Reflections on my investing.

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Reflections on investing

So far this month and this year, sure, I am beating the market nicely. I was up 2.6% today alone, which is more than I was up all last year. 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 I 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 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 rationale 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 1000 shares of a $10 dollar 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 decline, 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” like Mary Meeker said things like “This stock is at 200 times revenue, but comparables are at 400 times, so it’s a bargain”. [If you don’t know who Mary Meeker is just google her.])

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

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

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Saul,

Thank you for sharing your reflections on investing.

Your thoughts are honest and heartfelt. The vast changes in access to information brought back memories of scanning newspapers each morning to see how our portfolios were doing. Now, a few clicks on our laptops each morning give us more information than even our brokers had access to in the 80’s and 90’s. Advances in technology have made all this possible, of course, and frankly it is much more fun today.

What changes will occur over the next 25 years? Some of us may or may not be around to witness them, but you can be sure the advances will be just as dynamic as the past 25 years have been.

I agree with old Gus as he was sharing his last words in “Lonesome Dove”:

“It’s been a helluva ride, Call.”

Jim

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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%.

Excellent start for the year. The market had switched moods from value to growth. Growth stocks are on a tear and value stocks are taking a breather. If taxes come down as promised, this could be the start of a great year.

Pharma stocks are not participating. It only takes one Trump tweet in the middle of the night to bring them down crashing. Why bother.

#6

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I’d be glad to hear other ideas from others on the board.

How about some heretical thoughts?

Beating the market each and every year is likely a fool’s errand. The market has periods that defy rational explanation. Those periods can be up or down.

What is more important is beating the market more often than the market beats you, and beating it by enough to make up for the losses.

It’s more akin to a skilled card counter playing blackjack. If you can count cards very well (which I can’t), you can shift the odds of the game slightly in your favor. That doesn’t mean you will win every hand, nor does it mean you will win every session. But it does mean you win more than you lose in the long run.

I’m not suggesting an abandonment of periodic assessments and self-evaluation. Those are very important to learning new lessons and avoiding mistakes. Instead, I’m suggesting that sometimes there is no rational explanation for the results. If your analysis is adequately thorough and doesn’t reveal mistakes, it’s possible that market irrationalities simply overwhelmed rational thought this period.

I have one specific comment on your second reflection. I’m not sure avoiding those sectors is the right choice. To some extent, the stocks you mentioned were “story” stocks. They were getting a lot of hype and management was pumping out plenty of rose-colored predictions about the future. I’d suggest going back and looking again at what was being written about those companies a year ago. I recall seeing a lot of prose and not nearly as much hard analysis.

Of those three, I bought only Skechers. They had (and still have) excellent fundamentals - strong balance sheet, cautious use of debt, comfortably profitable. I don’t recall the fundamentals of the other two, but I do recall being turned off by them for some reason.

I bought and sold Skechers twice, making about a 10% profit in a few weeks each time. But I kept my position small, and treated it as a riskier investment - keeping it on a short leash - because it appeared to be pumped up and down by it’s story more than fundamentals. Through some combination of skill and luck (but mostly luck), I came out OK. What I relied on is a hard-learned lesson from several years ago. Whenever I have a stock go up 10% in a very short time after my purchase, I take the money and run. The luck part is that I first bought at a good time, when the stock was near a low point. Without that bit of luck, I likely would still own it and be looking at a small loss.

I have no idea if I’m actually right about Skechers, but that’s my story and I’m sticking to it. :slight_smile:

–Peter

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Whenever I have a stock go up 10% in a very short time after my purchase, I take the money and run.

I’m glad this works for you, seems counterproductive to the idea of letting winners run, though.

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I’m glad this works for you, seems counterproductive to the idea of letting winners run, though.

I lean a bit more toward the value end of investing than Saul. So I see stocks such as the ones he mentioned as the risky part of my portfolio. If I roll the dice and win, I’ll take it because I see the chance of continuing to win as increasingly small. I’m not going into these stocks for a multi-bagger, I’m buying them for a chance at a shorter term (less than one year) bump of 10% to 20%. If I get that 10% in 5 or 6 weeks, I’ve met my goal for the stock.

In the spirit of self-reflection, I went back to look at the specific of my buys and sells. My first buy was in mid-April, with the sell later in May for a 9.5% gain. The second round trip was about 2 weeks from the end of June to the beginning of July. That trade was a little over 8% gain. (Overall, about 18.5% due to compounding.) It was the speed of the gains that caused me to sell more than anything.

The stocks I am more willing to let run are my value-oriented picks. And those aren’t quite in line with this particular board’s philosophy. You all a source of ideas for what I think of as my gambling money, and a good counterpoint to my (sometimes overly) conservative nature.

–Peter

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Whenever I have a stock go up 10% in a very short time after my purchase, I take the money and run.

Hi Peter, It might be worth reading this carefully.

I bought Arcam for about $15 just before the end of 2012, I think it was, for $15 or so pre-split (it split 4-for-1 along the way). About a year later it hit $200 pre-split. I had added, rather than sold, as it started up. If I had sold after it had risen 10%, that would have been just $1.50 profit that I would have taken and run with. I sold out at about $185 on the way down, so while I would have had that $1.50 profit I would have missed about $170.00 in profit (over one hundred TIMES as much.

All it takes is ONE like that that runs away for 1130% profit ($170 on an investment of $15), to overwhelm a lifetime of taking little 10% (or $1.50) profits.

You might want to think that through a little.

Saul

PS - Someone who took that nice 10% profit (60 cents per share) on Amazon in 2001, when it was at $6.00, would only have missed about $829 per share in profit up to now (about 13,900%).

PSS. - For something more immediate, I bought Amazon about a year ago at about $550. Shortly afterwards it rose 10% to over $610. I added along the way. It’s now at $836 which is up 52% in about a year…

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Hi Peter, It might be worth reading this carefully.

Thank you. I’ve read similar things multiple times. It’s always good to hear it again, as I’m probably too conservative in my investing.

As a bit of a counterpoint, I hear lots of stories of stocks like Arcam - multiplying your investment 5 or 7 or 10 times or more. I always wonder, though, how many similar investments did those investors make that went down 25% to 50%? How many frogs were kissed to find that prince? Two 50% losers take your 10 bagger down to a 9 bagger. Ten 50% losers cut it to a 5 bagger. How many mediocre to losing investments were there to get that big winner? What was the performance of that overall portfolio?

Personally, I don’t have the temperament to invest enough money into high growth stocks to make a significant difference to my overall portfolio. I can only manage to put perhaps 5% into those stocks, spread over 2 or 3 different stocks. So a 10 bagger in a year on 2% of my portfolio dilutes down to a 20% return overall. Nice, but not life changing.

I like to keep informed on growth investing to push me a bit more towards it - familiarity leads to comfort. And making actual investments - even small ones - also leads to more comfort. So I continue pressing on.

–Peter

PS - I did eek out an 18% return on SKX in a year when when it was flat to down. That’s got to count for something? :slight_smile: I also notice that it’s recovered from it’s meltdown last summer. Perhaps it’s time to get back in again.

PPS - The fundamental investor in me can’t stomach investing in AMZN. It’s just starting to actually turn a profit and is levered to the hilt. That doesn’t mean it has been a poor investment over the past 2 decades, because clearly it has been wonderful to it’s investors. I just can’t explain why it’s been so good or why it would continue to be good for someone buying today.

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clearly it has been wonderful to it’s investors. I just can’t explain why it’s been so good or why it would continue to be good for someone buying today.

Hi again Peter,

That’s an interesting observation. For a long time I felt the same way and wouldn’t buy Amazon because Bezos didn’t care about making a profit. I finally changed my mind when they started making positive cash flow and figured I take that for now.

But as for why it’s been so good as an investment? Look at it this way: It started out as a little business selling books on the internet. Bezos tells how he had to run them down to the post office himself. Now it owns huge warehouses all around the country, and around the world, and actually handles a noticeable part of all the retail commerce in the US, and over 25% of all the rapidly growing internet commerce. Besides which it has a promising ecosystem built around the Echo, and Alexa. Many people buy almost everything from toothpaste to underwear on Amazon. I know, because I’m one of them. And Amazon owns all these huge computer data centers all over the world as well, and has the leading position in cloud hosting and analysis of data, with AWS. It owns a fleet of airplanes for deliveries. It’s trying out drone deliveries in England. Now going from a little book seller in a garage so to speak, to a huge dominant and massive company on a world scale, doesn’t that explain why the value of the stock and the market cap would go up?

Saul

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And with Arcam you could have made another 2 bagger in the few months before GE bought the company.

Saul’s initial purchase probably benefitted enormously from the bubble in 3D stocks.

Finding a giant bubble in the early stages can lead to huge profits . If you know when to exit, something Saul usually does well.

Getting out because you have made a small but quick profit may be good at the blackjack table but not so good in the stock market.
In blackjack the long term odds are against you. If you hold equities the long term odds are with you.

I agree ALL IT TAKES IS ONE

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Hi Saul - some interesting introspection. How about one point recently brought up that with your experience and extraordinary entry and exit decisions and focus on growth stocks, in the last 4-5 years as pointed out by one poster recently, you had an almost exact correlation with a technology growth index (which presumably comes with lower risk). I know you do use market indices as a benchmark but that one was interesting comparison - with all the effort and risk are you comfortable with mirroring a tech/growth index performance and what do you think you could do to beat it?
Ant

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Saul,

You are a great inspiration to all of us, especially with the way you are able to question your decisions and act accordingly. Thank you for that!

One additional factor that I see in your stocks is that in my opinion people are overvaluing companie’s moats. Or if you look at it from the different perspective, they are underestimating other options customers of these companies have. That makes the stock more risky than it seems. With hindsight, SWKS and INFN were like that. In the current portfolio, I think people overestimate SHOP’s position on the market - it is more vulnerable than it seems.

This is not bad per se - if you are in the growth business you’ll have to lose some to win some. It’s just that there will be years were through no fault of your own analysis the loosers will bunch up by chance.

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One additional factor that I see in your stocks is that in my opinion people are overvaluing company’s moats. Or if you look at it from the different perspective, they are underestimating other options customers of these companies have. That makes the stock more risky than it seems. With hindsight, SWKS and INFN were like that…This is not bad per se - if you are in the growth business you’ll have to lose some to win some. It’s just that there will be years were through no fault of your own analysis the losers will bunch up by chance.

Thanks, stenlis, that’s a very good observation.
Saul

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reflections on your reflections

1 - there were plenty of growth stocks that fell in early Jan 2016. Which areas did well or bad is no reason to give yourself a pass. I missed this too.
2 - I think what you are describing is the lack of the ability to derive your own earnings estimates and path. This makes your more susceptible to changes in the actual business model, but many of the stocks you mention had a history of inconsistency. There is no ready solution here, but generalizations like ‘avoid hardware’ don’t make sense to me. Up to you though.
3 - I know it would influence me - i visit this board now instead of coming each day so I can focus on my technique and not others, but I’m glad you post - and you are stronger investor than I am! I post on a membership only site and absolutely hate it and the people there because they only respect a certain type of writeup - regardless of what the idea does!!
4 - I actually think it is isn’t that information is more readily available (it clearly is) cause the future is the future (nobody knows that) but what’s different is the SPEED at which things change and react
5 - if you invested in high PE stocks in the microcap space then as you say volatility is the norm, and I think reporting quarterly or half-year results is especially irrelevant (though if results suck then pay heed) in that case, but we have been in a bull market since 2009 so be careful. You know the risks though.
6 - the past is past. We are 17 years past that, so it is time to let it go. But keep the $$$'s! :slight_smile:
7 - this is the one part I don’t get; Lynch used to say that you should keep written diaries of the stocks you follow and it is clear you do that (have written analysis and updates). All investors would benefit from this, esp. since it provides a time stamped way of viewing your analysis vs. relying on memory which is inherently tricky. In many ways, your board posts fill that function, but it seems inefficient.
8 - Agree completely. I invest a lot in Canada now for this reason. The one benefit is again that if things change positively, it won’t take long for that to be reflected in your results.

thanks for posting and sharing…

As always, these are just opinions and worth 2c

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PPS - The fundamental investor in me can’t stomach investing in AMZN. It’s just starting to actually turn a profit and is levered to the hilt. That doesn’t mean it has been a poor investment over the past 2 decades, because clearly it has been wonderful to it’s investors. I just can’t explain why it’s been so good or why it would continue to be good for someone buying today.

just curious- when was the last time you glanced at Amazon’s balance sheet and cash flow statement? What you are saying is absolutely false…

(and don’t worry - I’ve done this too - you hold an assumption and then forget to check that assumption - happens all the time to me).

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol…

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Getting out because you have made a small but quick profit may be good at the blackjack table but not so good in the stock market. In blackjack the long term odds are against you. If you hold equities the long term odds are with you.

Interesting point Mauser.
In blackjack or other gambling games, each play is independent. If you’ve thrown two 7’s on the dice, it doesn’t increase your chances of throwing a third 7 on the next throw (unless they are crooked dice). The odds are exactly the same as if you hadn’t thrown those two 7’s.

But if a stock is moving up in an uptrend, it’s often for a reason, and it usually will continue for a while. A stock moving up increases the chances that it will continue to move up.

Saul

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in the last 4-5 years as pointed out by one poster recently, you had an almost exact correlation with a technology growth index (which presumably comes with lower risk).

Actually, that correlation goes back 10 years. I have numbers for FDN starting at 2007. I only posted the last 5 years because it is statistically significant. I’ll provide the rest in a later post.

BTW, just for kicks, Saul is up 9.1% YTD. FDN is up 8.1% during this same time window.

#6

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My first buy was in mid-April, with the sell later in May for a 9.5% gain. The second round trip was about 2 weeks from the end of June to the beginning of July. That trade was a little over 8% gain. (Overall, about 18.5% due to compounding.)

Did you subtract out “transaction costs” and “taxes” to get a true overall compounding amount which also include the subtraction of real world expenses?

b&w

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Did you subtract out “transaction costs” and “taxes” to get a true overall compounding amount which also include the subtraction of real world expenses?

Yes. I used actual dollars in my figures, not dollars per share. I also accounted for the small difference in dollars between the first sell and the second buy.

–Peter

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just curious- when was the last time you glanced at Amazon’s balance sheet and cash flow statement? What you are saying is absolutely false…

I last looked while writing that post. And it’s a good thing I did, as I was going to write something stupid based on exactly your fear - holding an assumption that is no longer true.

Their total debt is in the neighborhood of 4 times their stockholder’s equity. For me, that’s a lot of leverage. I get uncomfortable when a company gets past 1:1 debt to equity.

I was going to make a stupid mistake by saying they never turned a profit. But that is not true. They have been profitable in 2 or 3 of the last 5 years, and they will be profitable again in 2016 once the year end results are released. I called that “recently profitable” because I tend to think about investing in very long time scales. Five years is recent history in my mind. If there were any profits in the years before then, they would have been minor in comparison to today’s figures.

I was also going to say something stupid like it would take years of profitability to offset all of the accumulated losses. But that’s not true either. The profits in the last few years have already wiped out their accumulated losses since inception. Which means they’ve finally generated a net profit over their existence.

Here’s my big problem. Its the valuation problem that most Amazon fans know well and choose to discount as irrelevant. In case someone hasn’t seen it in a while, let me recap it briefly.

As I write, AMZN is trading at about $839 per share. They have 475 million shares outstanding. That’s a market cap just short of $400 billion. I look at their balance sheet and see $70 billion of assets. (Frankly pretty good assets, too. Only a small amount is goodwill from previous acquisitions.) So I need to believe that there is $330 billion of goodwill baked into all of their systems - marketing, distribution, AWS, and everything else. That’s a lot of goodwill - 3/4 of their current price.

I haven’t looked up the estimates for the 4th quarter, but let’s assume its the average of the first 3 quarters. That would put them at about $2 billion of profit for 2016. That’s in the neighborhood of 4 times their 2015 profit. Clearly a banner year. Let’s assume they can double that again in 2017, so they have $4 billion of profit. And let’s say they double that again for 2018. $8 billion that year. And let’s say the stock price doesn’t change between now and 2 years from now. (Yes, I’m making some heroic assumptions here.) They’d still be priced at a 100 P/E. And they’d probably be up to somewhere around the largest 20 companies in the world based on sales.

They’re certainly a good company. But the stock is simply too expensive for my blood. Would I bet against Amazon? Certainly not. I may be conservative, but I’m not stupid. But I can’t plunk down my money to buy a few shares. I believe that the only way I’ll profit on that investment today is to find a bigger fool to buy the shares down the road for even more.

–Peter

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