Saul's Knowledgebase

Happy Monday All,

I was reading Saul’s Knowledgebase for about the 3rd or 4th time and what struck me is how much investment “Knowledge” I have gleaned each time I have read it. Case in point, part 1 has the following information that I find very helpful in guiding me:

"When I first started out I didn’t mind concentrating your investments in four or five companies. However, when you are retired, and you are investing for a livelihood, and you don’t have any other income to replace potential losses, it’s safer not to let any position get too big. You should rarely, if ever, let a position grow bigger than about 15%, and even that is usually way too much. I’ve been breaking that rule lately and letting positions grow to 20% or 21%.

I usually start with small position and let it grow. Sometimes, I add to a position while it’s growing. I almost never start with an oversized position. I usually don’t buy a full position all at once, or sell all at once, but I taper in and taper out, unless I have a good reason to get out in a hurry. (Although when I had a smaller portfolio I sometimes would buy or sell an entire position at one time).

You can’t really keep track of more than 20 or so stocks, and that’s an absolute outer limit. I greatly prefer a much smaller number of stocks, as they are easier to keep track of. You need to read all the quarterly reports, and the transcripts of all the quarterly conference calls, which gives you a busy earning season. They often say a lot more on the conference calls than in the earnings press release. Reading the transcripts works much better than listening to recordings as it takes a quarter of the time, and you can skip the forward-looking statements messages, etc. Look at investor presentations too. And get a news-feed from your broker on each of your stocks.

You can beat any mutual fund over the long run. You can’t tell much from a mutual fund’s results because you are always buying last year’s results. For example, if it’s a oil company fund, and last year oil stocks were in, it will show great results, but this year it could do terribly. Also, you are always buying the results the fund had when it was much smaller and nimbler than it is now, because those good results they had when they were tiny made people pour money in.

I pay no attention to 2-baggers, 5-baggers, 10-baggers, etc, in individual stocks, nor do I count them in considering investments. This is relevant because this way it never crosses my mind to think anything like “This stock is slowing down, but it’s a 9-bagger. Maybe I should hold it for another year to try for another 10-bagger.” Going from a 9-bagger to a 10-bagger is only an 11% gain. If I’m no longer in love with the stock, I should be able to put the money into a new stock that will be up 30% in a year, and it will never even cross my mind that I missed having a 10-bagger. Here’s another way to think about it: If you have an 80-bagger on a stock that grows to an 85-bagger it sounds exciting, but it’s only a 6% gain on your money. If you take the same money and put it into a new stock where you just get a tiny little 2-bagger, you’ve made a 100% gain on the same money. Which is why I don’t pay attention to trying to get multiple baggers. If they happen, fine, but it’s not my focus.

If you were to put a small amount of money in every stock listed on the market, you would eventually pick up every 10-bagger, even every 100-bagger, that occurred. You’d be able to brag “I have fifty 10-baggers now, and three 100-baggers!” But so what? You’d just be doing as well as the markets as a whole, by definition, as you’d be investing in the whole market. My goal, and my entire focus, is increasing the value of my entire portfolio. As I pointed out above, having a multi bagger on my whole portfolio is what counts, not on individual stocks.

Not accepting that an investment could be a mistake as it continues to go down is a dangerous error, and could be very expensive. A big problem investors have is getting attached to their previous decisions and not being willing to consider that they may have made a mistake. Some of the most angry I’ve seen people get on these boards is if you criticize a stock that they’ve fallen in love with.

I try to always pay attention to criticism of a stock, to reevaluate my investments, and to get out if it turns out that I’ve made a mistake, or if the situation has changed. Which is why I rarely end up holding stocks for 5 or 10 years.

Sometimes changing your mind in the face of new evidence, and selling when necessary, is the most important thing you can do. If you are wrong, you can always buy back in. I think that being willing to change my mind in the face of new evidence is one of the most important skills I have. And learning that it’s okay to change your mind when appropriate is one of the most important things I try to teach on this board. Let me remind you that I sometimes make mistakes getting into a company (big mistakes, on occasion), but that I am willing to consider the possibility that I was wrong, and change my mind when I see that I actually was wrong. And that that is very important. Although I realize that I make mistakes, I don’t regret my decisions. I figure I did the best I could at the time. And sometimes I make mistakes getting out too. So what! I can’t be right all the time."

I can relate to the above information because I am recently retired and have always been somewhat of a conservative investor, especially when it comes to selling out of a company I am or was in love with. This board has helped me in so many ways, not just in making money, but giving me confidence in my investing abilities.

As of time of this post I noticed that Sauls Knowledgebase Part 1 had only 206 recommendations, Part 2 had 116, and Part 3 115. I was blown away by the low number of recommendations, maybe it was because the readers were so into the great source of investment knowledge they were gaining. This well written investment knowledgebase can not and should not be taken for granted, I challenge you all who read this post go back in and read Knowledgebase parts 1,2,and 3 again or for the first time, and hit that rec link.

A big thank you to Saul and all the folks who manage this board. It has changed my families life.