Another amazing day

[drillerjim101]

Those who have been following this board since Jan. 1 of this year and whose top five holdings have been close to those of Saul’s portfolio have experienced returns that have been rather amazing. Especially those who have pruned their stocks back to a manageable 15-20 companies.

All week I’ve noticed how my stocks have held steady, beating the S&P even in a down to sideways market week. However today, 3 of our top 5, SKX, BOFI, and CRTO were up sharply giving us all a big boost while the market again has been meandering sideways. My returns have never been better.

We owe a debt of gratitude to Saul and all those who provide so much sound investment analysis day after day. You know who you are as do the rest of us.

Such sacrifices of your time must not go unnoticed.

Jim

[htownrich]

Add a dash of AMBA and the week has been very nice!

Htownrich

[brittlerock]

Jim, I second that sentiment.

I would like to note that “pruning back to a manageable 15 - 20 companies” has been much more difficult than I thought it might be. I have sold some stock that has performed well for me including SBUX, HAIN, KMX among others. I’m not done cleaning house.

Why did I sell? In most cases the numbers just weren’t very good. By that I specifically mean the growth in earnings and Saul’s new stat, 1YPEG. There was a secondary reason also. I had some small positions in companies that performed well and had pretty good numbers as well. CMG for example. But each company requires time and attention no matter how small the position. I pretty much sold (or will sell) everything that is under 3% (unless it’s a position that I’m just starting to build). I simply don’t have the time to pay attention to a lot of small positions when I can do as well or better with more concentration.

It’s somewhat harder to explain why some of the larger investments were difficult to sell. True, historical performance had been pretty good. I suppose there’s always some second-guessing going on (for those of us who are pretty new to Saul’s investing philosophy) when it come to selling a stock that has performed well. I sold with the intention of doing better by reinvesting elsewhere. I had to let go of a company in which I had grown to have a level of comfort and confidence. I trust Howard Schultz. I can’t name the CEO of several of the companies I have recently purchased.

But even though SBUX and HAIN have done well, they don’t come close to the performance of SKX or SWKS or AMBA, etc.

It’s easy to get mediocre performance. The mutual fund industry is built on this. It’s not even that hard to get good performance, I had sort of stumbled around and got pretty good performance. And now I find it’s not even that difficult to get outstanding performance if you follow a few simple rules. I don’t expect every investment to be super. I’ve learned from Saul that what’s important is how your portfolio performs, you should never expect every investment to be top-flight. You must always be willing to sell in order to reinvest elsewhere in a company that holds more promise. And even though we can’t predict the future with any certainty, we certainly can be confident that performance can be measured on an on-going basis. And it’s not measured by looking at the stock price.

[anthonyms]

Yup - an amazing day and if you had cyber security in your portfolio it would have been a total blowout. Ignore cyber security at your peril (literally and financially).
Currently holding:
Qualys - up 4.2%
Fortinet - up 3.90%
Fireeye - up 6.42%
Infoblox - up 4.52%
CyberArk - up 7.41%
Imperva - up 4.11%
Barracuda - up 3.45%
Palo Alto Networks - up 2.87%
CheckPoint - up 0.16%

…all on the day. (CYBR, PANW, CHKP, IMPV are all multi baggers for me with PANW and Checkpoint up 300%-400% and Imperva and CyberArk - which I have traded, on the way to 200%).

And the ones I am tracking but don’t own have ripped it up today too (rrr - but I guess you can’t win them all)…
KeyW corp - up 10.58%
Proofpoint - up 6.15%
Vasco data systems - up 1.82%
Zix corp - up 1.07%

Ant

[htownrich]

Brittlerock

I had 65 positions a couple of months ago and a handful were losing money. I am down to 38 today. I started by selling small positions.It is hard continuing to prune companies. I want to get down to less than 25 preferably 20. I am not adding any company without eliminating at least one.I recently added INBK. I need to run 1YPEG on them because my gain on almost all of them is pretty strong and I have a mental block selling a company with strong performance in the past. Quantity does not equal quality and past performance does not guaranty future performance.

Htownrich

[GDPerks]

I find it hard to trim positions in taxable accounts. Stocks that have done well I tend to hold on to, because of the cap gains tax. It means whatever I replace the position with has to do quite well just to get back to the dollar amount I had before triggering the tax event.

Any tips for getting past this? I just like holding my winners even without knowing whether they will continue.

[mauser96]

I heard a lot of similar congratulatory posts in 2000 by dot com stock owners.

Prolonged periods of outperforming by any group of stocks often means a bubble.
I hate to say it but it might be different this tim. Because I can’t find a lot in common with “Saul Stocks” except they tend to be smallish are growing fasts and are "cheap by some measures. And unlike dot com., are actually making money. So 's hard to define them as a sector.

I’ve read some posters who think it is easy to outperform the market . Its never easy, if it were easy everybody would do it. The Mechanical Investing board has many stock market and timing methods backtested to show improved return too, but few people can actually follow it because they lack discipline.

We are in a bull market, and bull makes tends to make all investors feel smart. But this’ bull is old, and has gone an unprecedented time without even a 10% correction. Like all good things it will end . And when it does "Saul Stocks " (sorry don’t know what else to call them) will suffer along with everything else. Since they are making money and are diversified in different lines of business, most will eventually recover.Assuming the US market isn’t like the Japanese stock market. Holding them through a collapse, seeing your life savings melt away like the Wicked Witch of the West won’t be easy.

Sorry to be a wet blanket but old enough to have been there and done that, so I k now how I will react to big losses. Not well. So we get back to self discipline., which is easy to say but hard to do. Just ask those of us who are overweight…

[SaulR80683]

Aw, don’t be such a killjoy, Mauser.

When the market is flat on the year, and people are up over 30%, they have a right to celebrate a little! I hope you’ve had some of the fun too.

Best,
Saul

[MataroPete]

We are in a bull market, and bull makes tends to make all investors feel smart. But this’ bull is old, and has gone an unprecedented time without even a 10% correction.

Of course there will be a market correction at some point and the predictions, whether immanent or more distant, will be of the “even a broken clock is right twice a day” nature.

When using bull market highs and lows to direct investment decisions (which I don’t personally see the value of), it may be important to recognize how one calculates the trend line. The bull market is relatively old if measured from the bottom (March 2009), but not so old if measured from the previous high (October 2013).

Pete

[mauser96]

MataroPete, you will note that I put no estimate on when the bull will end, just that it will end. Eventually. So that is my only prediction, really a non prediction, just a fact based belief that every equity bull market in history has been interrupted by substantial declines…

Personally I only try to recognize a bear before it gets too advanced. Not before it starts. I have trained myself to only pay serious attention to events that are actionable. And macro economics or forecasts are mostly non actionable.

So I am happy to ride this present bull tide. But don’t expect it to last forever.

[brittlerock]

Mauser,
Just a reminder that you are not alone on this board when you post old enough to have been there and done that. I too am old enough for that experience, more than once. Saul is old enough for that as well . . . my guess is that there are several of us who are both regulars on this board and who are also in the geezer category.

So, what makes this one different? Well, a few things. First, even though you did not use the dreaded term “bubble” you implied it. But if you look into the history of financial bubbles going back to the Dutch tulip craze you will find that the current bull run does not bear the hallmarks of a bubble. The most pronounced bubble characteristic is the upward spiral in price of a relatively worthless “asset” which is driven upwards not due to its intrinsic value or its ability to create value, but rather by the frenzy of nothing more than rising price. The term “bubble” is apt for this phenomena, an expanding entity with nothing but a flimsy, thin film that serves as its structure. If the current bull market is a bubble, then please identify the relatively worthless asset at its core. I for one do not see it.

You might argue that people caught up in a bubble never see it, but that is simply not true. I distinctly remember that during the dot com bubble the investing frenzy over ridiculous web concepts were the butt of a lot of late night TV humor. Cartoons appeared in the New Yorker and numerous other respected magazines. The fact is that almost everyone recognized the bubble, but that didn’t stop the stupidity. The more recent real estate bubble was a bit harder to spot, but when a friend of mine with no work history, no money and a new, not very well paid job bought a house with zero down, while I was happy for her, I also thought there’s something going on that smells bad.

You assert this bull is old, and has gone an unprecedented time without even a 10% correction without specifying just what “old” means. And indeed, there seems to be a bit of disagreement about the age of the bull, but most experts would not disagree with something in the vicinity of 5 years.

According to one Forbes published guru (Robert Lenzer), the average bull market lasts 97 months, so that would suggest that this “old” bull market has another 3 years or so to run (the corollary bear markets average 18 months). But lets grant that if you continue to predict a bear market, eventually you will be correct, at which point you can tell us “I told you so…I told you so…I told you so…I told you so…”

But let’s change gears now from generalities about bulls and bears and markets and all that to specifics. I can’t speak for everyone who follows this board. I know what Saul does because he very openly tells us. I know that I’ve learned from him and others who post here and I know what I do that’s different from what I’ve done in the past. And you almost wrote it down yourself without quite realizing how important it is. Here’s what you wrote:

I can’t find a lot in common with “Saul Stocks” except they tend to be smallish are growing fasts and are "cheap by some measures. And unlike dot com., are actually making money.

I’m not so sure what “smallish” means, but I’ll grant that most of the companies he picks are not mega cap companies. On the other hand, Saul does not focus on micro-caps either, I think INBK is the smallest with a market cap of a bit over $100M. And they make money, I think XPO is the sole exception. And the fact that they are “cheap by some measures” is not just a coincidence, it’s actually really important. If you look at the companies Saul invests in you’ll find a higher PE has to be offset by very high earnings growth. Let’s look at a couple other important characteristics of Saul’s investments. Here’s four companies selected at random high on Saul’s list:

AMBA: $0 debt $208M cash
SKX: $114M debt $398M cash
SWKS: $0 debt $1.05B cash
CRTO: $17M debt $322M cash

So when you assert “Saul Stocks” (sorry don’t know what else to call them) will suffer along with everything else. I wonder if that’s really true. Personally, I’m of the opinion that when everything else is suffering, “Saul’s stocks” will opportunistically deploy some of that cash to buy up some of their competitors in a weakened state. Even if they don’t, I think most all of them are pretty well positioned to weather a financial storm without too much damage, maybe some of the fantastic growth will taper off, but I’m hard pressed to see how more than one or two will actually be hurt.

So Mauser, one last comment. If you think following Saul’s investing strategy is a bad idea, and we’re all set-up for a whole lotta hurt, what do you suggest as the alternative?

[mauser96]

No I think Saul’s Strategy is fine. And have said so several times.I value a strategy on how well it works, and Saul’s Stocks work well. I have been doing something similar for decades., but his form has some new twists. And candidly I think it is better than my old process , because I often paid too little attention to price when I bought. And even though I picked lots of winners, I was not very good at selling. The return was however enough to support me comfortably for over 25 years without a “job”

All I am doing is saying it won’t work well forever.I can’t remember the exact percentage but Saul had some huge loses in 2008. Ask him , he gives straight shooting honest answers.

he most pronounced bubble characteristic is the upward spiral in price of a relatively worthless “asset” " Not so. Of course the word " bubble" is not clearly defined, but historically many bubbles had a real product. Like the railroad bubble, the ICE auto bubble the the fiber optic bubble , or maybe even the mortgage bubble.
.All with real assets, and when the over production resulted in a price collapse, they were bought up in bankruptcy and most did well in their new debt free condition.

Alternative-- personally I exit the market or drastically reduce my holdings or cover with puts when my indicators say the probabilities are that a bear market is underway. Most of these are momentum based, many can be found by a lot of reading on the Mechanical Investing board. There are over 260,000 posts , so it won’t be a quick read. It seems to be mostly inhabited by engineers and programers.

http://discussion.fool.com/mechanical-investing-100093.aspx?mid=…

I also strategically hedge by holding broad indices, not keeping everything in individual stocks.

Re being near a new high-- on that board is something called the 99 day rule. From memory (I’m not near my notes) if the broad market has made a new high within a range of about 90 to 130 market days ago, the odds are high that the bull will continue …The longer time passes after that, the lower the odds of a continuing bull get. I use the 100 market day variety of this, actually 6 calendar months. Along with several other momentum based indicators. It is entirely mechanical, follow the numbers, not my gut feelings. All signals are actionable.

Almost any plan based on sound principles and good back testing of results will work. If you stick to it. In shorter time periods the process may be more important than the results. Because 3 heads in a row is not rare and does not invalidate a system that days heads and tails should be present in equal numbers.

I will try to stop posting on this because I suspect that many board users are not interested in anything other than stock picks.

[LEGOABS]

Htownrich

The 1YPEG is a great statistic but careful not to make your decision to sell sole based on this number. At the end of the day, it’s a historic number and there is no guarantee of future performance. That said, it’s useful number to include in the decision process.

LegoAbs

[TracyK]

Please continue to post on this topic, mauser96. I appreciate all thoughtful outlooks. And yours is no exception!

~TracyK

[Tamhas]

Count me as another vote for meta-discussions to supplement individual stocks, as long as we stay away from the political issues.

For example, it would be interesting to me to hear some opinions on two issues:

1. What mechanisms are you using to detect a downturn and how well does that mechanism work in the context of what we know (based on my observation that many systems have downsides which potentially outweigh their pluses, particularly in less than extreme movements.

2. While 2008 was an extreme case, what are the real lessons to be learned? Some people have reported that, while their paper losses were pretty extreme at peak, that simply sitting pat meant that most or all of those losses were recovered fairly quickly. The big systematic exceptions seem to be people who panicked and sold, thereby realizing their loss (often compounded by being shy at getting back in and thus missing most of the rebound) or people who were invested in companies which didn’t rebound or rebounded slowly (which may mean that one should have known not to be invested in them prior to the crash).

[brittlerock]

Mauser,
I will try to stop posting on this because I suspect that many board users are not interested in anything other than stock picks.

As I said before, I can’t speak for everyone here, but speaking for myself I am most definitely more interested in investing strategies, rational and logic than tickers. I appreciate that Saul (and others) have done research and posted the research and their thinking about specific companies, but it’s highly unlikely that I would have made a number of the investments I have made recently if Saul or anyone else would have just posted tickers and said “buy these, I think they’ll do real good.”

Just because I posted a counter-argument does not mean I did not carefully read your post. You forced me to think through my own position. That’s a valuable exercise. Don’t be discouraged from posting your mind just because of some respectful disagreements. Respectful differences of opinion are one of the things that makes this board so valuable and interesting.

[SaulR80683]

Hi Mauser, Sorry, but this seems to me to be the Anti-Bubble. Instead of a raging bull market like 1999, this economy, and this bull market, have been creeping up, like watching paint dry for a bad analogy. And the S&P hasn’t budged in 5 months. Assuming that it is an reasonable approximation of the market, does that sound like a wildly growing bubble? Was last year (up 12% as I remember), a wildly up year? Where’s the bubble?

Saul

By the way, I agree that the market will eventually turn down and rest. But that’s not actionable. And stocks with low PE and little debt should suffer less than stocks with PE’s of 70 or 120, or those with lots of debt. And we’re not there now.

[mauser96]

I have no data based way to define a bubble. But bubbles can be in a sector without the whole market being in one. 3DP stocks as a recent example. I do not think most of the " Saul Stocks" are in a bubble - never said that. However unless you use industry group it is also hard to rigidly define sectors. Are “Saul Stocks” a sector in themselves? just asking…

I agree that these stocks will do better than many others. But I regard losing 50% vs losing 70% as a dubious victory. I was just warning about over confidence.
Meanwhile I remain as fully invested as I get because the bull seems intact. But I am aware that market tops are more of a processs while market bottlms are more of an event. Meaning that I have found no way to identify tops in advance or even in the early stages
None of this is any form of criticism of Saul stock selection methodology

[dumaflotchie]

But if you look into the history of financial bubbles going back to the Dutch tulip craze you will find that the current bull run does not bear the hallmarks of a bubble.

Hey Rock:

You bring up some good points as does Mauser who has historically been a pretty tempered investor and most certainly has not been a permabear from my years of interacting with him.

However, there is a great deal of complexity comparing prior bubbles with today’s market condition largely because circumstances are rarely the same between bubbles. As you know, the Fed has taken unprecedented steps in QE, essentially buying up over four times assets than existed in 2009 and kept interest rates at zero.

These actions have DIRECTLY been responsible for the market rise since 2009…numerous charts show the direct cause and effect. No doubt that businesses and consumers have benefited from these actions in the form of less expenses and greater disposable income…both which also drove the market.

At some point, the Fed tightens and many believe the market will be in for some degree of pullback:

http://www.forbes.com/sites/robertlenzner/2014/06/20/the-fad…

From early 2009 when the S & P 500 index bottomed at 700, the broad stock market average has hit new record peaks above 1900, nearly a tripling of stock prices. This astounding performance would never have happened had the Fed not been pouring $85 billion every month into Treasury securities and mortgage backed bonds which pushed down interest rates and pushed up bond prices as well as stock prices.

Here’s Jim Bianco of Arbor Research, a widely respected bond analyst, on what he expected in a report to investors last fall. “QE has been extraordinarily effective in boosting stock prices and the FOMC (the Federal Reserve Open Market Committee) is correct to worry what happens when they stop. Restated, the bull market of the last 4+ years has a lot to do with FOMC stimulus. If history is any guide, its removal would figure to be a profound negative for equity prices.”

Now…one can argue that if you are invested in high quality stocks and lower PE with high growth, that you would be insulated from any downturn. But that is simply not the case…in all cases. These stocks are taken down with everything else and if the consumer loses buying discretion…so goes the company’s sales growth rate.

I believe what you and Saul are suggesting is that even were the above be the case, these companies with low PE, PEG, debt and high growth rates would at least statistically weather the storm and recover better. That does sound logical to me as well…but they will take an initial hit along with everything else and what appeared to be insulation may be minimal if the consumer bows out again.

However, one interesting aspect of the market is that as logical as one may be with one’s trading/investing “systems”, analysis, TA…the market is substantially emotional…and that emotion doesn’t care what your calculated PEG, growth rates, debt loads were.

Shiller who wrote Irrational Exuberance right before the 2000 stock collapse, has tried to quantify this emotional component and wrote about it here:

http://www.businessinsider.com/robert-shiller-investor-confi…

In an interview with Goldman Sachs published over the weekend, the Yale professor and Nobel Laureate said there is a “bubble element” to the behavior we’re seeing in the stock market.

The fact that people don’t believe in the valuation of the market is a source of concern and might be a symptom of a bubble, though I don’t know that we have enough data to provide it is a bubble."

His point really is that despite our number crunching, technical analysis, etc…sometimes there is just an emotional component that is the trigger for substantial swings in the market.

He has published the well known Shiller Index that suggests the market is overvalued here:

http://www.gurufocus.com/shiller-PE.php

There are other data points that suggest an overvalued market:

The BMW method:

http://invest.kleinnet.com/bmw1/stats16/%5EGSPC.html

http://invest.kleinnet.com/bmw1/stats16/%5EIXIC.html

The Buffet Market to GDP:

http://www.advisorperspectives.com/dshort/updates/Market-Cap…

Various Indicators:

http://www.advisorperspectives.com/dshort/updates/Market-Val…

I could go on of course and there are many permabears that have been calling for a market collapse every year forever.

But I do think this concept by Shiller of what defines a bubble is fairly good:

http://www.zerohedge.com/news/2015-05-29/robert-shiller-unli…

Robert Shiller: I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going. So there is a bubble element to what we see.

But I’m not sure that the current situation is a classic bubble because I’m not certain that most people have extravagant expectations. In fact, the current environment may be driven more by fear than by a sense of a new era. I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically.

So it would appear if we are to try to bring all this together that we likely do have significantly overvalued markets and yet at the same time, there is anxiety and insecurity about our future…hence no “bubble”.

But that can change quickly and everyone I know is focused on the effect of Yellen’s plans to discontinue assets purchases and raise rates and ? off-load those trillions of assets. These previous actions taken by the Fed, directly relates to the stock market rise…take them away and what is the outcome???

No one knows…this time is truly different…because it is nothing like last time.

[Tamhas]

These actions have DIRECTLY been responsible for the market rise since 2009…numerous charts show the direct cause and effect.

There have been numerous claims of proof of cause and effect in the market lo these many years, but few, if any, have turned out to have much predictive value. There isn’t much question that a number of investors are varying degrees of jittery about interest rates and that jitteriness has certainly translated into short term reactions to various events, but that is a long way from providing predictive value to longer term events. To be sure, if the Fed would make a drastic change, there would probably be a sharp response in the market, but how long it would last is questionable and they are hardly likely to make a drastic change. If they make a small adjustment, there could be a knee jerk reaction, but it could as well be greeted by a sigh of relief that the much anticipated adjustment was finally underway.

As for the overvalued markets, while this is oft cited, there is also strong counter argument that, for example, the Shiller indication is an artifact of changing GAAP accounting rules that make the numbers essentially non-comparable.