I’ve been investing since I was 13. I learned how to evaluate companies when I was 9 and 10 on the lap of my grandmother whose vocation was as a bookkeeper. She did a great job and I’ve generally beat the S&P in the decades which have followed (this year’s return, while hard to pin down exactly, has been about 12%.
I have always avoided the type of stocks discussed here like they carried leprosy in my attempt to emulate Ben Graham. Every so often I try something uncomfortably new. Sometimes it works, sometimes (more often) it ends up costing me money. But, nothing ventured nothing gained.
I came across NPI a few years ago, but gave up on following the group “back then” as the discussions were very disjointed and, at least for me at that time, hard to follow. I forget how I found Saul’s group back in November, but I have to credit, not only Saul, but the rest of the posters, for holding meaningful, on-topic discussions.
So what’s someone like me doing playing with fire? It come from the realization that, from a macroeconomic basis, the US equity market is running on fumes. Whoa, you say, the economy is finally growing and we have full employment, what have you been smoking?
The point is (again leaning on grandma’s training), everything has a fair price. The price of a company is a function of the assets it owns (including the value of its name recognition) plus a function of how fast those will grow. That growth is a function of its either organically growing new business or being successful in acquiring the business flow of other firms (by acquisition or out-marketing). WHen you buy a share, there should be a relationship between that commodity and the current value of the business it represents.
Right now, we are in an upward trajectory as an economy. This is a plottable path and the speed of increase of its slope will be governed by the Fed’s interest rate actions. If we are optimistic, that’s 3%. Take 3% growth to most companies stock prices right now, coupled with the likelihood that interest rates will continue to ratchet up and the math on most “conservative” stocks indicates that you are paying a premium for their shares at this point (and, should the market continue to advance) and a higher one down the line, leaving the market fragile and breakable.
While I have not considered putting together a “portfolio” of fast-growing, money-losing stocks before, looking at the numbers from the standpoint used here makes sense. As long as the current value of the share’s value stream is better than more slowly growing issues, what’s the sense of holding “safe” stocks which are arithmetically worse values and arguably currently overvalued.
So I’ve begun to build a “portfolio” of these newfangled issues to replace the larger numeric valuation which the older shares being sold. This simultaneously lets me upgrade the earning quality of my equities, while reducing my overall exposure to the equity class of assets. I admit to be a market timer. Yes, I know they say the market can’t be timed, but I did very well through the 1980’s 1990 and early 2000’s. I did get somewhat caught in 2008 because I jumped the gun in 2007 and had started buying back in figuring I’d been wrong. Since then, I’ve been too gunshy and over the past decade have had more opportunity costs by selling too early than opportunity gains by buying low afterwards, so timing has not been an asset.
That said, I expect an interest rate inversion somewhere around 2020 (maybe shifted a bit further out by election shenanigans) which would signal an imminent recession and precipitous drop in equity prices. Fortunately, I do not have to depend on the income generated by stocks to finance my style of living so decreasing my absolute exposure to equities while increasing the absolute potential for capital gain appeals to me.
My perception is that the “Saul type” of equities are more volatile on an individual basis (still holding an ice pack to the bruise of my double-down position in Nektar), so psychologically, at least, it’s easier for me to think of the entire grouping as if it is a single large position (which tends to smooth out the individual activity). I have progressed to the point where these positions, taken together, are larger than the sum of all other US headquartered equities, excluding a large position in Goggle.
It is my expectation that the “Saul Suite” exposure will increase by 30% over the next week and a similar amount of European equities sold off. I’m not a big fan of taking repeated nibbles. If I have conviction, I throw a full “chip” on each position I buy. Since I was starting with a try of these stocks, I started with “half chip” positions and have been increasing them recently to double the initial entry as I became more convinced of the approach.
After a lifetime of excluding stocks like these out of hand, I find myself using “new math” to actively include tham.
Thanks to you all.
Jeff
(Just don’t tell WendyBG - she already thinks I’m insane, but this will convince her I’ve lost my mind 