SHOP, PAYC, and constructing a focused portfolio

SHOP and PAYC two companies have blown the market away this year. They are also both stocks that used to be held by frequent contributors here, but no longer. The general conclusion from discussion has been that they were no longer attractive due to slowing growth.

And yet the share price continues to appreciate. I’m left wondering why that is, especially in light of the fact that other stocks that are more loved here, Twilio, for instance, have started to languish.

My first thought on this is that this is testimony to the idea that this board is full of expert “value” investors. Surely, not value in the sense of where we fall on the growth/value spectrum, but rather in the sense that we carefully examine business metrics to make investing decisions, rather than just looking at a story.

My second thought is that given such an effective process has been identified, it doesn’t really matter if one doesn’t catch all the winners. Saul’s process identified Alteryx and ZScaler as compelling buys. And if the process is working to identify good investments, there’s no need to stress too much about finding more investments outside of that process. If you have one golden goose, there really is no need to go hunting for more, so to speak.

And yet, I wonder about these two companies. They are in our investment universe. We have found them lacking, but the larger market has not. This is the opposite of what has happened with a lot of other companies that have been discarded here and then seen their stock prices tumble… Pure, Nutanix, Pivotal, New Relic, to name a few. I can’t help but wonder if the market is seeing something that we don’t.

Saul has explained Shopify’s soaring stock price as being related to marijuana hype. I have a sneaking suspicion that there is something to that. But could there be another explanation? Could it be that Shopify’s market opportunity is simply enormous? Is it more likely for ZScaler to become a 45 billion dollar company or for Shopify to become a 215 billion dollar company? Both of these market caps represent a five bagger from the current price and both seem plausible to me.

As for Paycom, is it the fact that the company is already profitable? They have already started buying back shares. And they also seem to have a very large market opportunity. They are disrupting the incumbents in their industry similar to how ZScaler is to theirs. Both stocks seem to just go up continuously. Is the market missing something by continuing to bid up Paycom? Or are we missing something? Does it even matter?

The reason I ask that last question is because I am having the hardest time limiting my portfolio to 5-10 stocks. I feel like this would be a good size for two reasons. First, because my portfolio is quite modest (just about equivalent to a year of my salary at this point.) and having more positions would just result in peanut position sizes. Second, because I think that I will become a better investor if I can focus on tracking just a few companies, reading their conference calls and checking their statements each quarter. If I have more companies it will just be overwhelming.

I look at my spreadsheet and I say to myself. OKAY how about just focusing on Alteryx, Twilio, The Trade Desk, Shopify, and MongoDB.

But then I think…oooh, what about Elastic, and Pinterest, and Roku, and Smartsheets, ZScaler, and Okta.

And then I start thinking about Atlassian, and Paycom.

And then I start thinking about Square, and Crowdstrike.

And then I start thinking about more speculative plays in med tech and emerging markets that could just explode…Omeros, Charlotte’s Web, Tandem, Novocure, Baozun, IqYi, MercadoLibre

And then there’s solar…that S Curve is coming in the next decade and it will be huge…Enphase

And then there’s a couple more intriguing picks in the MF universe…StitchFix, Match.

Before I know it, I’m up to 25 stocks, more of a David Gardner sized portfolio than a Saul sized portfolio.

I feel as though I am at an impasse. My own psychology tends towards being a collector. I want to own them all! But I know that if I do that, I will not reap the rewards of closely following just a few stocks. At the same time, I don’t have faith in my ability to differentiate. I know Saul likes Mongo more than Elastic. But I don’t know if I like Mongo more than Elastic, and I waver so much on making the decision. It’s frustrating and I’ve been turning over my portfolio reconstruction in my head over the past couple of weeks. I own twenty stocks now, but would love to narrow it down to a more reasonable number. And yet whenever I do so, I just end up with a list that’s even bigger than the one I started with. Should I just surrender, and go the Gardner way, or is there hope for me yet?

Anyways, sorry if this is getting to be off topic. I wanted to post just about SHOP and PAYC but then just ended up finding an outlet the work through my current thoughts. Sorry if this post is on the edge of off-topic, but if anyone has sage counsel, I would love to hear it.

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One might note that there is a big difference between dropping SHOP based on declining earnings and thinking that therefore it is something which will have to be watched carefully because a bad earnings report might erase a bunch of gains (and, having other good places to put the money) vs dropping it because they had already laid an egg, as has happened with some of the prior darlings on this board.

Anyways, sorry if this is getting to be off topic. I wanted to post just about SHOP and PAYC but then just ended up finding an outlet the work through my current thoughts. Sorry if this post is on the edge of off-topic, but if anyone has sage counsel, I would love to hear it.

Not sure that this is sage thinking. But, this are my thoughts, for what it is worth.

I understand Saul’s reasoning for a focused portfolio, and I agree with it from an anti-diversification standpoint. I could be wrong, but I have always interpreted that message as “don’t diversify” as a mutual fund would. And I agree with it. These funds get so diversified that the effects of the real winners get buried unless the whole sector or index is rising together. People diversify to protect themselves from losses, by and large. But that protection also gives up the chance for significant growth as a trade off. And for a passive investor, that is probably the correct approach. (I do not use passive as the opposite of aggressive, but rather as the opposite of active.)

I believe that a focused set of stocks as Saul recommends will usually outperform the market. It also carries more risk. But, that can be largely mitigated by involvement and activity. (Not falling in love with a stock is a key part of this.) However, I think that within a focused set there is room for individuality in two areas.

One is the number of stocks that you hold. Do you have to choose between ZS and OKTA, or can you take half positions in both to get that exposure to the sector and not have to pick one or the other? Are you starting down the slippery slope to diversification? Maybe, but it is up to you to decide and control it.

The second is that I do not see anything wrong with effectively make one position effectively a basket of speculative stocks. This can get you a taste of more companies that you seem to be looking for while still keeping the vast majority of your portfolio focused on a smaller basket of potentially high growth stocks. This is where you can weed out some ideas and identify some winners. I think that Saul typically has a few small positions in speculative stocks that he is trying out.

Anyway, take this for what its worth. Just my thoughts for free, so it is worth about what you paid. Best of luck to you.

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One is the number of stocks that you hold. Do you have to choose between ZS and OKTA, or can you take half positions in both to get that exposure to the sector and not have to pick one or the other? Are you starting down the slippery slope to diversification? Maybe, but it is up to you to decide and control it.

This is the hard part! The slope sure is slippery. I guess its just like any endeavor. There is a learning curve and it takes time. I’m working on it!

I don’t think it has to be black and white and that there’s a magical number of stocks that is “too many.” There’s a big difference in holding 40 stocks that each comprise 2-3% of your portfolio vs. holding 40 stocks where the 10 biggest holding make up 90% of your portfolio and the other 30 make up the other 10%.

When people rail against holding too many stocks, I think they’re most often talking about the former, but the latter is a legit way to manage a concentrated portfolio while still allowing yourself to explore smaller positions in other companies.

I think simply setting a rigid upper bound on how many stocks is “too many” is too black and white. Having some sort of target can help keep impulses to own everything in check, but I don’t think you have to operate with hard fast rules.

I do think there’s a limit everybody has to feel out in terms of the number of stocks they can follow, but even that varies from person to person. Some may need to spend 5 hrs/week scouring the internet for the tiniest bit of news/rumours/innuendo on a given company to feel comfortable holding it. Others may read the earnings report four times a year and that’s that.

I tend to keep a portfolio that is pretty concentrated when it comes to the top 6-11 companies, but saves some room for a bunch of smaller positions that I’m either interested in and ideally will develop into a larger holding or may have lost some confidence in relative to larger holdings but I’m not quite ready to abandon.

I tend to use the latter to build the former into larger positions as I become more comfortable with them over time. Then let the performance of each company do the heavy lifting. The cream tends to float to the top and the scum settles to the bottom.

Here’s how my portfolio is currently concentrated from largest to smallest:


         Range %        Cumulative %
1	 35.87457519	35.87457519
2-6	 30.07921023	65.95378542
7-11	 14.86821468	80.8220001
12-16    9.226457694	90.0484578
17-21    4.863801802	94.9122596
22-26    3.422614526	98.33487413
27-31    1.665125875	100

So although I hold 31 different stocks at the moment, the top 1 holding makes up 36% of the total, the top 6 make up 66% of the total, the top 11 make up 81%, the top 16 make up 90% and the other 15 make up the final 10%.

I don’t feel like I have any trouble keeping up with 31 stocks enough to feel appropriate level of confidence in each given their relative size in my portfolio. A while back I had about 35 and I was starting to feel a bit spread too thin, so I pared down a few of the smaller positions and feel more comfortable now. I think everybody has to find their own level of comfort, though.

To try to keep this more on topic, here are my Saul (some Saul-ish) stocks and their current percentages relative to the rest of my holdings along with the current :


OKTA	2.154764216   12
AYX	0.7544133539  22
PYPL    0.6857479976  23
TTD	0.6705769114  24
TWLO	0.6582185228  25
MDB	0.6536577401  26
ZS	0.4989092221  29

OKTA is the only one of the above that is presently in my top 15. With the exception of OKTA and PYPL, I’m a Johnny-come-lately on all the above. They currently make up a small percentage of my total portfolio (~6%), but if they do their job they should quickly start to move into the upper echelon as I add to them/they outperform the rest of my portfolio. If they don’t migrate to the top, then I won’t have risked too much.

To paraphrase Tom E if they do well a little is all I need, and if they do poorly a little is all I’ll want. YMMV

Cheers,

Eric

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I’m sorry guys, but there are boards for discussing portfolio management, but this is NOT one of them. I’m sure you know that!

There are seven posts on this Off-Topic thread already. Please cooperate or we will have to delete.

Thanks,

Saul

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When people rail against holding too many stocks, I think they’re most often talking about the former, but the latter is a legit way to manage a concentrated portfolio while still allowing yourself to explore smaller positions in other companies.

That’s pretty much what Peter Lynch did at Magellan but he has a staff of analysts to keep track of all those stocks. He was of the opinion that if one of those small positions were a ten bagger it would really juice the portfolio.

Denny Schlesinger

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A 10 bagger on a 0.1% holding or even a 1% holding will not produce the results I am looking for in concentrated holdings. Which is to latch one to one or a few of those rare stocks that produce enough returns in dollars (you can not spend percentages) to make a significant improvement in my life style (already retired).

. Because something like an exaggerated Pareto rule goes on with stock returns, a few stocks make most of the big bucks for holders. Small holdings should be a temporary psychological crutch, something reminding you to focus on whether to buy more or sell all within some reasonably limited period.
With the type of stocks discussed here multiple small holdings will only give modest individual stock diversification, and not any sector or general market diversification.

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Sleepy PAYC is only growing in the mid 30% range, but it continues its assent…while not flashy or shiny, it continues to be a core holding in my portfolio…

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