We’ve had a lot of interesting discussions on the Rule Breaker TSLA boards and elsewhere, but recently a couple of people have asked me to start a board of my own to discuss investment philosophy. Here it is. I’ll recopy some of my posts here to get things going. I hope you enjoy it.
Saul
My Current Positions
Several people on this thread have expressed an interest in following my portfolio, so here is a current list as of Dec 31 in size order, with a verbal description of the size for extra color. (Very large, for instance, means a very large position compared to my average position size).
AMBA (MF RB) very large, passed CELG on the last day of the year
CELG (MF RB) very large
UBNT ------- large
SYNA ------- large
INVN (MF RB) large
MTZ (MF RB) large
ELLI (MF RB) large
BOFI (MF RB) large
SODA (MF RB) large
WAB (MF SA) large
YHOO (MF RB) large
GTLS (MF RB) average
SCTY (MF RB) average
TMUS ------- average
CSGP (MF RB) average
WETF (MF SA) average
SZYM ------- average
PSIX --------average
TSLA (MF RB, SA) below average
AFOP ------- below average
LNKD (MF RB) below average
INBK ------- below average
AMAVF ------ below average
NGVC ------- very small
DPZ ------- very small
Since my last posting on Nov 15, I sold out of PRLB, QCOR and SSYS and took two very small starter positions in NGVC and DPZ. I don’t know if I will stay with these yet.
Of my non-MF stocks, AFOP has not worked out for me, but I don’t have a clue why. I’ll probably gradually get out of it if it doesn’t turn around. The same for INBK, except I know why it hasn’t done well.
On the other hand, continuing with my non-MF picks, AMBA, YHOO, INVN and SCTY (all four have since become MF RB picks), SYNA, UBNT, PSIX, AMAVF and PSIX, have all done well, some very well indeed.
SZYM is an exception to my policy of not buying money-losing startups.
Remember that my biggest positions don’t mean the stocks I’m buying now. The very big positions were bought at average size or less and grew to be big positions.
PLEASE don’t buy anything on my list without researching it yourself and making sure it’s a stock you want. Some of them (especially some of the non-MF stocks), I’m not sure of at all. And I may not stay in all the stocks I have now. Again, please decide for yourself.
My End of the Year Results
For 2013, I ended up with my entire portfolio up 51.0%. This was quite a successful year. As you know, my goal, and my entire focus, is on making 30% to 35% per year on my entire portfolio. I don’t care a hoot about counting multiple baggers on individual stocks. The only thing that really matters for me is how my portfolio as a whole does.
Previously, I had given you my yearly results starting from 1993. That’s because back in 1991 and 1992 (back in the age of the dinosaurs), I had kept only a record of my annual results, and I didn’t start keeping a permanent record of my obsessive weekly running results until 1993. Therefore I was surest of my results from 1993 on. However I do have the annual results of 1991 and 1992 too, so I’ll give you the whole record.
From 1991 to 2007 I averaged about 32% per year compounded. This produced a rather amazing overall multiplication of my total portfolio, In fact, if you sit down with your calculator and multiply 1 by 1.32 (since I averaged a 32% gain) 17 times, you’ll be amazed too. (It’s the power of compounding). You’ll note that this was not a large multi-bagger on one stock, but on my entire portfolio, the whole works!
In 2008, in the big meltdown, I dropped 62.5%, which was pretty terrifying.
In 2009 I was up 110.7%. The way percentages work, after dropping 62.5%, gaining even 110.7% doesn’t get you back to where you started.
In 2010 I was up just 0.3%. In 2011, I was down 14.5%. If you wonder what happened, that was when, with the help of MF Global Gains, I got into all those little Chinese stocks that turned out to be fraudulent. (This was partly the fault of MF GG for recommending them, but certainly in large part my own fault for being naïve. Starrob even warned multiple times about these stocks but I ignored his warnings.)
In 2012 I was up 23.0%, but, as of the end of 2012, four years after the 2008 collapse, I was still not all the way back to where I had been at the end of 2007.
This year, 2013, put me up to a new high, a higher multibagger than I even had had at the end of 2007.
Back in May of this year I posted this response to a question on a MF Rule Breaker board, expressing doubt that anyone could consistently beat the averages. I’ll repost it here and add some follow up posts.
By the way, I pay no attention to what the indexes are doing as my goal is to average between 30% and 35% per year, and it’s an internal goal. If the market was down 15%, I wouldn’t feel I did well because I was down “only” 10%. It’s not a game. I need to make money at this as my family and I live off what I make.
Here is that earlier post:
Saul
Listening to this discussion, I have to comment on my own personal experience. For 17 years, from 1991 to 2007, I averaged 32% compounded without a single down year. I figured that by the percent gain of the money in the account each year. No gimmicks. (32% compounded really multiplies your money, by the way). I then was badly negative in 2008 like everyone else, which broke my streak. From 2009 through 2012 I averaged 22% compounded (if current percentages hold that last number will be up when 2013 is added in). Here are my thoughts about investing:
Stock picking does work (obviously). Especially if you are lucky, as I must have been.
32% a year compounded doesn’t mean you make roughly 32% every year. For example, here’s a string of the gains of my entire portfolio for twelve consecutive years starting in 1993. Numbers are percent gain. In other words 21.4 means every $100 turned into $121.40, and 115.5 means every $100 turned into $215.50. Here they are: 21.4 - 15.4 - 43.4 - 29.4 - 17.4 - 4.9 - 115.5 - 19.4 - 46.9 -19.7 - 124.5 - 16.7. (So don’t be discouraged if you only make ten percent some year. Keep trying for good gains).
Go for companies that are growing fast, and hopefully that are not yet discovered and bid up in price. Avoid “story” stocks that are always going to make money next year or in two years or in five years (Westport is an example of what I mean, or early stage biotechs whose drugs are still in preclinical). If it’s next quarter, that’s okay. Absence or near absence of debt is important, except in companies where debt is part of their business model, where it’s sort of excusable (like DDD which does a lot of acquisitions).
It’s a lot harder to make great returns as the amount you are managing gets larger. You can’t just get in and out of a stock with one or two trades as the dollar amounts become too big. You can’t invest in companies that are really small or illiquid, because it’s too difficult to accumulate a position that will be meaningful to your portfolio. And if there’s bad news you’ll be stuck and unable to get out in a hurry without moving the market. It’s like turning a battleship instead of turning a motorboat.
When you are first starting out you don’t mind concentrating your investments in half a dozen winners. However, when you are retired, and you are investing for a livelihood, and you don’t have any other income to replace potential losses, you don’t let any position get too big. You never let a position grow bigger than 12% to 15%, and even that is way too much, no matter how much you like the company. (My biggest position now is just under 9%).
Trading in and out is self destructive. You remember the trades where you made a few dollars and it encourages you, but you forget the losses. Never take a position to make a few percent. You should be investing in stocks that you can see at least tripling, if not going up ten times.
A corollary of this is to never miss getting into a stock because you are waiting to buy it 25 cents cheaper. The decision is whether you want to invest in it or not. Once you decide, take a starter position, at least. Don’t wait around for a slightly better price. When it’s at $50, I can guarantee that you won’t remember or care whether you paid $10.05 or $10.30, but you’ll be kicking yourself if you didn’t get in. (For a concrete example, earlier this year I bought some shares of a little unknown company AMAVF at $15 and change. It hit $170 this week for an 11-bagger in less than a year. Do you think I care whether I paid $15.25 or $15.50? The issue is: Do you want to buy the stock? If the answer is yes, don’t fool around trying to buy it a bit cheaper. You are buying with a long term perspective.)
I now have about 25 stocks in my portfolio, plus or minus.
You can’t really keep track of more than 20 to 28 or so stocks, and that’s an outer limit. You need to read all the quarterly reports, and the transcripts of all the quarterly conference calls, which gives you a busy earning season. They often say a lot more on the CC than in the earnings release. Reading the transcripts works much better than listening to recordings as it takes a quarter of the time, and you can skip the forward-looking statements messages, etc. Look at investor presentations too. And get a news feed from your broker on each of your stocks.
You can beat any mutual fund over the long run. You can’t tell much from a mutual fund’s results because you are always buying last year’s results. For example, if it’s a oil company fund, and last year oil stocks were in, it will show great results, but this year it could do terribly. Also, you are always buying the results they had when the fund was much smaller and nimbler than it is now (because those good results they had when they were tiny made people pour money in).
You can beat ANY index over the long run, in spite of what you may hear.
I always buy with the idea of holding for years but I often have to sell out sooner as conditions change.
If you have the time, do a weekly graph on your stock, on old fashioned large graph paper. It helps you keep things in perspective. A drop from $51 to $49 doesn’t look so bad if you look back and see that it’s been between $52 and $48 for the past six weeks, or if you see that your stock rose from $40 to $51 in the previous two weeks and the “drop” to $49 is meaningless. (The problem with graphs that your computer makes is that a move from $10.00 to $10.05 will fill the whole space if that’s the whole move for the day or week. There’s no fixed scale.) Mark where you made purchases.
Peter Lynch suggested a monthly graph of stock price vs trailing earnings on a log scale map, which I have found very helpful. I scale it so that if the stock is twenty times trailing earnings the price and the earnings graphs will overlap. That gives you a quick visual perspective of whether the stock is cheap, reasonably priced, or wildly priced, and also give a nice visual of how fast earnings are growing that you can compare with your other stocks, as you use the same scale for all of them.
Hope this helps
Saul
Since this is a board on investing philosophy I’ll repost another of my posts from that same thread in May. This was in response to the question:
When you buy a stock, what is the most important thing you look at?
"It’s really a tough question because there are so many factors involved.
First, I look for a company that is rapidly growing its revenue. By rapidly I’m looking for usually AT LEAST 25% per year. (That usually rules out companies with no revenue like start up biotechs or start up diesel-from-algae companies, as well as slow-growing companies. I do occasionally make an exception as I have done for a small position in SZYM, which has two large factories coming into production by the fourth quarter and another the first quarter of next year, with big time partners).
I look for recurring revenue. I LOVE recurring income and the razor and razorblade model.
I look for a company that has a long way to grow. A company that I can hope will be at least a 3 bagger and maybe a 10 bagger. (That’s one reason I sold out of my position in Apple. Most people who are long Apple are hoping for a rise from $450 to $550 or $600. That’s equivalent to buying a stock at $4.50 because you hope it might get to $5.50 or $6.00. I wouldn’t buy a stock at $4.50 unless I though it could get to $20.)
That means a company that has a long runway, that ideally can grow almost forever. (Like Solar City, for example, or WisdomTree. What I mean is a company where the addressable market is so big that their share of it allows them to keep growing for the foreseeable future. That’s no guarantee that they will, but it’s better than a company that already has 40% of it’s total available market, for instance, and can only double once.)
I want a company with rapidly growing earnings. I usually won’t touch a “story” company that is losing money, but that "will break even two years from now”, no matter HOW enticing the story is.
I pay no attention to GAAP earnings and only look at non-GAAP or adjusted earnings. I know this bothers some people like Fletch, but it’s what I do. I feel that GAAP earnings ridiculously distort the picture. (Consider company X that has a big tax benefit this quarter and reports huge GAAP earnings, and then next year they pay normal taxes and looking at GAAP, it appears as if their earnings have tanked, just for a trivial example. Or company Y that has outstanding warrants. If their stock price goes up, GAAP rules makes their apparent GAAP earnings go down due to repricing of warrants. Just nonsense. I especially remove stock-based compensation as an expense).
I look for companies that are easy to follow, ( which is why a lot of my companies are recommended by the MF). It means that I generally avoid foreign companies. (Arcam, the Swedish 3D printing company, is an exception.)
I won’t touch ANY Chinese company. Not even Baidu. This is due my experience in 2010 or so with 13 little companies (some recommended by MF global Gains), of which fully 11 turned out to be fraudulent in one way or another. You simply can’t tell what’s going on in a Chinese company. Consider that Yahoo is a major company and owned 40% of Alibaba, and the Chinese CEO blithely gave himself the fastest growing subsidiary as a present without telling Yahoo. If it can happen to a big company like Yahoo, what chance do I have? I probably wouldn’t invest in companies in other emerging markets either.
I want a company that does something special, a “Rule Breaker”, not a company that just makes a commodity product well.
I avoid mining and drilling and natural resources stocks, which tend to go in cycles from boom to bust.
I look for insider ownership.
I want management to be interested in making a profit. (That’s why I sold out of amazon even though I love the company. I saw an interview where Bezos touched on a dozen or so goals he had for the company over the next ten years. Making a profit just wasn’t on his radar screen, never even mentioned. (I realize that this has made me miss out on the increase in amazon’s price, but I just wouldn’t be comfortable with it).
I buy no bonds of any type.
I’m usually nearly 100% in stocks, and only rarely and briefly as much as 10% in cash. I have a couple of small accounts in which I can buy on margin, but my amount of margin in rarely as much as 4% or 5% of my total investment.
15 I don’t invest in options.
16 I don’t invest in futures. (I tried them when I was younger and saw a bunch of money disappear overnight. You are competing against experts).
Saul
A thought that I had on investing philosophy while walking: I pay no attention to 2-baggers, 5-baggers, 10-baggers or whatever in individual stocks, nor do I count them.
This is relevant because this way it never crosses my mind to think anything like “This stock is slowing down, but it’s a 9-bagger. Maybe I should hold it for another year to try for another 10-bagger.” Going from a 9-bagger to a 10-bagger is only an 11% gain, so counting 10-baggers is meaningless to me. If I’m no longer in love with the stock, I should be able to put the money into something that will be up 30% in a year, and it will never even cross my mind that I missed having a 10-bagger.
What I do pay attention to is how my total portfolio is doing. When I multiplied my results out from 1991 to 2007 it came to a 115-bagger on the whole portfolio. That’s what is really important to me, since my family and I have to live on the gains.
Saul
PS Here’s another way to think about it: If you have an 80-bagger on a stock that grows to an 85-bagger it sounds exciting, but it’s only a 6% gain on your money.
If you take the same money and put it into a new stock where you just get a tiny little 2-bagger, you’ve made a 100% gain on the same money.
Which is why I don’t pay attention to trying to get multiple baggers. If they happen fine, but it’s not my focus.
In response to the following comment from Huddaman:
Your 32% compounded annual growth for a 17 year stretch looks stellar. Perhaps TMF should make you an offer for a job and dedicate or start a new newsletter service with you as an lead advisor. I don’t know of any fund manager or hedge fund manager with this kind of spectacular run for 17 year period. Even BRK/A managed only 19.6% CAGR during the period 1/1/1991 to 12/31/2007. Good job!
Thanks Huddaman,
I started a lot smaller than Berkshire, a LOT smaller. When you are investing billions of dollars like they are, you can only invest in very large established companies, and hope to find a pricing anomaly.
I don’t know of a fund manager or hedge manager with that kind of run either. It goes through recessions in 93 and 94 and another brief one in 2001 after 9/11. But again, if they do real well for a year or two, not only do they get larger because of capital gains, their funds get flooded, swamped, with inflows of dollars and they can’t duplicate what they did when they were small.
Also they have lots of people looking over their shoulders for quarterly results (are they equaling their benchmark each quarter?). It makes it hard to get good results, I’m sure.
And, I’m retired. I don’t want a job. I have enough of a job managing my own money.
Saul
Great Stuff! Have enjoyed the posts on your board. I am curious - How many sells do you average in a year, if you don’t mind sharing?
2020Investor
Nice, really looking forward to this board!
I was also wondering what your average holding time was, or how many sells you average a year.
Saul, thanks a lot for sharing your experience! I am looking forward to following this board.
Tomtou
Great discussion board, Saul. Looking forward to it.
I will post my year end review here … would be great if I can get some comments from you regarding my current holdings.
Anirban
Saul:
This is great that you now have your own board. Count me among the frequent readers and hopefully, contributors.
John
Saul,
I am looking forward to interacting on this Board.
Please let me know when you have taken a look at SWIR (and perhaps also DGII and CAMP), and also if you get a chance, would love your updated thoughts on ELLI on that Board.
Happy New Year.
Vic
Great Saul!
Would you mind posting your % returns by year from 2000 forward?
Also, for years that you had highest returns were those based on spectacular results in one or two stocks?
I was also wondering what your average holding time was, or how many sells you average a year.
I always buy with the idea of holding indefinitely, never with the idea of a short holding period, but in practice I guess my average holding period is six months to two years. I sell when I’ve fallen out of love with the company or I think the story has changed, or I think that the price has gotten way out of line.
I’ve currently had ELLI for 2.5 years and it’s probably my longest. I think I had had IPGP for several years when I sold it because I thought it was turning into a slow grower. Most of the stocks in my portfolio, I’ve had between 6 months and a year and a half now.
On the other hand, I usually don’t buy all at once or sell all at once, but taper in and taper out, unless I have a good reason to get out in a hurry.
Note that, with, for instance the two “tiny” positions that I mentioned in my current positions, the stocks I’m thinking about, I can decide not to take a position and exit those right away.
I hope that helps.
Saul
Would you mind posting your % returns by year from 2000 forward?
2000 - 19.4
2001 - 46.9
2002 - 19.7
2003 - 124.5
2004 - 16.7
2005 - 15.6
2006 - 8.6
2007 - 22.5
2008 - (-62.5)
2009 - 110.7
2010 - 0.3
At this point I have a little reminiscing: I remember in 2010 there was a lot of talk in the media about the “Lost Decade” for the stock market, which was unchanged in 10 years. At this point I was up 570% in those same 10 years, inspite of 2008, so I was wondering what they were talking about.
2011 - (-14.5)
2012 - 23.0
2013 - 51.0
Saul
This is part of the discussion from May. I posted this in response to a number of good questions from Huddaman:
Thanks for the questions, Huddaman, they make me search my motives. Let me start with your #5 as I know the answer to that one.
5) After making 115% in 1999, what made you get out and still keep your head above water in 2000. By start of 1999, if you thought equities were still good place, it would have been hard to change course in 2000 when not much had changed in terms of valuation to seek refuge in safer stocks. Or did you never actually buy into the crazy technology boom that occurred in previous years?
I was in lots of internet stocks in the internet bubble, especially YHOO, amazon, and AOL. They were priced ridiculously but reputable analysts from big brokerage houses were saying “Sure it’s at 200 times revenues, but comparables are selling for 400 times revenues, so it’s cheap”.
What got me out was one series of days when YHOO at the time went up $30 to $50 a day for three days in a row. I said to my wife, “This is insane. I’ve made enough. I’m getting out. They may keep going up but I’ll let someone else have it.” And I got out of all of them. And three or four weeks later they crashed, and lost 90 to 95% of their value. I didn’t get out of equities. I’m always nearly 100% in stocks. I just bought non-internet stocks and finished 2000 with 19.4%. Less flashy, but I was lucky to have gotten out.
2) Do you also buy in stages like say Anurag or TomE advocate?
This is tricky to answer. Since I’m almost always nearly 100% invested unless I’ve recently sold out of a big position, I often don’t have the money to take a full position all at once. If it’s something I absolutely fall in love with, I’ll jump into it right away with whatever money I have available, and will likely trim some other large positions to fill out a full position. If I’m not sure, I’ll take a small position and start graphing it and getting news feeds to put it on my radar. I then may start adding more as money becomes available, often building to a “full” position, which is an average position, not a “large” position like the ones I listed a few posts back (which stocks have to grow into). I may do this fairly rapidly, or if I’m building two or three new positions I may have to split available funds between them. Or as I get more familiar with the stock that I’ve taken a starter position in, I may say to myself, “This is stupid, it’s not my kind of stock”, and sell out of my starter position. That does happen.
3) How many stocks do you usually like to keep in your portfolio to minimize volatility?
I touched on this in my original post. I would probably prefer fewer, in order to get more influence from my big winners, but I now usually have to keep 20 to 30 positions. Rarely under 23 or over 28 and never more than 30.
More to come tomorrow.
Saul
Also, for years that you had highest returns were those based on spectacular results in one or two stocks?
Duma, The answer to this would be no. As my biggest positions are usually 7-9%, no stock can influence my results that much.
For instance, I had an incredible year this year with Arcam - going from $15 to $170 at most, but I never had a very big position because it was a foreign stock (Swedish) with small volume and hard to get in and out of. And when it went way up and my position size got big, I trimmed it back down (several times). I also had good runs though this year on AMBA, TSLA, PRLB, SSYS, CELG , BOFI, WAB, YHOO, PSIX, etc. so it’s hard to say that any one stock makes the difference.
Saul
“Lost Decade” for the stock market
Right and for your lost decade you averaged around 30% annual return!
I am starting to think this may be more than just luck 
Me thinks we need to dissect this a bit more.
Can we go back to the big years of 100% or more gains…was this on the basis of 1 or two big stock gains or more broad successes?
Sorry for the questions but I am a trust but verify sort of person
duma, the answer is in the post just before yours. The two posts must have crossed in the ether.
Saul