Hi All,
About one year ago, I joined Jonah Lupton’s service, and he became my de facto Mentor. He’s the best investor I’ve ever come across. See his returns below:
I read his notes daily and reviewed all his holdings since he started his service in 2020. I have no relationship with Jonah, other than asking him questions from time to time and being a subscriber & I am not here to plug him. In 10 days, he is cutting back his service to make it much more basic as he is starting a hedge fund this summer. I just wanted to highlight some of the things I’ve learned from him over the past year and how it has influenced my investing style. He has core holdings, which are his long term buy and hold stocks. Besides this, he does swing trades, hedging, occasional shorts, etc. I’m mostly a long-term investor (not a trader) so I have focused on his core holdings and what I can learn.
Here are some of the things I’ve learned or incorporated into my investing style:
-Obviously the first trick is to find the best growth companies with defensible MOATS such as NVDA, APP, RDDT, HOOD, NU, AMZN, etc. Nothing new here. You don’t need to buy hypergrowth. Sometimes an undervalued mega-cap like META in 2022 is a much better choice.
-Trim or sell completely if a stock becomes over-valued. You can always buy it back later if the valuation becomes reasonable again. There is nothing wrong with selling out completely on an over-valued stock. It’s ok to take profits.
-Average down whenever you can and look for pull-backs to add. I never understood the whole, it’s going up, so it makes me want to buy more theory. David Gardner used to say something like “Only a dip buys the dip.” Short-term movements of the stock market are often meaningless & arbitrary. Sectors go in and out of favor. Market tends to over-react in both directions. I like to average down, not up. Just because your stock went up over the past few weeks doesn’t mean you should buy more.
-Diversify to at least a dozen stocks. Growth stocks are risky, with high Beta. You’re better off with some diversification. Don’t ever put more than 15-20% in one stock. Remember Upstart? I put 25% going into earnings, big mistake. Never again. Small and mid-caps should be balanced out with some mega-caps, etc. Diversify industries, themes, etc. If you remember when many of us lost 50-80% of our portfolio in 2021-2022 by owning mostly SaaS, then this one should be easy to remember. I’m not a gambler, maybe you are, but hoping an earthquake doesn’t hit Taiwan or Elon Musk doesn’t lose his mind is gambling. I lived in Taiwan and was in many earthquakes there and Elon is a loose cannon, there is no doubt.
-Hedge your bets. Keep at least 10% in cash. If you use any margin, make sure you hedge by shorting TQQQ, IWM, ARKK, etc. to mitigate risk.
-Mostly ignore trailing metrics - they are mostly meaningless. Forward metrics are what good investors keep an eye on.
-Buy mostly profitable stocks at reasonable valuations. Let’s take XYZ stock as an example, I have a 4% position, XYZ is the lame new ticker for Block (formerly Square):
The key is to look for stocks where the NTM EV/EBITA is .5 or less the Fwd 2-Yr EBITA CAGR. This is Jonah’s favorite metric. In this case, we see that the ratio is approx. .3 so if everything else checks out then there is likely a lot of upside. Obviously as the ratio gets closer to one, we can use it as a rough guide to see that a stock may be “fairly valued.”
For example, I loaded up at APP last summer, made it a top position as I liked the company, and the ratio was somewhere around .25, if memory serves. Now the ratio is about .72 so I would consider it roughly closer to fairly valued. I still have a 11% position but obviously I took a lot of profits as it run up 500% or so over the last 6 months.
-The biggest change is I stay far away from overvalued stocks like Axon. It is expected to grow around 21% this year but is trading around 110 NTM earnings. I stay even farther away from crazy stocks like PLTR trading at 70 x NTM sales or stocks like CRWD or SNOW, where most of the FCF is eaten up by stock-based compensation.
-We all have different styles, and none are necessarily right or wrong. But I’d rather be trying to follow the fundamentals when the next correction or bear market hits. The pull back will be much less, and it is just much less stressful knowing the valuation is very reasonable and the company is profitable. I just can’t invest by hoping the multiple will go from 30 x sales to 60 x sales. PLTR and CRWD are great companies doing great things but I’m not a gambler, I’m an investor.
-I’m not done buying unprofitable companies altogether or story stocks with incredible optionality like Tesla, but I’ll keep them small, if and when I do buy. However, I sleep much better focusing mostly on profitable, undervalued stocks, with a great narrative. And it’s not just about sleeping well, which is more important than making $$. In the long run, I think my returns will be better as well.
-FoolishJeff