The dangers of “Saul-type” stocks

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The dangers of “Saul-type” stocks

Some posters on the board feel that investing in the type of high growth, “over-valued” stocks we talk about here is foolish, and headed for disaster. That may be true, but it hasn’t got there yet. Let’s see:

As of the end of September, almost two weeks ago, my portfolio was up 64.8%, for a new year-to-date high. My largest position, in fact 21.9% of my portfolio(!) was Shopify, which was at $116.40. Since then, we’ve had a short attack, which at one point, intra-day, had it down to $89.50 as I remember, and it’s now at $94.35. You’d think I should be in mourning with 22% of my portfolio down 19% in under two weeks.

But what has actually happened. The portfolio, as of yesterday’s close is actually up 66.1% year-to-date, up from the 64.8% at the end of September! How can that be?

First of all, if 22% of the portfolio is down 19%, that’s only a 4.2% loss to make up, not the end of the world.

Second, there were other high-growth overvalued stocks in the portfolio:

LGIH was at $48.60 at month end and is now at $54.00, up 11%, in less than two weeks. (I pleaded with people six months ago not to sell their LGIH at $29.50… It’s up 83% since then).

Hubspot was at $84.10 at month end and is now at $85.50, up 1.7%.

Square was at $28.81 and is now at $32.81, up 14%.

Arista is up 1%

Talend is unchanged.

Nvidia is up 7%.

Nutanix is up 15%

Ubiquiti is up 2%

Instructure is up 3%

Alarm is up 7%

And Brinks is up 2.5%

And when you put all that together, the entire portfolio has held its own, and is actually slightly up, in spite of the short attack on Shopify.

Again, I know a correction will come, they always do, and certainly my stocks will drop twice as much as the S&P, guaranteed, but I would have paid a big opportunity cost if I had kept a large part of my funds in cash equivalents or old stalwarts this year. I’ll take the correction risk. It’s just the way I think about it.

Saul

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Cowboy.

Bear

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Cowboy.

Hehehe
Now they wear integrated circuits not 6-guns.

Where Have All the Cowboys Gone
by Josh Brown

http://thereformedbroker.com/2017/10/10/where-have-all-the-c…

JT

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=2c

even those of us who are scared of the way you invest (and most would call LGIH a value stock, so you are both value and hyper-growth!!) are envious - love the knowledge base; besides, position sizing is the weakest part of what I do so it is refreshing - and downright awesome - to see a real-live example in action.

thanks for posting…

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SaulR80683: The dangers of “Saul-type” stocks.

At times I wonder if “Saul-type stock” is an investing term that will outlast its creator. Quite a legacy to the world that would be!

I was musing on this topic not long ago and wrote in my journal about the risks of a correction from these “high risk” investments. Here is what I wrote (modified for today’s return):

Seems to me the best defense against a widespread correction is success. I seem to remember seeing 20% being referenced both for individual stock correction and market corrections. I am personally more pessimistic and assume any individual stock or my entire portfolio could drop 25% at any time. Looking at the math with my current YTD gains of +55% is very comforting:


**Personal Real Performance with Theoretical Correction**
Event          Value   Net Value YTD   Math
-------------- -----   -------------   -------------------
Starting Value  100%
YTD Gains:     + 55%     155.00%       = 100 * 1.55
Correction     - 25%     116.25%       = 100 * 1.55 * 0.75

In a diversified portfolio, any portfolio wide drop of 25% or more could only happen with a widespread market correction which would be seen as disastrous by the market in general. Now, I compare that to a “non-cowboy” rate of return … numbers which I would have targeted before learning from Saul. Even assume a much lower correction in the same event because of exposure to more stable stocks:


**What I would have targeted a few years ago...**
Event          Value   Net Value YTD   Math
-------------- -----   -------------   -------------------
Starting Value  100%
YTD Gains:     + 12%*    112.00%       = 100 * 1.12
Correction     - 10%     100.80%       = 100 * 1.12 * 0.90
  • 12% was my original hoped for yearly return before I discovered Saul’s knowledgebase and I considered that unreasonably optimistic. Average real returns were 9.8% CAGR 2006 - 2015.

So … A disastrous correction is better than my pre-Saul ideal year.

How, again, is this investing style risky?

Thank you Saul, for a sharing your wisdom!

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So … A disastrous correction is better than my pre-Saul ideal year. How, again, is this investing style risky?

Hi Othalan, I agree entirely with your conclusion, but just keep in mind that a correction, when it comes, will be very scary, nonetheless.
Saul

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My wife who is Chinese and has not the slightest inkling of what our specific investments are or why I bought one company versus another only inquires about the dollar position summed across my three portfolios. She asks daily.

I tell her the number and occasionally I mention the percentage gain since the beginning of the year, currently it’s about 65%.

She’s always happy about the news on up days, less so on down days. After the short attack on SHOP I tried to explain to her how one makes money on a short. The notion of borrowing something and then selling it just did not compute. What got her attention was that our portfolio was down quite a lot for the day.

I always caution her that she should not get too excited about the dollar value of the portfolio. First, because to date this has been an extraordinary year. My goal is 20% per annum. I also explain that eventually we will suffer the dreaded correction, I anticipate that it will cost us maybe 25% in a matter of days. So, let’s see how that works out if it happens tomorrow: .75 x 1.65 = 123.75. Still more than my annual goal.

Do I expect to make 65% in the first 9 months of next year. No. I didn’t expect it this year. But here are few certainties. Even with a correction, I’m way ahead of where I would be if I had kept my “powder dry” waiting for the awesome opportunities after the correction. Cash is very expensive. How about if I had been in stalwart, slow and steady companies or an S&P index, up about 16% for the year. Ouch, that’s not even the 20% I hope for, but the year’s not over, it might make 20% by year end. What happens if it suffers a somewhat more moderate correction, say 20%: .8 x 1.16 = 93%, that would be a 7% loss for the year.

So there you have it, those “Saul” stocks are awfully darn risky compared to the alternatives.

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Again, I know a correction will come, they always do, and certainly my stocks will drop twice as much as the S&P, guaranteed, but I would have paid a big opportunity cost if I had kept a large part of my funds in cash equivalents or old stalwarts this year.

Well, in an apples-to-lemons comparison, of course people who like apples will always choose apples.

A correct barometer would be, say, the Fidelity OTC Fund with top holdings like Google, Activision, Tesla, Amazon, et al. Not comparing to cash.

FOCPX has returned 21.3% CAGR for 5 years and 11.3% CAGR for 10 years.

How does your portfolio compare in an apples-to-apples comparison?

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Trying to understand the thinking here. Which would upset you or make you happy most? Taking your 65% profit now, being very content with yourself or feeling sick as you just keep watching those stocks go up and up. Or say next week, we have a 50% correction and you watch those same stocks plummet, yet have cash aplenty to start all over again at prices you didn’t think were achievable? But it could take 2-3 years to get there?

A profit isn’t a profit until you put it in your pocket…

I am just asking a question and interested to hear your risk tolerance.

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SaulR80683: Hi Othalan, I agree entirely with your conclusion, but just keep in mind that a correction, when it comes, will be very scary, nonetheless.

To be honest, while I do find big corrections disconcerting I’ve never understood why they are seen as scary in investing. 2008 I barely shrugged at the effect on my investments though in 2010 I did scowl a bit at the nuisance of selling my house at a huge loss. Perhaps my money - emotion linkage is broken? If I absolutely needed that money in my stock portfolio within the next few years (or risk starvation) I probably wouldn’t have it in stock at all. A big drop is either a learning lesson (INFN) or an opportunity (Jan/Feb 2016) … or sometimes both. If anything, the stocks rising is the scary event … or at least, the time to really pay close attention. Perhaps I took that Warren Buffett quote to heart? “Be fearful when others are greedy and greedy when others are fearful.”

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Which would upset you or make you happy most? Taking your 65% profit now, being very content with yourself or feeling sick as you just keep watching those stocks go up and up. Or say next week, we have a 50% correction and you watch those same stocks plummet, yet have cash aplenty to start all over again at prices you didn’t think were achievable? But it could take 2-3 years to get there?

Not Saul here (obviously), but you need to read the knowledgebase if you don’t know Saul’s answer to these questions.

Saul stays 100% invested at all times, and for good reason. The main one…you can’t time the market (or the drop).

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And I expect my losses with all growth stocks to be much higher than the market as a whole. We go up faster than the market, we will fall farther than the market as a whole. I expect my losses will be at least 20 - 35% higher than the market. I hope I am wrong, but expecting to fall just a little more than the market as a whole I think is a little optimistic.

Even if we fall 25 to 50% further, the numbers say in the long run we will be ahead. Far, far ahead.

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With Saul providing his YTD returns, has anyone updated his three, five and ten year annualized returns?

I remember he was getting a lot of heat for not beating the s&p 3 and 5 year returns at the end of 2016…

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I have no idea if anyone has updated those, but I have done a quick spreadsheet of what 26% annual returns since 1989 can turn into…and I am thinking Saul lives as comfortably as he could reasonably desire to live.

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If Saul started his portfolio with 100,000 in 1989, and it grew 26% annualized, he would have 64,000,000+ right now…

however, he has indicated that he draws down from his account for living expenses…

still a nice sum though… :slight_smile:

and his initial investment could be way higher than 100,000…after retiring as a doctor…

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Lol! Sounds like I could live on Saul’s daily fluctuations for a year. I’m up 2% today.

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If I absolutely needed that money in my stock portfolio within the next few years (or risk starvation) I probably wouldn’t have it in stock at all.

While I understand the point you are making, that assumes your choices now are based on what will happen to you in the next few years. It rather reminds me of a famous quote:

Buy a stock, if it goes up, sell it, if it goes down, don’t buy it.

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Branmin,
Taking your 65% profit now, being very content with yourself or feeling sick as you just keep watching those stocks go up and up. Or say next week, we have a 50% correction and you watch those same stocks plummet, yet have cash aplenty to start all over again at prices you didn’t think were achievable? But it could take 2-3 years to get there?

Do you know something about next week? I sure don’t. So let’s say I take my profits (which after taxes would not really be 65%). Then what? Do I sit on the cash and wait until after “next week?” Oh heck, no correction, maybe sit on the cash for another week, and another and . . . .

Think this through with me, because I’ve thought about it a lot. What exactly do I do if I sell everything to cash. What’s the next move? The 65% I’ve gained this year is extraordinary. I’m fully aware of that. It has surapassed all my expectations.

In fact, I’ve actually followed the sell everything to cash strategy. After the 2016 presidential election it was my assessment of the situation that the market would tank. I sold almost every holding. Obviously I could not have been more incorrect. It was not long before I got back into the market.

So, it’s my well considered position to stay in the market while remaining fully aware that at some point there will be a correction which will severely impact my investments. My considered opinion is that I’m financially better off by staying in the market, invested in the companies I’m invested in.

I assume you are of a different opinion. May we both live well and prosper . . .

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I mention the percentage gain since the beginning of the year, currently it’s about 65%…I also explain that eventually we will suffer the dreaded correction…But here are few certainties. Even with a correction, I’m way ahead of where I would be if I had kept my “powder dry” waiting for the awesome opportunities after the correction.

Thanks brittlerock,

I couldn’t have said it better.

Saul

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Good morning all,
I will have to admit that I always cringe a little when I read what feels to me to be a “gloating” thread. I do understand the sentiment of being up 65% in a year. Well, I don’t know that I can say that I personally know that feeling except maybe quite a few years ago when I had much less money and much less to lose. But I think I get the feeling of satisfaction, it is deserved.

I also get the defensive feeling one can get when it appears that something you are doing (which is clearly working) gets attacked? There are or may be a couple of motivations going on from those attacks…

  1. Jealousy. Easy and obvious, 65%!! Clearly you can’t get that without big risks. You are going to get burned! I need to warn them! That is just crazy and if you think it is not, you are just crazy.
  2. Concern. Also pretty easy to see. In general, I have found the people on Motley fool to be different than any other investing site that I have ever visited on the Internet. It seems to be a place where people congregate to discuss investing, not push a stock, not sell short, not hype, just invest and learn about investing. A great place. Because of that people care about helping others. These comments could be people who "know better"and they want to help. Even though this might be similar in nature to reason 1, my response to these people is and should be very different that to the first group.
  3. Logic and experience. And this is where I fall. If you talk to any reasonable investment person, 65% is not a reasonable expectation. I know You know this Saul. I am not concerned about you, you clearly have this investing thing figured out. And there are others on here that probably fall into this camp. I say probably because unless you have done it over a long time period, you haven’t proven that you have got it figured out. But let me be clearer. 20% per year over the long term is exceptional. Like Warren Buffett type exceptional. And I think there are a number of people on this board who might say they understand that, but then thier actions are such that I don’t believe theyreally understand.

Here are the facts. Over long periods of time, the market cannot go up faster than the economy as a whole. For short periods of time, the market can go up faster because the perceived future value can go up as well and there will be significant increases. In addition, portions of the market can go up much faster because they are both growing faster and because the perceived future value is increasing. But this, by definition cannot last.

Conversely, the opposite can occur. Earnings can slow, AND the perception of the future can change and by definition the market drops much faster than earnings are dropping (a double whammy). But overall, the market has to move with the economy and earnings growth. In addition, stock prices are set by what people are willing to pay for them, but there is a finite amount of money either entering or leaving the market. If money is entering the market, they rise (in general), if the money is leaving the market, they fall. Likewise, different portions of the market can rise faster or fall faster because the flow of investment dollars are moving into or out of that portion faster than other portions. That is all part of the flucuation part, but overall and long term, the market is rising by the earnings and productivity and growth of the economy. No more and no less.

So how has this board been so successful? In one word, Saul. Has the board and the group desire to succeed helped? I would say yes, probably a bit. Especially in the research efforts and putting different options and thoughts out for review. But the recent tear has come from the fact that, in general, the majority of the stocks followed here are internet, SAAS, and e-commerce related. And those stocks have been on a tear. But it wasn’t always that way. 18 months ago it was sketchers and WAB and CELG and a number of others. The change came (in my opinion) because Saul’s portfolio started to shift. And if it hasn’t yet, I would expect it to start soon. Do I know where it will go? No idea. My guess is that Saul doesn’t even know. Because he doesn’t think about it that way. He (appears) to be looking for one good stock at a time. I believe that behind all of the talk about earnings and (used to be) 1YPEG and (now) is SAAS and recurring revenue is a gut feel for the market. What portions of the market is money flowing, what portions is it leaving. Then throw in the ability to pick individual stocks that have real growth and substanance instead of hype in the are of money flow and you have a methodology that beats the market. Handily…

So what am I trying to say with all that? I guess what I am trying to say is, try not to gloat, th success here is tough to maintain. Mainly because as people figure out what works in today’s market, they copy. As they copy, it reaches a point where the method leads to overvaluation and then look out because things can get brutal. Everyone can’t beat the market and there are a lot of very smart people out there trying. Like Saul! Haha…

For me, the key here is to learn the methodology. Not necessarily the 1YPEG, or looking for recurring revenue, but the true methodology. There are many that work. Sauls’s is but one. It is very good, but it is difficult to master, you have to be willing to allow the market to tell you the path to take. Look for great companies in parts of the market where it is underestimating the growth. Hold them for as long as that happens. But be ready to change if it stops working and be able to creat your own view of what is happening, then act on it. If your good it will work, but not many people are able to do that.

Anyway, I won’t try to say too much about what Saul is doing because I am not Saul…

For those who are not Saul, learn, pay attention. Follow his selections but be very careful in assuming there is a new game in town and you have it figured out. The market is as old as the hills (can anyone say tulips) and it doesn’t really change. What works changes and I believe strongly it is a growth machine that can change your life but it is not a casino.

Enough said… I love this board and appreciate everyone on here. I want long term real success for you all…

PS: there is one exception, Saul if you want to gloat, you have my total blessing to do so. :slight_smile:

Randy

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