Post #9939- Knowledge Base

[thejusticier]

Saul:

Wow. I finally read your post #9939 in its entirety. This is a very informative and instructional piece. I wish I could be as skillful as you are, and obtain the results you have obtained.

I have a few comments and questions. First let me summarize your approach. I may have this totally wrong but let me give it a try. You give some instructions about what to get into and when to get out. In general, I would characterize your approach as ‘get in (don’t wait) and get out fast in a year or less if it doesn’t pan out in that timeframe. Always find better opportunities to put your money in and that involves selling your positions and buying the ones you think have better prospects. You hope you can hold your positions for longer than a year or for the long term but the long term never end up being more than 3 years’.

I find that there is a contradiction when you say that you are buying with holding for the long term in mind, and then you sell after a short period of time when you have a ‘reason’ (or because you realized that you made a mistake which could be one according to your estimation but it may not be one if you held?). I consider 6mo to 3 years still on the short term side. A potentially strong business often needs more time to get to where it wants to get, and there will be missteps along the way.
When a growth hook (to employ Tom’s) is identified, time may be needed for the thesis to take hold and if it does the rise of that business would – I believe- be on a much stronger ground, and more lasting. Something like a a MSFT in the 80s/90s or a CiSCO in the 90s or AMZN in early 2000s or an AAPL at the end of the 1990s etc…
You may not really know if that bad news (the ‘reason’) is really something that is really significant for the long term. The stock may tank in the next several quarters but it may be back up and much much higher in 5 , 10 or more years.

You get out and you feel confident that you can place that money into something better? That requires skill which you obviously have, and a lot of luck because with all the skills you still do not really know what would happen to the stock (and the business behind it) you want to sell and to the one you want to buy.

Another contradiction: you said ‘do not trade’ but you want to be nimble enough to get out fast when ‘bad news’ hit. Given that the ‘bad news’ may not be really bad news in the long run, I still have not really understood your rational about what you did on BOFI lately. You took some out ahead of that short news breaking. If the news of that short did not come out yet why did you (or what made you) sell some of your positions? And then you went back in after the news that the reasons for the short were somewhat groundless. How much did you save or make doing that kind of move?

I see you look at EPS growth rate over the last 2 or 3 years and look for increasing growth at ‘reasonable price’ when looking at 1YPEG. But that trend would eventually reverse itself and maybe abruptly. You are confident that you can get out fast enough if that occurs? If you don’t, you could lose serious money the way you do things. The growth may stop but continue after a year or two. You may miss that since you sold already and have moved on to a ‘better’ opportunity - riding the 2-3 year growth spur of another stock. I agree if you can find those you would always be on a growth path and that will give you excellent returns. How do you find these better opportunities?

But isn’t all this very hard to execute? I wish I could do what you do but I don’t think I can. It is hard because I would not be able to link my actions to the result other to say that I was lucky or unlucky doing that a few months or a year back. One could get similar results as you did using your method, or they can get very different results maybe even better or much (much) worse. Who knows?

tj

[CMF_BigECat]

Hi tj,
Interesting post. I think i would agree with you for the most part. I do think you have a pretty good handle on what Saul does and how he does it. I also agree that what he does and how he does it is not easy. If it was, the process would be repeated and eventually wouldn’t work.

The only real exceptions I would take to your post was that you used words like contradictions when you describe things that disagree with your definition of what he does. Saying that when he buys for the long term but doesn’t own it long enough to say it was long term. But that is only because your definition of holding for the long term is different than his. What he says is he plans to hold long term. That doesn’t mean it ends up being long term.

You also use the word contradiction when you describe his actual trades not agreeing exactly with his rules. I have to say that if I reported all of my trades and had previously had to write rules, I might be called worse words than saying I have some contradictions.

The truth is you are really just pointing out why he is so good and it is hard to replicate his track record. That doesn’t take anything away from what he does, and I for one am grateful that he has this board. I think many people have learned a lot from being here. I do wonder if some of the posters realize how difficult it is. 1YPEG is a great tool. Just like the more typical PEG, free cash flow, and a bunch of other ratios, but it only works when you separate out the good companies with low 1YPEGs from the bad ones. That is what he does.

I will say one thing. If Saul recommends a stock, I am looking into it to see if I should be buying a little bit.

Randy
Long SKX since the 60’s and I found it because of this board.
Thank You Saul…

[captainccs]

tj, speaking for myself, not Saul, I often pondered what LTBH meant. Does it mean owning stocks for several years? I finally reached the conclusion that the long term perspective is applicable more to the portfolio than to any particular stock. Companies have life cycles and growth cycles. Ideally one buys a growth stock when the curve in the hockey stick is well established and sells before it reaches the top of the “S” Curve.

https://www.google.com/search?q=%22S%22+Curve&num=50&…

Between these two points you’ll often see 50% drops. Should you sell in such a case or top up or what? You need a plan to deal with volatility. You have to trade to be an investor but the reverse is not true. Just because you sell a position or part of it short of an arbitrary fixed time period does not make you a trader.

I see you look at EPS growth rate over the last 2 or 3 years and look for increasing growth at ‘reasonable price’ when looking at 1YPEG. But that trend would eventually reverse itself and maybe abruptly. You are confident that you can get out fast enough if that occurs? If you don’t, you could lose serious money the way you do things. The growth may stop but continue after a year or two. You may miss that since you sold already and have moved on to a ‘better’ opportunity - riding the 2-3 year growth spur of another stock. I agree if you can find those you would always be on a growth path and that will give you excellent returns. How do you find these better opportunities?

This is an issue that exists in all aspect of life and the boy scouts have the solution: “be prepared.” I was never without a date in college because I had a well stocked little black book of telephone numbers. I got plenty of “sorry, I’m busy” but my list was long enough to see me through. When selling insurance they made sure we always had a list of “prospects” to visit. At IBM they called it “canvassing the territory.” Building up an inventory of dates, or prospects, or investing opportunities is part of the job description. You need to research new ideas all the time and keep them on the back burner for when their time comes.

Denny Schlesinger

[SaulR80683]

Hi Justicer, Let me respond to some of your points.

I would characterize your approach as ‘get in (don’t wait) and get out fast in a year or less if it doesn’t pan out in that timeframe.

I don’t see my approach that way at all. I often take a tiny “look and see” position, just to put a stock on my radar and see if I want to take a real position in it. I usually make up my mind on those in a few weeks and either start adding more or exiting. When I take a real position it’s not for “a year or less”, but it’s for as long as possible.

I consider 6 mo to 3 years still on the short term side.

You just have a different idea of short term than I do. Most trades on US markets are held for a week or less, and probably most of those are held for two days or less. (I wouldn’t be surprised if 50% of trades are held for just minutes. High speed trading and all the rest).

I still have not really understood your rational about what you did on BOFI lately. You took some out ahead of that short news breaking. If the news of that short did not come out yet why did you (or what made you) sell some of your positions?

I’m not sure where you got that idea. I consider BOFI a high conviction stock. I’ve held it almost three years now. I sold a little when it approached 20% of my portfolio. Then I sold about a third of my position IN RESPONSE to the short attack. Because it scared me that even Fletch was worried about the issues presented, and he knows much more about the subject than I do.

And then you went back in after the news that the reasons for the short were somewhat groundless. How much did you save or make doing that kind of move?

I actually made a few dollars, but that was irrelevant. I didn’t sell out to rebuy cheaper. I sold because I was scared and wanted to reduce risk. I bought back because I felt that the risk was enormously exaggerated.

You get out and you feel confident that you can place that money into something better?

Of course I can find something better! There are lots of good companies out there and I am only invested in 15 or so. If I think a stock has changed and is no longer a stock I want to be in, how could I NOT find something better? If there is one stock I think I should sell and another I think I should buy, how could it NOT end up, ON AVERAGE, that the ones I think are buys would do better than the ones I think are sells??? If I couldn’t do that, again, not every time, but on average, I should just give up.

Best,

Saul

[thejusticier]

Saul:

we certainly have a different concept of short term.

I am sure a better investment is out there and you want to find them. But better is your assessment at the time. Since you don’t mind the stocks you sold, you would not know if it was in fact better one year, 3 year, 5 year or 10 or more years on. I guess you don’t care.

There is enough to bring in the money you need to bring in.

I am just interested to know from where you confidence is derived (the confidence about when to sell). If it is looking at growth and 1Y PEG then that should be simple enough. But I gather it is not that simple.

Why do you think that other investors following your approach would get so different results than you?

How do you assess luck?

tj

[buynholdisdead]

I am just interested to know from where you confidence is derived (the confidence about when to sell). If it is looking at growth and 1Y PEG then that should be simple enough. But I gather it is not that simple.

I would say Saul’s confidence comes with experience and his past as a psychologist. Everyone is looking for the golden bullet from Saul but it is never that easy. A lot of his rules have been built on his past experiences. You find those rules as you invest, sometimes a few amazing people can learn just by Saul explaining it to them. Unfortunately many more of us, and I would put you in this category TJ, can only learn by doing. I have come to many of Saul’s conclusions only by discussing it with him and other’s on this board.

Sometimes our only way to learn and become better is through exploring and making mistakes. While you are doing that, make your bets small, so when you learn you are not paying to high a cost.

Andy