Coping with new investment realities

Earlier this year on the Saul’s Investing Discussions board, a number of angst-ridden messages were posted by people who were quite unhappy about the huge losses they were suffering with their SaaS stocks. Some of the messages were deleted, but Saul allowed some of them to remain, perhaps making a compassionate exception out of recognition that letting people vent their frustration for a period of time would help soothe their psyche. In response to the profound disappointment and fear expressed by numerous people, an assistant board manager under the alias of PaulWBryant (who refers to himself as Bear) took on the additional role of board CEO (Chief Encouragement Officer). On multiple occasions this year, he’s made a point of conveying his optimism and encouraging board visitors to “hang in there”. Judging by the number of recommendations such posts received, it’s evident Bear’s words of encouragement are an emotional balm for many people.

Last week, in a thread titled “A Few More Thoughts”, he posted another message that’s clearly intended to help himself and others cope with the adversity they’re facing this year. One way of coping with a massive drawdown in one’s portfolio is to avoid acknowledging strategic errors, as this allows a person to believe the losses were unavoidable. If, as Bear essentially concluded in his recent post, there are no lessons to be learned from his horrendous results this year, he can then comfortably assert that a greater-than-60% decline in his portfolio’s value is an acceptable consequence of his investing style.

To Bear’s credit, he has correctly cautioned people to think carefully about adopting his investing style. Nevertheless, it’s clear that many readers of Saul’s Investing Discussions look to Bear for reassurance, which Bear is happy to supply as needed. For those who find Bear’s words comforting, is it because he offers intelligent reasoning, or is it simply due to Bear telling them something that’s consistent with what they want to hear? An examination of the thought process he displayed in the aforementioned message suggests it’s the latter. What follows is a breakdown of his recent commentary, which is illustrative of how previous investment success can impact a person’s attempt at self-assessment when things go awry.

It’s impossible to perfectly time the market.

This is a straw man argument, as no one has claimed it’s possible to perfectly time the market. The straw man tactic is typically employed when a person lacks an intellectually sound argument for their point of view.

Investing this year has been excruciating. But every time I zoom out, I don’t know what we could have done differently.

The obvious answer — gradually selling his stocks when they became egregiously overvalued late last year — completely eludes him. The timing of such a decision need not have been perfect nor could have been perfect. Any time in Q4 2021 (or even slightly earlier) would have sufficed, and the sales could have been spread out over that entire timeframe versus picking a single day, week, or month. Incrementally divesting a portfolio of overvalued stocks over a multi-month period does not constitute the “perfect timing” he correctly, though needlessly, states is impossible. His reasons for not having considered this option become clear in his subsequent remarks.

I hold the companies I think are the best!

He doesn’t seem to understand that a highly successful company is not necessarily a good investment. As many people painfully discovered this year, valuation matters, and that’s true irrespective of how fast a company is growing or how well-managed it is.

And I believe long term, these companies are perpetually undervalued, not only when they trade at a trailing PS of 15, but even when they trade at a trailing PS of 30.

His professed belief that his stock holdings are “perpetually undervalued” (even at a P/S multiple of 30) means he believes his stocks have been undervalued the entire time he’s owned them, including when valuations peaked last year — valuation levels that he himself previously labeled as “insane” in a post dated 04/23/2022. Hence, a stock that is insanely-valued can still be considered undervalued in his view.

Maybe it’s reasonable to hold more cash when they’re at 50 and 60 and higher, but that’s what I did. Other than that, and the trading around the edges that I’m already doing,…

Note that even a P/S multiple of 50, 60, or higher is not a sufficient reason to divest a stock holding, though such conditions might warrant holding more cash. His comment about adjusting cash levels raises a question: Why is it reasonable to increase cash at certain times if the stocks of his favorite companies are, as claimed above, perpetually undervalued?

…there’s really not much to do but wait – and as Saul has said in the past, enjoy the [wild!] ride.

Enjoy the ride? In the second quoted sentence above, he expressed that his investment experience this year has been excruciating.

It hasn’t been enjoyable this year, for anyone who invests in anything (even bonds!)

Anyone invested in oil and gas equities would disagree, as that sector has performed quite well year-to-date. It’s interesting that his poor performance has led him to believe that nothing has worked this year.

But we have to know our limitations as humans. We can look back and do Monday morning quarterbacking, but if we think we could have seen this coming we are fooling ourselves.

Last year and earlier this year, numerous people openly and repeatedly questioned the valuations of SaaS stocks, but their concerns were dismissed and their posts were often deleted. Perhaps the people who are fooling themselves are the ones who believe their favorite SaaS companies are “perpetually undervalued”.

Anyway, I’m not trying to start a long thread either, as I’m really just pointing out the obvious.

Apparently, the obvious point is that it’s perfectly rational to allocate most or all of a portfolio to a collection of overvalued stocks in a rising-interest rate environment, and any contemplation of a precipitous price decline of such stocks is tantamount to fooling oneself.

Hopefully this is in some way encouraging.

Whether or not anyone finds it encouraging, it is certainly revealing.

I have no idea if we’ve seen peak pessimism and are headed back for PS ratios of 30 or higher, or if this bounce is just a slight reprieve and we could be in this mess for another year or more. Maybe/hopefully something in between.

Why is he hoping for something “in between” after previously stating his stocks are undervalued even when they trade at a P/S multiple of 30.

But whatever the case, my strategy remains the same: Hold the best companies.

Again, no distinction is made between successful companies and successful investments. He’s convinced the former automatically equates to the latter.

…and don’t expect to be able to predict the future.

He ends with another straw man argument. No one on these message boards is claiming to be able to predict the future. People do make guesses. No matter how one allocates their money, investment decisions always involve making guesses about the future. Last year, some people concluded that the type of stocks owned by Bear were vulnerable to a sharp price decline on the basis of extreme valuation. Others guessed their highly-valued stocks would either keep rising or, in the event of a downturn, would not decline nearly as much as they have the past twelve months. Whatever one guessed, everyone can decide for themselves whether their respective guesses were reasonable, and whether the guesses they’re making now are reasonable. The diversity of guesses, of course, is what makes a market.

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I mentally read your post in a posh British voice…makes it sting a bit more.

I have a feeling one of the unintended consequences of Sauls Board limiting those that can post, is that you will find more scathing comments/posts littered across my board, and others, in the coming months, as the sun sets on 2022 and huge negative losses for the year.

The current BMR has some oomph in it, so far…wonder how many will sell into strength vs how many will ride it all right back down again.

And what is the patience level, in 2023, for more “A few more thoughts” threads if the bear market / recession mimic more the action of 2000-2002 vs the quick “V” of March 2020, or even Dec 2018, that I think most have been expecting. After all, just btfd, dude.

Dreamer

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