I still think it would be interesting to go back to your first monthly and just calculate returns if never sold.
Hi Duma, you are welcome to do so. My first monthly summary (end of Nov 2013), is on the right hand panel under Additional Info
I read that first monthly summary last night. I did not do a careful historical analysis of those stocks, but I strongly agree that holding all of them until now would have been appalling compared to Saul’s actual results.
I then read through most of the monthly summaries since then (it was a late night), and have come away with several impressions.
First, characterizing Saul’s trading as churn is the wrong way to describe it. He is a unique combination of momentum following of high conviction stocks by continuing to buy as they trend up. He also buys on dips, which is going against the crowd, when he believes the fundamental investment thesis is intact. He also does not wholesale turnover the whole portfolio quickly. These are normally incremental trades.
Second, he avoids falling in love with a stock through a couple of techniques. If the valuation gets too high, he starts to sell some of the position. If this was a large position, which is turning into a very large position, he trims it back. Thus, even in his highest conviction stocks, he trims them back in the normal course of his trading. This is healthy, as it prevents him from riding a high conviction stock down too far when it stops performing well in the market.
I am a newbie (a couple of months) following this board, and really wish I had found it sooner. I have had several stocks that went up multiple times in a few years (TMF RB types). To stay in them for the big run-ups, I have not sold on pullbacks. The consequence of that is that I could not tell the difference between a correction when the fundamentals are unchanged, and when they had. I have held on to the big gainers until they came way back down, and many times until I was in a loosing position in the stock. When you have a big gain in a stock, and your mentality is buy and hold, you start thinking you are right, and the company will come back. Trimming a position still on the way up helps keep your objectivity so you do not ride it too far down.
Third, the unusual gains of the last year and a half are because the Knowledgebase technique of finding companies with high revenue and earnings growth, plus high NPS and/or ARR scores, has selected companies that have developed a culture of continuous improvement and focus on the customer, with a large (at least perceived) moat, and a long runway ahead (TAM). I think the secular change in the market we are seeing is a unique period when the enabling power of the Internet allows these successful SAAS companies to scale without adding lots of staff quickly. It is almost impossible for a company to triple or quadruple staff and maintain the quality of staff and culture. The unusual leaders who are capable of leading a company through these transitions are the ones that have created the world class software institutions, and the results of staying with them with a buy and hold strategy produces phenomenal results. Most leadership cannot do this, so the fortunes of a company will typically not be able to sustain the high growth rates. There are multiple other factors at play here, but this is a big one in the long term success of a company. I think many of those who believe these high growth companies cannot be sustained, are looking at the law of averages. There is no way for outside investors to fully understand the culture of a company, and how that will translate into long term competitive advantage. That risk is one reason the PE will stay low sometimes. What I really love about what Saul has synthesized in the Knowledgebase, and how this board discusses the relative merits of a company, is a way to uncover companies that have the potential for continued high growth rates.
However, when a critical mass of large institutional fund managers, buys into the ability of a company to sustain the growth rate, this produces the secular change we have seen in AYX, NTNX, SHOP, SQ, ANET, and other favorites on this board. The clearest example (still developing) to me is MDB, and the inflection point was Feb 27th. No news but volume tripled and continued. This was when some deep pockets made the shift in the investment thesis, and started buying. Most stocks do not have such a dramatic shift in how the big money views them without a new earnings report, analyst upgrades, or some event triggering it.
I would like to express thanks to Saul and the other contributors to this board for helping me become a better investor. So let’s keep up the respectful discussion so we can continue to uncover these growth stories and also when to sell them to manage our portfolios.
Many thanks,
Earl
