How to handle success?

Investment Analysis Clubs Saul’s Investing Discussions
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I need some advice. I believe I know the answer, but I am looking for some feedback from those with more experience than myself.

I find I have been unnecessarily timid in many of my picks, choosing a smaller amount than I could have. No regrets as I chose to keep those positions small in order to limit the risk of my own ignorance. But I find now that I am uncertain how to handle some of my picks that have had the best performance.

For example, AMZN, ANET, and SHOP. Since my initial purchase:


        %GAIN   %Portfolio
     ========   ==========
ANET  +75.74%      2.2%
AMZN  +58.30%      3.9%
SHOP +142.34%      6.8%

Reviewing my portfolio now, I wouldn’t mind owning more of these stocks. However, my buying strategy so far has been primarily based around identifying entry points where the stock price is far below any reasonable fair value. I don’t see any of these three as being anywhere near as undervalued as when I made my initial purchase, however I still see room for growth. How much? No clue.

Adding to an already wildly successful investment is new territory to me. Do I let my position sit and enjoy its growth? Do I add more at what seems an absurdly high price compared to my initial investment? My instinct is that the later is the right choice, though especially for SHOP it seems odd to be purchasing after the stock price has already risen so far!

I can, of course, just put my money elsewhere. I am looking at UBNT, HUBS and SQ right now. And maybe SPLK. All good possibilities (and I am invested in all except SQ), but I don’t want to ignore the possibilities of these other great companies when I feel they are a needlessly small portion of my portfolio.

Any thoughts?

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I find I have been unnecessarily timid in many of my picks, choosing a smaller amount than I could have. No regrets as I chose to keep those positions small in order to limit the risk of my own ignorance. But I find now that I am uncertain how to handle some of my picks that have had the best performance.

For example, AMZN, ANET, and SHOP. Since my initial purchase:

%GAIN %Portfolio
======== ==========
ANET +75.74% 2.2%
AMZN +58.30% 3.9%
SHOP +142.34% 6.8%

Reviewing my portfolio now, I wouldn’t mind owning more of these stocks. However, my buying strategy so far has been primarily based around identifying entry points where the stock price is far below any reasonable fair value. I don’t see any of these three as being anywhere near as undervalued as when I made my initial purchase, however I still see room for growth. How much? No clue.

Adding to an already wildly successful investment is new territory to me. Do I let my position sit and enjoy its growth? Do I add more at what seems an absurdly high price compared to my initial investment? My instinct is that the later is the right choice, though especially for SHOP it seems odd to be purchasing after the stock price has already risen so far! I can, of course, just put my money elsewhere.

Hi Othalan, Great questions. I think you can learn from your past choices even if it’s too late to change them now.

It looks to me as if you put too little in your high conviction stocks (if they were high conviction when you bought them). It looks as if you only started with 1% to 2% in each, which leaves you now feeling remorse. That probably means you have too many positions total if you average less than 2% per position (perhaps 40 to 50 positions), and it might make sense to have fewer eggs in your basket, but pick what you think are the best eggs, and watch them carefully.

As for adding now, I just added a little to my Amazon position, but whether you feel comfortable doing that is your decision. One thing which might help you is to imagine they had a 10 for 1 split and that you have 10 times as many shares, but at $92.50, up from $89.50. That way you don’t get scared away by the big numbers (Wow, it rose $30 from $895 to $925. It’s the same thing of course). I can see Shopify and Arista continuing to go up, but either or both could take a temporary tumble. If you wanted to add 2% to your Arista position, for instance, you might just add a half percent at a time on the same day of the month, over four months. That way if there is a pull back, you won’t be kicking yourself overly, and if it goes up you’ll have a little more skin in the game.

Hope that helps

Saul

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I find I have been unnecessarily timid in many of my picks, choosing a smaller amount than I could have. No regrets as I chose to keep those positions small in order to limit the risk of my own ignorance. But I find now that I am uncertain how to handle some of my picks that have had the best performance.

For example, AMZN, ANET, and SHOP.

While Saul’s points are great, I happened to save your review from the beginning of the year, Othalan: http://discussion.fool.com/year-end-self-review-32537556.aspx

I noticed it’s not that you had a zillion tiny positions, but that you had some very large positions, maybe 4-5 that made up half your portfolio. You only had 20 or so positions. But the largest I recognized were LGIH, SWKS, and SKX. Note: this was at the end of 2016, not 2015. What was interesting about that to me is, SWKS and SKX were the top positions of Saul’s holdings at the end of 2015: twelve months earlier. And he had sold out of both. Just thought that was interesting. Obviously to do what Saul does, you have to be very nimble. But this is just something I note in passing. My real point is:

At the beginning of January, LGIH and SWKS added up to about 30% of your portfolio. Avg of 15%. SHOP, AMZN, and ANET added up to about 9%. Avg of 3%. 15 / 3 = 5. Were you really, less than four months ago, FIVE times more confident in LGIH and SWKS than in AMZN, or SHOP, or even ANET? I suspect not.

I would suggest one of two things:

  1. Do what I do, and try to constantly (I do it almost daily but weekly seems more reasonable for most people) consider the balance of your portfolio. If you sold everything and had to buy afresh, would you buy it right back in the same amounts?

or

  1. Don’t have such extreme differences between position sizes. (Come to think of it, I’ve also been doing this, lately. Because honestly right now I see a lot of good investments, but none are extremely cheap.)

I think like me you see valuation quite a bit. That’s the only reason I could imagine you are more confident in LGIH than SHOP. Sure, LGIH is orders of magnitude “cheaper,” but look at what they’re dealing with: LGIH has a cyclical market to navigate. SHOP is playing on the mega trend of ecommerce which is supposed to double by 2020 or something! LGIH has to worry more about costs, policies like interest rates, consumer buying patterns, etc, etc, etc. They also haven’t ever grown at 100% revenue growth (in other words, they’re human, like 99.9999% of other businesses).

I guess all I’m saying is there’s more to this art than price/value. Potential is also a valuable lever. Make sure not to just put more of your allocation into the cheaper stuff in your portfolio just because it is cheaper. That’s something it’s taken me most of my life to learn, and even in the last year or two of being increasingly enveloped in investing, it’s still difficult. And I’m not saying ignore price or value. Just be more holistic.

I hope that helps a bit. That’s what I’ve learned, so that’s what I can offer.

Bear

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As for adding now, I just added a little to my Amazon position, but whether you feel comfortable doing that is your decision. One thing which might help you is to imagine they had a 10 for 1 split and that you have 10 times as many shares, but at $92.50, up from $89.50. That way you don’t get scared away by the big numbers

I love this board - I am a risk averse investor “nearish” retirement and agonize about every detail to the point where I don’t often get rewarded for my best picks (PCLN in Jan 2016)…but…

a different way to view this is ignore that meaningless stock price - use the actual market value
if amzn has 490 shares and the price is $900, the valuation the stock is…441 billion. If the stock goes up 20% from this point, it needs to add another 80 billion in market value. That is the way to look at it, and it also reveals the challenges involved. You could look at every business you own this way. Don’t get caught on how much you make - analyze it entirely on how much earnings - eventually - a company will have to produce to warrant this sort of price.

Course, the problem with doing this is it will put the ‘FEAR’ into you sometimes and you’ll watch stocks you pass on go from $20 to $120, but…

–

enough from me this week here…

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Saul, Bear and OneEyeBirdRtns, all great points and you have given me some wonderful new directions to think about. Here are a few thoughts based on what you have said (as much for myself to think on as for a reply to all you said).

Saul: It looks to me as if you put too little in your high conviction stocks (if they were high conviction when you bought them). It looks as if you only started with 1% to 2% in each, which leaves you now feeling remorse.

Remorse. I had to think about that a long time and eventually I decided that while I do have some remorse, I have no regrets and I would have made the exact same decision again. I kept my investments low in many stocks as a way to mitigate risk. I am delighted at how that risk management turned out even if I am not so thrilled at the precise allocation of my stocks in hindsight.

Consider: I began seriously managing my own investments in January 2016. I made some big mistakes in that time, but I also have performance I am so far very satisfied with:


**2016** : + 9.8%
**2017 YTD**: +19.2%

Remorse. Definitely. But as I consider it more, that is ridiculous! I made my best decision I could at the time and it is time to move forward, not dwell in the past. Thank you for getting me thinking on this!

I had targeted 3% - 4% initial investment size, but ANET started at half that (1.5%) and I never purchased more. SHOP I added more at a later date. But … yes, my initial investment I now realize was too small for those stocks. Today I would choose 5% minimum as a starting point for those stocks.

Bear: At the beginning of January, LGIH and SWKS added up to about 30% of your portfolio. Avg of 15%. SHOP, AMZN, and ANET added up to about 9%. Avg of 3%. 15 / 3 = 5. Were you really, less than four months ago, FIVE times more confident in LGIH and SWKS than in AMZN, or SHOP, or even ANET? I suspect not.

Again, this got me thinking … and checking my notes.

AMZN:
Chosen specifically to add stability to my portfolio. (along with BRK.B) Confidence in performance had less to do with my choice than confidence in a a relatively stable stock I could potentially use as a source of funds for an opportunistic purchase.

ANET:
I was very uncertain about the company initially. No conviction at all.

SHOP:
I was confident but skeptical of my own conclusions. Inexperience talking there. So I erred on the side of overly cautious.

Compared to LGIH & SWKS:

SWKS:
Very confident initially. Performance so far is a bit better than I expected (+47.6%) but even with the run-up in price lately I remain confident in the potential return for this stock.

LGIH:
Very confident initially. Performance so far is worse than I expected but it seems as if the market never believes LGIH can live up to their own guidance. Yet surprisingly often the DO live up to their
own guidance. Which leads me to believe the stock remains undervalued and thus remains my #1 position. I see the downside risk as minimal and the potential return beyond my humble goals.

SWKS and LGIH probably have a lower potential return compared to ANET and SHOP. However, this is in part the reason I have more money in these SWKS and LGIH. Risk management. I like the get rich slowly certainty, not the get rich quick hopefulness.

All that said … what about 4 months ago?
You are right. Four months ago I could have looked at the stocks in the exact same way I am looking at them now and I may have made adjustments to my allocations. Yes … I need to be more nimble and more proactive in reviewing my positions from the perspective of “how certain am I about the prospects of each of these” and “how large a position do I want each to be within my portfolio.”

Bear: I guess all I’m saying is there’s more to this art than price/value. Potential is also a valuable lever. Make sure not to just put more of your allocation into the cheaper stuff in your portfolio just because it is cheaper. That’s something it’s taken me most of my life to learn, and even in the last year or two of being increasingly enveloped in investing, it’s still difficult. And I’m not saying ignore price or value. Just be more holistic.

Bear, this is a fantastic reminder. Thank you! I look mostly at valuation and trends. A perspective on potential would be a good to give more consideration.

OneEyeBirdRtns: a different way to view this is ignore that meaningless stock price - use the actual market value
if amzn has 490 shares and the price is $900, the valuation the stock is…441 billion. If the stock goes up 20% from this point, it needs to add another 80 billion in market value. That is the way to look at it, and it also reveals the challenges involved. You could look at every business you own this way. Don’t get caught on how much you make - analyze it entirely on how much earnings - eventually - a company will have to produce to warrant this sort of price.

This is a great perspective to keep in mind, thank you. I couldn’t care less bout stock price ($900 vs $90 at 10x1 split … who cares?) but I don’t look closely at market value. I’ll keep this in mind!

Thank you all for the feedback!

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2016: +9.8%…2017: +19.2%

My Gosh, Othalan, in a market that’s up just a few percent, you are doing great! especially for a new investor! Another demonstration that intelligent stock picking works.

Sorry about suggesting you had remorse about your decision. I did read back and see that in the initial post you did state that you had no regrets. I’ve had the same feeling at times: seeing a stock go up that I wasn’t in or turned down, and deciding that I had made the decision that felt right at the time, and that’s life.

Saul

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I’ve had the same feeling at times: seeing a stock go up that I wasn’t in or turned down, and deciding that I had made the decision that felt right at the time, and that’s life.

Saul

Hey Othalan,

Let me add just a tiny bit of nuance to Saul’s comment about the one that got away. Believe it or not, alot of success in the stock market is not picking the winners, but instead it is simply avoiding the losers.

Just this morning I read a great post from Captainccs over on The New Paradigm Investing board. Here is the meat of it:

Suppose you have four stocks, each 25% of the portfolio, and suppose further that three see gains of 30% while one has a loss of 30%. Despite the fantastic showing of three of your picks, the portfolio is up only 15%. That one loser cut in half the gains of the other three!

**Stock   Start  G/L   End     CAGR** 
A         100   30   130   30.00%
B         100   30   130   30.00%
C         100   30   130   30.00%
D         100  -30    70  -30.00%
**Total     400   60   460   15.00%**

Here is the post: http://discussion.fool.com/the-high-cost-of-losers-32693679.aspx…

Warren Buffett has said the same thing. “If you can keep from losing money in the stock market you’ll do pretty well.”

So my advice is don’t mourn the winners you lost, celebrate the losers you missed!

And, you’ll do fine…

Take care,

Jeb

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Thanks Jeb, that’s very kind of you!

Denny Schlesinger
a.k.a. Captain Caracas
a.k.a. captainccs

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Do I add more at what seems an absurdly high price compared to my initial investment?

I’ve been following this board pretty close to it’s entire existence which corresponds pretty much to when I started to take the activity of investing seriously. I too still consider myself a newbie. Nevertheless, I’m up just a shade under 22% the year, so I think I’m catching on. I’ll chime in . . .

The one sentence I quoted from your note I found very telling. It’s symptomatic of price anchoring which is covered in Saul’s Knowledge base and discussed on this board from time to time. In fact, what you once paid for a given stock is entirely irrelevant with respect to a given buy or sell decision today. Everything else in the universe (especially the universe of investing) has changed. The only thing that makes a difference today is gathering the best information you can about the current situation and weighing it against the universe of opportunity before you right now.

In the past, I’ve felt exactly as you do. My goodness, I paid “x” and it’s now “25 times x,” why should I pay so much when I initially bought it for so much less? There is no answer to the question because it’s the wrong question. The only thing that should concern you is how do you feel about the future of that investment based on what you know about it and every other viable opportunity before you - however you determine “viable opportunity” is something you have to decide.

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Jeb: Let me add just a tiny bit of nuance to Saul’s comment about the one that got away. Believe it or not, alot of success in the stock market is not picking the winners, but instead it is simply avoiding the losers.

Jeb, great comment and a great reframe of what I am looking at! Thinking on this, I also realized I am skeptical of my own success: Why am I NOT loosing money?!? I certainly have had my losers, but I have weeded them out and I have a record that shows I am making better choices.

Thank you all for your thoughts, I have what I need now to move forward with my successful investments!

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How not to handle success?

In the years leading up to the tech bubble my portfolio grew four fold to two million dollars. My ego grew even more. If it was this easy to make money, I’ll just double the portfolio once more before retiring. Four million? Let’s round it to five! I visited a boatyard to Maine thinking of trading up my Sabre 38. A coupe of years later I was looking around for ways to create income because the portfolio would no longer support my expenses on interest alone.

On a different note, the fast growers that Saul favors have the habit of dropping by 50% before continuing their upward march except sometimes they don’t rebound. The Gorilla Game has a section explaining the reasons for this behavior. It’s been a long time since I read that but as I recall it’s the effect of the leveraging of the fast growth expectations going into reverse. If the stock rebounds no long term harm is done but if the company goes bust the effect is terrifying. During the tech bubble bust at least two of my stocks went bankrupt while I clung on waiting for the rebound that never came. You need an exit strategy!

We need an exit strategy! When we first start investing all we are concerned with is picking winners. But once we have winners we better know when to hold them and when to fold them. Difficult.

Making money in the market is not all that difficult. Losing it is easier still.

Denny Schlesinger

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“…the fast growers that Saul favors have the habit of dropping by 50% before continuing their upward march except sometimes they don’t rebound.” - Denny

That statement made it seem that “Saul stocks” differ somehow in price behavior as compared to “average” stocks. The fact of the matter is that most stocks vary significantly in price over the course of 52-weeks. Several of my watchlists show the 52-week price range of each stock (a very useful feature). 50+% price swings are typical. Sure, there are variations. Some stocks exhibit greater price swings, some less, but 50% swings are more or less expected.

The only reason I wish to emphasize this is that ENTRY/EXIT POINTS MATTER! You may fall in love with a company. Great. Check the 52-week range. Look at a 1-year stock chart. Are you buying near the top or near the bottom? Assess your investment accordingly. I’ve found that “analysts” behave like lemmings. They will cheer on a fast-rising stock until it becomes overbought. The share price inevitably falls, offering a better entry point. Take a moment to determine if you’re buying high or buying low. Over the years/decades, it makes a significant difference.

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The only reason I wish to emphasize this is that ENTRY/EXIT POINTS MATTER!

Of course they matter, I didn’t say it didn’t, but no matter at what price you buy and even if you never buy the stock, they still fall by 50% on occasion and the investors holding them have the dilemma I posted about. Don’t they? :wink:

Denny Schlesinger

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putnid the idea that Saul stocks are no different from the average stock when it comes to volatility is likely wrong.
But if you wanted to take the trouble, it could be researched out. It won’t be me doing it since many of Saul type stocks are worth the extra volatility, and maybe that volatility is part of their appeal. As long as we are in a bull these stocks will mostly do fine.
But ask Saul what happens in a Bear market.

I agree about best entry points but in the real world these are most obvious in retrospect.

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…my portfolio grew four fold to two million dollars. My ego grew even more. If it was this easy to make money, I’ll just double the portfolio once more before retiring. Four million? Let’s round it to five…the fast growers that Saul favors have the habit of dropping by 50% before continuing their upward march except sometimes they don’t rebound.

Agree, Denny, in a market like now, everyone is a genius, and it’s easy to think you’ve figured out the formula. We’ll all be humbled at some time down the road, whether by a 10% correction, a 20% bear market, or worse, it will happen, just a matter of time. And that’s when the boards get pretty quiet, except for the people grumbling that they want their money back from their Fool subscriptions, instead of posting how well they’re doing. That’s when it’s hard to stay the course and not miss out on the rebound that also will be inevitable.

I’m not saying a drop is going to happen soon, the market could continue going up for years more…or not.

Try not to think you’ve got it all figured out. Continued good luck to us all, however you invest!

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