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!