Reflections on investing (reprise)

Investment Analysis Clubs Saul’s Investing Discussions
#7

Re Ross Stores , what would have lead one to invest in this company a decade ago? What was different?

20% growth rate? Nothing different, just the same growth rate. I was in California from 1985 to 1990 and I used to shop at Ross Stores for Oxford button down shirts. On every visit I would find two or three. They had lots of stores all over the place and when I saw one I’d look in. Same shirts as at more and much more expensive department stores. The advantage of the department stores was larger assortment and well organized shelves. The advantage of Ross Stores was affordability. Like I said, there are more poor people than rich.

Do some comparison investigating, which is the better investment, MacDonald’s or some high flying steak house like Outback or Red Lobster? Which airlines make more money, deep discount like RyanAir and Southwest or American?

A decade ago Ross Stores had 20 years of fast growth.

I now avoid all retail because I will be one of the last ones to know what is “in” and what is “out” I have to rely on my 25 year old granddaughter…

At Ross Stores affordable prices are IN and never go OUT of style. :wink:

Denny Schlesinger

5 Likes
#8

First, thank you Saul most sincerely for being so generous with your time and being so ready to share your thoughts on investment matters. I have read like a glutton EVERY POST you have written in the last 3 years or so, and have tried to formulate a set of rules that I could use myself in my own investments. Like you I did suffer significant losses due to investing in the stocks which were very popular in 2015 and 2016 and am therefore very interested in your observations in this post.

As you said you learned your lessons from the relative underperformance of your investments in 2016 and used them in 2017 which led to the fantastic performance.

  • You have categorically said you invest only in growth stocks, not in value stocks or cyclical stocks.
  • You avoid microcaps or illiquid stocks and retail companies.
  • You also avoid companies with few customers who are responsible for the majority of their revenues.
  • You strongly believe that reducing the number of positions led to the success in 2017.

If someone wishes to construct a portfolio today based your observations, not necessarily consisting of just a few stocks to start with, then what other critera has he/she to use to arrive at a reasonable list? What about eps growth, revenue growth, profit margin, ROE, debt/equity ratio etc - the critera very often used by financial advisors.This is to explore an alternative to just following what you or other regular and successful investors on this board have in your portfolios. Such independently screened portfolio is likely to include many of the stocks discussed here but may also identify new candidates.

I hope like me many other readers of this Board will benefit from what you may be able to add in reply to my query.

Regards.
alpha

6 Likes
#9

- You have categorically said you invest only in growth stocks, not in value stocks or cyclical stocks.
- You avoid microcaps or illiquid stocks and retail companies.
- You also avoid companies with few customers who are responsible for the majority of their revenues.
- You strongly believe that reducing the number of positions led to the success in 2017.

If someone wishes to construct a portfolio today based your observations, not necessarily consisting of just a few stocks to start with, then what other critera has he/she to use to arrive at a reasonable list? What about eps growth, revenue growth, profit margin, ROE, debt/equity ratio etc

Hi alpha, not to be critical, but if you are trying to follow this board without reading the Knowledgebase, it’s like playing with one arm tied behind your back.

I’ve always only invested in growth stocks.
I’ve been forced into avoiding microcaps and illiquid stocks.
Avoiding retail and companies with just a few large customers were new restrictions on added in 2017.
I’ve always preached a small number of stocks, but I had drifted up to 20-25 positions as my portfolio grew in size, and it was a mistake.

All the rest of my requirements are well discussed in the Knowledgebase: such as recurring revenue, revenue growth, etc, although recently I have bought more stocks not yet profitable if they are growing fast enough.

Saul

10 Likes
#10

I don’t recall exactly when I stumbled across this board, but it was pretty early on. Actually, as a Fool I was already familiar with and impressed by Saul. I had read a post authored by him on some other board (long since forgotten) which impressed me.

As for my investment strategy and performance, I started trying use Saul’s methods in 2015 (I think). But I hadn’t fully bought in. I was still more in the grasp of “buy and hold” come what may. I also held small positions in a lot of companies. I seldom added to my winners, rather I would look for something new to buy. Due to a mishap with my computer, I lost my records. I also had my investments spread across four brokerage firms (I thought I had a good reason at the time), including Edward Jones (I have nothing good to say about this company). Some of those records were also lost so I have no practical way of reconstructing my holdings and performance. But of this I’m certain, at best my returns were mediocre but it would not surprise me to determine I had lost money for the year.

By 2016 I had consolidated all my investments to one firm (Fidelity, no complaints). I hold three accounts, a revocable trust, a traditional IRA and a Roth IRA. This was the year I really began to try and implement Saul style investment in growth companies. Like Saul, I was not happy with my results. For the year, my performance summed across all three portfolios was a 7% loss. But for the first time in my life (I’ve dabbled at investing for many years) I actually knew what my performance was. I had never bothered to keep track of it before. I saw that I had room for improvement.

Last year, I was more diligent in my investment strategy. I was also not in the least reluctant to admit that I had made a mistake and sell. But even more to the point, I expanded my definition of “mistake” to include companies that may have been doing OK and had a rising stock price, but it was rising more slowly than other opportunities with little evidence that the company was going to improve. I sold stock in order to buy a different company or put more money in something I already owned that was performing better. Most of the year I held 15 or fewer different companies. I ended the year up a little better than 82%.

I still consider myself a newbie. I don’t have the same level of conviction in my investments that Saul has. I fail to recognise problems with a company as readily as Saul does. Saul has over 20 years of experience. I have maybe a year and a half. There’s no teacher like experience. Saul is often given credit for having something akin to a sixth sense about investing. I just think that’s what comes with 20 years of reasonably intensive study and experience. Intelligence and humility also play an important role. I’ve never read anything by Saul that displays a need to be right. Accepting that as a human we are prone to err is a valuable attitude as an investor.

2018 is off to a great start, but I keep admonishing my wife that she should not get too excited by the early performance. I’m pretty old, I don’t expect to see another year like 2017 again, ever. My goal, which I think is achievable is 20% annual gain. Anything over that is gravy. Although 2017 was more like steak, potatoes and gravy along with a nice red and maybe even a desert.

30 Likes
#11

An excellent post, Saul!

I have to say that being willing to sell positions where the story has changed is crucial to my success.

This is particularly hard for me. The hard part isn’t selling; it’s detecting whether the story has changed in a meaningful way (as opposed to being just noise). And it’s why the “Saul method” doesn’t work well for me, at least right now.

Let me give some examples.

Chipotle

The first of the health problems. Had the story changed, or was it just a bad break? Sell or hold? I held because it seemed like bad luck, not a fundamental problem with the business. Then another problem. Starting to look like a pattern, which makes business problem look more likely; but I default to holding when I can’t tell.

It wasn’t until after Monty Moran (co-CEO) suddenly left without any explanation that it was clear to me that the story (the one I had invested in) had changed. I invested in Chipotle after seeing his interview with Tom Gardener. I was thoroughly impressed with his attitude and perspective. With him gone, my investing thesis had seriously changed. But it took me weeks (or maybe a couple of months?) before I consciously realized all this (to say in my head, “The thesis has changed!”). As soon as I realized, I sold.

Ubiquiti Networks

I had watched it a while, but the apparent commodity nature of its business, and frequently having product shortages, caused me to avoid investing. Then they hired a new CFO who got them to ramp up more on new products. They took a short-term hit for that expenditure, but were positioned to be able to fill demand. So I bought in.

Later, Saul starts to complain about the CEO paying more attention to his basketball team than Ubiqiuti, and being unable to answer some of the more detailed financial and inventory questions during conference calls, and sells. Has the story really changed? At the time, I was much less worried about the conference calls. Isn’t that the CEO’s job to hire good CFO and COO to take care of those details? Does the CEO really need to have all of that information on the tip of his tongue during a conference call? I held.

Later, that CFO left. Saul has been imploring people on the board to reconsider holding. Like Chipotle, it took me a while to consciously realize that the story I had invested in had meaningfully changed. When I did, I sold.

I have since reestablished a small position after buying and being impressed with their AmpliFi mesh WiFi router system. Adding the home networking market seems like a good move for longer term growth.

XPO Logistics

XPO was growing rapidly. Their multiples were high, but they appeared to deserve it. After the merger with Con-way, Saul became concerned about the business becoming more asset heavy (now owning a lot more trucks), and being evaluated more like a “big company” (and thus the market would become more skeptical of its high multiples). Saul sold. This was a big change, sure, but was it a bad one? I couldn’t tell, so I held.

The stock price dropped significantly. I think Saul missed most or all of that drop. I didn’t. I held. I’ll admit that I was worried. Was I blind to some important problem?

XPO sold off some of the less profitable parts of Con-way. The business continued to grow. The stock price eventually rebounded – vigorously. I’ve held the entire time. What started out as a small position has grown into a medium sized one, by virtue of the stock price growing faster than many of my other holdings. I’m glad I didn’t sell.

–

It seems that I’m sluggish to react compared to most people here. I think that’s another reason why Saul’s method isn’t as good a fit for me.

I’m much more comfortable with the Rule Breakers approach of picking a bunch of companies with opportunities to change their industry or the world. Pick enough of them so that you get a better chance to pick several of the winners-to-be. Don’t worry as much about ones where the stock price is losing; they’ll become irrelevant. Let the winners self-select and reveal themselves. This makes me much more relaxed, and able to stick with winners, even through hiccups. It fits me better emotionally.

I was up “only” 44% in 2017. Not nearly as impressive as many of the people here. I’m quite happy with it. Frankly, I only need to match S&P500 performance to have a high probability of a successful retirement. I’d like to do at least a little better to progressively improve our standard of living in retirement. If I can do a little better without a lot of stress, that would be much better for me than dramatically better returns with high stress.

-Mark
… who still really values the discussions here!

50 Likes
#12

Mark,
XPO Logistics was my best performing stock in 2017. TMF podcast - Motley Fool Money mentioned CHRW (C.H. Robinson). They are a 3PL, meaning they gain a big portion of their revenue by providing logistics solutions through their software. Navisphere Vision is their newest solution. Might be something to explore.

2 Likes
#13

Hi Mark,
I relate to a lot of what you said. Taking a very similar approach… I now have ~50 positions and with ~40% up in 2017, I couldn’t be more happy with the performance.

I am also thankful to Saul and many others on this board. Hugely benefitted this year from these discussions.

Nilvest

1 Like
#14

Hi Mark,
I really liked your post. My extra problem is not knowing which RB stocks to invest.
Do you use some rules to pick your RB

Thanks Saul for all you do
usha

#15

Hi Mark,
I really liked your post. My extra problem is not knowing which RB stocks to invest.
Do you use some rules to pick your RB

Thanks Saul for all you do
usha

Not Mark, but I’ll give you a quick run-down of part of my method. I subscribe to Rule Breakers and Stock Advisor (now Hidden Gems too). I look for carry-over recommendations between services (also factoring in discussions here on Saul’s board pretty prominently), and I pay particular attention to the Best Buys Now lists.

There is one particular company that I will not name in this posting out of respect for both The Motley Fools’ business and for paying members of the Motley Fools services, but will say it has been on both the December and January Best Buys Now lists for multiple services (January RB list is just out today, fyi). If you haven’t yet bought shares of that company or if you haven’t at least researched it a good bit already, you’re doing yourself at least a bit of a disservice.

5 Likes
#16

volfan84,

I currently subscribe to PRO, MFO, SA & RB. I’m a former Duke Street/One subscriber. Before that, one of the individual services I subscribed to was HG (along with GG, PD and others).

HG (when Tom ran it) was great and I found BWLD, BABY and many others with that service.

My question is, what made you decide to add HG to your fold? And also, perhaps you can tell me what I may be missing with the 2018 version of HG (compared to the HG of 12-13 years or so ago).

I have been very happy with my SA/RB/PRO/MFO combination since I “downgraded” from One about 2.5 years ago.

– This…is the MaineReason

#17

To be honest, the main reason (haha) that I joined HG was to be able to compete in all 3 2018 challenges. Also, it was only $53/year for 3 years, so really cheap if it gives me just 1 or 2 good picks. With its target of smaller cap companies, I could envision some picks being made there that could later “graduate” to being Rule Breakers or Stock Advisor picks. No Hidden Gems picks have jumped out as screaming buys for me yet, and I am performing very poorly in HG 2018 challenge (averaging -4% so far across 5 picks) after 7 days of the market being open in 2018.

So far, HG has yet come close to RB or SA from my opinion. The boards have much less traffic…and the first recommendation on there that jumped out at me that I hadn’t previously heard of has had a pretty salaciously-worded short attack already just this week (from Copperfield Research). Fortunately, I hadn’t already bought any shares in real life. I haven’t read the full report, but glancing at it was enough for me to push that company down from a 3.75 to a 3.25 out of 5 on my personal watch list rating system (Arista Networks is about a 4.5 or 4.75, presently, fwiw). 3.25 is basically not worth significant further research. The numbering is mostly arbitrary, from my brain pulling information from different places…doubt any company could get a 5, other than maybe NVDA circa CES 2017, but since I already owned NVDA and the system was less-refined than its still poorly-refined state, it didn’t have an up-to-date rating then.

1 Like
#18

If anyone cares, here are the companies I am presently trying to decide between for starting new positions, and their associated rankings. I just threw Starbucks in there today after reading an example of what Altria shares with DRIPs would have done and seeing that Starbucks has right about a 2.0% dividend yield presently…SBUX isn’t much of a Saul-type stock or method though.

Present Rank (out of 5 stars) Symbol Company Name
4.00 TLND Talend
3.75 AYX Alteryx
3.75 APPN Appian
3.75 PSTG Pure Storage
3.75 SBUX Starbucks
3.75 ALRM Alarm.com
3.75 JUNO Juno Therapeutics
3.75 SWKS Skyworks Solutions
3.50 PAYC Paycom

Looking back on some prior ratings from my watch list, I see MELI as a 4.50 back when it was at a much lower price. Paypal and Starbucks were at 4.25…definitely should have bought some Paypal back then. Westlake Chemical was at a 3.75, that would have been a decent buy from the then-price. I had Western Refining as a 4.0, which is one that I actually did buy (then bought out in late-2016). Align Technologies at a 3.50 back then was a far-too-low rating, apparently. I had LGIH as a 4.0 last summer; I did dip my toe into LGIH via options, but it was right before Hurricane Harvey hit Houston, so that timing turned out to be very unfortunate for my portfolio.

Apologies for using this board as my personal reflection ground, but it aids in organizing some of my thoughts…and if you use any of my thoughts to make a buying decision, caveat emptor, of course.

2 Likes
#19

There is one particular company that I will not name in this posting out of respect for both The Motley Fools’ business and for paying members of the Motley Fools services, but will say it has been on both the December and January Best Buys Now lists for multiple services (January RB list is just out today, fyi).

volfan, Is there some way to see the Best Buys for December? I only get the Best buys for January.
Saul

2 Likes
#20

Is there some way to see the Best Buys for December? I only get the Best buys for January.

I don’t know about RB, but for SA, I just looked, and if you are on the best buys page

for subscribers https://www.fool.com/premium/stock-advisor/recommendations/b…

you can scroll down below the list and there are links to the previous months “Why These 5 Stocks Are David’s Best Buys Now” for David and Tom

-mekong

1 Like
#21

I happened to remember that one and navigated to it via the company page. I’m not sure of a consolidated list of month-by-month BBN links, but I may have to pass a long a suggestion for such.

December Tom G. Stock Advisor BBNs:
https://www.fool.com/premium/stock-advisor/coverage/18/cover…

December Rule Breakers BBNs:
https://www.fool.com/premium/rule-breakers/coverage/1069/cov…

Here’s a link to a Rule Breakers board post where a member discusses his tracking of RB BBN performance historically:
http://boards.fool.com/1069/10-years-of-bbn-data-32948406.as…

2 Likes
#22

mekong’s link is a useful one.

#23

If anyone cares, here are the companies I am presently trying to decide between for starting new positions, and their associated rankings.

Present Rank (out of 5 stars) Symbol Company Name
4.00 TLND Talend
3.75 AYX Alteryx
3.75 APPN Appian
3.75 PSTG Pure Storage
3.75 SBUX Starbucks
3.75 ALRM Alarm.com
3.75 JUNO Juno Therapeutics
3.75 SWKS Skyworks Solutions
3.50 PAYC Paycom

Well, I guess I might have missed the boat on Juno. Up over 30 to 45-ish% in after-hours trading (from closing under $46/share to jumping to $66-ish/share) after rumors of a Celgene buy-out (which I already have a small position in).

https://www.marketwatch.com/story/celgene-in-talks-to-buy-ju…

1 Like
#24

Thanks again, Saul. Another enjoyable and educational read.

1 Like
#25

In conclusion, I’d say that reducing the number of my positions was the most important change.

As Mark Twain said, there is nothing like a hanging to focus the mind.

And I think this is true of a concentrated portfolio. If you have 50 stocks, you are likely “widely diversified” and you don’t have to care if the stock representing 1% of you portfolio starts doing poorly. But if you have 12-15 stocks and 5 of them are 50% of your portfolio, you are focused. You could be hung any minute if you don’t know what is going on in the underlying company. you have to know ahead of time that when a short seller comes out, he is full of BS and you can buy after a 15% dip. You have to know if a miss in earnings is representative of a major change or a one time blimp. You can’t do that with 50 stocks. You must do that with 13 stocks. And if you can’t, you better not try to invest like Saul.

P.

7 Likes
#26

But if you have 12-15 stocks and 5 of them are 50% of your portfolio, you are focused… You can’t do that with 50 stocks. You must do that with 13 stocks.

I can’t do that with more than one or at most two companies. I’m very impressed with people who can handle more than that.

-IGU-
(invested in TSLA and AAPL, gambling in SHOP)