Thanks for opening my eyes

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 :slight_smile:

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they say the market can’t be timed
meaning they can’t do it, so nobody else can. Like world class ballet dancing must be impossible.

If by timing you mean a prediction that is very tough because the future is actually a nearly infinite number of possible futures, all branching off from the present. Like weather forecasts , the further out you go ,the less reliable the prediction. If you mean “recognition” it works better. Knowing when the sun is shining or whether it is an ice storm.

Recognizing a sea change in the market is quite doable.Doable but lagging. The Mechanical Investing Board has multiple examples , data backed, of such approaches . Most of them beat B&H by only a few percentage points but reduce volatility substantially. If you limit the “timing” to recognizing the ending part of a bear market you can do even better. Bottoms are much easier to recognize, fear being more contagious than hope.

None of these (except perhaps picking the end of a bear) comes anywhere close to the profits of Saul /NPI type picks in a tech bull market. And we are in a bull 2/3 of the time. So I remain invested in these types of stocks.

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“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)”

I am really sorry for all those who (for the time beeing) have lost money betting on NKTR.
We all know that biotechs are often very speculative investments and that only a few of them will be multibaggers.

Fuma was right and I´m glad that I listened to his late advice.

Good luck to you all!

What is this “Saul” like stocks. Stocks are stocks. What Saul finds and invests in are the most rapidly growing, market leading disruptive stocks in the world. Nothing Saul about it. It is called value investing, if one really defines value correctly. We are investing in value creating companies.

These stocks are creating economic value more rapidly than any others in the world, and they are doing it on a sustainable basis, with a long runway of growth to continue, with little real competition for the most part.

They are not “Saul” stocks, “market darlings,” or any other such term. They are creating value more rapidly than any others, and they are undervalued relative to the value creation they are creating because (1) the rule of thumb investor is backward looking at P/E, (2) the rule of thumb investor assumes all companies will revert back to the mean, and (3) and the rule of thumb is that making a GAAP profit, at all times during a company’s life, is the highest accolade that any company can achieve.

Therefore companies with the characteristics we are discussing here are nearly always undervalued to the predominance of the above rule of thumb assumptions that dominate the investment world.

At some point, human beings not being forever without recognition of facts, will turn around and go whoa! We are missing out! At that point, suddenly, expectations for these sort of companies will rise above reality (whereas before, they were always below reality) and these highest paid of money managers will make the last 20% of profit on stocks with such characteristics (as Peter Lynch described the process).

As things stand now, as I look at next year’s assumptions by analysts, just as it was late last year, assumptions far underestimate reality. This year’s estimates still remain below reality, but next year’s revenues and earnings estimates are way below reality. I am talking in general for these most rapid of value creating stocks.

Tinker

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What is this “Saul” like stocks. Stocks are stocks. What Saul finds and invests in are the most rapidly growing, market leading disruptive stocks in the world. Nothing Saul about it. It is called value investing, if one really defines value correctly. We are investing in value creating companies.

Thanks Tinker - Once again, a wise lesson learned on this board! Much more to understand and will keep my eyes and ears open! I hope to be wise enough to offer sage advice someday.

GaFez

I don’t believe Saul is backing down on NKTR.
At least nothing he has said recently indicates this.
Buy and hold for me for at least this year.

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Good point Tinker. While “stocks are stocks”, it took a huge change in attitude to make a quantum switch in what constitutes the type stock that I currently want in my portfolio. These have fluctuated over the years, but as “value” stocks become overvalued the pendulum has swung way towards growth stocks being the only game left. The advantage of this board is that the sorting process has been distilled and the results are in focus, rather than the chaos found in other places.

Over my life, I’ve done rather well in investing in foreign currencies. To make that work, it’s important to retain an objective view of not only macroeconomics, realpolitik and geopolitics, but the relative psychologies of other traders. I currently travel 6-10 months a year (this year will be 9 months outside the US) and most Americans would be surprised at the attitudes people have (frequently the opposite of what might be expected). While it’s entertaining to watch disruptive politicians, the turbulence they cause makes it hard to plan a course which reduces the risk of losing money. In this game, having a clear path to making a profit is more important than supporting any particular ideology and the uncertainty caused by turbulence runs the risk of screwing up the models.

If we ignore derivatives, it’s important to realize that the Big Game is the forex market, followed by the bond market. The stock market (global or US - you pick it) is much smaller and as an entity generally responds to the forces exerted by the two much larger trading environments. If it doesn’t for any period of time, rest assured it will revert to the mean violently. Fortunately, while individual stocks do tend to follow the markets direction (because of their inclusion in ETF’s for example), properly choosing them (like done here) provides the probability of a greater slope upwards than the market average (unfortunately the reverse as well).

Anyhow, while I promise not to call them “Saul-like” again, I do want to reiterate my thanks for his (and the rest of the denizens here) ability to remain focused and remove a lot of the noise.

Jeff

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Tinker, you have neatly defined ‘Saul stocks’ (which has always seemed to me a perfectly reasonable term to use) though not value investing.

Value investing is all about balance sheet strength, cash, management record in returns on capital and serious discounts to business value. It is about risk. It is about seizing opportunity when everyone else is running for their lives. Value investing has, of course, outperformed GARP investing over time. Bill Nygren is a value investor. Saul is not!

I am always extremely interested to see what both are doing, and why, and both are generously willing to tell us. Saul will be vastly outperforming Nygren but there is no doubt which is a value investor, and therefore safer! Nothing would please Nygren more than if his holdings fell 40%; would we feel the same way?

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Strelna
I’d be interested in seeing what Bill Nguyen has to say as a counterpoint.
Do you have a place Where I could see some of his ideas?
Thank you

they say the market can’t be timed

https://www.amazon.com/Yes-You-Can-Time-Market/dp/0471430161…

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