The dangers of “Saul-type” stocks

Hi Brittlerock,
I could say that you missed my point based on your response but I’ll let it go.

What I will say is that you are probably one of those that does understand. I didn’t mean any ill intent, and I am not of the jealous group. I am totally congratulatory. While I am at it, I certainly didn’t mean to suggest that the market isn’t the place to be. I clearly believe otherwise and I thought I said that.

What I would suggest is there there are followers here that may be just copying Saul’s portfolio and feel like somehow they have figured it out. They say they understand a correction is coming but unless they have experienced one with real skin in the game, I would argue they don’t. They also believe that these companies are great companies and even if a correction comes, must bounce back sometime. That is simply not true. Sometimes highfliers, get passed, replaced or otherwise just don’t make it.

Again, I believe Saul is very good at what he does and I believe people can learn immensely from him. Just don’t start believing it is easy.

Some of the emails, which say things like, those other people just don’t understand,we have the answer, are like alarm bells in my head…

Again, I love this board and appreciate everyone who participates. It’s all good… keep it up.

Randy

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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.”

not sure why your wife being Chinese has to do with any of what you are talking about?

I think you mean the ‘Saul stocks’ are NOT as risky as the alternatives…

tj

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“o 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…”

Yes no one can know where it will go next but apparently some may think they do by changing their entire portfolio towards another concentration on some trigger. Things happen faster and faster and in 18 months many things could happen. However, from a business point of view, 18 months is not ‘long term’. I would look at it in the longer term and search for a potential to become a generational grower. How do you do that? You cannot really but you try. Such businesses would make the difference and one’s retirement.

The business concept of SaaS has been around for more than 10 years now. How would you decide to swing deliberately your portfolio to SaaS stocks 18 months ago? wasn’t that ‘timing the market’ in a longer timeframe sense? There must have been talks about investing in SaaS in various communities such as this one and some may have pulled the trigger and while doing that they may have pulled others in etc…this kind of signal would happen all the time in the market. But no one can knows that there would be such a trend until it forms. I don’t subscribe to the ‘investing with your guts’ thing.

There must be a process. Maybe the most important thing is applying the process consistently over time and not think that ‘this time is different’. Maybe it is not so important what process it is but that you have one.

After you have accumulated a bit of money, making more is not that hard but you have to be careful not to lose a lot of it. Losing money can also be very easy.

With a growing economy and economic activities and maybe just activities, money gets generated. Ready your buckets.

tj

Hi Branmin, Welcome to the board, and I’m sorry I misinterpreted what you were saying. Glad you liked reading the whole Knowledgebase through. We are glad all to have some first hand experience from the retail field.
Best,
Saul

So what makes you swing your money into all growth/tech stocks? They have indeed done very well and with the gains you have had, it is quite understandable that you are not that worried about a correction. You might still be ahead even if you don’t do anything. But looking back, what was the process you went through to start investing in no earnings or small earnings and highly valued growth stocks? This was not your style 1 or 2 years ago, was it?

Hi tj,
There were a couple of things. I saw that my results weren’t as good as they had been. I decided that part of it was because I had too many stocks in my portfolio. I was way up to 25 or 28 for a while, and decided to cut back. I also had invested in some hardware stocks like Skyworks, Infinera, even SolarEdge briefly and SolarCity. That reminded me of the need for renewable revenue, and, in the cases of Skyworks, Infinera, and Solar Edge, of avoiding companies with one or a few dominating suppliers who might have their own reasons for cutting back their purchases. Skechers reminded me that retail chains (and restaurant chains) can only get so big and then they can’t keep growing. So I unconsciously migrated to a smaller number of stocks which were faster growing, had recurring revenue (SaaS companies), mostly software, with high gross margins.

As for earnings, I wrote up a review of Shopify about a year and a half ago. Here’s what I wrote:

You must be kidding. This company has no earnings. It breaks all your rules!
Well, you are right about having no earnings. It lost 13 cents in 2015, and a penny in the last quarter, and that’s why it’s a tiny position at present, but you are wrong about the other rules. It fits a lot of the other things I look for in a company. For example:

Revenue growth - This is in millions of dollars, rounded off. (Hold on to your hats!):
2012 - 24
2013 - 50
2014 - 105
2015 - 205
Thus, revenue has doubled every year, compounded.

Moat – It controls its space of providing a platform for small and middle size businesses who want to sell over the Internet. It has the best, most flexible, and most complete platform, and has such a dominant position that, in 2015, even Amazon closed its own platform for these businesses and decided to just use Shopify’s. Clients can use a Shopify platform to sell anywhere they want to, on their own website, on Amazon, or with a buy button on Facebook, etc., or all of the above simultaneously.

Recurring Revenue – It’s pretty much ALL recurring. Their monthly subscription revenue is at a current pace of over $130 million, well more than 50% of 2015’s revenue, and growing rapidly. The other part of their revenue is the cut they take on each transaction, and on shipping if necessary. That’s growing even faster.

Insider Ownership – Still run by the founder, who owns 11% of the stock. And total cash salary of the top five executives in 2015 came to just $1.3 million, according to Yahoo. They are clearly counting on a rise in the value of their stock. (The founder’s stock is Class B stock with increased voting power, so he retains control of the decision making. He certainly seems to be doing well so far.)

Long Runway and Long Way to Grow – They are only handling maybe 0.5% of all worldwide eCommerce Internet sales at present, and Internet sales are growing rapidly. They could probably compound 100% growth for another five years, and still have a wide open field in front of them. (I strongly doubt though that they actually can keep up 100% growth.)

And, in addition, in 2015 they introduced Shopify Plus, which goes after larger enterprises, and seems to be doing well, getting divisions of major companies signed up. They have over 1000 accounts already.

Absence of Debt – They have about $190 million in Cash and No Debt.

Easy to Follow, Covered by the Fool – They pass on this one.

Reasonable PE – They flunk on that one.

Most of that still holds.

Saul

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After the 2016 presidential election it was my assessment of the situation that the market would tank. I sold almost every holding.

I did not disturb my portfolio. I remained fully invested. Since the presidential election my portfolio is up 29.6% and it remains geared towards tax deferred income. Income so far in 2017 has reached 94% of the 2016 year end total, with 2 1/2 months to go yet.
Nothing in my portfolio has exploded up for me to be concerned that they are overvalued. In fact, I am still adding to positions to get additional income because I believe my entire portfolio is undervalued. Portfolio yield is about 7.5% annually and about 50% of the projected income is being reinvested because it is excess to my needs after all expenses and FED and STATE taxes

No Drama–so far

Good luck to all

b&w

That reminded me of the need for… avoiding companies with one or a few dominating suppliers who might have their own reasons for cutting back their purchases.

That should have read:

That reminded me of the need for… avoiding companies with one or a few dominating customers who might have their own reasons for cutting back their purchases.

Saul

The business concept of SaaS has been around for more than 10 years now.

A wee bit longer than that. As I recall, Progress Software was helping their ISVs in this direction back into the 1990s.

Like so many note, this is neither a place for FED nor STATE politics.

B&W,
I’ve read a lot of your posts and appreciate where you’re coming from. However, I get the impression that you either live a very frugal lifestyle or have a very large capital position.

While I’m not wonton, I’m not frugal. My capital position is not such that I can live on a 7.5% return, but fortunately I and my wife have pensions that pick up the slack - for now. But the pensions are pretty well fixed and inflation is a hungry beast. Maybe sometime in the future I will migrate my positions to something more like the model you present, but for now, aggressive investments in growth stocks seems the most suited to my situation, even in the face of the inherent risks.

May the odds always be in your (and my) favor. Live long and prosper.

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Hi Brittlerock:

Thanks for reading my posts. Your impressions are interesting but not exactly correct. My annual expenses currently are about 3 to 4 times the amount of my highest earning years. I wouldn’t say I was exactly frugal. I was never a high earner. Illnesses kept me from working 3 years early in my marriage and required a career change. Later on I needed to withdraw funds from my IRA’s to make ends meet for several years. finally in 2003 at age 70 I had to “Retire” with no pension-No annuity-And not too much of anything in reserve.

So-Yes you are right “I was frugal” And at the same time you are wrong because I didn’t have much–so I couldn’t be frugal because I didn’t have much.

I started my retirement on July 1 2003 by spending money because I had no income and limited SS due to a limited earnings history. If I hadn’t learned how to make money by investing in the market, I would have run out of money by Nov 2008 and would have been living in a cardboard box by the railroad tracks since then.

So I started my “retirement” with NOT TOO MUCH. I got involved on the internet Yahoo message boards and started reading. Some people made sense to me and I asked questions. I asked more questions and kept asking. I leaned towards income BECAUSE I WAS SPENDING FROM RETIREMENT DAY #1. I felt income was more stable than capital gains. The growing income helped drive share prices up which drove income up. Most of the capital gains came during market declines–So yes NOW I have a large capital position --for me–because I never really had much before. After 14 years of “retirement” I have spent about 4 times my original portfolio value(This includes all FED and STATE taxes) I avoid capital gains by not trading much and seeking tax deferred income(In 2016 about 92% of all dividend/distribution income was tax deferred) to keep taxes as low as possible. Over the years I have built up the portfolio income to where I project 2017 total expenses should be about 45% of total income projected for 2017. That means I project that about 55% of total 2017 income will be above my needs and reinvested to create further (tax deferred if possible) income to cover future expenses and inflation.

So the 7.5% income my portfolio is currently generating, is not a static number.

Also note that I am not depending on (or seeking) any capital gains. Stable prices are my goal. Since I am continuously reinvesting excess income, I can buy more income by buying cheaper shares.

You are fortunate to have a pension, so spend it wisely. I’ve been feeding the hungry beast for 14 years without a pension.

Stick with what you do as long as it works for you. Otherwise to change would be market timing and that is very hard to do if not done at the right time.

good luck
b&w

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While I’m not wonton…

I sure hope not! LOL

Denny Schlesinger

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Saul:

could you expand on why you sold out PAYC? eventually any (SaaS) growth will slow. But if the SaaS can still produce its recurrent revenues, why sell PAYC?

and when you evaluate that the growth is slowing, on what timeframe are you looking at it? Quarter to Quarter? a few quarters? In this case I would not ask years since you had PAYC for less than 1 year?

I think that it is true that businesses like SWKS and INFN are somewhat dependent on a few large customers during one period but which customers they are can and has changed over the years (talking about SWKS).
SWKS has IoT opportunities and that could become something much more significant in the future.

About retail, I gather than you got seduced by SKX growth but that stopped abruptly. The retail sector has not been good over the past year. Would you say you do ‘sector timing’?

tj

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b&w:

“So the 7.5% income my portfolio is currently generating, is not a static number.
Also note that I am not depending on (or seeking) any capital gains. Stable prices are my goal. Since I am continuously reinvesting excess income, I can buy more income by buying cheaper shares.”

How do you generate 7.5% from a portfolio if you do not realize capital gains?

hoe much your portfolio has grown since 2003 when you retired?

tj

could you expand on why you sold out PAYC? eventually any (SaaS) growth will slow. But if the SaaS can still produce its recurrent revenues, why sell PAYC?

Hi tj, Getting out of Paycom may turn out to have been a mistake, but here’s what I wrote in my August End-of-the-Month post: Paycom is a company I had had for a long time and liked a lot, but there comes a time when even the best of friends must part. It’s growth has been massively slowing, and in addition they have had to increase their R&D spend massively (up 80% to 100% each quarter), but the big thing is that they only seem to grow by opening more sales offices, and with that you get the restaurant syndrome (when you have 25 offices you can add 5 and grow by 20%, but when you have 50 offices, adding 5 only gets you 10% growth, and how can you keep adding more and more offices each year. I was sad, but I sold out.

I gather than you got seduced by SKX growth but that stopped abruptly. The retail sector has not been good over the past year. Would you say you do ‘sector timing’?

I don’t do any “timing”. I think retail is not going to be good for the foreseeable future with the exception of on-line retail. Look, my wife needed some blouses and various pieces of underwear. In the past she would have gone to a store and struggled through trying to find things she likes. (She HATES shopping). This year she just ordered them on amazon and they’ll arrive in two days. No sweat.

Skecher’s ignored the trend and kept renting expensive showcase stores, which cost lots of money.

Best,

Saul

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B&W,
You, like Saul are an inspiration though the two of you are quite far apart in style.

I wonder if there’s a way to kind of split the difference???

What other information resources do you follow?

Easiest way to split the difference would be half your portfolio in Saul growth stocks, half in B&W income vehicles.

Yeah, my wife could just as easily be American and possess the same ignorance. The only reason I mentioned it is that the entire concept of investment is unfamiliar to the vast majority of Chinese. They understand saving, but investment is an alien concept.

An American (or for that matter, most middle class western women) are at least knowledgeable of the concept of investing, but possible disinterested in the topic or feel it applies only to the wealthy.

You raise a fascinating point. Your wife hates shopping. But others enjoy an outing to look at clothes, feel their material, see new ideas, come home with something. I think that is typical: it’s fun (much like the anticipatory wait for photographs and the family inspection of them. Was it not fun? Is it all over? Is there now no girl who wants to go shopping? Amazing.

I see my sector list has just one entry under ‘Retail, general’: a cinema outfit. (Popcorn is a gratifyingly outrageous price). Nothing else. And even that is virtual in a sense.

How do you generate 7.5% from a portfolio if you do not realize capital gains?

hoe much your portfolio has grown since 2003 when you retired?

My portfolio has gone up since the last time I figured the return . The current annual figure as of today’s market close is 7.203%

I have discussed my portfolio many times on this and other MF boards. This is Saul’s board and I am not in competition with him or anyone else. If you are seriously interested please send me an e-mail and I will try to answer your question privately.

b&w