And Open Letter to Miklo and other Lurkers
Hi Miklo. I notice no one publicly replied to your post #68196. Maybe some did privately. But it’s a busy time, as we’re at the end of earnings, and there isn’t much time for broad discussions as we deep dive into earnings reports and watch lists.
As you’ve discovered, this isn’t a board where you are going to get hand-holding. All the knowledge is here, but you have to be the one extracting it and putting it into practice. So you are doing the right thing by going heads-down and studying for the past few months. And from your takeaways of Saul’s rules, I think you are on the right track. It also seems like you aren’t entirely new to investing – which is good, as I don’t think Saul’s methods are a good entry point for novices. But I suggest that if you still have questions, you continue to study.
As you can probably tell from my posts, I like to take notes, and to track all this valuable education we are all getting from each other. So here are a huge amount of past posts to further your education, that are hopefully helpful both to you and other lurkers here that are relatively new.
These are the some of my favorite posts here over the past 2 years. I consider this the best-of-the-best posts for understanding hyper-growth investment. Not only from Saul and major contributors, but also from the others here that came before you that, like you, have tried to boil down Saul’s rules.
REVISED KNOWLEDGE BASE (2019 edition):
Saul - buying criteria
- doesn’t look at P/S ratio - margin matters
- growth matters - companies are growing very fast
- SaaS companies are a new breed, evaluations haven’t caught up
- looking for $NRR > 120%
- deferred rev is money paid in adv of service (eg annual fee)
- S&M expense is in advance of revenue gained w/ it - hence bigger upfront losses
- GAAP accounting doesn’t account for deferred rev vs expense mismatch
Bear - explains how Saul can sell and move on to higher confidence companies
- find companies that are growing rapidly in a sustainable fashion
- sell when rev is no longer growing meaningfully
… saul stocks are >40% growth! cull ones <10% immediately, then shift 20-30% growers to higher ones
- sell companies w/ rapid rev growth that is not sustainable
… avoid fad consumer devices or “hot trends” (3D printing)
- rules don’t insure success but lack of them ensures failure
- cut huge growers back to 10-15%
Bear - selling is major part of Saul’s success
“There’s never ANY danger in short term thinking that leads to selling a stock. Only in buying or holding. This is a huge part of Saul’s success, in my opinion. He not only finds a bunch of good companies, but he is ruthless in cutting any among them in which he loses confidence.”
Saul - this time is different !!!
- what we are investing in has never existed before
- its a new model w/ recurring revenue and $NRR > 100%
- high gross margin cos can shift to profitable at any time
- rapid rev growth >25% if not >35%
- special niche
- recurrent rev (SaaS, not capital intensive, high gross margins)
- rapidly improving metrics
- dollar-based retention rate >100%
- has cash, founder led, don’t have huge customer concentrations
- company is misunderstood
- Recurring Revenue!!!
… Recurring Revenue is the revenue that recurs each quarter because it is on a subscription.
… Dollar-Based Net Retention Rate ($NRR) takes the dollars received as revenue from all of last years customers in the year ago quarter and compares them to the dollars received from from those same customers this year, not counting any new customers acquired this year.
Saul - why criteria has changed
- SaaS w/ recurring revenue
- land and expand - dollar-based net retention rate
- now see +40-60% YoY growth
- SaaS-provided services needed across all fields
- cloud gives leverage - margins rise
- still early innings
… sign up as many customers as you can, as rapidly as you reasonably can while still providing good service, and not worry about current profits
Saul - 10 baggers are irrelevant
- going from 9- to 10-bagger is 11% gain - compare to high growth stock going up 30%
- high number of stocks dilutes the baggers
- concentrate on percentage gain of whole portfolio !!!
- Saul method requires active participation & cooperation, not buy-and-forget
Bear - conviction criteria
- Recurring, subscription-based revenue
- The amount of time I’ve followed the stock
- Consistent, high rate of revenue growth – possibly even accelerating
- High gross margin
- Demonstrated ability to rein in spending
- Understanding why its customers love the company
RetirementDough - Saul criteria
- Rapidly growing revenue. 40-70%
- Dollar based retention rate of 120% or greater
- Accounting loss as percentage of revenue. Should be low.
- Need to have plenty of cash and no debt.
- Low Capex requirements.
- Leader in a new field or disrupter in an older field
- Founder Led. Plenty of inside ownership.
- Long way to grow. Large TAM.
- Need to feel comfortable owning the company.
- Easy to follow.
tchalla - Saul criteria
- High gross margins
- Recurring revenue
- Large Competitive advantage period / Category crushers
- Fast growing new markets with tailwinds
- Predictable revenue growth
- A degree of switching costs
- Less subject to cyclical behaviour
Saul - EV/S deserves to be higher w/ high margins
- a company with high margins is worth higher EV/S ratio than low margins
- subscription model & recurring revenue with a high retention rate deserves a higher ratio
- a company consistently growing rev at 50-70% deserves a higher ratio
- companies with high margins AND subscription model with recurring revenue AND high retention AND growing revenue 50-70% deserve an even higher ratio
Ethan - Investing fallacies
- Hang on until you have profit (NO - invest in where opportunities are from here)
- I love this multibagger (NO - focus on overall port not one stock, what is going to earn going forward?)
- I haven’t lost money, let’s keep it (NO - focus on what company is doing not stock)
- It’s only a small part of my port (NO - every dollar counts especially when compounding)
- It’s house money (NO - every dollar is yours)
Saul - methods recap on hyper-growth !!!
- SaaS is a revolution
- business model is entirely new - recurring revenue and dollar-based net retention rate didn’t exist, hypergrowth wasn’t possible before
- SaaS services can be needed by EVERY company in EVERY field (platforms for payments, security, analysis, communications)
- recurring revenue gives greater visibility into how business is doing
- land and expand helps scale revenue & increase margins, but requires greater S&M expense outlay up front – sign up as many customer as possible, then increase their spend
- it is still early innings
- may be hard to shift providers once locked in, and if saving time/money, there is no incentive to
- hypergrowth companies have a growing pool of recurring revenue that is also expanding within existing customers (high $NER)
50% growth rates can quadruple+ biz in 4 years
- profit comes once they slow the high S&M expenses with land and expand strategy
Bear - switch to the best horse from now forward, don’t wait for recovery
Tinker - invest in the best
rdutt - created Oomph factor & EV/S/Oomph
Saul - on Oomph factor
darrellquock - Saul’s method is condensed and all-in
Duma - for tech stocks, rev growth over all else
Saul - 3 factors of hypergrowth
- very high rev growth
- most/all of it recurring
- very high gross margin
- high net retention rates
- 1: take home more profit
- 2: revenue compounding means profit compounding
- 3: recurring means it all scales
Saul - 5 thoughts
- market rises can be condensed on certain days - stay fully invested
- pay attention and don’t just sell if over-valued
- avoid complicated stories, go for the clearer ones when numbers are there
- don’t stick with train wrecks hoping that they will come back
- admit mistakes and correct them
Saul - concentrate your portfolio to 10-12 best picks
Gaucho - Exponential growth matters more than EV/S
bulwnkl - investing rules
- Concentrated portfolios are the only way to go.
- Invest in the best.
- Develop amnesia.
- Limit risk by managing initial investment size. (<8%)
- Shoot your dogs and let your wild horses run.
- All things being equal, go with diversification.
- Think for yourself.
- Know that I am fallible.
- When a business speaks, listen.
Saul - Worrying too much about valuation
Brittlerock - summing up Saul lessons
- focus on what is important
- follow metrics that matter (non GAAP, SaaS rev)
- adapt as needed
- recognize mistakes and act quickly
- keep it simple
- use SEC filings for data
- listen to CC
- follow trusted sources
- make your own decisions
- understand the products (find Category Killers)
- skip if complicated
- focus on numbers, not the story
- keep looking forward (no regrets)
Saul - these aren’t average companies with avg PE
Diablito - Superiority of SaaS
- hard to operate in cloud
- hard to replace the software or commodize its features
- lower churn, higher expansion rates, more longterm profits
Saul - look under the hypergrowth hood
- watch the numbers under the numbers
- declining rev growth could still be bringing sequential $ growth
Gaucho - a deep look at CRM’s success
Saul - use adj figures not GAAP
Saul - doesn’t look at EV/S
- takes holistic look at the whole thing – revenue growth, ease of on-boarding, movement toward profit, gross margins, operating and free cash flow, recurring revenue, effectiveness of land and expand, dollar-based net retention rate
Saul - the 3 factors of hypergrowth
- 45-90% rev growth
- high gross margin, low capital needs
- recurring revenue, spread over time
- land-and-expand w/ high dollar-based net retention
- EV/S is not an appropriate metric (doesn’t factor in high margins)
- Cloud/SaaS enables all these trends, and gives visibility into recurring rev
- 1: more margins, more profit
- 2: revenue compounds, so does profit
- 3: scale up
Ticker - on owning the best vs collecting all
StockNovice - doing your homework on earnings: https://discussion.fool.com/poleekocowboy-thats-an-excellent-mes…
After all that, go back and sort posts by # of recommendations, and start going over the top rated content. (Many already posted above.)
After that, go over the past reports from Saul on his portfolio changes, month by month. Then do the same for Bear, Gaucho, Stocknovice and others that port their movements monthly. Most of them make going through their history very easy, as they post links to prior reports in the current one. Start back as far as you wish, but I’d say at least a year. Watch and track their portfolio movements, and watch as the rules get put into place on buys/sells.
Finally, start deep diving into the companies you are interested in, and look at the recent posts on their earnings and their technical deep dives.
Good luck. The education is worth all that work. I myself sat and studied for a year before solidifying an overall investment ststrategy.
long Learning How to DIY