Why is Saul able to do what Warren Buffet was willing to bet a million dollars couldn’t be done?
First, just to be clear, that’s not the question I asked - that’s a strawman you proposed yourself and then answered.
I completely get the fee aspect of funds - I quoted Buffett’s pithy summary after all. Here’s a fuller statement from him:
Even if the funds lost money for their investors during the decade, their managers could grow very rich. That would occur because fixed fees averaging a staggering 2.5% of assets or so were paid every year by the fund-of-funds’ investors, with part of these fees going to the managers at the five funds-of-funds and the balance going to the 200-plus managers of the underlying hedge funds…
Indeed, Wall Street “helpers” earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade.
Yes, Buffet was smart to compare against funds of funds - in essence avoiding the possibility that a few outliers would beat the S&P (which some probably did), as well as to have the comparison be over a decade to avoid lucky streaks.
But, looking at the numbers, I don’t believe the 2.5% fees cover all of the shortfall. Of the 5 funds-of-funds, only one came even close, with an annual average gain of 6.5% versus the S&P’s 8.5%. Three of the funds were between 2% and 4%, and one (which closed after 9 years) was only gaining 0.3%!. In other words, 4 of the 5 did far worse than the S&P even before fees!
A Buffett quote in my previous post covered this: Stick with big, “easy” decisions and eschew activity. During the ten-year bet, the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell decisions.
My point here is that this advice to investors is the opposite of what Saul does so successfully. Of course, some of the real-money portfolios in Fooldom also beat the S&P. Tom’s Everlasting Portfolio is up 170% since mid 2012 compared with the S&P at 137%. MF Pro is up 242% compared to the S&P’s 227% since Oct 2008. SuperNova’s Odyssey1 is up 64% more than the S&P 500, Phoenix1 is up 79% more, etc. What’s interesting is that MDP is up 115% with the S&P in that same time being up 123%. MDP is similar to a real money portfolio of TMF portfolios.
So, that supports the idea that the more you average investments, the worse you do. Saul’s approach is to have a small collection with relatively high concentrations - something which goes against conventional wisdom - including Fool wisdom - that says to broadly diversify.
Saul does move in and out of stocks a lot. After touting LGIH strongly for many months, he’s now sold out of it completely, describing it as a “cyclical business, and a capital intensive business. … Lots of debt was necessary, pretty much forever it seemed to me. Sorry, not a long-term forever hold kind of company.”
At the end of 2106, Saul’s positions (http://discussion.fool.com/my-portfolio-at-the-end-of-the-year-2… )were:
Big Three: SWKS, SKX and INBK (total 48% of portfolio)
Middle: LGIH, SEDG, CASY, INFN, SNCR, AMZN, and CBM (total 47% of portfolio)
Bottom Three: CYBR, CELG, and AMBA (total 7% of portfolio - yes the totals don’t add up)
Try-Out: AMAVF and FB
My point here is that today, less than 15 months later, Saul has turned over 100% of his portfolio. His current portfolio of Shopify, Alteryx, Arista, Nutanix, Nvidia, Square, Talend, Twilio, Hubspot, Pure Storage, & Okta were all purchased in 2017 or 2018.
I’m not criticizing Saul - to the contrary I’m showing that Saul’s flexibility to move in and out of stocks (always for long-term reasons) gives him fabulous returns, but that goes against what Buffett advises (see the “eschew activity” quote above), and against what almost all professional money managers can do.
Even with double the 2.5% fees Buffet describes, I believe a Saul-run portfolio would have yielded superior returns to the S&P over the past 10 years. Are the companies in which Saul invests really so small that one couldn’t have a fund that invests in them?
Agree 100%