Reflections on investing I made seven years ago, in January 2017

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Please remember that this was posted at the beginning (Jan 2017) of the incredible run from 2017 to 2023 inclusive during which I compounded to 750% of what I started with in seven years, seven and a half times what I started with, even including the horrible 2022.

Reflections on investing

So far this month and this year, SURE, I am beating the market nicely. I’m currently up 9.1% for the year, while the S&P is up 2.65%, the Russell is up 1.9% and the IJS (the small cap value ETF) is up 0.7%. However, I’m not content with my recent results (2016, and 2014, for example), and am trying to reflect, reevaluate, and better understand what went on, with an eye especially towards what I can do to improve? The thoughts I will express below probably won’t all stick together, and some thoughts may conflict with, or contradict, others, but so be it. They come from different directions

First reflection:

What happened in 2016? The beaten down oil and commodity stocks made a comeback throughout the year, and especially as the incoming President promised infrastructure spending and support for fossil fuel industries. I don’t usually invest in oil or commodity stocks, and it wasn’t my kind of market. Growth stocks were not the number one priority of the market in 2016.

What can I do about it? Not much. There will be some years that value stocks and cyclicals do better than growth stocks, but it’s not in my nature to invest in value stocks, hoping for a turn-around, or to invest on the basis of trying to guess cyclical patterns.

Second reflection:

At the end of the first week of August, 2015, I was up 51.6% for the year, well on the way to a year similar to my best historical years. However, I finished the year only up 16.0%. That was still a lot better than the indexes, but it represented a drop of 23.5% of my portfolio value from August to the end of December, nevertheless.

What happened? The S&P only dropped a few percent from that date to the end of the year, so it wasn’t due to a big market move. What happened was that a number of my stocks that I had major positions in crashed or semi-crashed. These included Infinera, Skyworks, and Skechers. One thing especially troubled me: These companies had been rapidly growing, and management had kept telling us that all was well and that they had plenty of visibility into the future and it looked bright, and then they crashed, not because they had been too high in price (their PE’s had been reasonable to low), but because results tumbled suddenly and unexpectedly.

What did I learn from this? First of all, to avoid companies that sell bits of hardware. Even though Skyworks said it could see years into the future, obviously it couldn’t. Even though Infinera sounded as if it had the world by the tail, it didn’t. Neither had any guaranteed recurring income. Even management couldn’t tell what was going to happen. I don’t think they were lying outright to us. I think they really probably believed what they were saying. Maybe it was partly wishful thinking, but they both believed what they were saying.

Second, I learned again to avoid clothing retail. Also to pay attention! When I bought a pair of shoes at a big Skechers store a year or so ago, and they gave me 40% off of all three if I would buy three pairs, I should have sold out of my position, or at least seriously worried, instead of thinking that they were just silly employees who were giving me a bargain.

Third Reflection:

Was there a problem, as some people have suggested, due to my having to post what I am doing and giving a rational for it?

I don’t think so. If there was, I doubt that I could have been up that 51.6% in 2015 in just seven months plus. Also, I don’t feel inhibited in my decisions. I do what I feel is correct, and if people disagree, I’m fine with that.

Is there anything to do about it? Nope. I like what I’m doing with this board.

Fourth reflection:

Changes in the market: There are a lot fewer underfollowed and mispriced stocks than there were 20 years ago!

Why? Information wasn’t readily available. Twenty years ago if you wanted a stock quote, you looked in the physical NY Times newspaper in the morning and looked through all the stock quotes from the day before to see high, low, close, and volume on your stocks. Not much effective internet. If you wanted an intraday quote you called your broker. (Spreads were often a quarter or a half a point, by the way, and commissions were 1% or so. That means $100 commission on a single trade of 1000 shares of a $10 dollar stock (or $1000 commission if it was a $100 stock). Now you’ll pay perhaps $5 to $9 on the same trade). You weren’t invited to conference calls. There often weren’t even recordings, and never transcripts. You were entirely dependent on your full service broker – who got his information from his company’s analysts, who may or may not have listened to the conference call. I don’t even remember ever seeing earnings press releases like we have now. Where would you look for them with no internet? Now, information is everywhere, and it’s much, much harder to have an edge on a stock.

What to do about it? Nothing. It’s a lot better in general. A lot better! I’d rather be fully informed.

Fifth reflection:

I can no longer invest in microcaps or illiquid stocks. Look, I’m investing many times, perhaps twenty times, what I was investing twenty years ago. I guess I could slowly work into a position in an illiquid stock, but the problem is how would I get out in a hurry if there was bad news? I’d be locked in. Not a good place to be.

What can I do about it? Live with it! I much prefer having the additional assets.

Sixth reflection:

Listening to everyone talking about the Internet Bubble made me wonder how much of my success was due to my one extraordinary decision to sell out of my internet stocks at what turned out to be the top of the bubble, or close to it. This resulted in me making a gain of 115.5% in 1999, and then, in 2000, when everyone who held their internet stocks, or added to them on the deline, had huge losses, I was up 19.0%. The indexes were down, as well, of course.

This certainly helped my overall results. However, I did make that decision, and immediately acted on it. That’s one of the cornerstone of my investing style: to be willing to change my mind and sell. (Amazon, AOL, and Yahoo, which were the darlings of the Bubble, lost 90% to 95% of their value. Amazon came back, but it took ten years. It’s now way above where it had been. Yahoo and AOL never came back. This was the Bubble when “great” analysts said things like “This stock is at 200 times revenue, but comparables are at 400 times, so it’s a bargain”. [I kid you not, they did say things like that.]

Seventh reflection:

Have I made incremental small changes in my investing style over the years that have changed my results? I don’t know. It’s hard to remember exactly what I was doing 10 or 15 years ago. I am trying to cut down the number of stocks in my portfolio though, to make it closer to the streamlined version it was then.

Eighth reflection:

One more point. There are now people from all over the globe investing in the US markets. Everyone wants to invest in the strongest most stable economy and currency. That also makes undervalued stocks harder to find in our markets.

And:

I’d be glad to hear other ideas from others on the board. And best to you all, and may we all do well.

Saul

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Saul,
I remember reading this when you first posted it. That was fairly early in my journey toward developing a more active, interested and intelligent decision-making process around investing. It was invaluable then, and it is invaluable now. Thank you again for sharing your thinking.
It always helps to be reminded that even the greats (in any field) are still always affirmatively working on self-evaluation and improvement. No doubt a large part of what helps make (and keep) them great.
Thank you,
Bryan

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The Second reflection is my favorite, I think. A very good reminder! Wish we’d had this on our minds when we first came across AEHR…

Bolding is mine. Wow that hits the nail on the head! Thanks for the reminder, Saul.

Bear

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Yes, Aehr was a poster child for: Even management couldn’t tell what was going to happen.
Saul

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Hi Saul,

Thanks for this reminder post. Like Bear, I appreciate most in your post, the bit about trusting Management. Regarding my last Portfolio summary, I was asked how I could trust the Genius man child Elon Musk. My answer referred to his pathological honesty as my reason.

Upon reflection after reading your post, I do believe trust is imperative; however, I too need more to be confident enough to invest. In my Portfolio summary I quoted your Knowledge Base in order to supply a bit of a list of those addition criteria.

Not easily described but not an intangible either, I’ll suggest here to open up for discussion, the value of processes underlying outcomes. I think it was the process of how software was sold, updated and made sticky among other reasons that led you to SaaS.

Narrowing this down I’ll use an example. When does selling some thing become a service, might be worth breaking down a bit more, for me anyway. Was Aehr selling a thing or a process? When is a process sustainable and therefore investable for 1-3 years at least? I look for ancillary actors needed to grow in order to sustain a trend of adoption. My thinking is when an entire industry is transforming due to a new thing then it’s perhaps that company that sells that thing that is investable.

Some could argue, when they invest in Tesla that their not investing in a company that sells things that must be sold again and again but instead their investing into a company that sells things that through over the air updates are made new again. That’s too much of a stretch for me.

I wrote in my January 2023 portfolio summary, when I explained why I invested in Tesla, I’m investing because it’s robots (factories) making robots (cars). And this year a Tesla factory will be making ‘some number’ of humanoid robots! It’s the manufacturing process of making an automobile that Tesla has transformed (and continues to transform with their ‘un-boxed’ process for the sub-$25k vehicle) and that has and will continue to completely transform multiple industries.

In choosing a management structure of a company, I suppose that those at the forefront of utilizing AI just might have some added sustainable advantage. It will be the AI that creates the software updates around all processes. In the planing stage of building a new company, or a branch within an existing company, if management structure is considered utilizing AI then what is the next type of management structure? (What might transform management like SaaS restructured a business model?) How a company we might invest into is itself structured is another process of great value when considering where to invest. Might the flat, bureaucratic free, management structure of say Google, Meta, and Tesla be reshaped for the entire investable landscape? Although our investment choices may not be limited in the near future, my point is that those companies utilizing AI for this process as well as all other processes, for years now, are at an advantage, no?

When I wrote a couple months ago the Trillion is the new Billion, I was thinking that there are going to be huge moats set up by those early adopters of AI.

Edit

I suppose it’d be easy to say, “When Tesla is selling the technology for the manufacturing process, the tech that is “transforming industries”, then I’ll invest.” Yes there is a lot to unpack up there.

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But didn’t many recurring revenue software companies we invested in see big unexpected declines in demand in 2022? I’ve actually forgotten a few of the names I was once excited about. Lightspeed, et al. Even many that have come back strong lately—DDOG, SNOW, NET.

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I don’t know which ones you are thinking of, but I just checked the last three you provided tickers for. My thoughts are that you may be confusing “declining growth rates” with “declining demand” because all three of those have increasing revenues and increasing gross profits by quarter for the past 11 quarters. Either that or your timeframe remembrance is off and we’d need to be checking 2020 into 2021?

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