Hypergrowth question

[sstaylo]

Hello Saul and Friends,

I’m a longtime MF member in my early 50s who recently discovered this excellent discussion board and have learned a great deal by reading the past few months worth of posts, so thank you so much for your ideas. I’ve been investing for 30 years and have been pursuing great companies (Mostly rule breakers) with a buy and hold strategy. I already owned many of the SaaS companies you all discuss here when I found this board.

I know this board is focused on hypergrowth companies, but I’m curious as to whether you all think hypergrowth investing should be an “all or nothing” strategy. As someone who was burned badly by the 2000 dot-com bubble bursting, it seems very risky to invest 100% of a portfolio in hypergrowth companies. It seems to me like building a baseball team with all sluggers (HR or K) and nobody to get on base.

I’ve had my share of huge winners like AMZN, NVDA, NFLX, TSLA and ZM and also plenty of flameouts, and I realize how hard it is to find these hypergrowth companies since they are the true unicorns of the investing world. I can’t argue with the returns many of you are achieving, but do some of you feel it is ok to settle for some singles and doubles instead of always swinging for the fences?

For example, I own both TDOC and LVGO so today was a sad day for me in the near term as LVGO seemed to be a true hypergrowth company. At least for now though I am planning on keeping both of them and hoping that the combined company becomes a solid doubles hitter with less risk of striking out, with the possibility of growing into a juggernaut over time. I would consider a 3x gain in TDOC going forward over 2-4 years to be a win, even though recency bias would suggest that isn’t a spectacular return compared to 2020 results so far in most of the stocks discussed here.

Sorry for the long post but I’m just trying to reconcile these exciting things I’ve learned from this board with 20+ years of Motley Fool investing philosophies.

Thank you so much for your ideas and input!

Cheers,
Steve

[RafesUserName]

“Sorry for the long post but I’m just trying to reconcile these exciting things I’ve learned from this board with 20+ years of Motley Fool investing philosophies.”
a. That wasn’t very long if you’ve really been reading a lot around here
b. I know what you are going through. I, and I am sure many others, including Saul(?), also went through the process of reconciling Foolish general advice with “real life” investment management. I continue to do so.

What it comes down to for me is comparing long-held beliefs or language with the reality I have experienced myself over the last 14 years. The Motley Fool is what started me down this path with concepts like the long-term risks of being in high-cost managed funds. Or that we only need to be right ~30% of the time and the few biggest winners will wipe out all the losers. In Hidden Gems (RIP) I learned “risk is not the same as volatility” and the best protection against risk is holding companies to high standards. The idea of “high risk, high reward” is a gambler’s view and these two things do not have to go together!

What I’ve learned here on the Saul’s Investing Discussions board just took all I had learned and got me to confront it with ruthless pragmatism. It was like permission to ignore even more “noise” than The Fool had already trained me to ignore. The most important rule: contribute value to the community. Through contributing I have already learned a lot and my confidence in my holdings and increased ability to track the progress on my own has caused the feeling of risk to subside quite a lot. It has allowed me to feel comfortable focusing on fewer holdings, which is directly against the first advice given to new members of Rule Breakers, for example. The feeling of risk certainly isn’t gone (and it should never go away completely because it is a positive driving force to stay vigilant), I simply need more time to create a track-record for myself as the final true confidence builder.

I had created a comfort-zone with The Fool’s teachings and it has been an uncomfortable, but also fun and exciting, growth process to confront it. I actually view myself succeeding here as proof The Motley Fool is successful in its mission to educate. I have learned enough to stand on my own and decide what is for me. At the same time the core philosophy is still there at the core.

Climbing back out of that rabbit hole…

“…I’m curious as to whether you all think hypergrowth investing should be an “all or nothing” strategy.”

I don’t even see it as a strategy. It is just investing to me. I’m after quality companies that are growing fast. Why would I want to be a part of anything else?

“…it seems very risky to invest 100% of a portfolio in hypergrowth companies.”

Let me ask you this. Why do you associate high growth with risk?

[wkimzey]

Steve,

Rafe’s concluding question:

“…it seems very risky to invest 100% of a portfolio in hypergrowth companies.”
Let me ask you this. Why do you associate high growth with risk?

This is really a key question. I think a lot of people repeat various versions of the cliche “high risk/high reward” to themselves all the time without it being true. I’m a long term MF stockpicker, lurking, and following the smart people. Started in Hidden Gems and now ONE.

The main thing I’ve learned on this board is that these high growth stocks aren’t actually the highest risk. These big macro changes–eCommerce, cloud, security, WFH–are happening and most of “Saul’s” SaaS stocks are in that sweet spot–so they are low risk not high risk. Many people have said that on this board and it took a pretty long time for me to let that sink in. (Other reasons why they aren’t high risk: >50% rev growth, > 70% GM etc, DBNRR > 130% … sticky, moats, easy to use … all of it.)

The second really important thing I’ve learned from the board is that concentrating on 10 or fewer stocks really helps you focus and understand your companies. (This flies straight into the phase of ONE’s philosophy … but I find, for me at least, in my situation (retired, no new money, need income from my portfolio to travel, buy a car etc. …) that my sweet spot is the intersection of ONE & this board’s recommendations.

I have improved my performance from beating S&P by 2 or 3% annually to eg. YTD 36% better than S&P. Not near as good as the leaders of this board, but an improvement for me.

So what do I do: I keep a “Saul” portfolio, it is about 1/2 my total holdings, and in that 1/2 I am trying follow this board’s principals. The other half is more conservative, more like I’ve held historically (AMZN, MSFT, AAPL, GOOGL, CRM, CMG, a bank or 2, a telecom dividend stock, a utility dividend stock, etc., cash, fixed-income … that half allows me to sleep at night in times of covid). And I still suffer a bit of bias/delusion–because the “conservative” half isn’t necessarily less risky than “Saul” stocks.

Also, as many say, you can’t own all the best stocks …

Also, note taking is key: I write-up my monthly performance. I don’t post it on the board for 2 reasons: my tool set doesn’t make it easy to just report on the Saul 1/2 of my money, and they other reason, is that I don’t have anything new to say that hasn’t already been said many times. And it is much easier to keep current notes on why I am high conviction on 10 stocks than 40 stocks.

regards,
Bill

[GaryMF2020]

This is a great post Bill, well considered and on point in so many regards.

I’ve shared The Strategy (e.g. Saul’s strategy, hold the best of the best, “best” defined by the criteria, which typically means you only have a handful of companies in your basket, often 7-12 companies, get out when the story changes, etc.) with other really smart financial folks (including one fund manager of an investment company, who was very interested), and they often cite the “high risk/high reward” aspect, and having to get out for cash when people cash out, etc. But I think some confuse short term market volatility with long term risk: as you point out, the long term risk can be argued to be lower than holding a broader market ETF or mutual fund that included not only the best companies, but the average, and the worst companies. So unless you’re in cash, which also has risk factors associated with it, the "risk reward dynamic might be somewhat misunderstood.

Today is a good example: I’m down almost 5%, and that’s just today, with all but LVGO and WORK down a few percent. But is this volatility due to the fundamentals of the companies I hold? The answer to that, (for all but 2 of them) is likely “no”:

the LVGO story has changed: I sold LVGO in my non tax accounts when it was down around 8% (now up ~5% as of 2:15ET), but still long in my taxable accounts, and the FSLY story, IMO, hasn’t structurally changed, but others might disagree, and that’s OK).

Has the ZM, CRWD, DDOG,OKTA, etc. story changed? Not to my knowledge. Why are they down? Who knows? (I don’t). Maybe getting dragged by the FSLY decline (TikTok dynamic), maybe just a general “COVID stock” pull back (I don’t like that term for most of these companies, it’s not accurate). Again, these are the market idiosyncrasies that aren’t always tied to reality. Someone once said the market has the mentality of a drunken sailor: when things are bad, it’s terrible, it’s never going to get better, the world is ending, sell it all, etc. When things are good, it’s always going to be this good, it will never change, this is awesome, I’m buying everything, etc. Both views are not accurate, but often arise in times of market gain and decline.

Aside: would it surprise you that some mutual fund managers and CEOs of companies we follow, check in on this board from time to time? It shouldn’t.

[KayakerRW]

Steve,

A real risk can result from holding on to or even buying companies that were successful in the past but haven’t adapted to changes. I knew people of my parents’ generation who bought GM and IBM in the early 2000’s on the advice of financial advisors who probably recommended them because “Nobody gets fired for buying IBM.”

Actually if someone had bought IBM, then sold 7 years ago and invested in companies similar to those discussed here, it would have been a good move.

Like you, I came to this board late and read a while before acting. I already owned some companies discussed here, but decided to gradually shift part of my portfolio to companies discussed here starting in March 2019.

Here is a link to a long thread discussing why people might hesitate to shift their portfolio and the value of transitioning at least part of it. My post is # 68584 and shows that if I had stayed with a “safer” more traditional portfolio, I would have lost money on those companies up to that point.

https://discussion.fool.com/an-observation-for-investors-3453860…

I still have a mixed portfolio, but I have continued to increase my holdings in companies discussed here.

Looking at my holdings, a small REIT dividend for income portfolio is down ~8% this year. A more traditional mix (mostly dividend) is finally up ~1%. My AAPL, AMZN, NFLX, and MELI portfolio is up “only” 60%.

My Saul’s board influenced buys are up 82%. That includes some recent buys in July and August that bring down the percentage.

More importantly, following this board has improved my ability to know when to sell, to analyze new companies in their growth stage, and concentrate on owning some of the best (and not worry about missing out on some of the ones I don’t own).

It does take time and effort to benefit (more than just following Stock Advisor), but it does offer value. Deciding whether to be as concentrated as some are on this board depends on each investor’s psychology and confidence in being able to evaluate companies.

All the best,

Raymond