The game we're playing

This is my first post, I have been following MF methodology for a few years and doing well but in Q3 of this year I committed to concentrating my portfolio in the Saul style. Since then I am down around 20% :blush:. I’m hoping it fits into the secondary topic of this board “philosophy around investing in growth stocks” but if not feel free to delete.

Obviously no drop feels good, and particularly when you become more active in your management its call for reflection. I wanted to share how I’m trying to see the current volatility through the lens of Saul style. Getting my mindset written down helps me keep perspective at times like these and hopefully it may help others, in particular the new members who don’t have the accumulated gains to fall back on. I still love this board and look at the increased volatility as the price of admission to a market beating strategy.

Insight from the knowledgebase:
Recently, there’s been a lot of threads on macro trends and expectations for the next 6 months to a year.
I’ll assume anyone reading this has read the KB, but here’s some typical characteristics of the companies being researched on the board.

  1. Rapid revenue growth – the only macro consideration I would think here is are these normalized or was there a temporary macro driver (think covid and zoom)),

  2. Recurrant revenue – Should be safe. Even in lean times not many are likely to drop their provider, these costs essentially become “fixed” in the eyes of the customer as it can often be more expensive to change, both directly and in efficiencies lost.

  3. High gross margins and rapidly improving metrics, positive and growing FCF, little or no debt – The confusion on this one seems to be people thinking that the increased rates are going to affect company debt but most of the companies discussed on this board have little or no debt. The reason increases in interest rates are impacting growth names now is because it increases the risk-free rate being used in discounted cash flow models. The rationale being that our companies have further out before they generate the earnings to match their valuations, and thus get discounted harsher with any increase in rates. I would argue this still shouldn’t bother us. The basis of the Saul method is that analysts still consistently underestimate the length of time which great companies can maintain their hypergrowth rates, Bear shared a great example recently on Shopify (…) We’re already going against the grain on this, while not all growth names will bounce back to their highs, the great ones will and those are the ones being discussed on this board.

While this style is not LT buy and hold regardless, it is LT provided the thesis is intact. Saul always buys “with the idea of holding indefinitely, never with the idea of a short holding period, but in practice he guesses his average holding period is six months to three years”. Stick with it, there are few financial variables more correlated to performance than commitment to a strategy during its lean years.

As stocknovice stated recently, its all about company execution so we can tune out the noise. Let others play the daily/weekly game, hoping for a stock to go from 70 to 72 by lunchtime. We can just watch the fundamentals. Think of it as a blessing.

Personal responsibility: I still can’t believe the information shared on this board is free. I feel like we have free access to Jim Simmons medallion fund or have a monthly lunch with Buffett. With that in mind I was shocked at some of the frustration people showed towards the board facilitators during earnings as some stocks dropped. I understand its from a place of fear but they have no obligation to us, are not being paid by the MF, and we are under no obligation to follow their methods or agree with their conclusions. Smart, informed, and reasonable people can disagree in finance, we all have different goals and desires. There is no single right answer, just the one that works for you. Invest in the way that helps you sleep at night.

Saul usually pays little attention to what the indexes are doing. This year is misleading as the S&P is being driven by a handful of large cap companies outperforming (…) If you want to outperform when times are good why would you expect your base level to be the S&P when times are tough?

Everyone needs to define their own game. For me its that I’m investing in companies that are high performing & I believe will continue to outperform expectations over a 3+ year period. The standard I’m looking for is a double in 3 years which would be a 27% hurdle rate. For this I should watch company performance. What the market is doing or the macro environment at large has little effect on this so I shouldn’t pay attention or be persuaded by it.

Expectations of this methodology are increased volatility which is the price of admission, for me its worth taking the occasional gut punch because the end product, financial freedom, is worth it.

My actions, in reflecting the above, should be having news alerts for my companies but avoiding the financial news in general.

Thanks for all the insights and contributions and I look forward to many more years of lurking and hopefully some collaboration as I gain experience.