I hope this is not out of place.
Out of curiosity I created the following hypothetical portfolio with 13 of the 15 stocks Saul had in January 2016. I assumed the positions to have equal weight and were bought exactly one year ago. None of the stocks were sold.
The return works out to be 2.31% ignoring tiny dividends on SWKS, INBK and CASY. This is close to what Saul’s actual p/f achieved.
For simplicity, let us assume we had a rule that when the price of a stock goes below 5% of the purchase price it would be sold. If this cash was not reinvested then assuming the loss as 5% for the three stocks marked with (*) the return works out to be 10.0%.
We could have done even better if we employed this cash (or part of it) for buying additional shares of, say, the then three top ranking stocks, although this would have reduced the number of positions in the portfolio.
I would be interested to have your comments, critical or otherwise.
I’m certainly not against analysis, but the following just seems completely unrealistic in almost any portfolio, let alone one geared toward growth and smaller cap companies.
For simplicity, let us assume we had a rule that when the price of a stock goes below 5% of the purchase price it would be sold.
I think the above criteria really hurts the analysis.
Hi Alpha, that’s an interesting thought piece and should provoke some discussion. Part of the trouble would be that it isn’t so simple. For example, I would have been out of all of the big three winners before the year started (AMZN, LGIH, SNCR) because all of them had fallen more than 5% from when I actually bought them before they took off.
I used 5% as an illustration. One may set it at 10% , 15% or some other figure if the nature of the stock so dictates. For this hypothetical portfolio setting it at 10% for all stocks will reduce the gain by about 1.2%. A 15% limit will make the gain about 7.7%.
This is obviously an approach which will limit one’s losses when a stock eventually experiences a ‘large’ fall. In some situations (such as those mentioned by Saul) one may miss a subsequent gain in the stock price but if we can ‘anticipate’ this then there would no need to sell, that is, put the limit for this stock at a higher percentage. This is a case of balancing the risk with gain.
It seems to me the real advantage is that it may make management of even a growth stocks portfolio somewhat easier.
I think the above criteria really hurts the analysis.
I was going to comment that the short and arbitrary time frame also made it largely irrelevant, but you make a good point that the nature of many of these companies means that one should expect significant price variation. In particular, it is very non-Saul to arbitrarily sell a company for such a small price decline if the business analysis itself still holds. Conversely, it is quite appropriate to sell a stock that is up, if the business thesis no longer holds.
It is if you consider Saul an investor. In the market there are investors and there are traders or speculators. I haven’t got anything against either group. I do both at various times and with different securities. At five or ten or at any other number what you are talking about is a stop loss order which is a trader’s tool, not an investor’s tool.
Peter Lynch advises to sell when the story changes or when you realize that you made a mistake. Philip Fisher in Common Stocks and Uncommon Profits essentially says to give your stocks a chance to prove themselves, don’t sell in a short term panic.
Denny Schlesinger
Common Stocks and Uncommon Profits and Other Writings 2nd Edition by Philip A. Fisher, Kenneth L. Fisher (Introduction)
Philip Fisher in Common Stocks and Uncommon Profits
Is everything worthwhile learned from a book? I suspect not, else there would be myriad folk astute enough to grasp most everything read and relate it to vast riches.
BUT…
The fact you seem to be able to recall everything you’ve read is nothing short of incredible.
What a sobering analysis of Saul who is probably one of the all time best stock pickers on here.
My index funds are doing well.
My three single stock accounts 2 are down 75% one is down 30% in the last two years
In the past few days you have made attempts to run Saul’s and my portfolios, through a strict set of guidelines seeking a formula to how each works. I’m glad you didn’t actually compare us because there is no doubt in my mind that Saul’s portfolio is superior to mine both in performance and length of time it has performed. I believe portfolios are individual and the results are based on how we individually react to the market volatility at all times.
Maybe it might help if you set your portfolio up with similar standards and see how the numbers come out opposed to actually what your portfolio actually did. You might find ways to make your personal portfolio perform better for you by a little tweak here and there. You will be dealing with a collection of stocks that you are more familiar with, and you like them because you bought them in the first place
You could teach yourself golf, pottery or snooker without ever referring to a book or seeking tuition.
But you would be working under a terrible handicap and your chances of success would be small.
Anyone hoping for success as an investor should at the very least be familiar with the ideas of Lynch, Fisher and Buffett.
Then If you decide upon a different approach, at least it is a concious decision made with knowledge.
Investing approaches that work have been studied and written about extensively. But time and time again I come across novice investors looking for ‘get rich quick’ ideas all over the place, without ever finding the time to study the basic, classic texts.
If you follow Saul’s success with an understanding of Lynch et al, you will find resonances with many of their well-established methods.
This can be a great help in understanding the process.
Saul often explains that you should not copy what he does, but learn from his approach.
This is great advice. The more great investors that you study, the more informed that your process will be.
Saul often explains that you should not copy what he does, but learn from his approach.
I have seen that statement before and it is one I struggle to understand. Can somebody please explain why I should not copy Saul’s every step?
Saul provides monthly detailed updates. A complete X-Ray of his holdings down to percentage of holdings. Sometimes he will even tell you about mid-month buy/sell as he did just this week (adding SQ and HDP). What else do you need to know?
Statistically speaking, you are only lagging him by two weeks on average. Since he is not a day-trader, your portfolio is going to match his pretty closely. His top 4 holdings have not changed in 6 months.
That two week lag could actually work to your advantage when Saul buys or sells too early. Your relative wins and losses (vs Saul) will cancel each other out.
#6
Yes, obviously you are correct in your statements, but that isn’t the point of this. By copying, you are lowering your goals from what you can obtain from a rich resource. Saul has said it himself. What are you going to do when he stops posting? If you just copy now I guarantee you are not learning by doing because you are not seeing how you react when you have to make the decisions. It’s the age old adage, “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.”
Maybe Saul should go back to only sharing monthly.
Everyone is looking for the $1 M stock. Many wouldn’t recognize it even if by chance it was sitting in their portfolio. As it started to grow it would overwhelm the rest of the portfolio and we all know the concensus of opinion of the “Experts” is to rebalance the portfolio because it is “Safer” So, in seeking safety, we sell the best we have, and keep the junk. After a while we may start to wonder why we aren’t making money, or we may not and keep on doing the same as before.
I have seen that statement before and it is one I struggle to understand
It depends on what you want to achieve, make money while Saul is around or learn how to make money. I was making good money with Louis Navellier but I quit the newsletter because I was not learning how to invest.
The fact you seem to be able to recall everything you’ve read is nothing short of incredible.
I wish I had a photographic memory but I don’t. Philip Fisher has a dozen or so rules about something or other and I can’t remember a single one. I don’t read for the detail but for the philosophy: Why are successful investors successful? What’s the secret sauce? Can I incorporate it into my own style? Let me give just two examples.
Peter Lynch has a lot of lessons but I picked up just two or three of them:
In retail, find out what people are buying, they know more than analysts do.
Buy concepts after they have been successfully replicated across markets.
Sell when the story changes or you realize that you have make a mistake.
Warren Buffett also two or three of them:
Invest other peoples money (insurance float, subsidiaries excess working capital, don’t pay dividends).
Avoid regulations (operate as a corporation instead of as a fund).
Disclose only as much as you have to. Talk your book.
Denny Schlesinger
Is everything worthwhile learned from a book? I suspect not…
You’re right! I didn’t read a book to learn to ride a bicycle. I tried learning to ride one on flat ground and that was a flop, as soon as my feet were off the ground I’d lose my balance and fall. Frustrating as hell but I was not giving up. One day we went on vacation to a mountain resort with very steep roads. I borrowed a bike, found myself a terrific slope and headed downhill. If I made it I would have learned, if not I would probably be dead but I had no intention of going through life without riding bikes.
I gave up on bikes about a decade ago because my knees were hurting.
Learning to invest like I learned to ride a bike does not seem like a smart idea, throw all your money at the market to see if it works.
The first thing that strikes me as inappropriate about the selling criteria is that you are only measuring the stock against itself without any consideration of the market.
In other words, over a given stretch of time if the market goes down, say 8% and I’m holding a stock that goes down 5.1% am I going to really sell it? Maybe, but probably not if I don’t see anything about my investment thesis that has changed.
But you can set any criteria you want for a thought experiment, so I guess given your parameters, your conclusions are valid. I just think your parameters are not broad enough to reveal anything of particular interest in the real world.
In spite of the criticisms I intend to carry out an experiment of the proposed method with a hypothetical portfolio of good quality growth stocks over a period of one year from now. I have chosen the top eleven stocks Saul currently has in his portfolio since I cannot choose better ones myself. However, as the intention is not to mimic Saul’s portfolio I have assigned equal weight to these stocks. This is intended to be a LTBH portfolio except that a stop loss limit of 10% will be imposed on all the stocks to limit the downside. Additionally, if the ‘story changes’ substantially a stock will be liquidated no matter what the price is at the time. Hopefully such events will be few, if any, during the year. The proceeds of such liquidation will be divided equally between the three top performing stocks to buy additional shares.
At the end of the year the performance will be compared with that of S&P 500 Growth ETF, VOOG or IVW.
In spite of the criticisms I intend to carry out an experiment of the proposed method with a hypothetical portfolio of good quality growth stocks over a period of one year from now.
Not me. I like what you are doing. Solid, data-driven, experimental research.
This is intended to be a LTBH portfolio except that a stop loss limit of 10% will be imposed on all the stocks to limit the downside.
This is an idea strongly promoted by IBD. I think they put the limit at 8%. If that really worked, the academic world would have discovered it long ago. They have data dating back 100 years and could run the models on it to confirm or deny. There is no lack of grad students and computing power.
At the end of the year the performance will be compared with that of S&P 500 Growth ETF, VOOG or IVW.
The best performing asset class of the last 100 years is the S&P 600 Small Cap Value index. Why not compare against the best?
#6
“In God we trust. Everybody else please bring data.”
This is intended to be a LTBH portfolio except that a stop loss limit of 10% will be imposed on all the stocks to limit the downside.
My experience is that this is probably the surest way to peg your returns at minus 10%. That’s when you sell. I would spend my time drilling down into the businesses rather than trying some arbitrary sell criterion.