Question to Saul

Saul,

With great respect to incredible knowledge and wisdom that you bring to this board, I am curious to ask this question to get myself better.

I have seen you move incredibly fast when numbers do not support future stock price appreciation.

I am trying to better grasp this, as from Fool cofounder Tom Gardner and other great investors, I have read and understood that a quarter or two is not a decent enough time to give management to prove themselves and a year seems to be somewhat accurate time to make a decision to exit a business, if numbers and story does not align. Fool preaches 3-5 year hold due to long list of stocks and that to me is too long a time for a concentrated portfolio like most people here.

I understand that you do not look at returns on investments that you have exited but just for my sake of understanding want to bring these up. Over the last 2 years, I have seen you exit Zscaler, Trade desk, Twilio, MongoDB, Elastic, Alteryx, Zoom as they have all suffered growth deceleration for a quarter/to few quarters. Zscaler, Trade desk, Twilio, MongoDB and Elastic came back strong and back in accelerating growth mode.

So my question comes to: Should we give 365 days time when dealing with some of the best businesses in the world having the best management teams to handle temporary set backs? or Is it your concentrated portfolio approach that warrants taking ‘hope’ out of investing equation and getting back to crunching numbers (Revenue growth, margins, management team, moat and market opportunity etc.) and moving onto current best that can sustain its growth based on data at that point?

My question comes from my mindset that: Winners continue to win. They may go through temporary setbacks but winners most often find ways around to keep winning. Should we give them more time in our portfolio?

Appreciate your insights and I am sure your inputs are going to help a lot of us in learning and getting better at investing.

If I have stated anything incorrectly, please pardon me. Again, I am posting this with great respect for you Saul and the great team that we all can access for free.

Thanks,
-Raj

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Hello Raj. Not Saul but I have a mathematical answer to your question. Good managers, good leaders, can make decisions on their feet while others just let problems fester because of indecision. Does mathematics support this idea? Let’s suppose our manager is just average but quick to perceive problems and act on them. Being just average he’ll be right half time. Let’s see how this plays out.

  1. A problem arises and the manager takes action and is right half the time.

  2. If he is right all is fine. If wrong he takes action and is right half the time. At this point he is right 50% + 25% = 75% of the time.

  3. If he is right all is fine. If wrong he takes action and is right half the time. At this point he is right 50% + 25% + 12.5% = 87.5% of the time.

  4. If he is right all is fine. If wrong he takes action and is right half the time. At this point he is right 50% + 25% + 12.5% + 6.25% = 93.75% of the time.

Very quickly an average manager willing to act is right over 90% of the time.

If you see a problem with a stock and have a better candidate why not switch? The issue, in fact, is the ability to recognize a problem. You need a valid indicator. With growth stocks it’s revenue growth, all else being equal.

If you read a previous post of mine about FSLY when the Tik-Tok problem arose, you’ll notice that I disagreed with Saul about the problem (I didn’t think there was one) but at the same time I said that the decision to sell made sense. It was the decision of the agile manager!

BTW, this board was born because Saul did not agree with the hold forever philosophy. But many good investors like Philip Fisher, author of Common Stocks and Uncommon Profits believe that one should give stocks time to prove themselves. Those were slower days!

How did Fastly work out? This is a one year chart, the Tik-Tok issue is the huge gap down in October. For comparison there is an overlay of NET, the other CDN company.

https://softwaretimes.com/pics/fsly-01-31-2021.gif

In my view this chart says that both Saul and I were right, he to sell and switch to NET, and me to hold.

Denny Schlesinger

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Raj, read the Knowledgebase linked to on the right side of the page. Read it at least twice. It answers your questions. One of the key things that this board teaches is selling when appropriate.
Saul

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Another possible answer to the OP’s question is to look at Saul’s returns for the last 4 years and compare them with your own and you might find the solution.

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The key you will find in the knowledgebase is that Saul’s quick decisions to exit are not based on some shifting metric or some slight change in results, but in a perception that the earlier evaluation of the company has changed. With some frequency, this isn’t even a question of foretelling bad future performance, but just that the expectation is for less stellar performance and there being other companies which are more appealing.

It isn’t really the same job as trying to manage a company.

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Thank you so much for addressing my question Saul, captainccs, branmin and tamhas. Appreciate it.

I have gone through Saul’s knowledgebase few times before, but this time went again searching for answer to my specific question. Few points stood out for me from Saul’s Selling Policy section under Part2. Including those specific nuggets of wisdom from Saul here:

When I’m thinking of selling I seem to sell a little first while I’m evaluating, then decide for sure what to do. I might even decide to buy back the little piece I’ve sold if I reconsider.

One problem investors have is getting attached to their previous decisions and not willing to consider that they may have made a mistake. Not accepting that an investment could be a mistake is a dangerous error. I try to always reevaluate my investments and get out if I’ve made a mistake, or if information changes. Which is why I don’t hold stocks generally for 5 or 10 years.

We all often worry when stocks we have sold go up. I try to ignore them and figure that once they are sold they don’t matter any more. Here’s a great quote from Huddaman: “I don’t really need to be right for the stocks I sell, I just need to right about the stocks I own.” Boy! Doesn’t that really say it all! It simply doesn’t matter what happens to a stock after you sell it. You can’t hold all the stocks in the market. Some stocks you don’t hold are going to go up. A lot! So what!!! The only thing that matters is what the stocks you are holding do!

Is there somewhere better you can put that money, that 3.7% of your assets, with a clearer path to a long-term good profit? That’s the question.

Thank you,
-Raj

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