And out of curiosity, if someone made this same argument against Amazon–anytime in the last two decades, really–how would you answer them now knowing what we know about the company and its share price? Don’t buy shares at $60 because price matters?
Right. The general philosophy on this board is that we’re buying stocks that are growing so quickly that standard valuation metrics don’t apply. That is, fast as everyone else thinks the company is growing, it’s actually going to grow faster.
If anything, I believe the prevalence of “common wisdom” around P/E, P/S, EV, etc ratios does more to keep people out of high growth investments. If a company is priced for 100% growth (which might mean a very high P/E), but actually grows 250%, then it was a great investment after all. The analysis in this thread that wouter28 gives is better, as it doesn’t compare to “norms” but to other high growth companies. I would just caution that while informative, the philosophy here is that the market really can’t properly price companies with super high growth since overall Mr. Market doesn’t believe in that growth.
The Amazon example is perfect, but most companies are not like Amazon. Had Amazon not invented easy Cloud Computing, AMZN probably would have turned out to have been a bad investment around 2012 or so. So, that’s why the Saul philosophy also includes being willing to get out of stocks that are still growing, just not growing at the very high rates they once grew. When ANET’s growth slowed from 45%+ to around 25% (as predicted by the company itself in back to back earnings calls), Saul sold it all and moved into other companies that he expected would grow faster than ANET. Same with NVDA before that. Both those are solid, growing companies. But, there are faster growing companies out there in which to invest.
That agility is a REALLY important part of the investment strategy. Companies not only slow down, they peak, they hit growing pains, they have new competition, they experience market shifts. Saul’s ability to find companies about to hit a growth spurt, then ride them until that spurt is over, is uncanny. He’ll have misses, but as he as pointed out, he’s made so much that even a big double digit percentage drop means he’s come out ahead compared to more traditional, conservative, investing anyway.
I remember reading what Mickey Mantle said after winning a baseball Triple Crown in 1956, paraphrased: “I actually won the Quadruple Crown, since I also had the most strikeouts!”
In other words, when you make enough hits, home runs, and RBIs, it doesn’t matter that you also strike out the most - overall you come out ahead. That, in my view, is Saul’s approach.