Investment discussions

Investment Analysis Clubs Saul’s Investing Discussions
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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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22

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.

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Saul, this is awesome. Thanks for doing this!

Neil

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Gerald, I know nothing about American Airlines.

Sorry

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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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26

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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27

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?

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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?

That is basically correct. The three obvious names that would apply to that second wave of SALC/TALC disconnect would be:

ISRG
OLED
CREE

Here are their present charts:

http://www.stockta.com/cgi-bin/analysis.pl?symb=ISRG&cob…

http://www.stockta.com/cgi-bin/analysis.pl?symb=OLED&cob…

http://www.stockta.com/cgi-bin/analysis.pl?symb=CREE&cob…

Of the three, ISRG still looks headed down and as you know it has a great deal of negative overhang including Obamacare as well as the GYN market questioning the added efficacy compared to standard laparoscopic hysterectomy.

ISRG is a “special” case in adoption IMO, since unlike most companies, it essentially has to go through an adoption lifecycle with every specialty. Just because a urologist uses the daVinci doesn’t mean that a cardiothoracic surgeon will embrace it…each is its on TALC.

As regards, the disconnect of SALC and TALC, each of the stocks have their reasons for disillusionment but I personally rarely IF EVER average down, so I wait for stability of the chart and both OLED and CREE appear to be better positioned for a leg up than ISRG at THIS TIME.

Hope that clarifies and please feel free to criticize and dispute.

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Sorry…left out this obvious stock as well:

http://www.stockta.com/cgi-bin/analysis.pl?symb=NUAN&cob…

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In my opinion, the best thing you could do Saul, is to post your moves moving forward- current portfolio, allocation, and trades. You keep impeccable records; hopefully this would be easy. At least for 2014/15 to better understand your thinking.

Everyone clearly appreciates your advice, your experience, and your track record. In addition to your snippets of wisdom and experiences, I recommend putting up a verifiable record. You could do it via CAPS and include details in the notes or just post it here.

You have an incredible track record and a lot of people are impressed and following your advice. I have seen your disclaimers asking people not to follow…but you do clearly give advice as well as call people out when you don’t like a recommendation from motley fool. You have been explicit in your results, I suggest you post details over the next couple of years as this is the responsible thing to do when you bring on a host of followers.

Look forward to your thoughts.

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longterm

In my opinion, the best thing you could do Saul, is to post your moves moving forward- current portfolio, allocation, and trades. You keep impeccable records; hopefully this would be easy.

I’m not willing to do that because I have a responsibility to myself and my family to get the best results possible. What I’ve been doing works for me. If I started posting each trade, I’d feel I had to justify it (to the readers and myself), which I often can’t do. I’d be second guessing myself all the time and it would mess up what I do.

On the other hand, I do post where I am every month or six weeks. You have my positions at the beginning of 2014. And here’s a repost from the TSLA board of where I was in mid November, for comparison.

Saul

Several people on this thread have expressed an interest in following what I have in my portfolio, so here is a current list as of Nov 15 in size order, with a verbal description of the size for extra color (“very large”, for instance, means a very large position for my average position size).

CELG (MF RB) very large
ELLI (MF RB) very large
UBNT ------- very large
MTZ (MF RB) large
SYNA ------- large
AMBA (MF RB) large
BOFI (MF RB) large
INVN (MF RB) large
SODA (MF RB) large
WAB (MF SA) large
GTLS (MF RB) large
YHOO (MF RB) large
PSIX --------large
SCTY (MF RB) large
CSGP (MF RB) below average
INBK ------- below average
AFOP ------- below average
TMUS ------- below average
WETF (MF SA) below average
SZYM ------- below average
LNKD (MF RB) below average
PRLB (MF RB) small
AMAVF ------ small
QCOR ------- very small
TSLA (MF RB, SA) tiny position
SSYS (MF RB) tiny position

I wrote last time that “I sold out of TSLA at $165-$167. I still love the company.” Since then it went up to $194 or so and back down to $135, which tempted me to take the tiny position you see.

I also wrote last time that “I’ve been reducing my stake in SCTY for two reasons. I don’t see their moat. In other words what’s stopping anyone else from adopting the same business model? Also the utility companies are starting to fight back hard against solar power and it’s not clear how that will go.” Since then I have felt more secure due to the Rule Breaker recommendation and the last earnings report, and have rebuilt my position.

You’ll notice that I’ve reduced my positions in very high PE stocks. Even PRLB, LNKD, AMAVF and SSYS, and I sold out of Z. Most of them don’t seemed fazed by my decision at all, and have kept moving up in spite of it.

SZYM is an exception to my policy of not buying money losing startups.

Below is a list of my stocks from Oct 1st, a month and a half ago. You’ll see that almost all the names are the same. I’m not a short term trader.

As of Friday’s close, my entire portfolio is up 38.7% so it’s on track for my goal of averaging 30% to 35% per year (but who knows how the last six weeks will turn out).

Remember that my biggest positions doesn’t mean the stocks I’m buying now. The very big positions were bought normal size 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.

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Saul,

I’m delighted to have found this board.

Would you comment on CSGP? I was surprised to see it on your portfolio. I bought CSGP in 2007 and it has lost 70% of its value. I’m getting ready to sell it, but haven’t found much recent info on MF. (I’m an SA member, but not RB).

I’d love to hear what you like about this company. Thanks.

35

akym,

CSGP lost 70% since 2007???

Yahoo shows it around $50 to $60 in 2007 and $182 today.

What am I not seeing here?

Gene

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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?

…my broker once made me a million dollars in airline stocks…

…I gave him 2 million… :slight_smile:

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37

Hi Saul, I’ve really learned a lot from all your great posts and it did help me to reallocate my portfolio effectively in 2013. I had a very good year, not as good as yours, but good compared to my history. I’m really glad you created this board. I’m sure we can all continue to learn from one another.

Thanks for all these great posts and discussions on your approach.

All the best for a great 2014. Brian

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38

akym,

I also looked up historical prices for CSGP in 2007 and found then in the $40 to $58 range. As it’s now $180, and near its all-time high, maybe you are thinking of a different symbol.

Saul

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About the CSGP error – I originally purchased LoopNet (LOOP) in 2007, which merged with CSGP in 2012.

After some digging today I learned that my LOOP stocks were transferred to CSGP at a conversion ration of .03702! That means, if I understand right, I received shares of CSGP at a cost basis of $594 each, when they were worth $49 on the open market.

What the hell? I know this is off-topic of your discussion, Saul, but I’m wondering if anyone can explain this to me. It’s the reason my cost-basis on Fidelity website (displayed as CSGP on my portfolio), looked like it was down so dramatically, from $594/share to $181. Realize this is an indication to me to follow my smaller holdings more carefully. But seriously, is it typical to lose so badly in this kind of merger? How could I have avoided this slip?

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I don’t know what it means myself, but I bet that if you asked the question on the CoStar board, someone could answer it for you.

Saul