Saul, I have a question for you about your method for building or reducing positions. I’ve read that you build positions in small increments as a stock rises. Can you explain your approach and the reasons for it? Same for when you reduce a position. Sometime you get out all at once and sometimes you sell just some or in increments.
Hi Chris, it’s nice to see you back on the board. I do tend to add in small increments. And as the stock price rises. And I think it’s mostly to be sure that the story and results are as I thought they are supposed to be, and as I learn about the company and get more confidence in it. Let’s take Shopify, my largest position, currently almost 16%, and trace back through my end-of-quarter summaries, and my weekly graphs where I mark my buys, and see how it grew.
The first mention I find was in my end-of-March summary last year, when it was a new “try-out” position at 2%. I had bought small amounts from about $26.50 to $28.50. It closed the month at $28.00. A MF service had recommended it, and I had ignored the recommendation. But then it re-recommended it the next month. I had never seen them recommend the same stock two months in a row, so it got my attention. And then Bert wrote it up. A perfect storm. It got me started.
In April the price rose to $32.00 and closed at $31.80. I had added from $29 to $32. At the end of April, Shopify had grown to just under a 4.0% position.
In May the price fell from $32 to as low as $25, and closed at $29.25. I added a little on the way down at $29.40 and some more just about at the bottom at $26.20. These were smaller purchases than the previous ones. At the end of May, it was up to a 4.7% position, even though the stock price had fallen during the month on great earnings. (It’s now at $64.15 for a reference point).
In June, the price fluctuated from $26 to $31, and closed at $30.70. I had bought a tiny bit at $30.50. It was still under a 5% position.
In July the price started to move up. The low was $29.80, and the high was $34.80. It finished the month at $34.25. I happily added to my position at $32 and $33 and Shopify finished about a 5.5% position.
In August it continued on up. The low was higher than July’s low, at $32.75, but the high was much higher at $43.75, and it finished the month at $41.40. I added a little at $39.75, and it was now my fifth largest position at 7.7%
In September it continued to rise, but at a more moderate pace, to a high of $45.40 and a close at $43.00. I added substantial portions at $41 and $42.40. It was now tied for fourth place at 9.0% of my portfolio.
In October it fell off a little, closing the month at $41.40. I bought a considerable amount at an average price of $40 when it fell during the month. (Remember my initial positions were at about $27.50). Shopify finished the month in sole possession of fourth place at 9.1%.
Let’s go on to November when SHOP was as high as $45.30 and as low at $37.75 (!) and closed at $41.60. I added a bunch at $38.40 on the fall, and smaller amounts at $39 and $40. Shopify was now in third place at 11%.
In December the range was up a small amount and the close was up to $42.90. I bought small amounts at $41.50, and $43. Shopify finished the month in second place at 12.5%.
In January of this year we took off again, hitting a high of $52 and closing at $50.70. I added itty bits from $47 to $50.50. Shopify was now in first place at 14.3%.
Last month it continued straight up to a high of 64.35, closing at $59 or so. I got a little worried when it got up to 15.5%, and trimmed a little to keep it around 15%, but then reconsidered and bought back a fraction of what I had trimmed, and decided to just let it run for now. It finished February over 15% of my portfolio, and still in first place.
This week it closed at $64.15, and at 16.0%. As it’s a really super-sized position, I probably won’t be adding any more to it but just letting it run. But who knows.
What I did was keep adding to a position that was doing well, that was coming out with good quarterly reports, that I was learning more about, that was growing revenue at 85% to 90% year over year, and that I was getting more confidence in… and letting it grow.
How about selling out? I usually don’t sell out all at once, unless we are talking about a small position that I’m just deciding about. With a larger position, when I start having minor concerns I usually trim a little out of prudence. If I regain confidence I’ll sometimes buy back. If not, and my concerns mount, I’ll sell more, and then finish up closing the position all at once over a couple of days.
Let’s look at Signature Bank, which I recently exited, as I told the board. It has some very good things going for it, and some not so good. Book value grew at 14.5% in 2015, and at 16.5% in 2016. Both values are very good. However EPS, which grew at 23% in 2015, grew at only 11% in 2016, and even that was only after I added back some of the set aside they had made for possible taxi medallion losses (as a one-time event). However the efficiency ratio was about as good as it gets, at 31.25%, which is astounding. I had added a really large amount about seven or eight months ago at about $122.60, and added a little more in October at $115.00…. So what happened to change my ambivalence into a decision to sell. Well, in November, after the election, the stock price rose from $120 to $150 in a week and a half. I thought this was a bit of irrational exuberance, and trimmed some at $146 to $150, and trimmed some more in December at $148 to $153. By January I had a small change of heart and bought a little back at $148 to $149. But the price rose to $164, while the December earnings report that came out near the end of January was so-so, with EPS up about 5%. In February, I started selling more, but hadn’t decided to sell out, and at the end of February I still had a substantial position of 8.6% (down from a high of 12.7% at the end of November after the huge run-up). And then I started reflecting about all the empty storefronts that I wrote about elsewhere, and I decided that I had better places for my money in stocks with much better growth trajectories, and sold all of it in the first week or so of March.
I hope that helps with understanding what I do.
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