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 