Investing Philosophies Revisited

Investment Analysis Clubs Saul’s Investing Discussions
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So let me start by saying that JSeargent recommended this board a few months back from the Options board where I have spent an inordinate percent of my time visiting. Since then I have been lurking here regularly and it is probably second only to the options board as a favorite place to visit.

I love the interchange and discussions on different stocks and actually now own a few of Saul’s presently owned stocks. (I didn’t want to call them recommendations since he is just very kindly sharing his portfolio and not necessarily telling people to follow along). In fact I just sold a 2017 Leap put on SKX. But I didn’t write this post to discuss that sell. What I wanted to discuss today is my thoughts on investing philosophies in general and perhaps Saul’s in particular. Hopefully I won’t offend anyone, especially Saul because I have the utmost respect for him and his sharing. In fact these musings have gotten me thinking quite a bit about my own, somewhat haphazard investing philosophy. But that might have to wait for another post, except maybe a slight mention for comparison along the way.

Today I want to talk about investing styles and what I have come to realize about them in general while following this board. So a little background is in order… I have been fairly actively investing for 30 years, ever since I graduated college and took a job at a major industrial company. They had a nice matching savings plan and deciding how to split up my monthly investments between stocks, bonds, international stocks and bonds, money market, my company’s stock, etc, had me fascinated from the start that these simple decisions could have a profound effect on my future including retirement. Since then, I started my own IRAs and got into mutual funds to start, began dabbling in stocks, hit my first double somewhere along the way and was hooked. In the beginning, it was hit or miss, some big successes, some failures, and I learned a lot along the way. The biggest thing I learned was that you need to have a consistent path or philosophy. It doesn’t matter as much what the path is, there are many good ones but you must stay consistent or you will get caught in every passing fancy. This always starts well and then the markets turn and you get burnt. When you change with the wind, it’s easy to get caught in the crowd mentality and usually at the worst possible times. I could go on this topic for quite a while but I digress.

My point is, you need to have a sound philosophy, and you need to stick to it. So I am always trying to condense people’s strategies and learn from them. With that mindset, I came to this board and started reading Saul’s posts and became fascinated to see what he does and why it appears to work so well.

But before I do, let me give some examples of my favorites from the past and my synopsis of each.

Peter Lynch. Probably my first following. His philosophy was to look for simple companies that would grow for years and buy small positions in each. He never sold and by holding on, the ones that did well became big positions over time. He loved chains that were spreading across the country and made a lot of money buying companies like this. LEggs is probably his most well known example but the one that hit me the most was his discussion of Taco Bell. He bought then when they were very small and grew for a number of years. At one point, they were bought out by Pepsi at a big premium, and what struck me was that he was upset by the buyout. At the time I couldn’t understand why a big jump in stock price of a company he owned would upset him, but his explanation that he knew they were going to keep growing for another decade or two and Pepsi stole those gains from him was eye opening for me.

Warren Buffet. I won’t say much here, but he loves cash machines, toll road stocks and thinks very long term and very low risk.

David Gardner, he buys very high growth,high risk stocks. Looks for game changers. Buys and never sells. Similar to Peter Lynch, he lets the big positions develop by growth and is looking for a few stocks to carry the entire portfolio.

TMF1000, Tom is a little like Peter Lynch. He looks for a simple business model that can grow for decades. Wants to hold forever but with a twist. He likes to get to know a stock and then use the ups and downs to buy and sell the volatility for added profits and as a source for future investments. He owns a lot of stocks but relatively few account for the majority of his holdings.

I could go on with a number of other people on these boards who seem to do well and each has his own path. But now in come to Saul.

Saul threw me for a loop for a while. He seemed to buy and sell quickly, only keep a few stocks and pick some really off the beaten path selections, as well as better known without a seeming pattern. I certainly don’t know the percentages but the turnover is high, at least for an old buy and holder. But overall, if you believe his numbers and even by the preannounced holdings, seems to do very well.

So that being said, my take is the following. He looks for long term holdings, looks for fast growing stocks with reasonable PE’s and reasons for them to keep growing. But, in my opinion, the key to his secret sauce is that he has a trader’s M.O. For his portfolio. He keeps a very few stocks and stays 100% invested at all times but has no qualms with dumping a holding at the first sign of trouble. I would go so far as to say almost a gut feel to maintaining a position. When done right this allows him to avoid some of the bigger fall offs that are typical of the types of stocks he follows.

I have followed a similar stock picking philosophy in the past. Finding high growth, low PE stocks is not impossible, they just usually have baggage of some type, and when they fall, they can fall far in a short period of time. This high volatility or risk is the reason you get the great PEG ratios that almost all of his stocks have. Somehow, though Saul seems to be able to sniff out the bad news quickly and have the traders mentality of getting out and not looking back. It is impressive…and educational.

I am still learning here but thought I would share my thoughts with you, Saul, and e board as a whole. Sorry for talking to you in the third person. I didn’t know if I should be writing this to the board or to you.

In any case, this message is meant to be a compliment that I am trying to learn from and has been an evolving thought for a while that I thought I would share. Sorry for the long post, and if I get some interest I can discuss further with specific examples.

Randy

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So that being said, my take is the following. He looks for long term holdings, looks for fast growing stocks with reasonable PE’s and reasons for them to keep growing. But, in my opinion, the key to his secret sauce is that he has a trader’s M.O. For his portfolio. He keeps a very few stocks and stays 100% invested at all times but has no qualms with dumping a holding at the first sign of trouble. I would go so far as to say almost a gut feel to maintaining a position. When done right this allows him to avoid some of the bigger fall offs that are typical of the types of stocks he follows.

Thanks Randy for the excellent and interesting discussion of investing philosophies. With regards to your analysis of my philosophy, I mostly agree but see a few things a little differently.

He looks for long term holdings, looks for fast growing stocks with reasonable PE’s and reasons for them to keep growing.
I agree 100%.

But, in my opinion, the key to his secret sauce is that he has a trader’s M.O. for his portfolio.
I have to disagree with this. I ALWAYS buy with the idea of a long term holding (over a year at least). A trader buys with the idea of holding for a few days at most, and taking a short term gain (often as little as a dollar or so). I NEVER do that. Different outlook entirely.

He keeps a very few stocks and stays 100% invested at all times
True if a very few stocks means 15-25. (Some people would consider that a lot).

but has no qualms with dumping a holding at the first sign of trouble. I would go so far as to say almost a gut feel about maintaining a position. When done right this allows him to avoid some of the bigger fall offs that are typical of the types of stocks he follows.
My problem is with your wording. I don’t feel married to any stock forever. Nor to I keep adding tiny amounts of stocks and holding forever. As I have no outside income, and live on what I make in the market, I can’t do that. On the other hand I certainly DO have qualms and hesitation about selling a stock, especially a major position, and will often just reduce the size of the position gradually while I keep considering. Of course if there is news that changes the thesis in my opinion, I may get out overnight (i.e. SZYM), but that is rare. I do sometimes rely on a gut feeling about maintaining a position or not, as you say. My method does help me to avoid some of the bigger fall offs (as well as periods of dead money at the bottom before a possible re-rise).

Finally, you seem to characterize my positions as somewhat more risky, but I see them as very secure for the most part or I wouldn’t be in them. I especially think of stocks growing at 30%-60% a year, and selling at 20 times earnings, as very secure because they have a big cushion. For example, to look at some of my positions.

BOFI has been improving every metric you could imagine every quarter for years.

WAB is the only company on any US exchange to be increased in stock price every year of this century.

Skyworks is growing revenue at 60% and earnings at 90% or so the last few quarters, and gives an outlook for more of the same. It’s in almost 100% of manufacturers and almost 100% of models. It’s at 21 times earnings or so. That’s trailing, not forward.

Celgene is secure enough to give outlooks for 2015, 2017 and 2020. Every quarter is up year over year as far back as I’ve looked.

Sorry, I don’t see stocks like this as having extra risk even though they have great PEGs.

Just my way of looking about it.

Saul

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Peter Lynch. Probably my first following. His philosophy was to look for simple companies that would grow for years and buy small positions in each. He never sold and by holding on, the ones that did well became big positions over time. He loved chains that were spreading across the country and made a lot of money buying companies like this. LEggs is probably his most well known example but the one that hit me the most was his discussion of Taco Bell. He bought then when they were very small and grew for a number of years. At one point, they were bought out by Pepsi at a big premium, and what struck me was that he was upset by the buyout. At the time I couldn’t understand why a big jump in stock price of a company he owned would upset him, but his explanation that he knew they were going to keep growing for another decade or two and Pepsi stole those gains from him was eye opening for me.

Couple minor, and I mean minor, comments:

*thanks for sharing. Agree 100% on the sound philosophy comment, and what I love about your post is the willingness to ‘borrow’ from the best. Like you, I’ve made mistakes and had some winners, and I eventually patterned my own investments and career on Lynch’s books.

*On Lynch, I’m a bit of a fruitcake Lynch follower. His pic adorns my wall, I have autographed copies of both his books, I have written him a thank-you letter (sigh - no reply), I used his screen-name as my own (for a while), etc. etc. etc. I have little to disagree with what you said - he looked for ‘fast growers’ early in the growth phase and held on.

But Lynch was also Head of Research at Fidelity for three years, managed a gazillion dollar portfolio, and therefore had an all-encompassing style which contained not just fast growers but also stalwarts, slow growers (to a lesser degree), turnarounds, asset plays, and cyclicals. In other words, he would own virtually anything, though clearly fast growers were the most significant piece of his portfolios. That said, I can tell you’ve read One Up & Beating in detail so won’t go further here.

Again, just 2c and thanks for your enjoyable post.

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Greetings Sweetadeline, Randy, Saul and all,

Great discussion.

We can all learn from dissecting the nuances of investing - the
different approaches, styles, temperaments, risk tolerance, goals, et al, that each of us has, and bring to the board.
We each take a stab at developing our own approach, or plan, to investing in the market, with the goal of making money.

Are you a Trader or an Investor?

Bad question if it assumes one can’t be both.
If I could only choose one answer, I’d have to choose trader.
But I am definitely an investor.

Sweetadeline pointed out in another thread:

Some people seem to view “trading” as derogatory as if you’re turning your back on the particular company and disrespecting MF by jumping ship on a company they recommend. I don’t understand that at all.

Well said. I don’t understand it either.
But if this is what most define a trader to be, then the
excerpt helps explain the negative “trader” label:

A trader buys with the idea of holding for a few days at most, and taking a short term gain (often as little as a dollar or so).

That would be my definition of a day-trader, someone who trades on
pennies, even minutes. [different approach entirely from this board’s
focus]

That would not be a definition of my trading.
As a trading investor, my #1 goal is to not lose money; #2 goal is to make money. For me, like Saul, making money [in the market] means taking money from the market, as
my investments are my source of income.

There is downside to losing money to the market.
If I’m counting/planning on being in the green enuf to live off of
that green, then I’m not the same mindset as, “This investment
will pay off in 3-5 years.”
I won’t keep money in a stock that is in a decided downtrend, watch the downtrend remove profits, let alone, put me severely in the red - and wait for it to turn around because … it’s a great company…it’s a BBN…or any reason.

It’s about protecting profits. I trade in and out of
stocks to best protect profits.
I may sell when I have achieved a certain profit, but I will most likely
retain some, and buy more again when it’s price cycle has reached a
low and is again climbing. And I may repeat that cycle.

Just saying there are many different approaches. The label, trader, rather than imply a strict select parameter [i.e., pennies, minutes], ought employ the notion that traders come in all sizes and variations.

another .02, not worth anything
[but I still pick up pennies]

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Hi Saul,
Thanks for the reply! For a bit there I thought I was just going to get a bunch of recs but no discussion. :slight_smile:

I don’t disagree with much of what you say. I do think you misunderstood my choice of the words “trader mentality”. It was meant to get at what I think makes you successful. By trader mentality I was referring to your ability to quickly come to the conclusion that you no longer want to be in a position and sell out. I didn’t mean that you go in with a trader mentality and I believe I said that. But you do drop out of stocks quickly and for what I would describe as a small change. My example would be UBNT where not long ago you sold out because the CEO was becoming too involved in his new toy (sports team).

To be clear, I am not disagreeing with your choice, in fact time will tell if you are right. For me it was a telling event because with all the myriad data that you can review for a company and this one fact sends you away. I found that fascinating mainly because I would have never done that. Again, I am not critical at all. It actually resonates with me. The thought that there many companies and you have no need to be in this one particular one. It is just not a thought that many people would have.

As far as the comments about higher risk, I certainly don’t mean all of your picks, WAB is not higher risk, but then it is not growing by 60%. In my opinion, any company that is growing by 60% but only has a PE of 20 has to have a reason. Again, I am now in SKX so I think it is a good risk but the market isn’t stupid, I don’t think it is perfectly efficient but it is normally close to efficient. A higher potential reward means higher risk. It is textbook stuff. I think you handle that risk by not sticking around when you feel it is time to get out. I am impressed and I’m learning, but I am not sure I can copy your success… Unfortunately!

So do you still disagree? I am very interested in your methods so I hope you are getting that from my texts.

Thanks for your board, your input and this discussion.

Stay warm! It’s very cold here in Cincinnati…

Randy

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On Lynch, and his buying all types of stocks. I don’t disagree. I was really referring to what is his preferred style. He is a smart guy and when his fund and overall amount to invest grew he needed to expand his buying universe. I do think his preferred style is as I described. Not too dissimilarly, buffet has publicly stated that he would be buying difference companies if Berkshire was smaller. I am much less interested in the exact details than understanding a philosophy I can replicate.

To that end, I am much more interested in a successful strategy that I can implement for the next couple of decades than I am inventing my own strategy just so I can call it my own. I need to understand and believe in it so when the market turns against me, which it always does eventually, I will stick to the plan and plow forward. I believe That is when the real progress is made long term with a portfolio.

As someone has said. Imitation is the greatest form of flattery.

Randy

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My example would be UBNT where not long ago you sold out because the CEO was becoming too involved in his new toy (sports team).

Hi Randy, I think hundreds of people must have told Pera to ease up on the basketball and get back to running his company because at this quarter’s CC he was sharp and knew exactly what was going on, so I took back a (much smaller) position.

Again, I am now in SKX so I think it is a good risk but the market isn’t stupid, I don’t think it is perfectly efficient but it is normally close to efficient.

Randy, if the market was efficient no stock would never go up or down 30% in a week (it would have been already accounted for), and you’d never be able to make a 10-bagger. Fortunately for us, the market is OFTEN very wrong about a stock (either too high or too low at times).

Saul

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I do think his preferred style is as I described.

Agree 100% - he mentioned fast growers as his absolute favorite. Good point.

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Don’t disagree… it is just a matter of degree. If the stock moves 30% in a week without news either micro or macro. That is market inefficiency. If earnings come out and the stock price moves. That is market efficiency, reacting to the news.

But in general, we agree that there are inefficiencies. I would still say that if a company is growing much faster than it’s PE, then the market is perceiving more risk than you are perceiving, otherwise the price would already be higher. The risk may be that they have had growth spurts like this in the past and then had problems, it could be that the market doesn’t think the growth will continue (or last), it could be that there are financial concerns.

I am not suggesting any of these things, just that someone, somewhere in the market does think this or the stock price would be much higher.

In any event, you certainly seem to be doing a good job of deciphering real risks from not so real ones… and I agree, I am in CELG from a while ago, BOFI from this board, SKX from this board, and I believe a couple others that I don’t have on the tip of my tongue.

Oh and I am still in UBNT as well… but then I own way too many stocks… :slight_smile:

randy

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A comment about “market efficiency”. Unless you’re buying nothing but broad indexes like the S&P 500 or whatever, or exclusively own big mutual funds the whole notion of The Market anything is irrelevant.

I buy and sometimes sell (not often enough - or maybe “soon enough” would be a better phrase) individual stocks. The vagaries of The Market as measured by an index has only nominal relevance to my decision process.

It is true that I am influenced to some degree by the general trend of The Market. I try to exploit it. While I don’t try to “time” The Market per se, I might chose to buy during a downturn and postpone a sell. (As I noted, I find all kinds of reasons to postpone selling - a definite weakness in my overall investment “strategy” - in quotes because I would have a difficult time verbalizing whatever it is).

I dabble in options. sort of a way of milking “dividends” from stocks that don’t pay any. I’ll sell calls at a strike where I would be happy with the return if I were to sell outright. As the expiration date nears, I may reap the benefit if the stock is under the strike, or I might buy it back and roll it forward if I can do so profitably and don’t have qualms about holding the stock longer. Or I might let it get called away. If I still want to be in the stock, I’ll turn around and sell a put. There is a downside to puts however, I won’t allow a naked put in my portfolio, so it ties up the cash.

But that’s somewhat off topic. My point is that The Market is a like a school of fish - I think especially true now with the expansion of programmed trading. It doesn’t take much, and it seldom requires anything rational for The Market to veer in one direction or the other. A market leader in an industry misses by $.02 and the stock takes a hit - and so does every other company in the industry. Or the unemployment number is better (or worse) than expected and The Market turns one way or the other.

Call it “efficiency” if you like. I call it irrational.

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Randy,
I think you’re missing an important market reality. There is a great deal of activity in the market which I think would better be called gambling as opposed to investing.

Look at SKX for example. Currently more than 23% of the float is tied up with short sales. If they have a bang-up quarter and the price stretches up a little, all of a sudden there’s enormous margin pressure on all those shorts. The result is a flurry of buy activity as the short sellers scramble to cover before the stock goes higher and margin calls are issued. But, the perverse effect of this (perverse for the shorts that is) is the buying activity further pushes the stock price higher hereby exacerbating the margin pressure. So the stock get’s driven higher still, way out of proportion to the actual events. Of course, there are similar situations which will drive a stock down.

These are not trivial situations. They are real and they drive short term prices to a significant degree. For a long-term investor, they are noise (or maybe opportunities). But it’s often difficult to separate the noise from business realities.

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Hi brittlerock,
Thanks for the discussion. But it is kind of funny about these posts that the intent gets misconstrued as the trail grows.

In no way was I trying to say that the market is efficient and individual stock selection couldn’t beat the market. I was only trying to say that the market isn’t normally completely irrational. I was trying to state that the type of stock that Saul likes, i.e. a stock whose peg ratio is much less than one, generally has some reason why the PEG is so cheap. Everyone wants a peg ratio less than one.

Nothing more was meant than that. It seems fairly obvious to me, but I have gotten a bit of pushback. My assumption is my lack of ability to communicate well.

In any event I agree with your comments. In fact, I am reading a book that discusses the psychology of the market and the ways that it is not rational. The name, if your interested is Investing, The Last Liberal Art by Robert Hagstrom. Very interesting.

Stay Warm!
Randy

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Randy,
Maybe you’re right - I may have missed your point. And to be clear, I wasn’t exactly saying the market is wholly irrational, I was only trying to point out that a lot of the daily swings are not always due to well reasoned decisions that have something to do with the underlying business of the individual stocks.

If I understand technical investing (which I admit, I don’t really get very well) the underlying philosophy is that the market is subject to group think and it can be interpreted from the charts if you know what to look for. I’ve tried and I can’t decipher the patterns which are supposed to be significant. It’s like some sort of mysticism to me.

I wouldn’t presume to speak for Saul, but I think he (and probably most people who follow this board) try to evaluate the underlying businesses and figure that in time the selection of good businesses will be rewarded by the market, but a tolerance for the irrational daily gyrations of the market is required.

It was either Buffet or Munger who said the market is a voting machine short term and weighing machine long term. I’m not sure I would even go that far because voting implies some sort of thoughtful evaluation. I believe that an awful lot of market activity is driven by emotional reaction and/or mindless pre-programmed triggers. And exactly how one measures short and long is subject to debate.

Saul has mentioned repeatedly that he always looks for companies that he intends to hold for years, but events often intervene, either something about the business changes or some other opportunity looks like a better investment for the limited available resources.

But given all that, Saul, TMF, Buffet, Lynch and host of others have repeatedly demonstrated that there are various strategies that can be used to find undervalued stocks. Buying undervalued stocks almost always yields an out-sized reward as the “efficiency” of the market eventually reacts to the business realities.

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Oh yeah - P.S. I live in the Pacific NW, the temperature here are moderate for this time of year. The Pacific Ocean is quite a large buffer. I was born and raised in Chicago - I left over 40 years ago. Actually, the cold winters didn’t bother that much, it was the hot, humid summers and mosquito plagues (the Illinois state bird) that drove me out of the Midwest.

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It’s a good time to be in the Northwest and I agree with what you said. Just to be clear incase you didn’t notice, I was the author that started the whole thread about Lynch, Buffet, etc.

Of course I think there are patterns that work, again, that was the point of the thread. I was only trying, in my own mind, and putting it down in words here, to decider and understand Saul’s pattern that he uses. Looking for low PEG ratios, trying to understand why the market is giving that company a low PEG and picking the ones that are not getting treated fairly, appears to be his pattern. It seems like a good one.

The only other aspect I had noticed was that Saul, and I think it is to his credit, is able to walk away from a pick as soon as he becomes uncomfortable with the pick. It seems to work well and is a little different from most of the types that I usually try to emulate.

In fact, the original post was meant to be my thoughts that I needed to move a little closer to that idea as I believe I hang onto stocks that haven’t worked for too long.
AMRC is an example. It’s been a miserable stock but always seems to be just around the corner from waking up and I have never been able to sell it. I think I am always afraid I will do so and then it will finally blossom, earnings will take off and it will quadruple right after I leave. I admit, not likely but…

Anyway, the Northwest is nice, I have been there a number of times on business (Boeing). We got another 1/2 foot last night in Cincinnati. So it will be a quiet day here with nowhere to go, even if I wanted to, but that is okay by me.

Stay warm (if anyone is reading this thread anymore.
Randy

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