Investment discussions

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

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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

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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

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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

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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

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“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 :wink:

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 :wink:

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duma, the answer is in the post just before yours. The two posts must have crossed in the ether.

Saul

One problem investors have is getting attached to their previous decisions and not willing to consider that they may have made a mistake. I encountered this last spring when I made the mistake of suggesting an alternate investment on one of the MF SA boards. Here’s what I wrote:

PSIX and WPRT both sell for roughly the same price.

They both do the same thing (make engines for natural gas vehicles).

Westport this quarter had $30 million in revenue (down from $36 million, by the way). PSIX had $52 million in revenue (up from $45 million)

Westport’s reported loss was $31 million (more than their total revenue!!!) and they lost 57 cents a share. This means that they took in $30 million and spent $61 million. Even a hundred per cent increase in their revenues wouldn’t have helped as they only had about a 30% gross margin. Thus only $9 million of that extra $30 million would have gone to eating up that $31 million loss.

PSIX’s reported PROFIT was 21 cents a share.

PSIX made 81 cents adjusted in 2012, up 69% from 48 cents in 2011, and quadruple the 19 cents they made in 2010.

Westport seems unlikely to make any profit at all, any time, in the next few years.

So why would anyone buy shares in WPRT when they could buy PSIX? I’m just curious, it seems so odd…

As you will recognize, this is an extension of my philosophy of not buying money-losing companies that are going to make money some time in the vague far-off future. I was suggesting an alternative.

However, lot of people on that board were extremely and angrily annoyed with me for suggesting that there was something wrong with their WPRT investment. They were bitter in their attacks on me and PSIX. Infuriated. It was as if their inner beings had been criticized.

On that day both stocks were priced at about $29. Since then WPRT has fallen to $17 something and is now at $19.60. Today, PSIX closed at $76, for a gain of 162% from when I posted.

I’m not saying WPRT won’t ever do well. Who knows? Maybe 2014 or 2015. I’m just saying that not accepting that an investment could be a mistake is a dangerous error. I try to always reevaluate my investments and get out if i’ve made a mistake, or if information changes. Which is why I don’t hold stocks generally for 5 or 10 years.

Saul

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Hello Saul, would like your thoughts on the new American Airlines. The airline sector was red hot in 2013. Do you like this space for 2014?

Gerald.

Saul, this is awesome. Thanks for doing this!

Neil

Gerald, I know nothing about American Airlines.

Sorry

14. 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.

Saul:

How often have the RB stocks suggested “value” from such an analysis when you are comparing to a PE of 20? Peter lynch was more a value investor and it doesn’t appear to me that your approach is value based?

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.

Perhaps this really is where the rubber meets the road. Most of your other rules are pretty basic investment guidelines (don’t trade in and out, buy increasing earnings, look for insider ownership, etc.). There really doesn’t seem to me at first blush anything unique about your approach OTHER than the above statement that you have developed a talent for sniffing out companies that “have a long runway”…or at least the stock wasn’t fully valued for its potential at the time you purchased it.

So I think it would be valuable to the readers here to really explore this aspect of your approach in much more detail…maybe on separate thread since this one is getting quite long.

After all, there are an enormous potentially investable stocks out there…how did you decide to pick what you did? I know you mentioned basic criteria (earnings growth, followed by MF, no Chinese, no bonds, etc.) but while that narrows the landscape, there are still huge numbers of stocks that fulfill that criteria.

Like most people, my portfolio is up over 70% this year and enormous gains since the 2008 market crash. But I remain ever humble that this may be an anomaly based on circumstances beyond my control such as QE, Fed easy and expansive M2, etc.

Part of my gains strategy was different from yours in that I often invested in the fallen heros…they did have great stories and analysis but fell into disfavor for various reasons…these were very easy doubles and triples. I have based this largely on what I have called the TALC/SALC disconnect.

But I do often follow and actively participate in stock discussions that I am not invested in, yet ultimately do get into through that referenced disconnect. Folwing these stocks helps me understand the potential for SALC/TALC disconnects when they occur…if they occur.

You OTOH imply you commit early on and ride the outcome straight away.

May I ask then! what are your top 5 highest potential stocks as we now sit…not your top holdings but instead the top potential.

IMO, it is discussions of those selections that might bring more clarity to why Saul missed his destiny as a hedge fund manager making $500 million per year :slight_smile:

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Duma,

You OTOH imply you commit early on…

What does OTOH mean?

I have based this largely on what I have called the TALC/SALC disconnect.

What in the world does that mean?

more clarity to why Saul missed his destiny as a hedge fund manager

I could never be a Hedge Fund manager, nor would I want to be. I couldn’t do what I do managing billions of dollars, and I would find it a nightmare. Also I have no special training, no MBA, no accounting training, etc. I’m just an investor who has developed a method that works for me. I was actually a physician until I retired in 1996.

After all, there are an enormous number of potentially investable stocks out there…how did you decide to pick what you did?.. there are huge numbers of stocks that fulfill that criteria.

I don’t think or claim that I picked the “best” stocks out of that universe of investable stocks, nor that I handled the investment in the “best” way. Look, your portfolio was up 70% this year, which was better than me. What I’ve done is picked stocks out of that universe that allowed me to average 32% per year for a long, long time. That works for me.

May I ask then! what are your top 5 highest potential stocks as we now sit…not your top holdings but instead the top potential.

Look, if I knew which five would do best I’d only invest in five instead of twenty-five. I’m a poor predictor. Who would have thought that BOFI, a bank, would be up over 100% on the year, or that ELLI would barely have budged? Not me.

Saul

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PS Who would have guessed that AMBA would go up 36.5% in the last three weeks, and in fact, would almost triple in the last 3 months (It closed at $13.40 one day back there)? I liked the company but guessing potential for advance is beyond me.

Saul

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What does OTOH mean?

“on the other hand”

I have based this largely on what I have called the TALC/SALC disconnect.

What in the world does that mean?

Back in the post Y2k carnage, many a brilliant poster was left puzzled and suffering from PTSD…flabbergasted about how their brilliant research and deductions could have turned out so bad with that incredible market crash and the one that soon followed.

Several of us started trying to develop “rules” for technology investments (which many RB stocks happen to be) that might enable us to maximize profits and recognize when we had better get out or in a particular investment.

I explained the concept here because I observed that many times in conversations about stocks, there were parallel discussions occurring. One was about the excitement of a particular paradigm shift and the other was about a stock. The problem was that many times, the hype of a technology paradigm shift far surpassed the reality of the adoption.

But just as there are "early adopters in technology, there are early adopters in the investments. Yet these same early adopters can at times confuse their excitement for a technology with the hyped up price of a stock that they repeatedly argue the company will need to grow into.

With that observation, and watching what happened to stocks through hype and then disillusionment, it occurred to me that these same “brilliant” posters were more often correct in their original thesis but often incorrect in their investment approach with repeated hype and then crashes. They often left great storyline stocks because of the crashes in stock values only to see stock recover for several investment opportunities later.

I explained the concept back here (2 posts) and it tries to quantify the risk reward for investments based on the TALC/SALC disconnect:

http://discussion.fool.com/the-duma-rule-20598973.aspx

http://discussion.fool.com/stock-adoption-life-cycle-20518173.as…

I don’t think or claim that I picked the “best” stocks out of that universe of investable stocks, nor that I handled the investment in the “best” way. Look, your portfolio was up 70% this year, which was better than me. What I’ve done is picked stocks out of that universe that allowed me to average 32% per year for a long, long time. That works for me.

I am not impressed by my 70% gain…as I have said before, this past year was easy for everyone…even the dart board. What impresses me more, is your consistency over the years…point me to the mutual fund or money manger who has returned 32% annually average over 20 years!! Not sure that guy exists.

So from my perspective, if all we do is say “great job Saul”, then we have probably missed an opportunity to try to understand how you are so different from 99.9% of money managers.

So what is different Saul?

That is what I am interested in because many of your rules are pretty basic investment advice that everyone had had access to for decades. That is why I surmised that your instincts must be better than the average bear.

Look, if I knew which five would do best I’d only invest in five instead of twenty-five. I’m a poor predictor. Who would have thought that BOFI, a bank, would be up over 100% on the year, or that ELLI would barely have budged? Not me.

I agree but even so, you must have your favorites for stock price potential…everyone does. Which 5 do you think have the greatest risk reward and why?

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Duma, if I understand your “TALC/SALC disconnect” theory then I assume that ISRG could be one of those fallen heros right?