The average return of all companies in which Saul has invested (reading from Saul’s knowledgebase)
“From 1989 to 2007 I averaged about 32% per year compounded. This produced a rather amazing overall multiplication of my total portfolio. In fact, if you sit down with your calculator and multiply 1 by 1.32 (since I averaged a 32% gain) 19 times, you’ll be amazed too. (It’s the power of compounding). You’ll note that this was not a large multi-bagger on one stock, but on my entire portfolio, the whole works!”
For additional context to Saul’s achievement, for the most part Saul’s results were achieved prior to investing in the SaaS companies in which we are now fortunate to invest, with net dollar expansion rates of 156%, and with revenue… growth of +40% to +60%. To quote Saul, “It really is different this time.” The magnitude of the opportunities in which we are currently investing is truly unprecedented.
To put it into mathematical format so anyone can calculate the compounded rate multiple what you do is take 1 + the the return each year (32% = .32) so you have 1.32 and raise that to the power of the number of years calculating. Thus, with the numbers Saul gave, you take 1.32^18 = 148. Meaning that $1 invested in 1989 that had a compounded rate of return of 32%, selling in 2007 (18 years) was then worth $148.02….I believe those risk ratings are made to satisfy the average person, and not the entrepreneur who sees the investment opportunity such as David Gardner or Saul.
Thanks to sjo and Tinker for their kind words about my long-term results. Since they have already brought up the results of long term compounding I thought I might make some hopefully clarifying comments.
Tinker figured it was 18 years, but it actually was 19 years, as it started at the beginning of 1989 when my wife realized she was pregnant and we decided we had to get serious about investing. Multiplying Tinkers 148.0 times 1.32 one more time means the $1.00 you started with in 1989 became $195.4 by the end of 2007. The figure that I actually realized was 217.1, so that means that the actual growth rate must have been 32.1% or 32.2%, or something like that.
To get a grip on what that means, that’s not up 217%, that’s up 217 TIMES. Putting it in percent it was 21,710% of where I started. Or a 217 bagger on my entire portfolio. It went through the recession of 1993-94, and the bursting of the Internet bubble in 2000.
Then the bad news! In the huge crash of 2008 I dropped over 60% and that 217.1 at the end of 2007 dropped to 81.4 at the end of 2008. Really, really scary!
But remember that that was still immeasurably above the starting point. In fact, that number was 81 times the starting point. In spite of that horrendous year! That’s the advantage of having a cushion.
Now the people who love to warn about how risky our investing is talk about the averages taking 10 years to 20 years to come back from a loss like that. That may be true if you switch out of growth stocks because you are so scared and invest in the averages, or if you sell out completely and go into cash, and it may be true for the averages, but what happened to me is different.
As you remember, at the end of 2007, my portfolio result was 217.1, and at the end of 2008 it had dropped to 81.4. What about those predictions that it would take 10 to 20 years to come back? If we assume I will stay exactly where I am to the end of 2018, we can take my current results as a stand-in for 10 years since that 2008 catastrophe. At the present time my results calculate to 874.9, which is a little over four times the 217.1 they were at at the end of 2007, the year before the crash that I had to come back to, and ten and three quarters times the 81.8 I was at the end of the disastrous year of 2008.
To grow to 10.75 times where I was at the end of 2008 means I’ve compounded just under 27% in the last 10 years.
That means I compounded just over 32% for 19 years, had a catastrophic, minus 62.5%, year in 2008, when the world markets had their worst year since the Great Depression, 90 years ago now, and then I compounded just under 27% for the last 10 years. And that gave me an 875 bagger approximately, from when I started. It’s not just luck. There’s something to be said for this kind of concentrated, careful investing, and changing your mind when it’s called for.
A last and unfortunate point. I have VASTLY less than 875 times in dollars, from when I started. Why? Because I have been living off my investments for exactly 22 years now, since I retired at the end of June 1996. That includes everything: buying houses and cars and clothes and food. Paying rent. Sending our daughter to private school and college and graduate school, and still helping her with her expenses, and paying taxes, and paying for electricity and telephone and Internet, medical expenses, insurances, giving charitable donations, and anything else you can think of.
And remember the power of lost compounding! A dollar that I had to take out at the beginning of this year for living expenses means $1.60 that I don’t have now, a dollar taken out at the end of 2008 means $10.75 that I don’t have now. A dollar that I had to take out at the end of 2000 means $28.62 that I don’t have right now. And a dollar that I had to take out at the end of 1996 means $90.75 that I don’t have right now. $90.75!!! So $10 taken out for expenses at the end of 1996 means $907.50 I don’t have today. You can see why I have vastly, vastly less in dollars than 875 times what I started with.
Right at the beginning of part 3 of the Knowledgebase I explain how to account for putting money in and taking money out of your investing account without messing up your calculations. In other words, if you start with $1000 and make $100 you are up 10%. If you add another $100 to your account you aren’t suddenly up 20%. You only made 10% investing. On the other hand if you remove $100 instead from your account you didn’t suddenly make zero percent investing, you still made 10% so far this year! Again, in the KB I show you exactly how to account for the flow of money in and out.
My Goodness Saul. Great Post. Another one! Ever thought of writing a book? You have it done already, just a matter of formulating(as if you need this headache)./ “How to invest with calculated risk”.
Seriously though many thx for all you do.
P.s. Points 10/11. Lost compounding and money flows. So important so miss-understood.
I think the key is long term. But long term does not mean necessarily staying long term in one stock. You are more willing to get out and get in the growing areas of the time. So you do more transactions than the classic ‘buy and hold’.
I think I understand now what you mean by you go in with the intent of ‘staying long term’. However the reality is that there are times when the stock and/or the business are weak or in the process of getting weaker. At those times you are less hesitant in getting out.
When you do that and importantly when you make the right call over a long period that is the result. And it is quite impressive.
But - and I hesitated before writing this - one shouldn’t ignore the effect of timing. This is something that is discussed in terms of retirement planning. Retiring just before a major market decline dramatically increases your odds of running out of money. Just having a few years of retirement before a market decline really does improve the odds of having enough while you live.
And so it is with all investments. Saul was able to tolerate 2008’s 60% decline because he had 21,700% of growth from the prior two decades. If he had started investing in mid 2007 his results wouldn’t be nearly as good since he wouldn’t have had that huge cushion. More importantly, he would have needed great fortitude to not sell, and have had enough cash reserves to not be forced to sell to have enough to live on.
And, start of investment timing is even more important than whether you miss a later major market decline. Had Saul not sold out before the dot-com-bust at the start of the 21st century, his results also wouldn’t be as good, but again not nearly as bad as if he had just started investing in mid 1999 and kept investing through the early 2000’s.
So while Saul is absolutely correct in what he writes, and his approach is sound, there is a very real risk for people who are just starting out today that if they follow his method they may get hit really hard if the market tanks within the next year. Once they’ve had a few years of good growth, they’ll be in a similar position to Saul in having enough cushion, but until they’ve had that cushion, they’re at risk of losing more than just prior profits, which then takes huge mental fortitude to keep the faith and not sell (or worse yet, need the money to live and so are forced to sell).
One other point I’d like to make is that Saul’s approach is not an “invest and forget” strategy. He invests with a long term outlook, but constantly re-evaluates that long term outlook. If you look back, you’ll see Saul waxing poetic about SKWS’s long term potential for IoT, or how LGIH is doing well selling homes in areas where the economy wasn’t doing well, etc. But, he relatively soon thereafter sold both those stocks - and rightfully so as they stopped appreciating in value at the rate his new investments did. So, for Fools who are looking to adopt Saul’s approach, be aware that it’s different from the just buy and hold style that exists in much of Fooldom. You need to pay attention and be nimble. The results are obviously worth the effort.
These days retiring to live off investments while still having a child to send through school and college take a lot of guts.
Particularly when this happens- In the huge crash of 2008 I dropped over 60% and that 217.1 at the end of 2007 dropped to 81.4 at the end of 2008. Again , lots of guts.
Making the assumption that next Bear will not be accompanied by a banking crisis , it hopefully should not be as bad as the last one. It often takes a short generation for investors and bankers to forget the lessons of the last Big One.
OTOH new investors have not been through something like 2008 may have little idea about how they will handle losses that big. Thanks to some lucky timing, I avoided much of the 2008 crash, but the collapse of what I did hold resulted in some real stomach churning stress.
While you are correct about the risk of living directly off of investments, there is an easy solution to the issue: a cash cushion, separate from the portfolio.
A cash cushion creates a buffer between the portfolio volatility and the need for cash to pay living expenses.
I look at this as an insurance policy. If I die today, my family will have will have all the needed cash for 3 years. By that time, DW should have acted on my written instructions and be taking care of things.
When we retired in 2005, if the 2008 event had happened in 2006, we would have had no issues at all. We had the needed cash and would not have had to sell at depressed prices. The recession in 2008 was a speed bump for us. All bills were paid and no stock sales were made until Oct 2010.(Small amounts of dividends paid in our taxable account were taken for cash.)
You are the second poster I’ve seen on the boards discussing the values of a sizable,
3-year “cash cushion” and/or Emergency Fund, etc.
One question, assuming you’re retired and living expenses are taken out of the “cash cushion”, you would still need to add to the “cash cushion” to maintain the ongoing “3-year’s worth” status/size, correct? And I would assume these additional funds must come from investments/investment proceeds?
Would also like to hear Saul’s thoughts on this as well, since he has been retired many years now.
While this is OT for the board, it is something everyone should think about.
Investors like to think they will live forever and their families will be able to easily pick-up the portfolio pieces when they are gone. Based on my own experiences with family heads dying, some quite unexpectedly, people that believe that are kidding themselves and their families pay for it in the long run.
I do adjust the target size of our cushion based on actual cash outflow minus charity. I do charity separate since we size that to 20% of our portfolio gain each year.
When times are good, small sales and/or dividends are used to top-off the cushion. If prices are declining, the cushion spends down a little until “things get going again.”
Not an exact science and not hard to execute.
For other questions on this, we should go off-board.
You are the second poster I’ve seen on the boards discussing the values of a sizable, 3-year “cash cushion” and/or Emergency Fund, etc… Would also like to hear Saul’s thoughts on this as well, since he has been retired many years now.
Hi Maine Reason, This is from my post on how I chose a company to invest in, just a week or two ago:
Again, let me reiterate, I do know that a recession is likely to hit us. They always do. No expansion goes forever. I keep cash segregated so that I and my family can get through it comfortably without having to sell stocks at the bottom for cash. I carry no margin, and use no leverage. But I don’t know when the recession will arrive, and I won’t try to guess. I think that the recent chorus of voices saying that a recession is just around the corner possibly means that it is not right around the corner, but what do I really know about that? Nothing.
Why not? To take advantage of timing implies that you are prescient. When is the next recession going to happen? Is it overdue (as many caution)? Will it hit all equity investments equally? Based on your read of future events, when is the ideal, most opportune time to start investing (if you’re not doing so already)?
I’m not being totally facetious. I have encouraged my son-in-law to start investing. He was about ready to plunge into a retail brick and mortar business. I didn’t want to discourage him, but I advised that he needed to develop an objective, realistic business plan with a marketing plan to show how he would meet the business plan forecast as well as a comprehensive partnership plan (as he was going to start this business with a friend). I suggested that these things were requisite after he mentioned that he had already found a “great” location. I had to stop and wonder, if the location was so great, why was it vacant? Sadly, but fortunately, his partner got cold feet and the venture fell apart. I further suggested he needed the help of a business consultant to keep it real.
One of the questions I asked him was what were his long term goals. What was the future of this venture? Did he plan on selling it eventually? Was he going to work at it until he was 65? 75? 85? What was his end game?
After it didn’t pan out, did his long term goals change, or did he need a different strategy to achieve them?
I wish I had asked myself these questions as a younger man.
There are few ventures as flexible and low risk as investing. You can start investing at any time you wish with zero capital. Every broker allows you to set up a “watch” portfolio. You can make mock transactions while building your knowledge with nothing at risk. As your confidence and knowledge grows you can dip your toes in the water. You needn’t put more capital “at risk” than your comfort allows. You needn’t jeopardize your security and put your family’s welfare at risk because you don’t have to put your life savings into it and you can do it in your spare time while still gainfully employed.
So, if today is not the best time to start investing, when is a better time?
In my opinion, to learn, you need skin in the game. Then you actually give a damn. Also find yourself a mentor, I mean someone who is making 10 - 100 times more money than you are, it will put you on a whole new level of thinking.
