Hi Saul,
I’ve been away from this board for a while…well I’ve been lurking now and then. 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.
Thanks.
Chris
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.
Saul
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Saul…When you say “small increments” should we infer that you buy less than full lot (100 share) positions on a typical $20 to $50 stock? Or does “small” mean at least 100 shares? Just curious what your thoughts are about partial lots. Many of us aren’t able to commit to 100 shares as we begin or investing portfolio.
I think he means small in relationship to his portfolio. Any other info is really not our business
“Many of us aren’t able to commit to 100 shares as we begin or investing portfolio”.
I am wondering if lots have any validity anymore. Certainly in the old days I do believe that keeping your order within lots was easier and cheaper but now days I am not sure that is accurate. Please correct me if I am wrong. I have routinely bought as little as a single share of a stock (PCLN). I am not sure that staying within lots is necessary.
Also Saul I am just wondering as you discuss building your portfolio, if you see any of your current stocks as being relatively cheap and where you are putting new money. I love SHOP but am worried that it is a little overextended right now although I think in time to come I will laugh at that statement as it charges upwards. TWLO is close to its lows and seems to be building a base - perhaps TWLO, Likewise with HDP. PAYC also a little over extended. So many great companies and so hard to choose.
Thank you , Saul, for your explanation and for your SHOP example. That was somewhat helpful. I was looking for more of a quantitative example with details on how you decide to purchase, how much in relation to your position size. I know you look at recent price ranges and you factor in your conviction on a stock all while taking into account your existing position size and your portfolio balance. Exactly do you put it all together to make decisions on amounts timing. Buying as a stock rises seems like a partial momentum tactic. I understand that you also have conviction in the business (not just the stock price) but a rising stock that you like has a momentum component. I’m trying to see if there are somethings to be learned from your incremental purchase approach. Thanks again.
Chris
“Many of us aren’t able to commit to 100 shares as we begin or investing portfolio”.
Yes, small starter positions are usually less than a few percent of the value of your portfolio. If you take the approach of limiting your portfolio to 10 to 15 stocks that’s an average of 6% to 10% each. A full conviction stock and winner might rise as high as 15% to 20%.
As Craigdoc said - I think in today’s world it makes no difference at all if you buy in round lots of 100 shares or an odd lot of less than 100 shares. None. It is from the pre-electronic trading days and round lots were cheaper to execute as people would have to write down and find matching buy/sell orders. Now computers have no problem matching up odd lots in milliseconds.
Check out this 3 year old video that shows actual trading being conducted between different market makers. It is only 10 seconds of trading slowed down to 5 or 6 minutes so you can see what happens.