How to get out before a stock price crashes

I am never sure if my posts are appropriate, but I thought this one might be.
I am reading Benjamin Graham’s 1973 edition of the intelligent investor.

He actually talks about Saas like stocks. Companies that are growing fast with a great product.
He advises against them because they become very overvalued.

I can think of two examples of great companies he mentioned.

IBM was a stellar company, but due to its overvaluation, lost 70% of its value, even though it was still a great company.

Texas instruments was the same, only it lost 90% of its value.

Now Saul, and the rest of you, are the best investors I have ever come across. (or at least you have the best performance)

I am thinking that is because you are able to get out, before a stock tumbles.

I was pondering how you do that. I can look at the board, and see if there is any news on the companies. If there is a big drop that day, I can look at the company and see if there is any news.
I could use technical analysis (which I know is a no-no for this board)

Anyway, I am of the belief that companies that go up fast, can also go down fast.

I am curious how you are able to get out, before that happens.

Thanks in advance for any ideas.

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Thanks in advance for any ideas.

Saul treats stocks like casual lovers, not marriage.

Paul Simon gives a clue.

“The problem is all inside your head”, she said to me
The answer is easy if you take it logically
I’d like to help you in your struggle to be free
There must be fifty ways to leave your lover

She said it’s really not my habit to intrude
Furthermore, I hope my meaning won’t be lost or misconstrued
But I’ll repeat myself at the risk of being crude
There must be fifty ways to leave your lover
Fifty ways to leave your lover

Just slip out the back, Jack
Make a new plan, Stan
You don’t need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don’t need to discuss much
Just drop off the key, Lee
And get yourself free

Just slip out the back, Jack
Make a new plan, Stan
You don’t need to be coy, Roy
You just listen to me
Hop on the bus, Gus
You don’t need to discuss much
Just drop off the key, Lee
And get yourself free

She said it grieves me so to see you in such pain
I wish there was something I could do to make you smile again
I said I appreciate that and would you please explain

About the fifty ways
She said why don’t we both just sleep on it tonight
And I believe in the morning you’ll begin to see the light
And then she kissed me and I realized she probably was right
There must be fifty ways to leave your lover

Fifty ways to leave your lover
Just slip out the back, Jack
Make a new plan, Stan
You don’t need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don’t need to discuss much
Just drop off the key, Lee

And get yourself free
You just slip out the back, Jack
Make a new plan, Stan
You don’t need to be coy, Roy
You just listen to me
Hop on the bus, Gus
You don’t need to discuss much
Just drop off the key, Lee
And get yourself free

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This thread is about market timing and song lyrics — both themes are OT on this board.

No more replies to this thread, please.

Benjamin
Assistant Board Manager

3 Likes

I am reading Benjamin Graham’s 1973 edition of the intelligent investor.

He actually talks about Saas like stocks. Companies that are growing fast with a great product.
He advises against them because they become very overvalued.

I can think of two examples of great companies he mentioned.

IBM was a stellar company, but due to its overvaluation, lost 70% of its value, even though it was still a great company.

Texas instruments was the same, only it lost 90% of its value.

Sorry Mark, if you want to understand what we are about you need to read the links on the side panel. IBM and Texas Instruments have nothing to do with SaaS companies. In fact they are the poster child for the kind stocks we try to avoid.

They sold hardware, not software. That means high capital expense. It also means they had much lower gross margins. It means if they sold 100 things this year, to grow 70% next year they had to sell the same 100 things again, plus 70 more (which becomes impossible after a year or so, especially for a big company). They don’t have any subscription sales, or recurring revenue, so no guaranteed revenue next year. They have no dollar based net retention rate. Next year they may sell only 50 of the things, not 100. I could go on and on.

Best,

Saul

42 Likes

Saul,

I have observed that it not “getting out” that is the goal. It is the side effect. The goal is to always be invested in the best companies, not just great companies. This results in quite a bit of portfolio movement.

As such, when companies that are the
leaders, whether they be Union Pacific in the panic of 1870, or Curtis Wright in 1960, or IBM or NTNX, is is not about “getting out” it is about getting better.

“Then she kissed me and I began to see the light.

There must be 50 ways . . .”

Cheers
Qazulight

They don’t have any subscription sales, or recurring revenue, so no guaranteed revenue next year.

Saul, minor distinction but a semi conductor company like TXN does have a large base of recurring revenue cause much of the product lines they sell are priced low enough where there is little competition and they are ubiquitous enough where they have a diversified base so they get recurring orders all the time - as far as CapEx, TXN currently does nearly 7x CapEx in cash flow, and they don’t inflate cash flow with RSUs the way most SaaS related do - but as you note, what they don’t have is an unlimited (or undefined) TAM, and they aren’t growing by 60% a quarter anymore and can have quarterly variations in sales (including sales drops from time to time), etc…

Graham also wrote: “do those things as an analyst that you know you can do well, and only those things” which describes Saul to a T…

just 2c

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HBMartian, a reoccurring order is not the same thing as a subscription. For TXN to sell even the same value of chips this year as last, there needs to continue to be demand for those chips. For it to sell more, the demand has to increase. Moreover, demand for any one chip tends to have a limited lifetime, so one needs to keep developing new, better chips to even keep up to last year’s demand. With SaaS, the customer has your software, but needs to keep paying you to keep using it. So, except for customers going out of business or deciding to switch to new software … typically an expensive proposition for many of the types of companies we discuss here … they have to pay this year at least what they paid you last year. If they are growing or using your software in more departments, then they have to pay you more.

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It was mentioned by a board monitor that your post is about timing, and hence OT. Well, sort of, but I think your post is less about timing and more about a misunderstanding of the investment strategy in high growth companies that meet certain criteria espoused by Saul and put into practice with varying degrees of success by followers of this board. Understanding the methodology and its application I believe to be on topic.

Let me see if can clear up up some misconceptions upon which you have based your observations. First, your examples of IBM and to an even greater extent Texas Instruments are not at all analogous to the primary focus of our investments. Saul pointed this out in his post, so I needn’t elaborate. But the primary take away here is that the focus of investment opportunities that is followed here is no simply “high growth.” It is vitally important to understand this. We have no idea what Mr. Graham may hove thought about when it comes to s/w sold by subscription that becomes deeply embedded in business operations. Maybe as “value” investor he would just consider it another growth stock - but he was no dummy. He may have perceived the unique character of these companies.

Your next misconception is the notion that Saul (and others) are …you are able to get out, before a stock tumbles as if there were some magical sign (read technical analysis) that invariably flashed before the eyes of those trained to see it, allowing them to bail on the investment just before it turned into a disaster. But, if you follow Saul’s investing (he makes it really easy as he reports every month) you will never see any inconsistency in his buying and selling. He bases his decisions on the companies performance as reflected in the quarterly CC coupled with his impression of management enthusiasm, honesty and other intangibles.

Historically, Saul does not get out when the stock peaks. Take Shopify as a recent example, Saul clearly stated (and showed the numbers) that he got out because the rate of growth had been slowing at an increasing rate. He speculated that the stock price was being artificially inflated due the pending marijuana market. There’s no magic, just observation and analysis. From a performance POV, he bailed way early. Saul does not try to time the market. The company’s performance is there for anyone to look at. Saul has the ability to separate the wheat from the chaff. He does not allow the bewildering amount of information available interfere with the obvious.

As for getting burned, a stock that suddenly tumbles without much warning, Saul’s been caught by a few of those (I don’t recall tickers off hand, but I do remember him taking losses). He’s not perfect and he makes mistakes. It’s somewhat uncanny how quickly he recognizes mistakes and how ruthlessly he reacts, but Saul will be the first to tell you that Saul has been wrong. That’s why Saul manages a portfolio rather than individual stocks. And, of course, at times there has been a sudden change of affairs for a company.You can be right, right up to the point in time that you become wrong due to new information. You can’t undo what’s already been done.

The point is that if you know what to look for you will often see indications in the quarterly reports (and sometimes interim reports) of slowing performance. When these indicators appear, Saul most often does not wait for the stock price to collapse before taking action.

The point is, the companies we most often invest in are not simply high growth, that is one of several criteria. Another point is that there is no attempt at market timing. Saul gets out of an investment when there is indication that the performance is slowing. His evaluation approach and method is the same for both buying and selling decisions.

And finally, Saul seems to have an uncanny intuition. I attribute that to his many years of experience.

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They sold hardware, not software.

Actually back when IBM ruled the mainframe computer business, they very much sold subscriptions.
Besides leasing a lot of hardware, even if you bought it they would also would come install it, operate it, do service & maintenance, etc all with recurring revenue. You could also pay them to write the software, maintain it, etc.

This was why they dominated the industry back then…they didn’t “just sell hardware.”

But things are always changing and that model eventually got replaced by people buying cheap PCs and cheap software, etc.

Mike

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Brittlerock, you gave me the answer I was looking for.

Thank you.

They sold hardware, not software. That means high capital expense. … They don’t have any subscription sales, or recurring revenue, so no guaranteed revenue next year.

Actually, in IBM’s case, that is not really true. It was both.
Yes, in the 70s and 80s their revenue was hardware-based - and that hardware came with bundled tightly coupled software - operating systems and databases and communication software options and monitoring software options and high-volume transaction management software options. Once they sold that 370 or i5 or whatever with MVS and JCL and TPNS and Focus and CICS and IMS and DB2 and and and, with the fat maintenance contract, company A wasn’t getting off of it. Talk about your perpetual revenue stream!

By 2000 and the Interwebs they were selling Websphere, which of course was optimized for the new hardware (P530/550/570) for web and application servers, and they had a huge enterprise business doing that. And MQ messaging middleware. But got greedy and overpriced; and hence the rise of Tomcat, JBoss, ISDG, NetDyn, Oracle etc etc etc.

Now I don’t know what they even sell besides services anymore. And services are not sticky. Haven’t followed them for years.

They did better than DEC, which started as a direct competitor of IBM, built a great alternative mini-computer industry and culture and then… sold to Compaq.