As of right now, the “safe” three indexes I usually follow are, year-to-date:
**S&P up 3.1%**
**Russell up 0.3%**
**IJS down 0.1% ("value" stocks, for god's sake)**
They average up 1.1%
Throwing in the Dow at up 2.5% and the Nasdaq at up 8.6%, the five of them average up 2.9%.
Are our “risky” stocks more labile than the indexes? Of course!
Do our “risky” stocks give better results and greater gains, even after this plunge and wash out? Only about 20 times better.
Best,
Saul
Saul,
It’s very nice to have my biases confirmed here 
I mean that in a good way, of course. Because everywhere else I look, all I hear are things index funds being the best investment, the safest, the surest way to riches over the long-run, etc.
I’ve gotten in debates with people who completely misunderstand the bet Warren Buffett had with the hedge funds, and further, completely misunderstand at best, or ignore at worst, the explanation as to why Buffeet won that bet. It’s not at all about index funds being better than LTBH investing in stocks, rather, it’s all about index funds being better/safer ONLY IF you are not willing or able to do a minimal amount of research into the vehicles you’re investing in.
One person insisted that his 20 years of research has “proven” that index funds are the best. Yet, thought I was a genius and should write a book on beating the market because of my claim of averaging a 30% ROI over 10 years, which beats the market by about 3x. And he couldn’t fathom that a) I’m not a genius, and b) all the books explaining how to do what I do have already been written, he just hasn’t read them!
So, cheers to those of us making ridiculous returns in a market which is barely breathing…
–
Paul
Saul, you post so much good sense that when, incongruously, you write what can only be described as a self-indulgent inaccuracy, it should surely be questioned.
The general indexes are a benchmark no professional investor in one single sub-sector would be allowed to get away with. Nor would it be sensible to compare an ‘unconstrained’ fund manager who temporarily did the same thing to the indexes, except perhaps over a much longer period, say 15 years or so.
Instead, in present times, a valid alternative might be to compare your performance to the Less Work; Do Nothing average of the performance of three large cap. companies ADBE, MSFT and CRM.
Up 37% YTD excluding dividends, unlike your irrelevant 2.9% index comparison!
I am unclear why you do not apply the clear logic you apply to everything else to your performance. After all, you invariably beat the LW;DN portfolio average benchmark by a very wide margin, a considerable accolade and easily justifying your own constant work and high turnover.
Risk is the point indeed: the S&P at a TTM PE of, say, 14 might be described as reasonably good value (though it often falls much lower, 8 or so, overshooting to the downside). But that would not necessarily be the case for a selection of companies, concentrated in the same sub-sector, often without earnings, trading on a PS average which has come right down to, say 8 - a point not lost on advisors to widows and orphans - and wisely so.
Here, we invest in a liquidity-driven momentum market offering high return.
The S&P is down from its high 6.5%. DY of nearly 2% continues to be paid. Nothing to see here widows 'n orphans.
Are we off-topic?
Instead, in present times, a valid alternative might be to compare your performance to the Less Work; Do Nothing average of the performance of three large cap. companies ADBE, MSFT and CRM.
All indexes underperform their best components. 
75% of investors underperform the indexes.
Picking ADBE, MSFT and CRM is 20-20 hindsight.
Denny Schlesinger
Are we off-topic?
No, you are just off. Always when the market takes a turn, they came out of the woodwork.
Self indulgent inaccuracy you say. His returns therefore over 20 plus years are so inaccurate a knowledgebase has been produced which it appears you haven’t read or fail to understand.
It’s your post that is inaccurate and quite condescending without justified merit.
Saul gives his all, showing how it can be done and it’s up to us to choose whether to fall it or not. You obviously have difficulty with this. Sad.
How to make sure you never outperform:
How to Really Diversify Your Retirement Portfolio
Your goal as an investor should be to make sure that you own a collection of investments that will not move in tandem. For an asset allocation plan to work, you need to have asset classes that will rise when others are falling. You then have something to sell and can reallocate to a temporarily out-of-favor asset class. That’s the true benefit of diversification.
https://www.thestreet.com/retirement/how-to-really-diversify…
The highlighted part could also be written as “you need to have asset classes that will fall when others are rising.” That is the essence of Modern Portfolio Theory (MPT) - don’t make waves. The above tries to make sure your portfolio never falls far but by the same token it never rises far either. It’s a safety pill that cuts off extremes on the upside and on the downside.
In The Intelligent Investor Ben Graham talks about “The Defensive Investor” and the “Enterprising Investor” and how their strategies should differ. To each his own!
Denny Schlesinger
It’s your post that is inaccurate
It’s accurate to say Saul compares his amazing performance of the past few years* to irrelevant indices.
Which is the same behavior professional fund managers would engage in if they could get away with it.
No, Denny, the LW;DN benchmark is reasonable because it obviously corresponds with the investments and would remain suitable even if the best-performing companies in the S&P at the time came from a different sector or sectors. I am therefore comparing like with like. So, far from hindsight, I predict that if Saul’s preferred investments continued to all be in the same sub-sector, my benchmark would hold true in the future, whatever the top performers in the index. You could use an ETF or active fund but I presently cannot find one which works.
I too am no believer in what Peter Lynch described as ‘diworsification’, nor MPT which is disparaged by every great investor.
Branmin: I am indeed sad, as you kindly note, but only that you did not understand what I was saying. I must try to express myself better. Also, I am not at all sure you can even have read the bits about Saul’s clear logic, good sense and the ‘considerable accolade’ due his outperformance. No worries, we are all short of time.
Saul’s portfolio is composed of smaller companies involved in business data and subscription services. (His brief foray into Nvidia recently can be ignored!) Each company exhibits remarkable growth and potential. However, they are difficult to value and carry the usual risks of competitive ambush and for most, sustaining cash flow without earnings. This is exacerbated by global markets coming slowly out of no less than three kinds of artificial stimuli which lasted the best part of a decade. It is unknown whether the trend is still our friend. They are probably much more risky holdings than the S&P 500 index and the other benchmarks cited are little better.
If my holdings in ADBE and MSFT were not already so large, I would be watching them closely now. The figures for CRM are less enticing for adding more. But I am happy to be in those alone at the moment as my Saas plays. (How I wish it was possible to add to the AWS component of AMZN, which should really also be in the Less Work;Do Nothing portfolio.)
In case this getting off-topic I will wind up here.
The general indexes are a benchmark no professional investor in one single sub-sector would be allowed to get away with. Nor would it be sensible to compare an ‘unconstrained’ fund manager who temporarily did the same thing to the indexes, except perhaps over a much longer period, say 15 years or so.
Instead, in present times, a valid alternative might be to compare your performance to the Less Work; Do Nothing average of the performance of three large cap. companies ADBE, MSFT and CRM.
To me, this is an odd argument. Saul has the entire universe of American stocks that he can purchase. He has decided the right strategy right now is to focus on a subset of those stocks, mostly cloud-related stocks. This was a real strategic decision and had a big impact on Saul’s returns.
So now you want to pretend that that decision doesn’t matter–that all the analysis that led Saul to focus on those stocks should be ignored and not count on the scoreboard.
It makes me wonder… Suppose next year Saul (strangely) decides REITs are the best opportunity. If tech crashes and REITs hold up well, then would you have us say, “Saul’s REITs greatly outperformed ADBE, MSFT, and CRM, so he did great”? Or do we then say, “Oh, he only beat the REIT index by a percentage point, so he was pretty average”?
Your goal as an investor should be to make sure that you own a collection of investments that will not move in tandem. For an asset allocation plan to work, you need to have asset classes that will rise when others are falling.
It all depends on whether you are trying to get rich, in which case “concentrate”, or stay rich, in which case diversify.
Of course by concentrating you can also get poor, and quickly, as any number of Enron, AOL, Lucent, or other issues demonstrate nicely.
To me, this is an odd argument. Saul has the entire universe of American stocks that he can purchase. He has decided the right strategy right now is to focus on a subset of those stocks, mostly cloud-related stocks. This was a real strategic decision and had a big impact on Saul’s returns.
So now you want to pretend that that decision doesn’t matter–that all the analysis that led Saul to focus on those stocks should be ignored and not count on the scoreboard.
It makes me wonder… Suppose next year Saul (strangely) decides REITs are the best opportunity. If tech crashes and REITs hold up well, then would you have us say, “Saul’s REITs greatly outperformed ADBE, MSFT, and CRM, so he did great”? Or do we then say, “Oh, he only beat the REIT index by a percentage point, so he was pretty average”?
Thanks rbgibbons, I’ve tried explaining this over and over again, but some people just don’t want to hear it for their own personal reasons. Here’s the way I explained it in one of my end-of-quarter summaries:
One or two chronic critics on the board have said I shouldn’t compare against the market, but should compare against indexes of Cloud and Internet-based stocks because they are closest to what ours are like. I think that that is fallacious and ridiculous. I compare against The Market, meaning all the companies out there that people invest in. I don’t compare against the stocks that are already in my portfolio … …or against stocks that are just like the stocks that are in my portfolio, which amounts to the same thing, and which is what these critics are saying I should do. What would be the sense of that? You can only know to compare against indexes of stocks like mine when you already know what I’ve already invested in, and know how well they have done, and then look backward to figure out some index close to my stocks. What nonsense!
Consider an anonymous investor who figured out that stocks in a particular industry are going to boom (natural gas, or copper mining, or commercial real estate, etc…let’s say natural gas). This decision wasn’t obvious, but he figured it out, and he changed his portfolio and bought the best ten natural gas stocks he could find, and sure enough, natural gas booms and his stocks beat the overall market by a mile, and then some wiseguy comes along and says “Oh! That wasn’t so smart. You shouldn’t compare against the Market. You should compare against an index of natural gas stocks, etc.” Of course this critic hadn’t figured it out, and didn’t invest in any natural gas stocks or any index of natural gas stocks, so an impartial observer might conclude that he was just jealous, but who knows?
I’ve been comparing against the S&P (“The Market”) since I started this board in Jan 2014, over four and a half years ago, years before I ever invested in a stable of SaaS related stocks. I’ve compared against The Market irrespective of what my stocks have been. They’ve included companies in fields as varied as banking, biotech, real estate, a gas station and general store chain, a 3-D printing company, medical device firms, some solar companies, an electric car company, etc, etc. My goal will always be to support my family, and it’s not to beat some index made up of a collection of stocks that’s almost the same as the ones I happen to be in at the moment. That is just so silly as to be laughable.
To simply restate my goals, I’m trying to measure my performance against that of the “average return for an investor in the stock market,” not the return of someone who is smart enough to invest in the same stocks I’m in, or the same “kind” of stocks I’m in. It’s as simple as that. I never guarantee to be in the best stocks in my category. I’ve always said there will always be stocks that will do better than mine (or yours). I just want to make a good rate of profit, and a better one than the market as a whole is producing. I never expected to triple my money in two years. It just happened. 
So rb, I appreciate you explaining it again.
Best,
Saul
To me the “appropriateness/ inappropriateness” of his chosen benchmarks depends on what he is trying to show. His chosen benchmarks are ones commonly used. In fact TMF on occasion will mention that their chosen benchmark used is perhaps not the best one but is a common one as opposed to something more obscure. You mention that no professional investor in a single sector market could get away with that and I agree. But in that case the professional investor has had his sandbox that he is playing in chosen for him. He is thus constrained. He may feel that his sector is the wrong place to be invested but invested he must be. If Saul’s claim was that within the SAAS environment he was a great stock picker I too would cry foul if he used his current benchmarks. But to me he is saying I can pick and do much better than the indicies and here is the proof. He has not (warning I have not read every post he has written so I may be wrong) that his choices, timing and weighting is better than any other, just that it is better than if he had invested in well known benchmarks. If he or someone else’s wishes to tackle a better mix than so be it. Your LW;DN approach could be the more appropriate option for someone who values LW;DN investing. But I fail to see why that has to be “The Benchmark” or be branded with an SI on the forehead to warn others of Self Indulgent person is writing.
Dave
The idea to compare your returns against some index stems from “let me see if it makes sense for me to spend all the time researching a stock”. Usually, one says if I don’t want to spend my time researching some stock, I’ll put the money in an index usually S&P 500 or Nasdaq. No one ever decides to not research and put the money in a REIT or Cloud Index. Usually, they’re too volatile and require extra attention. The market index, however, is not as volatile.
If you’re a subscriber to any of the fool services, you’ll see that they compare all their services to S&P 500 even though their universe is very different. When Income Investor and Inside Value existed, fool didn’t compare these to a dividend and value index. They appropriately compared it to “market” index because they posited that you’re better off investing in the stocks these services pick than the “market” index. Saul is going one step ahead and comparing it to other additional indexes like Nasdaq and maybe Russell 3k? It’s for him to decide which index he compares his performance against. He is saying I spent X number of hours researching my picks. Does it make sense for me to keep doing that or should I instead put all my money in some index? It’s not for any of us to decide for him which index he should put his money in.
Why is it that Saul has to use any other benchmark that people who actually CHARGE YOU FOR ADVICE use to justify their existence!
Saul is here gratuitously. Saul has not always been invested in a SHOP or an Alteryx, etc, because frankly they did not exist (except for Salesforce for the most part) until 2016 and the rise of the cloud.
The choice alone to invest how he decided to NOW invest is brilliant. 99% of the public (and professionals) were behind Saul. But Saul must have a higher hurdle?
Instead of judging Saul, why don’t you use this board for what it is, to discuss growth stocks, whatever form they may take now and in the future. Because frankly 5 years from now they are not likely to be the same thing as they are now.
Ridiculous.
Tinker
I may regret wading in here, but here goes. Please note the following is nuanced.
First, as Saul and rbgibbons rightly point out, the standard comparisons are the standard comparisons, and should remain so. (I’ll just parenthetically point out that you need to included dividends to be fair, especially with the S&P 500.)
But, strelna’s idea of a “Less Work” portfolio, while certainly not a more appropriate standard of measurement, is intriguing as a worthy alternative to Saul’s approach for some people, and in my view worth resurrecting from the corpse of his misguided attempt to change the standard.
I think it parallels what Cramer recently talked about in his discussion of “Cloud Princes” for the riskier part of one’s portfolio (I posted about that a few weeks ago), at the same time he recommended the “Cloud Kings” as a part of most portfolios. As strelna points out, they’re Kings for a reason - they’ve done really well, and probably will continue to do at least reasonably well, and for the same reasons that the Cloud Princes (including many current Saul stocks) which are the reasons Saul is invested in them. Software has high margins, and delivery “aaS” (as a Service) involves recurring revenue and high switching costs.
I don’t really think Adobe’s Creative Cloud is significantly more popular than it was 10 years ago - it’s just that instead of buying version 3 and using it for 5 years before upgrading, customers are now literally paying a fee every month to use it. This also greatly reduces the copy fraud that was rampant for self-contained software as well. Similarly, Microsoft reinvented its Office business as Office 365, built on top of Azure, and it’s also now generating recurring revenue instead of individual versions every 18 months or so for sale (and often a version skipped). Office 365 also drives business to other Azure-based offerings from Microsoft. And Salesforce, well they didn’t invent CRM as a Service, but they Henry Forded it into popularity and success.
So, there’s something to be said for some people - not the ones frequenting this board, mind you - to invest in the Cloud Kings, heck the Cloud Titans, and then not to worry. Saul moves in and out of stocks as their performance changes and their future outlook changes. That’s not a style suitable for everyone. These are smaller companies and so they’re inherently less stable and what works for several months may not work over half a decade or longer. Look at HDP, now “merging” with Cloudera.
So, my take on stelna’s point is that people who aren’t prepared to analyze weekly and trade monthly may be better suited with a selection of more stable companies that have the same type of “aaS” attributes as those stocks frequently mentioned on this board.
So, my take on stelna’s point is that people who aren’t prepared to analyze weekly and trade monthly may be better suited with a selection of more stable companies that have the same type of “aaS” attributes as those stocks frequently mentioned on this board.
Agree with this statement. However I believe Strelna knows that this board and Saul and others have made it very clear, is not for discussing stable companies of the likes of MSFT, or similar… we are trying to find in the early stages the Microsoft’s of tomorrow. I just can’t understand why it’s so difficult to understand but get p$ssed when always we receive what some posters may perceive to them as constructive advice only when the market has a few bad days.
Many here have Aapl… stable enough? We are looking for the next Peach. Don’t need stability, we understand the risks.
So, my take on stelna’s point is that people who aren’t prepared to analyze weekly and trade monthly may be better suited with a selection of more stable companies that have the same type of “aaS” attributes as those stocks frequently mentioned on this board.
Probably true. Doubt Saul would argue with it.
Can we please end this thread? It adds nothing and is argumentative for argument’s sake.
Bear
Oh I agree, let’s end the thread. However, as the catalyst for the discussion, I do feel forced to respond one last time, though I said I would not, in order vigorously to rebut various flagrant breaches of the board rules, not least by our host himself, who chose to describe what I think is simple logic as ‘ridiculous’, ‘nonsense’, ‘so silly as to be laughable’ and even darkly suggests that I may have ulterior motives of my own or be ‘just jealous, who knows?’ etc.
rbgibbons: the answer to your question is: clearly the latter if his pf was concentrated in REITs alone and had been for the relatively short period referred to for index comparison (e.g. YTD).
My point here is that Saul’s results can legitimately be compared to the S&P500 index, but only over a much longer investment timescale, say 15-20 years. But that is not relevant to this discussion which assumes the S&P500 is a valid comparator over much shorter periods.
Why? Clearly the question comes down to risk. For the period in question (the month, the quarter, YTD, TTM or however long the portfolio is concentrated in a definable way, the chosen benchmarks are so much less risky than the sub-sector as to be invalid. They are an indulgence. They make you feel even better. They flatter your skill. All that is harmless fun and I don’t object unless they are formalized and taken seriously, which they seem to be.
Clearly you would think twice about suggesting to ‘just about managing’ retirees (or other groups) that they would be equally safe having a portfolio exclusively in a few smallcap subscription software companies, mostly without earnings and competing in an intensively competitive space as a general market index fund, carefully bought at market lows over time (I recently posted something on the BRK-A board about this.) And that is the point I make.
Now I really must wind up by saying something quite important. To adduce from my small criticism that I have ‘come out of the woodwork’ as one cheerful poster had it in order to disparage our host, so generous in his time, so open about his methods and indeed from whom I have profited, frequently expressing my gratitude, is ridiculous, nonsense and so silly as to be laughable.
In some cases, two slightly vicious in tone, it was a completely deliberate attempt to misread my post. That is a well-known human response (protection of the guru or soothsayer from time immemorial), but nevertheless a regrettable one.
Strelna - I don’t post often and have been on this board since the early days after being invited by Saul. The issue here is that you, every month, post this type of response to Saul’s approach. You also have similiar comments on other boards (Berkshire as example).
October post - this thread.
September post: (aka ‘the chronics’!) who think Saul’s results are stupendous but his chosen market indexes to compare his results against the strangest of quirky indulgences, here is a better and surely more rational one. Using the average of the performance of two market behemoths in the Saas space, Adobe and Saleforce, to represent a ‘No Work, Less Risk’ (NWLR) benchmark for the Saas space would obviously be a much better comparator.
August post (this one you go after Bear): "The reason for a benchmark is simply to find out if the hard work, time reading posts and gasping at the risk is worth it. If you had simply held a basket of MSFT, ADBE and CRM instead, you would be up 31%. So you are doing very well and trouncing the basket. The basket is representative and a reasonable benchmark. The S&P is not.
July Post:Saul, I continue to be as grateful for this board as I am unpersuaded by the explanation for your indulgent choice of comparators! A ‘very representative set of standards’? The S&P etc? (I especially like ‘small cap value’ for a group of investments on PS averaging something in the stratosphere!). And it’s unnecessary for you to do so. Let’s assume your benchmark is Salesforce (CRM).
June: Saul, I am always amused that you compare your concentrated bets in Saas with the general market indexes and then ask innocently and in bold ‘What bull market?’. The question rather obviously answers itself: the bull market is in Saas! You don’t need me to tell you that, it’s no accident you are where the bull market is. The suggestion implied, that everyone could be doing this and widows and orphans are disadvantaging themselves pointlessly, is not applicable. Your comparators could be, say, FDN, PNQI and let’s include a single company, CRM. Now that’s realistic and genuinely shows how splendidly you are doing YTD. In time, there will be better comparisons - rather surprising there are not.
May:Saul, your performance is outstanding. But you are a very rare kind of investor. Your speedboat surfs around the small atolls of the Saas Subsector Sea at high speed yet the draft is deep enough to cruise easily to another place if you need to, like its former port of origin, Old Pegland Harbour. Which is why comparing your current portfolio with an ordinary index is also irrelevant - and much too easy.
Feb: On a very minor matter, I do indeed ask “Why these three indexes?”! I always find it baffling that you track your result against 3 completely irrelevant benchmarks. No sector fund manager would (or could) do this. It may not be perfect, but the First Trust DJ Internet ETF (FDN) might do as a rough (but certainly better) guide to performance (especially now LGIH has gone). I expect there is a better index or ETF.
Nov 2017 - here you compare your results to an Index: Despite a continual cash position of 18-29% throughout, I have nevertheless soundly beaten the madly-aggressive S&P 500 index, supercharged on liquidity, over the last year. Currency played a part.
Nov 2017: Saul, I feel I must answer two points you raise! First, your index comparators are broad, while your portfolio, a preferred sector or usually even sub-sector, is narrow. A SaaS ETF in addition to the others(you could add, say DHI to represent the outlier) would be much more relevant. You are comparing the results of a big mixed farm to an intensive broiler shed. ‘Does anyone still doubt…?’. Well yes, over a suitably long investment timescale. Certainly an investor contemplating mutual funds in the past would have been well advised to doubt! Hence the success of Vanguard and the proliferation of ETFs. Not a single fund manager was left standing after, say, 20 years. "Active will do much better in the next few years. Buffett plays bridge and he chose the right moment to place his bet. But which would I invest in for the next 25 years, SAULX (an admired Morningstar gold 5-star fund with an immortal manager) or 9 ETFs of my choice? My admiration for your prowess is enormous and undimmed but I’d take the ETFs!
There’s more but my ask is this:
Sox
Well done Redsox, this now truly ends this thread.