Investing in Small Growth Through a Crisis

Hi Saul:

You have an incredible long term track record investing in growth stocks. You also appear to remain highly concentrated in the types of companies you have identified in the initial upboard posts.

I wonder whether you would share how you handled the 2008 crisis, in particular. Obviously, almost everything took a beating then, but it would be interesting to hear about your experience in view of your concentrated growth approach.

Thanks for sharing so much on this Board.

Thanks,

Andy

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I wonder whether you would share how you handled the 2008 crisis, in particular. Obviously, almost everything took a beating then, but it would be interesting to hear about your experience in view of your concentrated growth approach.

Hi Andy, I discussed that in my initial series of posts on the board. You might want to read back through them.

I got killed in 2008 like everyone else. Probably worse than someone who was in defensive stocks. It was my first negative year after 19 positive years in a row. I stayed 100% in stocks, selling anything which hadn’t gone down to buy more of the ones down the most.

Finally, I was down so much that I got scared and started to think of selling out and going into cash. All the talking heads were saying, “Sell! Sell! Sell! Get out! Get 100% in cash!”

I said to my wife, “If everyone is shouting ‘Sell!’ and even I am scared enough to be thinking about selling, there’s no one else left to sell! This must be the bottom.” And it was (Nov 2008).

And I was up 110.7% in 2009. It didn’t entirely make up for my loss in 2008, but I sure felt better.

Saul

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Hi Saul - lots of people are crying ‘2008’ but aren’t we really looking at a 2000 dot com crash scenario? Stocks with crazy high valuations brought back to Earth?

I look at most of my holdings and they’re companies that essentially produce something tangible and are (mostly) earning a profit. But many carry high valuations on the premise that they’ll grow into them. Amazon is a stock frequently cited in this scenario - good company, great growth, but took years to recover following the dot-com crash.

Cramer (and I’m not part of the Boohay! band) did an interesting piece recently - which I can’t find unfortunately - looking at the technicals and positing that we could be facing another high-flyer crash at the same severity as the dot-com collapse. I’m not a numbers guy, but had to do with 40-day moving averages converging with some other metric.

He didn’t approach it in his usually sensationalist way, and he’s been among those out there repeatedly saying that he doesn’t see this as 2008.

Thoughts?

  • Khleb

Khleb, In the 2000 dot com crash, stocks like YHOO, AMZN and AOL were selling at 200 times SALES, not 75 times EARNINGS. Lots of others had NO revenue yet and were selling on hopes. Believe me, THIS IS NOTHING LIKE THE DOT COM BUBBLE!!!

I was there and I know.

Saul

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I was there during the dot com bubble. I was working in one of those small dot com bubbling companies. At the high of the bubble, there were talking heads on TV talking about talent crisis and companies were not able to hire enough people. There were rumors that some companies gave employees BMW to keep them from jumping ship. Our company was a small one, but it kept hiring. Not just people, it also went ahead and signed lease for another floor of a large building though we didn’t need the space at the time. The company got the floor, decorated it, bought all the furniture and expensive ergonomic chair for every cube, though many of the cubes were empty. Of course the company also bought a lot of servers, storage arrays, network gears, pool tables, game machines and etc. We had fancy holiday parties, free breakfast every day, and gourmet coffee and etc. Once the company bought movie ticket for every one to go to movie during regular work hour. One time there was an announcement that the owner was going to buy lunch in the nearby Cracker Barrel restaurant and everyone was invited. For Y2K, the company needed people to watch out things 24 by 7, and we were given plenty of cash, free food, and a week off afterwards.

It was good old time and money was plenty.

I remember a lot new hires stayed on a few weeks and went ahead to other companies for a sizable raise. Our company had an IPO and the stock short up from 17 to close at 24 on the first day (not the best IPO during the time). There was a guy Henry Blodget who was a security analyst and boldly announced that Amazon was worth $1000. Now he is permanently banned from involvement in the securities industry. Our
stock went as high as 54 within weeks. I was worth several millions on paper at the time.

But all this changed quickly. Numerous revenue-less companies burned all the cash and went belly up. There were so may servers, desktop computers, network gears on the second-hand market that SUN, whose products used to sell like hot cakes and whose stock price was north of 100, started to miss sales target. Sun never recovered and was finally bought by ORACLE. So many companies crashed and burned even large ones like Nortel and Lucent. Our company stock dropped under $4 - less than my option exercise price before the lockup period expired.

I knew people who lost job and went to another company and lost job again, and all within 3 months. Our company started to do “RIF” - reduction in force. First my boss was fired and then my new boss was fired. Those nice chairs were piled up. All the people left filled only part of one floor. I was fired in the 3rd RIF with 4-week pay in early 2012 and the company went under soon after. I was lucky to find a contract job in 3 weeks. The contract lasted for a year before I got my current job. Some of the people I worked with were not so lucky.

I completely agree with Saul: Believe me, THIS IS NOTHING LIKE THE DOT COM BUBBLE!!!

It is not even close.

-M

Being afraid of bubbles is a good way to avoid a bubble.

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Being afraid of bubbles is a good way to avoid a bubble.

There are the four words that presage a bubble: “this time its different.”

Back in the late 90s, when evaluations were ridiculously high, the commentators said it didn’t matter, because this time it was different.

The internet had changed everything. It was a new day and time for a new reality. And those old metrics that your grandpappy used no longer applied.

Because this time it was different.

Sure, the company was selling for 100X sales, but that old fashioned ratio didn’t work anymore.

Because this time it was different.

XYZ Company was evaluated on the price-per engineer ratio. Of if you wanted to use the newly devised price-to-patent ratio! XYZ had one of the best price-to-patent ratios in the business!

This time, it was different.

The office parks emptied. The caterers went out of business. And the Herman Miller Aeron chairs piled up in dusty offices.

Because it wasn’t different.

Jeb
Long IN THE TOOTH

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mview,

Thanks so much for the personal testimony describing what it was like on the inside of the bubble. That kind of description is wonderful.

Saul