I can still hear the musical clackity-clack of the teletype machine and waiting for the batch processed results the next day…
We did our telexes on paper tape. You know, that sound they still play at the beginning of some news shows?
The punch would spit out little round bits of paper into a little bin under the puncher.
Some wag at our company added another bin next to it, and labelled the two of them “0s” and “1s”.
Jim
For the youngsters here, this is what Jim is referring to.
https://www.youtube.com/watch?v=yzulZaJbdUU
ciao
“In the four “clean” years out of sample since the screen was created, it beat the S&P by 8.1%/year, returning 25.7%/year after trading costs.”
Thanks for sharing, Jim. It looks to me like this is yet another backtest that shows the advantage of buying companies with high IV growth, either by virtue of having high revenue growth or by having high ROE.
I am convinced that owning companies with high revenue growth, earnings growth or book value growth outperforms the broad market. As I’ve mentioned before, I’ve plotted the price versus sales, earnings and book value of all the companies in the S&P 500 going back in some cases to 1962. For many of the companies price tracked sales, earnings or book value remarkably well. In the long term the market is a weighing machine.
In order to obtain high outperformance, though, it is necessary to buy companies in the top few percent of whatever metric one is using as a proxy for IV growth. Greenblatt’s data in Table 7.2 of The Little Book that Beats the Market illustrates that point. Greenblatt tabulates the returns by decile of his metric for the largest 2500 companies over the 17 year period ending Dec, 2004. Here are his data:
Decile of magic formula rank, return
top decile, 17.9%
decile 2, 15.6%
decile 3, 14.8%
decile 4, 14.2%
decile 5, 14.1%
decile 6, 12.7%
decile 7, 11.3%,
decile 8, 10.1%
decile 9, 5.2%
decile 10, 2.5%
If one plots the data, return versus metric, one gets a good fit to a 3rd order polynomial (as do normal distributions) with the return turning up more sharply at the high percentiles.
My conclusion, based on Jim’s backtests, Greenblatt’s backtests and my own plots of price versus sales, earnings and BV for individual companies, is that buying a portfolio of companies that are in the top 4% or so by IV growth, as estimated by either profitability or revenue growth, and paying something close to IV, should be able to give 25-year returns that are several percentage points above the broad market. Countering this conclusion is the fact that even the best performing mutual funds only manage 1.5 percentage point outperformance, after 1% fees, as compared to the S&P 500 over 25 years. The difference probably lies either in their discipline or in their estimates of future IV growth.
It is not hard for me to look at 2000 companies and pick the 1000 that are performing better and thereby exclude the worst performing 1000. Most people could do similarly with a very little bit of effort.
Investing is sooo simple. I just love it (but won’t tell where that gem was posted).
“buying a portfolio of companies that are in the top 4% or so by IV growth”
Not an easy thing to estimate, IV growth. However I think that browsing Morningstar data, with no analysis on my part, gives some indication. Morningstar tabulates 5-year average ROE and ROA and 3-year revenue growth and earnings growth. They also provide their historical fair value (FV) estimates. Here are Morningstar’s fair value estimates for a few, selected large caps as of Dec 31, FWIW. The FV growth rates are not adjusted for dividends.
company, P/FV, trailing 5-year annualized fair value growth
AAPL, 1.39, 30%/yr
MA, 1.05, 25%
FB, 0.82, 24%
BRK.A, 1.00, 13%
JNJ, 1.04, 8.3%
The range is large enough that we could probably select a basket of the highest IV growth rate companies.
“Not an easy thing to estimate, IV growth. However I think that browsing Morningstar data, with no analysis on my part, gives some indication.”
I asked Morningstar if they would consider including trailing fair value growth rate in their screens and portfolios. They said that they would look into it. For now one has to calculate FV growth rate company-by-company using the graph in the “price vs fair value” tab. I can’t claim that screening by FV growth rate is better than screening by ROE or sale growth, but price does track Morningstar’s FV estimates reasonably well.
Here are a few more FV growth rates, not adjusted for dividend, using Morningstar’s estimates of FV. I picked the companies non-randomly. The FV growth rates are not adjusted for dividend. It will be tedious to try to find a portfolio of 25 companies with high FV growth rate, and the merit of doing so is not proven. Anyway, FWIW.
company, trailing 5-year annualized FV growth, P/FV as of Dec '21
MSFT, 40%, 0.97
AMZN, 35%, 0.81
GOOG, 33%, 0.83
AAPL, 30%, 1.39
TECHY, 28%, 0.58
MA, 25%, 1.05
FB, 24%, 0.82
DE, 21%, 1.27
APD, 20%, 0.89
SWKS, 18%, 0.74
LOW, 17%, 1.40
AXP, 16%, 1.04
INTC, 16%, 0.79
BAC, 14%, 1.17
BAX, 14%, 1.0
BRK.A, 13%, 1.0
BABA, 12%, 0.63
KO, 6%, 1.00
JNJ, 8%, 1.02%
PEP, 8%, 1.13
DLTR, 5%, 1.33
MMM, 2%, 0.95
BIIB, 2%, 0.66
BMY, -1%, 0.9
KHC, -6%, 0.72
Do you think that screening for high FV growth rate has merit? I do think that screening for high ROE and high revenue growth rate has merit.
*If you look at that board you'll see that the leading figures, Saul hinself, Bear, Gaucho, jonwayne, that they are all convinced that the music did not stop, that it just as several times before has a pause and that every single one of those times it would have been a huge mistake to think otherwise and to have sold.*
It has happened before and the music does not even look like its stopped. I am down 40% or so since October 2021, but I am up about 100% on 2 years. My port is trading around where it was at in early September of 2021.
This IS value based investing. Its messier and scarier and you have to either have a lot of faith or think hard a lot to stay comfortable. But ultimately you coat-tail on Buffett or you coattail on Mungofitch or you coattail on Saul or you coat-tail on the C-suites of the companies you invidually invest in, and if you get it somewhat right you live a wonderful life and have resources beyond what you deserve.
R:
Gack. This is a copy of previous message but without formatting so that it wraps correctly.
If you look at that board you’ll see that the leading figures, Saul hinself, Bear, Gaucho, jonwayne, that they are all convinced that the music did not stop, that it just as several times before has a pause and that every single one of those times it would have been a huge mistake to think otherwise and to have sold.
It has happened before and the music does not even look like its stopped. I am down 40% or so since October 2021, but I am up about 100% on 2 years. My port is trading around where it was at in early September of 2021.
This IS value based investing. Its messier and scarier and you have to either have a lot of faith or think hard a lot to stay comfortable. But ultimately you coat-tail on Buffett or you coattail on Mungofitch or you coattail on Saul or you coat-tail on the C-suites of the companies you invidually invest in, and if you get it somewhat right you live a wonderful life and have resources beyond what you deserve.
R:
“It’s nostalgia, nostalgia for the “good old days” when Crowd was growing in the 90%s and dominated the field, and it’s hard to admit, even to yourself, that those days are gone for good.”
I found this very telling about Saul’s approach. It’s really a momentum investing philosophy with a laser like focus on on growth metrics. The slightest earnings hiccup and he’s out. Today he announced he’s out of crowdstrike because it’s only expected to grow at 50%. It’s nostalgic to expect it to return to 90% growth rates. He bought shares in this company 28 months ago and it’s already burned out its launch boosters. Time to look for the next rocket!
Mo momo please.
if you get it somewhat right you live a wonderful life and have resources beyond what you deserve.
Apart from the tiny fact that I am highly sceptical about the “wonderful life” claim (the correlation between happiness and money is not linear): At Saul’s “somewhat right” is not enough. You can see that in rmtzp’s “Retrospective Lessons from Crowdstrike’s 202”, saying “we received a couple of amber flags in Q1’FY22, and (2) several red flags in Q1’FY22” and then trying hard to explain why.
That’s not retrospect. It’s rationalization, a desperate try to bring order again into chaos.
As far as I remember NOBODY on that board with SO MANY highly intelligent and SO DEEPLY analyzing members did see those “red flags” then. After Q1 and Q2 numbers Crowdstrike was their highest conviction company (I thought about buying it). rmtzp knows that of course: “At this point, the market stopped agreeing with the level of conviction seen on this board.”
Did the market recognize from those public numbers a slowdown which the collected Intelligence of that super-analyzing board could not see? Very unlikely. So either that retrospective explanation about “red flags … slowdown” is wrong, rationalization only — or the board did not WANT to see it. Either way it’s to be doubted rmtzp’s “Lessons” will work in the future as they are based on a faulty explanation, on wrong assumptions.
“somewhat right” reminds me on a talk I recently had with a friend who all his life was heavily into options and warned me 2 years ago to start with them. After I told him about my amazing results (apart from T…) he said “Said, you did this during a time there was only one direction, a time it was relatively easy to win by betting on stuff going up.”
Isn’t that the whole reason why “somewhat right” regarding coat-tailing did work the last years? Very especially when it comes to coat-tailing Saul where “somewhat right” otherwise would be far from good enough?
BTW: I am down 40% or so since October 2021, but I am up about 100% on 2 years.
Because I am coat-tailing Warren in the most simple way (owning BRK) I am up 30% on 2 years, and a good 50% since nearly 2 years (since the bottom in March’20) — not with my portfolio but with total assets, of which around 25% was cash all that time and 0% Saul’s (bought some calls but quickly sold them again for ±0). The very best return I ever had with total assets and I won’t ever have that again but that’s absolutely ok. Thank you, Warren.
Given that Saul’s is all about Saul and his model I’ve been following his portfolio of companies for a few days. There’s of course been some significant falling of the stock prices which given the current environment is expected. The good thing is his companies probably average out to be about a 300-500 current PE on forward earnings which I’m sure seems quite the opportunity given the tremendous growth ahead for those companies. His ability to predict far out into the future seems assured to those in his camp. Steel balls will be require to gain the fabulous results expected.
In case anyone wants to observe along with me:
Datadog 20.0%
Monday 16.7%
ZoomInfo 10.4%
Zscaler 10.2%
Snowflake 9.6%
Sentinel 9.2%
Cloudflare 8.8%
Upstart 7.9%
Amplitude 5.0%
Crowdstrike 4.0%
In case anyone wants to observe along with me:
Datadog 20.0%
Monday 16.7%
ZoomInfo 10.4%
Zscaler 10.2%
Snowflake 9.6%
Sentinel 9.2%
Cloudflare 8.8%
Upstart 7.9%
Amplitude 5.0%
Crowdstrike 4.0%
What are these numbers?
In case anyone wants to observe along with me:
Datadog 20.0%
Monday 16.7%
ZoomInfo 10.4%
Zscaler 10.2%
Snowflake 9.6%
Sentinel 9.2%
Cloudflare 8.8%
Upstart 7.9%
Amplitude 5.0%
Crowdstrike 4.0%
What are these numbers?
Those are the now out of date portfolio weightings posted by Saul over at his board as of year end. He’s recently advised he’s sold out of Crowdstrike and redistributed his winnings into some of the other names on that list.
chompin:
The good thing is his companies probably average out to be about a 300-500 current PE on forward earnings which I’m sure seems quite the opportunity given the tremendous growth ahead for those companies. His ability to predict far out into the future seems assured to those in his camp. Steel balls will be require to gain the fabulous results expected.
You continuously write about Saul as if he thought of this last Thursday and started trying it yesterday and no one has any idea what will happen.
When in fact anybody who cares to check his message board can see he has been doing it for 30 YEARS with an AVERAGE IRR of 29%.
Proof that the future will be like the past? No. Orders of magnitude better bet than pulling the ideas out of your hat last Thursday? Yup.
R:
Ralph,
I have been around along time and the outcome is quite clear for 80-90 percent of those participating in behavior such as with that board. I am much more interested in the human behavior of dealing with investment cycles.
Your attempt to slam me is a perfectly expected part of that. It is quite easy to think that you (you as in anyone) as an investor have discovered the Holy Grail - and an endless number of originators of groups with followers always come forth to showcase this.
The thread was started and I added my piece. I will follow what I think will be the typical cycle in hot stock investing where the prospects make us all sweat.
Life is great…if you can stand it.
Interestingly, my investment club is such a vivid example of cycles of investment style. In the late 1990’s and early 2000’s we were 100% in tech stocks and held a 10 year record of 35% annual returns. It was, to say the least, quite incredible. We ended up with a portfolio of $1.3 million for the 25 of us…and that portfolio fell fast to $425,000. In the end we did achieve about a 15% annual return for 15 years which was steller.
But the human nature of it all is what interests me. From that experience, the huge fall in our stocks and the FACT that MOST of our members bought the same stocks at later times with far higher valuations? Well, I’m now part of a stock club with for the most part the same members…and they slam the panic button on all growth stocks.
I’ll keep my posts and you can do the same. Times change, and people change with them. Arrogance chills with time.
I noticed that they are banning posters on the board who are deemed trolls. It’s hard to determine why a troll is banned, since the posts are deleted, but I’m assuming that any post raising questions about buy price or valuation in general is deemed a troll and ejected.
One poster was called out by name as being banned, but I couldn’t find out why he’d been banned. I noticed that he had been posting there for at least a couple of years and mentioned on ideas for possible investments. Some 18 months earlier he had posted a trade he’d made based on some valuation decisions. He sold Zoom at $204 and bought NOW in its place.
https://discussion.fool.com/service-now-now-vs-zoom-zm-34526944…
Saul ripped the decision, and called the poster a “joker”.
https://discussion.fool.com/i-bought-zoom-last-month-at-130-last…
Saul pointed to DDOG as a better growth opportunity that NOW, which he was right about if current prices hold, but the poster was making a decision between NOW and ZOOM. Turns out he was ahead of the curve on that Zoom call. As for DDOG over NOW, the former is still early on in its hypergrowth phase and trades at 46 times sales, while NOW is “only” growing revenues at 30%+ per year and this trading at only 18x sales. If the mean reversion continues for these hypergrowth stocks then JasonRen’s call may be even better than it looks at first glance.
The most troubling aspect of this whole ordeal is that Saul is threatening to get the poor guy banned from Motley Fool altogether! From the best I can tell, all he’s done is raise questions about entry prices and valuation when making growth stock investment decisions. The guy is clearly a growth stock investor, so what is his crime?
I took a look at NOW and, which it has been growing at an impressive 30%+ clip over the last five years, with significant margin expansion, it would have to continue to grow at this rate for 10 years to justify its current price.
I noticed that they are banning posters on the board who are deemed trolls
You don’t have to be trolls, even if you question basic math, a math presented by Saul, or Saul touting some research and you point that is about 6 months old and things have shifted, they don’t like it.
You can agree, strongly agree, violently agree, are the options.
And what in the world does this have to do with Berkshire?
JK
It looks like some of you have been kicked off the Saul board. Have you considered creating you own board to complain about the Saul board.