Great Companies Always Recover

Investment Analysis Clubs Saul’s Investing Discussions
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I’m sure many investors who started earlier this year are feeling pretty down right now. I first started investing in SaaS companies in summer 2019 after a huge multi-year run. As I’m sure many of you remember, a couple weeks later we entered the significant Q4 correction and my stocks kept crashing even after great ERs.

It got to the point where I remember CrowdStrike’s CEO going on CNBC and when asked about his crashing stock price said: “I think Buffett said it best — if somebody bought a stock would they be happy owning it 5 years later if the stock market shut down.” https://ca.finance.yahoo.com/news/crowd-strikes-gives-perfec…. And CrowdStrike may be very strong today but during this time, it seemed like it consistently underperformed the rest of the cohort!

I felt like an idiot for buying in at the top, but I believed in my companies and bought the dip. What was supposed to be a 5-10% correction soon turned into 20%, 30%, even 50% crashes. I made another mistake of buying too much, too quickly so I had to sit through it all. It was especially painful because I had no cushion of gains to fall back on, I was losing all my money. Worse yet, the stocks that I had sold to fund the purchases kept going up!

I first bought Livongo in early Sept at $30 and just a month later, it was at $15 on no news! This was really a formative period for me as an investor. It taught me the importance of discipline. Investing is hard. It’s one thing to say it, but you really have to experience it. If a stock drops 20% right after I bought it, would I be tempted to sell? Or excited to add more?

In hindsight, I felt like I had just invested at the top of a bubble as earnings didn’t matter. Bears came out of the woodwork and said they warned us valuations weren’t sustainable. Remember this article? https://www.barrons.com/articles/soaring-software-stocks-sho…

Sell-side cut their PTs, citing multiple compression of comparables. I still can’t pinpoint a reason for it all. But I stuck with my convictions and continued to add, hoping to wait it out. It wasn’t until 4 months later at the end of December that these companies started to get momentum again.

What seemed so painful turned out to be a gift. CRWD at $50? ZM at $65? LVGO at $15? While multiples are much higher today, great companies always come back eventually. Although there was a bubble in some spec stocks, I don’t think the high-quality hypergrowth cohort was. We had multiple years worth of gains in 2020 and they need time to digest it all.

The fact is that few investors can handle the volatility required for high returns. Stocks that can go up 100% in a month can go down 50% just the same. Picking the right stocks is just half the game, what’s even more important and difficult is developing the right mindset.

I wanted to share that because I think a lot of investors need to hear this right now after what’s been a tough couple months. And what really helped me through that period was being a part of a community like this so appreciate you all.

Richard

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Richard,
I am so very grateful for your post. I started investing in January (other than index funds) and when the prices started to go down just a bit in February I bought and kept adding more, at what has now turned out to be the high for these stocks. I have lost half my money on several, including Fastly. I bought it because it was a Fool rec and by the time I discovered Saul’s board and read that you all were selling it it was already down more than 30%…so I held on.
Tonight I felt ready to give up, regretting I didn’t sell Cloudfare when I almost broke even last week. I got into this in the hopes of beating the S&P, have spent dozens of hours a week reading and learning, and would have been much better off staying in the index funds and doing something else. It has been a lot of fun learning about these businesses, but I am feeling so discouraged, I thought we were on a rebound! Anyway- your post is just what I needed and I really appreciate it. I will hang in there.
Thank-you.
Pauline
PS. I still haven’t found an ideal way to track my returns- do you have any suggestions? How do you do it?

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I apologize for my OT post- I didn’t mean to post it to the board. I thought I had checked off the box to send a reply to the author only. It’s been a long few days.

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The fact is that few investors can handle the volatility required for high returns. Stocks that can go up 100% in a month can go down 50% just the same. Picking the right stocks is just half the game, what’s even more important and difficult is developing the right mindset.
I would just ad that time matters. If you invested a few years ago, your whole portfolio would be very green, so if to see red on ZI and USPT that you bought recently, it isn’t so concerning. They would only be a small percent of a much larger green portfolio.

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I know that this entire thread is OT, but I have to say that this is one of the most important posts I have ever read here. While stock picking is the primary driver of returns in Saul-land, those returns don’t develop without CONVICTION, PATIENCE and CONTROL of ones emotions.

Great reminder Richard, thank you. Important to hear reinforced in times like these.

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it is interesting how the narrative follows Stock prices up and down. The same metrics that nobody seems to care about (P/S, Debt,Cash, TAM penetration…) when the stock goes up, now bother folks when the stock goes down, presumably because they now take a closer look here!

I can say from my own experience that investing in (high)-growth is not easy. Of course these are volatile and bring opportunities but you also need to have an good and fast exit strategy in case the story changes quickly. And it does when QvQ suddenly is not +10% anymore but -10% and thus the peak in growth (law of large numbers and so on…) is reached. This kind of shares will then be punished mercilessly and it can take many years until you get to old or even new highs…

See AYX, ABMD (have been a bagholder for 4 years), FSTLY and so on. All stocks that many here (even Saul) had in their portfolio…

High-growth investing is not easy so I always have the usual lame ducks in the portfolio next to these. If you buy P/S 75 or more you have to expect that it will take 5-10 years until you see a new ATH. The current market situation regarding High-Growth values honestly does not look good. Hope in a few weeks / months this is over. In meantime my lame ducks (MSFT,GOOGL, APPL and so on are up the last weeks…)

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This kind of shares will then be punished mercilessly and it can take many years until you get to old or even new highs… High-growth investing is not easy… If you buy P/S 75 or more you have to expect that it will take 5-10 years until you see a new ATH. The current market situation regarding High-Growth values honestly does not look good.

Do you remember in the fall of 2019 when guys showed up on the board to tell us that our stocks would NEVER see the highs of August 2019 again? Then at the end of 2020 we weren’t seeing old highs, many of us had actually tripled the value of our entire portfolios in 2020!

Well we just got another of those predictions (see above). I wonder if that means that the sector rotation is close to being over. :grinning:

Saul

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Hi Digized,

Thank you for your post - it really helps.

As I’ve stated in a previous, similar post, I started back in November and heavily bought in Feb. Not sitting on any of these 2020 crazy gains, it is very hard to keep at it. Of course, a lot of it is just sitting your hands and doing nothing when everybody freaks out. That part is hard.

But the hardest part at least for me, is to accept the need to rebalance and sell-out positions at a 30/40% loss, taking out large sums of money from initial investment. On top of it, media and posts (even on this board sometimes) are now turning to dramatic/overexcited titles that look a bit like clickbait.
For me, it is not helping.

What helps are constructive discussions; what is the company doing, what are our experts doing in reaction. Post that encourage others and newbies like yours are really, really helpful. I knew it was going to be a bumpy ride, but that is one challenging start!

Thanks again,
Ys

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I’m sure many investors who started earlier this year are feeling pretty down right now… The fact is that few investors can handle the volatility required for high returns. Stocks that can go up 100% in a month can go down 50% just the same. Picking the right stocks is just half the game, what’s even more important and difficult is developing the right mindset.

I wanted to share that because I think a lot of investors need to hear this right now after what’s been a tough couple months. And what really helped me through that period was being a part of a community like this so appreciate you all.

I think the reason people get scared is that down days register more than up days in your emotions, and they get the feeling that their stocks are just going down and down. But I actually hit my low for the year on FEBRUARY 9th, at 83% (down 17%). I hit a second slightly higher bottom on MARCH 29, at 84.3%, and right now (TODAY, mid-day), it’s a triple bottom at roughly 85.5%. It’s not going down and down and down, it’s trading in a range of +5% at my little tops, and about down 15% at my lows. This too will pass.
Saul

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Hi Richard, I wish you the very best of luck in your investing journey.

The first problem is, nobody knows which Great companies will stay ‘great’ companies. I agree that if you had a crystal ball you could just buy them and go away for 5 years and never look. The list of formerly ‘great’ companies is almost endless - Sears, Xerox, Kodak, any list of tech firms that used to be #1 and didn’t make it like Yahoo, etc.

The second one is valuation. Even MSFT, a truly, truly great company that is one of the 5 most valuable firms in the world went from $60 in 2000 to $16 in 2009 because the tech valuations had become completely absurd. It’s up 15x since then but nobody knew that would happen, obviously. That’s an approx 7.77% return since 2000, would you be happy with that outcome from a Great Company?

Apple fell 80% in a decade due to mis-steps which can and will happen to any firm/mgmt eventually. Hard to stomach those losses over that timeframe.
Cisco, a firm that had decades of greatness [maybe still is?] and is still worth $222bn peaked at $80 in 2000 and is still only $52. If you waited after the bubble and bought it 14 years ago it’s only doubled since then after getting cut in half first.

BlackBerry dominated their markets for years and had truly astounding growth, had all the browsing, email, web capabilities the iPhone had 5 years before the iPhone even came out, on a secure platform no less, but missed the turn in consumer preferences.

If you pay a truly bad price for a great company, you can’t expect time to simply bail you out ‘eventually.’ Many stocks that get cut in half have never come back to their highs again.

As many others have said: “Hope is not a strategy.”

Picking the right stocks is just half the game, what’s even more important and difficult is developing the right mindset.

You couldn’t be more right about that!

Best,
Naj

Long CRWD, AVLR, ADBE, MSFT, FB, AMZN, MTCH, SHOP, NFLX, et al.

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The first problem is, nobody knows which Great companies will stay ‘great’ companies. I agree that if you had a crystal ball you could just buy them and go away for 5 years and never look. The list of formerly ‘great’ companies is almost endless - Sears, Xerox, Kodak, any list of tech firms that used to be #1 and didn’t make it like Yahoo, etc.

The second one is valuation. Even MSFT, a truly, truly great company that is one of the 5 most valuable firms in the world went from $60 in 2000 to $16 in 2009 because the tech valuations had become completely absurd. It’s up 15x since then but nobody knew that would happen, obviously. That’s an approx 7.77% return since 2000, would you be happy with that outcome from a Great Company?

Good points.
I forget the exact stats, but something like only 60 of the Fortune 500 companies in 1955 were still on that list in 2017. Then in 2020, an article stated that 50% of the Fortune 500 companies in 2000 were no longer even in business by 2020.

My take on Saul’s strategy is overly simplified to: invest in top growth companies at any moment in time, allowing for growth and company health to be measured by multiple quantitative factors such as revenue, profit, GM, FCF, debt (or lack of), and then supplemented with more qualitative factors like TAM, Moat, CEO/Founder leadership in PRs and ER/CCs.

But I think a point often overlooked is that Saul doesn’t do LTBH. The intention may always be there initially, but because hyper-growth is hard to maintain for multiple years, often he has moved on from a company to another that has better near-term growth prospects.

Saul - end of May 2018
Nutanix 14.3%
Shopify 14.0%
Alteryx 14.0%
Twilio 13.3%
Square 11.4%
Okta 8.6%
Nektar 7.9%
Pivotal 6.7%
Pure 4.0%
MongoDB 3.7%
Arista 1.0%

Saul - end of May 2019
Twilio 19.7%
Zscaler 19.1%
Alteryx 16.0%
Okta 12.5%
Mongo 10.3%
The Trade Desk 10.2%
Smartsheets 5.8%
Square 3.0%
Zoom 3.0%

Saul - end of June 2020
Zoom 22.9%
Datadog 21.8%
Crowdstrike 19.8%
Okta 11.5%
Fastly 10.4%
Alteryx 9.9%
Coupa 2.1%

Saul - end of 2020:
Crowdstrike 34.0%
Cloudflare 21.7%
Datadog 19.2%
Snowflake 8.0%
Docusign 7.5%
Okta 5.1%
Zoom 3.6%

Saul - end of April
Crowdstrike 24.9%
Cloudflare 19.2%
Datadog 16.0%
Snowflake 13.2%
Inari 11.4%
Upstart 9.6%
ZoomInfo 6.9%

In the past 4 years at least, it appears AYX was the longest hold, and ZM, TWLO, and currently DDOG/CRWD have been around for a bit. But hardly any make it to 3 years.

This is not a knock, but rather an awareness that his method takes a certain amount of time and attention that not all investors either can and/or are willing to put into managing their ports.

I think 2020 was a one-off, and am more impressed with Saul’s ability to rebalance his port on an ongoing basis and netting great returns year after year. I don’t always agree on the timing or the valuations, but then again my results aren’t as good as his since 2016 either.

No idea if the current drawdowns are over, but I started nibbling at some of the growth companies yesterday and today, such as ZM, DDOG, ROKU, UPST, and ZI. Personally I am not ready to commit all my cash, but that is just me.

I do have my watchlist, and all of Saul’s companies are on there, because they are all great companies, whether I like the stock prices at the moment or not.

I think his exits are generally great timing, such as walking away from ANET (nothing in 3 years), NTNX, PVTL, PSTG, FSLY, and AYX, etc…

Doom

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Correction:

I think the reason people get scared is that down days register more than up days in your emotions and they get the feeling that the stocks are just going down and down. But I actually hit my low on MARCH 8th, at 83% (down 17%). I hit a second slightly higher bottom on MARCH 29, at 84.3%, and right now (TODAY), it’s a triple bottom at roughly 85.5%. It’s not going down and down and down, it’s trading in a range of +5% at my little tops, and about down 15% at my lows. This too will pass.
Saul

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To help me keep perspective, I have a Google spreadsheet that analyses the full price history (since IPO) for a number of shares. There is obviously a survivorship bias here, but if you have faith in the company, but get nervous about the share price swings, this sort of analysis helps.

Take Adobe as an example, because it has lots of history.

It IPO’d in August 1986 and has returned 25% CAGR since then. $1,000 → $2,221,500
It has fallen by more than 15% on 27 occasions
Its worst drawdown started on Nov 6th 2000. It fell 80% and took 2,206 days to reach a new top
This is currently the 18th most severe drawdown. At the recent low it had fallen 21% from the prior top, 247 days ago
It has recovered but is currently still 8% off that last top

Cloudflare (for example) has a much shorter history (1.6 years public) but is in its worst of 6 >15% drawdowns. 87 days in and 34% off at the bottom. Its CAGR since IPO is 126%.

History suggests that this will pass …

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