Is this board not about better investing?

The thread on high or low p/s stocks has gone on as long as a political rant on NPI. I appreciate the opinion. We all need to know that investing is not easy. We also need to know, as we have learned, is if you listen to the conventional wisdom of the investing industry you won’t make money. You will revert to the mean.

We invest here in companies, not systems. If you want to invest in systems have at it. It may turn out that Saul or my holdings may end up in certain sorts of stocks, but until the beginning of last year I only owned one SaaS stock and that was SHOP. The others I owned were Nvidia and Arista. Saul’s portfolio was similarly mixed.

One thing learned is that the low price to sale growth stocks faltered, all of them, to a person and have never come back. PURE is one that is an enigma as its business never actually faltered but improved but yet as if it were Talend its multiple has contracted and contracted and remains that way.

On the other hand, the stocks that the market has chosen as the highest quality have returned that way.

The way we will invest will change over time but some principals (at least for me) will not. This study ignores, as an example, systematically find and holding and investing in Netflix, Amazon (don’t give me if you bought during the bubble. It was a bubble! Experienced investors wold identify it. Even if you did not, systematically holding it and investing each month would have still given you extraordinary returns), or a SHOP, TEAM, etc. Perhaps Mongo and OKTA and Zscaler (as examples) may turn into the next great line of companies.

ALL OF THESE COMPANIES DESTROYED THE MARKET AND MADE THE RULES OF THE VALUE INVESTORS THAT ALL THINGS RETURN TO THE MEAN IRRELEVANT. Yes, IRRELEVANT.

This is not “things are different now,” this is how it has always been. Superior disruptive companies have always been expensive and they have always killed the market. That is what we attempt to identify and hold.

If instead you want to buy the market, or a general segment of the market, say SaaS then you also have to hold Talend and Cloudera as examples. If chips then you also have to hold all the chips, etc. THAT IS NOW WHAT WE DO HERE. Well most of us, I am sure there are some who do. And nothing wrong with it. But that is not what most of us do here. And that is not what our conversations here are about.

What we do here is try to identify and invest in the leading hyper-growth disruptive businesses in the world. Through crowd-sourcing we do this systematically. And this is contrary investing because 90%+ of the world calls us crazy for doing so. These market “darlings” that are extremely “overvalued” that will simply crash some day. Enjoy the “party”.

Those invested in Netflix, SHOP, Amazon, TEAM…they are.

If, however, you never want to find and invest in these, or the next generation of such companies, and hopefully there will be future generations like Twilios of the world that are only two years public, then you need to understand that for all rules there are exceptions.

Something like a very small number of all stocks create most of all the market increases. This study is misleading as many companies are acquired, or the ones that become laggards are the ones that we do not want to invest in and usually sell anyways, indicates just what I am talking about. If you want to buy the market you will have mediocre returns. If you want to buy the premium businesses of the day…well use your own judgment.

My mother told me that I was an idiot to go into law. Too many lawyers. Only the rich make it. My father told me to join the corp of engineers (I was not fit to compete in the open market apparently). There are not too many lawyers, there are too few exception lawyers. I saw this, and love you but screw you {lovingly :wink: } for not having faith in me. Yeah, call it a chip on the shoulder, but with a point.

The same is true with investing. Everyone, EVERYONE will take their lumps and have to lose sometimes. However, if you go into anything only responding to fear, conventional wisdom, and that everyone reverts to the mean then why even try. Settle for mediocre. We have proven that we are not mediocre here. We are the top 1% of all investors. We do not revert to the mean, never have, and we are not stuck buying the market (thus ensuring mediocrity), and we are not stuck investing in systems.

We invest in the best growth businesses in the world. A select few. And contrary to the pompous certainty of studies that show we are all idiots, the unequivocal evidence is that, wait, wait, wait, there is Netflix, Amazon, Shop, Team, TTD…but it is all luck, right? Tell that to David Gardner who found and invested in all of them early and continues to hold them.

So no, things are not “different this time,” things are actually the same. If you want mediocre returns simply scare yourself into acting as if you are mediocre by investing in the mediocre or the market or a system.

As I said, the way David Gardner invests scares the living bejeesuz out of 90% plus of the population. It stands in the face of all the investing experts who say it cannot be. You cannot invest in outrageous overvalued! Well he did, he does, and he will, and his returns are superior to almost anyone. Is that just luck and a fluke? Are we just lucky and a fluke? Does that not sound like the 90% of everyone who tries to pull you back in the pack because you are doing better than them?

Make your own call. I do not invest that way and I will not live my life that way. Of course we understand risks. We are not daredevils! But statistics…put them into context, and then explain if those statistics are so valuable, then what is with all these systematic outliers?

Silence. You will never hear an answer from the naysayers to explain them other than “luck”.

Tinker

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Tinker nice post.

I have one question for you.

We invest in the best growth businesses in the world. A select few. And contrary to the pompous certainty of studies that show we are all idiots, the unequivocal evidence is that, wait, wait, wait, there is Netflix, Amazon, Shop, Team, TTD…but it is all luck, right? Tell that to David Gardner who found and invested in all of them early and continues to hold them.

Which of these companies, you mention, do you still own?

Andy

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I don’t hold any of them. I never owned Amazon or Netflix. My investments have been more akin to Saul’s over the years. As an example, 8x on QCOM during the bubble, sold it. Bought it again in 2003 and held it until 2006 for a triple. QCOM has not done anything since then.

Statistically QCOM has underperformed as an “overvalued” stock, but only if you continued to hold it.

I held Nvidia, ANET, and SHOP since I returned to the market (I was away for about a year), when was that, late 2015 or something like that and sold them at the beginning of 2018.

I just wrote a post (that I think I linked to here) on when to sell. Turns out the time to sell is contrarian as well, it is at the time when you would not buy it. That is when it is no longer extremely overvalued. SHOP doubled since I sold it, while Nvidia collapsed, and Arista is only now back to where I had sold it. So much for hanging on to “reasonably” priced shares. This is not just an anecdotal example.

I also bought Twilio at its IPO and sold it near it peak in the $60s before it collapsed. Should have of course bought it back later but I moved on.

Currently, I bought Zscaler at its recent lows and have more than a double, have owned Mongo since early last year, bought Alteryx during the Tableau FUD (had to sell some for tax reasons) and have bought back all my shares, and recently made a foray into Elastic.

Yes, I appear to be quite nimble and good at this. So I am. So is Saul. However, every purchase I ever made was made only with long-term in mind. Long-term in the world today is 12 months and 1 day for capital gain purposes.

But over the years I have picked up some wisdom. What I have found, as well as I have done, I would have done better had I bought and added each month and only sold when it was time to sell (like it was time to sell with QCOM, with Arista, with Nvidia - I went into great detail as to why it was time to sell and was not difficult to ascertain why. Part of it had to do with the market no longer giving the shares the same premium. But the reason the market reduced its multiple also had to do with business fundamentals. The multiple is simply a clue that something may have changed), the best growth businesses in the world.

As such I have coined it the “do nothing” philosophy of investing. Do nothing but add monthly unless a very compelling reason to do something comes along. All of my investing mistakes from last year would have been avoided in so doing, and further Duma illustrated this with a three year old portfolio.

He showed us the 300% return of the port bought 4 years ago. All you needed to do was do nothing. All this hustle and bustle and doing something cost you lots of money and effort and energy. One can look at the port I had until the beginning of last year. Despite all the angst, drama, extreme overvaluation, the best thing one could do is add and do nothing. The thing that happened when it was time to do something caused the multiples to fall as well, except on Shopify. That should have been a sign to keep holding SHOP but sell the rest. And so the results indicate. There is nearly a 100% correlation with this.

I doubt Netflix has ever gotten cheap, nor Amazon, etc. Thus I have learned to do nothing, stop chasing all the FUD opportunities, be opportunistic but stick to the investments that fit my rules (articulated on the NPI board quite clearly) and do nothing until one just has to do something.

So no, I was not wise enough to cut through the drama that was Netflix. I have already had a mea culpa on that. I have an issue with consumer facing stocks. Roku is one at the moment. TTD another. But what I am good at has compensated. So I will continue to hold and “do nothing” until it is time to do something. Hopefully I will never need to sell something again. But you know what, I doubt that will be the case.

I don’t buy the market. I don’t invest in a system. I invest in business fundamentals. Being overvalued holds valuable information. The resultant multiple has within it (like a cookie on the internet) information that tells us the future potential of the business with current business fundamentals. It is not like the market is overlooking Talend but only has found Alteryx (at its core Alteryx does what Talend does - although at different scale - and yet Talend was always reasonably valued and Alteryx always extraordinarily overvalued - and yet it was Talend whose business fundamentals crashed).

The study from 1950 to now showing whatever result it has is defective for many reasons. One such reason is that is not how people invest either. The study also assumes that being “overvalued” is a fluke. It is not. It is the resultant multiple from extraordinary fundamentals. It is valuable information that the market is giving us, not some fluke that needs to be corrected. Ask David Gardner about that. Like with Qualcomm, those fundamentals change, and so will the multiple and the stock return. In a contrary fashion it is when the stock gets “cheap” that you no longer want it. Not because of technical factors, but because of how fundamentals have changed.

If I can own Zscaler for the rest of my life, I will. I wish I would have not been stupid enough not to have done the same with Netflix. With the experience I have picked up, under my rules, I’d still own it today. It is outrageously overvalued. Ask any analyst. Fortunately, I have at least 20 years until I need the money to ply the wisdom I have learned. Further, fortunately, I have been fortunate enough to create enough returns that I may not need it then anyways. But I am dang well not going to do anything but do my best to maximize it anyways but simply doing nothing as much as is possible.

Tinker

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Thanks Tinker very well written.

Andy

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Thank you Tinker. Very clear summary of your approach and discipline.

Do nothing approach really does have it benefits. My latest goof up is I got tired of watching Pure do nothing and sold it about $20 a share at a loss. Which would have been just fine if I put that money to good use but it is sitting in cash. Now I am watching Pure approaching $23. I have given up on this stock to bring great returns but I didn’t have a compelling reason to sell bc I didn’t have a plan on what to do with proceeds.

It was one of those days that I simply felt the urge to do something. Nothing else.

I should make a huge sign that will say Do Nothing Unless It Is Time to Do Something.

Please make correction to that if somehow I misunderstood your approach.

Thanks,
Natasha

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Hi Tinker,

I loved your post, and your righteous anger with all the nay sayers, and I even loved your capital letters!

There are a lot of people who just don’t believe it can be done and are annoyed, and even jealous, to see that we are doing it, to paraphrase Shaw.

During the three month crash last fall, I was amazed to see that day to day, the market was falling more percentage-wise than my portfolio was, and that as the market continued down, and down, and down throughout November and December, my portfolio didn’t make new lows, and stayed above the gain of 45% that I had hit in October. We are really invested in the best of the best.

I especially think that people who keep talking about overvalued still don’t understand that there have never been companies with SaaS models before, with 95% recurring subscription revenue, and that it is actually a new model of business which naturally will have higher EV/S ratios because a large part of that S isn’t counted when they make the Sale.

I remember in 2010 when they were talking about the lost decade for the market from 2000 to 2010 (including the great recession) because there had been no gains for the markets in a decade, I didn’t know what they were talking about because I was up 500% in that time, in spite of getting killed in 2008.

I have compounded somewhere around 28% to 30% per year now for 30 years and people still don’t believe it can be done. It’s a mirage. Oh well.

Thanks again for your help!

Saul

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BTW for those interested in what academia says about growth investing, the consensus is that overall growth stocks return less than value stocks. However, a popular explanation for that is that value stocks are easier to manage:

The reasons for the superior performance of value investing, however, are controversial. Some researchers attribute the higher returns to the higher risk of value stocks; other researchers contend that the rewards to value investing stem from cognitive biases underlying investor behavior and the agency costs of delegated investment management.

https://www.tandfonline.com/doi/abs/10.2469/faj.v60.n1.2593

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BTW for those interested in what academia says about growth investing, the consensus is that overall growth stocks return less than value stocks.

Do you know of any of those academics who have quadrupled their portfolios’ assets in the last two years. They love it if they beat the S&P by 2%. We aim for beating the S&P by 30% to 50%. They are in a different ball-game.
Saul

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Tinker-

I think what you and Saul are talking about is a difference between Gaussian (normal) distributions and fat-tailed distributions. Nassim Taleb’s literary (and investing) career are made on expoliting the difference in understanding between the two.

If we’re talking about the market writ large (thousands of stocks) perhaps reversion to the mean and Gaussian distributions apply. That’s ok for most investors, because they have other things to focus on in their lives than investing. No problem with that.

But for those who want to DIY, there are a few key things to remember:

The pareto principle is at play. I’m not just talking about 20% of stocks accounting for 80% of returns. It’s actually fractal. You can carry it out.

  • 4% of stocks account for 64% of returns.
  • 0.8% of stocks account for 51% of returns.

As Taleb would say, we live in Extremistan – not Mediocristan. Small inputs increasingly account for enormous percentage of outputs. For our purposes, FAANG stocks – just five stocks – are like the 0.8% of all investable companies that created over 51% of returns.

The thing that makes Saul’s board – and TMF services in general – valuable is the network effect at play: a team of dedicated investors sharing what they learn. Even if we only find 1 of those 0.8% of stocks every year, the returns will never return to the mean.

Best,
Brian

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Let me start by saying that there are many ways to make money in the stock market.

Arista is only now back to where I had sold it.

Actually, ANET has been hitting new ATHs recently. Even one today.

I doubt Netflix has ever gotten cheap…

Were you around during the Qikster debacle? Turns out that was a great time to get (back) in, just as about 3 months ago was a great time to get back into ANET. I didn’t sell out of Arista like you did - but I did add more at $200 thanks to options, so that’s been a great run.

Turns out the time to sell is contrarian as well, it is at the time when you would not buy it.

This may work for you as “you,” but as we’ve seen Mr Common Investor often does things backwards. In a related view, I’ve posted previously about whether a “Hold” rating makes sense. Either you would buy it or if not, then you should sell. Practically, however, this is true only in tax-deffered accounts. In a taxable account a Hold rating makes sense since selling something means you pay taxes and so have less money to invest in something else, and that may change the equation of whether to stay in your current investment.

And finally:
The study also assumes that being “overvalued” is a fluke. It is not. It is the resultant multiple from extraordinary fundamentals.

Somehow I don’t think you or most on this board would agree that Tesla being “overvalued” is the result of “extraordinary fundamentals.”

But, like I said, there are multiple ways to make money in the stock market. Holding onto ANET worked for me, for instance.

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We are really invested in the best of the best.

And this is the obvious key. All the discussion/proof around EV/S and other metrics not working only means that mechanical investing based on such metrics doesn’t work. Metrics alone will not pick the right companies. Of course, metrics can only help inform timing or inform whether growth expectations are in line with reality, but trying to use them as sole criteria or filter is misusing them.

I remember in 2010 when they were talking about the lost decade …

I personally don’t see Mr. Market’s short-terms reactions in down markets as indicators of the quality of the companies in which I’ve invested. Just because some/many of the stocks discussed here didn’t go down as much as the market as a whole in Nov/Dec doesn’t mean they were the right companies in which to invest long term. Conversely, just because, for instance, ANET dropped to $200 in late December, that didn’t mean it was a bad company in which to invest. ANET is currently above $320, hitting new ATHs, up over 50% in less than a half year.

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There should be a link to this (Tinker’s thread starter) added to the Knowledge Base.

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Do you know of any of those academics who have quadrupled their portfolios’ assets in the last two years. They love it if they beat the S&P by 2%. We aim for beating the S&P by 30% to 50%. They are in a different ball-game.
Saul

Saul, I think you have misinterpreted what I have written. The quote means that if you pick value stocks blindly they will have better returns than when you pick growth stock blindly. That doesn’t mean you should not invest in growth stock, in fact you have a better chance picking the right companiesas an individual than a large organization has, because putting the decision making through several layers of delegation makes the process more closer to blind picking.

As for academics with great returns, there are some like that. Robert Shiller (of Shiller ratio fame) mentions one colleague in his Yale course on financial markets (I’d have to see the lectures again in order to give you a concrete name) - Yale gave him a couple hundred thousand and told him to “go wild with it” seeking the best returns and he turned it into 100s of millions of dollars. Asawath Damodaran from Stern school of business NY has got a pretty good track record as well.

Academics know very well that you can make great returns on growth stock, don’t let anybody tell you otherwise!

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Asawath Damodaran from Stern school of business NY has got a pretty good track record as well.
Here is a link to his personal blog:
http://aswathdamodaran.blogspot.com/

And a link to his webpage, which has a lot of his teaching:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/biomissio…

My very brief search didn’t find anything yet on his results, but it appears that he’s a very well-respected teacher.

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Academics know very well that you can make great returns on growth stock, don’t let anybody tell you otherwise!

A “problem” arises when a value investor tries to value growth stocks as if they were value stocks – wrong metrics.

Denny Schlesinger

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I would only differ about the assertion regarding “returning to the mean.” Eventually, I suspect this is true for all stocks. I’ve not done a study of any sort to back that up, but I think even a casual review of the market over time will bear that out.

Even our hyper-growth, category crushers will eventually cool. It will be either competition, a disruption, M&A or simple saturation. Something will slow the growth and the market assigned multiple and ultimately the stock price will “revert to the mean” (however that’s measured, something quaint like P/E I suppose).

So the question we face, irrespective of an attitude of buy and hold, do nothing or whatever, there will come a time to sell. You allude to this, and even provide examples of positions you’ve sold, so tacitly I think you agree.

No opportunity is unlimited in time. There’s always an expiration date.

I will also admit that I for one find it much harder to make sell decisions than buy decisions.

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