or if I’m being too skeptical, but I really think that’s what it is!

My argument would be: look at SQ, SHOP, and TWLO. These were high-confidence positions for you, but they couldn’t keep growing at 60%+ paces forever. You did great on all three before you sold, but if you’d bought them at 40x revenue, you wouldn’t have. The recent ZS drop also makes me skeptical we’ll be able to sell before the PS (and share price) falls if there comes a day where you can no longer say that DDOG is a great company.

Bear

[12x]

Denny, are you calculating where companies are at on the S Curve? If so how?

[stocknovice]

But there is no reason to have a fixed five year outlook on a growth stock, just watch it develop and act accordingly.

Denny -

You forgot to drop your mic.

In my opinion, this is the most important sentence in what has been a very educational thread. I believe this thought pretty much nails both the art and science of what everyone here is trying to do.

[captainccs]

Denny, are you calculating where companies are at on the S Curve? If so how?

No.

The "S curve applies to the growth of technologies, not to individual companies selling them. But because they are selling them they go along for the ride if they don’t otherwise mess up. If you look at Apple’s chart you are likely to detect several “S” formations that correspond to the various iProducts. The same applied to the several generations of disk drives.

I don’t actually calculate anything, I use the “S” curve as my mental model of how growth stocks grow, all else being equal. There are always articles about how fast various technologies are being adopted, companies report their growth rates. It all helps create a mental picture but I don’t actually do any calculations.

While mathematics underlies everything we do, the system we are dealing with is way too complex for simple formulas to yield the winning answer. If there were such formulas we would all be stinking rich. Maybe one day AI will be able to do it but for now I rely mostly on educated guesswork. The only place where I use a ton of predictive arithmetic is in my Covered Call Selector where you have hard numbers to work with, stock price, strike price, premium, and days to expiration. But even there I look at charts to see if the omen is good or bad. LOL

Denny Schlesinger

[captainccs]

You forgot to drop your mic.

Thanks, very kind of you!

Denny Schlesinger

[buynholdisdead]

Hi Texmex,

Back in 2000-02 or 2008-09 Saul was invested in growth but used to pay attention to earnings and p/e as I understand. So, just because he has been successful in past recessions does not mean that SAAS stocks will do well in a recession.

I am just going to let Saul do the talking, this is all from his Manifest on the right side.

I lived through the Internet bubble of 1999-2000. I sold out of Amazon, Yahoo, and AOL one day in January or February of 2000, after Yahoo, as I remember, had gone up something like $30 to $50 per day for three days in a row. I said to my wife, “They may keep going up, but this is insane. I’ll let someone else have the rest of the ride.” The bubble broke about 3 weeks later. Sometimes selling can be the most important thing you can do. I didn’t get out of the market. I just bought non-internet stocks and was up 19% for the year. Sure I could have held through the decline, and 10 years later Amazon came back, even if Yahoo and AOL never did, but why???

I got killed in 2008 like everyone else. Probably worse than someone who was in defensive stocks. It was my first negative year after 19 positive years in a row. I stayed 100% in stocks, selling anything which hadn’t gone down much to buy more of the ones that were down the most.

Most people on this board will be unable to do what Saul did in 1999-2000 because they are going to miss getting out. 2 to 3 weeks before the bubble blew up wow.

Also, Now the last recession. How many people here will be able to do what Saul did? Riding it down in the midst of Recession staying fully invested? Especially people that are close or into retirement.

Jeb is right this is all turning into semantics and this will be my last post on this also. The one everyone needs to read is Saul and think how that is going to fit into your investing style. Everyone else that brings ideas to the board, thank you.

Andy

[SaulR80683]

I got killed in 2008 like everyone else. Probably worse than someone who was in defensive stocks. It was my first negative year after 19 positive years in a row. I stayed 100% in stocks, selling anything which hadn’t gone down much to buy more of the ones that were down the most.

Hi Andy, you missed one important point about this. At that very bottom, when I was down an incredible 68% on the year (Nov 20, 2008), which means I only had 32% of what I started the year with, my investments were still at 265% of what I started the decade with (Dec 31, 1999), up 165%, after going through the Internet Bubble Crash, the 9/11 crash, and the 2008 crash (which was the worst crash we had had since 1929 as I figure it). That’s because staying invested in growth stocks pays off so well that I had an enormous cushion. And in 2009 I was up 111%. And in 2010, when writers were talking about the “Lost Decade for the Markets” because they were still where they were 10 years before, I didn’t know what they were talking about because I was up 500% in those 10 years (even after getting crushed in 2008). There are always people saying “Next time it will be different and the market won’t come back”, but personally, I doubt it will be different next time.

Saul