OT - What I've Learned From Saul

About a week ago I received this off-board question from momitja:
I am really interested in the main lessons you learned from Saul. What made the biggest differences? I already read the knowledge base a few times and half of the board with over > 60 recs, but still i am sure I can learn something by asking people like you personally.

I started to answer off-line, but after I got started, I thought my reply might be of general interest, so I’ll post my off topic reply on the board. I want to add that I’ve learned a lot from a lot of very intelligent investors who follow and post to this board. It’s not easy to segregate what I learned from whom, but in a way it all goes back to Saul because he started this blog which has attracted this cyber-community, I wouldn’t have learned anything from anyone had he not done so.

Anyway, here’s a stab at what I’ve learned in no particular order . . .

  1. Focus on what’s important: Sounds obvious; begs the question, “what’s important?” That’s less obvious, and it changes. I’ll try to illustrate. When I first starting following Saul, he focused on growth and PE ratio. Obviously, PE ratio implies earnings. Have you seen anything recently about earnings as an important decision criteria? His focus remains on growth, but now it’s the source of revenues (recurring) and factors like NRR (net retention rate) and margins much more so than before. Saul recognized that the IT factors have coalesced to create new business imperatives and a new business model that addresses those imperatives. That leads me to - - -

  2. Be willing to change your criteria if the environment indicates that a change is required. I won’t elaborate on that a great deal. It’s not difficult to understand. Keep an open mind. Keep asking yourself if the same things that were most important yesterday are still the most important things today and tomorrow. If not, it’s less important to know why the change has taken place than to recognize that a change has taken place. Understanding why helps validate the observation, but the observation is the more important factor.

  3. Be quick to recognize your mistakes. Sounds simple, but it’s not. How many of you have held onto a position that has gone sour with the conviction that it will come back. When I first started following this board my portfolio was overweight with poorly performing stocks that I maintained confidence in. Don’t be confused by this - what I mean is that stock price is an indicator of poor performance, but it’s not the explanation. Saul is much more prone to buy a company with a rising stock price, but he will buy when the stock price goes down as well if the story has not changed. There are hundreds, maybe thousands of reasons a stock price may decline, but only a few reasons to suspect that there are performance reasons. Back to number 1), focus on what’s important. Stock price appreciation is the name of the game, but it’s an outcome not a primary decision factor. The most recent stock quote is irrelevant. If you determine you were wrong, get out. If you suffer a loss in the process, that’s better than a greater loss later on coupled with the lost opportunity of not making a better investment.

  4. Use primary sources of data when available. Saul has often admonished that one should only trust the company published financial numbers. There’s no more to it than that. Relying on websites, brokers, and other secondary sources for data is prone to be unreliable. OK, one more word about primary sources, make sure you have confidence in the primary source. Saul (and I) won’t invest in Chinese companies. If they trade ADRs they must follow GAAP. Often they will use a Western accounting firm to instill greater confidence in their financial reports. But you will also see on every report the word “unaudited.” Of course, you often see that word on reports of Western companies. I don’t want to go into details on this post, but quite simply it boils down to having little trust in the financial reports of Chinese companies (that, and political risk). Not all Chinese companies falsify data. Not all Western companies can be trusted. Baidu, Tencent, Ali Baba and other Chinese firms can probably be trusted, but why make that choice when there are so many Western companies that are good investment opportunities? Always use trusted primary sources when available.

  5. Keep it simple. When I first started taking investing more seriously, I read some stuff on financial analysis, and I thought back to my MBA studies. You can drive yourself nuts with ratios and derivatives and extrapolations and all kinds of numerical gymnastics. Most of it is a waste of time and effort. I’m pretty good with math and numbers. Differential equations are not needed. Sophisticated statistical analysis is not required. You don’t need an Alteryx subscription to be a successful investor. Straightforward arithmetic will do.

  6. Use non-GAAP numbers, but be mindful of the reconciliation. GAAP provides a common reporting basis for all publicly traded companies. That’s really important. But, GAAP often forces companies to include non-performance related values in their income statements. For example, a big legal settlement, irrespective of whether it inflates or deflates earnings is seldom related to performance. OTOH, as there is no such thing as non-GAAP standards we only have conventions, companies can and sometimes do play fast and loose with non-GAAP numbers. Even when not trying to be deceptive, there are times that you might think a non-GAAP adjustment is inappropriate. Keep your eyes open. There have been arguments on this board about this. I won’t argue about it. I’m relating what I’ve learned from Saul, not a philosophical point about financial accounting.

  7. Pay attention to what the corporate officers say and how they say it. No analyst knows the company better than the executives. Of course, executives will always try and put a positive spin on things. Other than a few vulture capitalists, most executives work for the benefit of the company and stockholders. Responses to questions are often the most informative part of the quarterly conference call. Look for clear, on-topic, no BS answers. Pay attention to tone. Also, assume press releases and other official corporate information is approved by corporate officers. If you see signs of attempts of deception, obfuscation, etc. sell. Don’t hang around waiting for “clarification,” just get out.

  8. Pay attention to trusted sources. There’s more information about investing than there ever has been. Used to be Barron’s, WSJ, a few other print sources and TV like Wall Street Week. Now it’s 24/7 from countless “analysts”, commentators, TMF, CNBC, SA, Yahoo, Cramer and on and on and on . . . And almost all of them have some agenda. TMF and Bert and some others have an agenda, they use the freemium model. But experience has shown them to be reliable sources, the agenda does not obviate the value of their commentary. But most of the myriad sources are either agenda driven (short attacks are a classic example) or just not reliable for any number of reasons. Be discriminatory, there’s not enough time in the day to take it all in. Personally, I have found this board to provide a high concentration of high value information.

  9. Make your own decisions. Everyone has a different style, risk tolerance, risk evaluation, goals, etc. If an investment makes you uncomfortable but Bill or Susan or whoever holds it or recommends it don’t follow suit. In fact, if growth investing makes you uncomfortable, this is the wrong board to follow. If you’re looking for cash flow rather than capital gains you’re in the wrong house. Make your own decision. Your comfort and mental health are more important than investment returns. I have friends who wouldn’t buy any stock ever. That’s OK.

  10. Products/services matter. Saul is known for focusing on financial results based primarily on quarterly results. But he pays attention to what the company sells. Not that long ago Skechers was one of his favorites. Sneakers - but if you think about it, sneakers are almost like the subscription model (if the company has secured brand loyalty). That’s recurring revenue, not much opportunity for expansion, you can only wear one pair of shoes at a time, but you’re going to buy new sneakers just about every year, maybe more often than that depending on your activities and lifestyle. Saul talks about “category crushers.” He doesn’t have to dig deep and understand all the intricacies of the technology. But, he knows enough to understand the needs that are being addressed and the competitive posture.

  11. If it’s too complicated to understand, look elsewhere. This is a corollary to number 5), Keep it simple. This applies to the product/service offering as well as the company’s business model. If the company has to invent a lot of jargon to explain their product (Nutanix) or new financial measures to explain their performance (Solar City) move on. If you can’t understand what the company does or how the business operates it might still be a good investment, but you’ll never really know much of anything beyond the stock price. Invest in stuff you are able to understand.

  12. Don’t invest in stories. All I should really have to say is dot com. There’s amazing stuff going on in biotech, Bulwinkl has brought some biotech opportunities to this board in the past (I’ve not seen any recent post from him). But, almost every biotech is a story stock burning through cash with the hope of a blockbuster drug, procedure or device. Meanwhile, the stock price fluctuates like crazy depending on test results, filings, pipeline and a bunch of stuff that’s near impossible to quantify. Some of these investments will prove very lucrative, but it’s really hard to pick winners before they actually cross the finish line. By then, the ship has sailed. Westport Fuel Systems (WPRT) had a great story as the leading natural gas engine maker. They were a favorite of TMF. In march, 2012 the stock was at an all time high over $47. Today they are trading under $3. Saul early on saw that they were a losing proposition by focusing on performance as opposed to the story. He was castigated for his observations. He was right.

  13. Look forward, you can’t change the past. Saul bailed out of SHOP too early. Their stock price meandered around $150 for the last nine months of 2018, and then took off like a rocket this year. Not that long ago Saul observed that their revenues were declining at an accelerating pace, handwriting on the wall, he sold. Stock price is still climbing. So what? The money is invested elsewhere. Numbers don’t lie, but the reaction often lags. Don’t wait to get caught in a downdraft.

OK - there’s a baker’s dozen things I’ve learned from Saul or because of Saul. If I cogitated on it longer, I could probably come up with more lessons. Oh, one more thing before I close. Just because I wrote these things down doesn’t mean I unfailingly adhere to them. I’m human. Old impulses die hard. I still tend to hold on to investments that turn sour too long. It took me months to finally sell my last few shares of Nvidia. I still think it’s a good company with great products, it’s just not a great investment. Not now anyway. Peter Lynch said pull your weeds and feed your flowers. That’s not a Saul lesson, but it is a Saul practice.

Good luck. I hope this helps.


Thanks so much to Brittlerock for this kind homage. Some of the points he made that I’d like to emphasize are (in no particular order):

Be willing to recognize your mistakes and don’t sit with them in the hope that they will get back to breakeven and you can feel vindicated “See! I was right all along!” while the stock where you could have put the money has advanced 200% (opportunity loss!).

Remember that you WILL make mistakes. Just go ahead and correct them if you need to get out of the stock, or repurchase at current price or go on with another company if a sale seems to have been in error.

Look at what Gaap says, but use the adjusted numbers that the company uses, that the analysts use, and that are usually more based in the reality of the company’s performance. A big income tax rebate inflating revenue, or a legal settlement profit or loss, don’t usually tell you anything about the performance of the company. Neither does the vindictive attempt to punish rapidly growing tech companies for offering stock-based compensation to new hires, by double counting the SBC as both a dilution and as an expense. They are not an expense. They cost the company nothing. Not a penny. They do dilute the stockholders, but the number of shares are listed. And if the company made $30 million dollars net profit in the quarter, but they paid $5 million in SBC, they still have the $30 million in profit, and the stockholders have a tiny bit less of the pie, but they are probably happy because that $5 million in SBC allowed their company to hire umpteen very skilled employees who would have gone to a different high growth tech company if they hadn’t received the SBC. Enough on this.

Make your own decisions. Don’t follow me. My style of investing may not work for your temperament, or for your financial position, or for a million other things.

Read the conference call transcripts, so you can get a real feel for management and what they are thinking. There’s always more there than in the press release.

If you are using figures to make decisions about placing your hard earned money, get the information from the company’s website or press release, not from what some Yahoo bot picked up who knows where.

Don’t lose yourself in numerical analysis. As Brittlerock said… You can drive yourself nuts with ratios and derivatives and extrapolations and all kinds of numerical gymnastics. Most of it is a waste of time and effort. I’m pretty good with math and numbers. Differential equations are not needed. Sophisticated statistical analysis is not required.

Think about the whole company, don’t try to figure out the intricacies of the technology, or try to compare with other companies’ statistics. (EV/S doesn’t mean anything unless you consider how fast the company is growing, how high its gross margins are and where they will end up, what it’s place is as far as competition, how far it can continue to grow, how much of its revenue is recurring, what its dollar-based net retention rate is, etc etc.)

Keep it simple… I love that point.

Look forward, not back. That stock is worth just what it’s selling for at this moment, not what you paid for it. It’s simply a piece of your portfolio. If you have a better place for that money, don’t price-anchor on that old stock price.

Hope this helps,