They think we're cowboys

In Saul’s monthly write up, he said:

At one point this month I read a thread on another MF board in which some guys were commiserating over the future fate of the “naïve” investors on Saul’s board who are investing in all these aggressive companies, and who will be panicked when the correction, or bear market (that these posters have been expecting for years), arrives. I thought to myself that these poor guys are SO jealous! They’ve believed all this scary stuff for years, and have seen us make large gains by ignoring it, and they just have to comfort themselves by believing we’ll be spanked for being bad boys, and not listening to the conventional wisdom like they did.

Saul’s point was that you can’t time when to get in and out of the market. I agree with his point, and I’m here to make another point.

It’s true, there are several conservative investors who think people like Saul, or me, or other on this board are absolutely nuts to have our entire portfolios invested in high-growth small cap companies. They see these companies as risky by nature, and companies like GE and Coca-Cola as the “old safe ones.” But really believe that idea is worth flipping on its head.

Growth is safety.

If demand falls continually, there’s no safety in any industry. If a company isn’t growing, and indeed if it is making less and less money every year, brand power kind of ceases to matter, doesn’t it? What’s going to protect the oil companies when oil is no longer needed to power the economy? That may be years away, but the market works in mysterious ways. I wouldn’t want to be holding on to companies where the demand is waning.

Alternatively, if a company is attracting new customers, selling more and more to its current customers, and growing in all areas, to me this is a much safer company to own. If in fact the company has recurring revenue booked to come in for months and years to come…well that’s an even deeper level of safety.

Yes, the stocks we traffic in may be volatile. The large multiples aren’t a given. Things can fall in and out of favor with the market, and we have to be ready for company specific and overall market volatility. But with companies that continue to grow at 30%, 40%, 50% and faster, any dips create massive buying opportunities. It’s a double discount: if the stock drops 20% and the company grows 50%, multiples drop precipitously.

There’s a lot of opportunity out there.

Bear

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Bear:

Most people would be nuts to put all their investments in a few high growth stocks. Mainly because they either do not have the time, and/or the skills to research and evaluate those stocks. So they tend to go with large companies where the needle moves much slower, either up or down. And they feel safer. And many probably are.

Its amazing what is taught in university finance classes. My daughter is a recent grad from a highly regarded university and has her degree in Business Finance and she told me since I was about to retire that I should have 30 to 40% of my retirement account in bonds. BONDS. I asked her why would I want to invest in something that at best would pay me 2% a year, and at worse (or more likely) I could lose 60% of my capital when interest rates rose. She had no real answer, " but that is what the experts say." I asked her if they ever taught thinking for yourself, and making your own rational decisions based on the facts you understand. That conversation did not go far.

I may be crazy, but I am not buying bonds, and I will stick with growth stocks until I figure out a better way to increase my investment income. BTW, I’m not holding my breath until I figure out a better way, but I am open to suggestions.

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I believe I saw that tread. Some people believe that their way is the only way which is absurd but the warnings sounded in that tread are not entirely groundless. I’ll get to that.

I’m a firm believer that growth stocks are the best investment but not all growth stocks qualify. Complicated businesses, lack of earnings, weak balance sheets (excessive debt), and too much volatility are some of the issues that disqualify growth stocks for my portfolio. There are several thousand stocks available for purchase and one only needs about a dozen to build a great portfolio. One can be really choosy!

My one issue with any investing board, not just Saul’s, is stock tips. Renowned investors and speculators like Peter Lynch and Jesse Livermore have warned against taking stock tips. The tip might be good but the tipster might not clue you in to selling. If you don’t know what you are doing it could cost you dearly. Frequent posters most likely are learning from Saul who does a great job of teaching. But how many lurkers are there who are just tip takers? Those are the people who are truly at risk and when the crash comes, and it always does, they will hurl insults at Saul and the board. I used to frequent George Gilder’s board when he was famous for Telecosm. People showered him with accolades – until the crash came. Then he became a vile know-nothing con-artist if you were to believe the insults hurled at him. This can happen here too. All the time Gilder stressed that his newsletter was not an investing letter, that it was a technology report as the name indicated, the Gilder Technology Report (GTR), to no avail.

One problem with lurkers is that we don’t even know who and how many they are. They contribute nothing, they take what they can get for free, and likely will crucify you when the crash comes.

Denny Schlesinger

PS: I arrived at TMF after leaving the Gilder Forum.

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Risk in investing should be defined as “whether or not your money will be there when you need it”. If you are too conservative, you might not create the money you need when you “get there”. If you invest in all the Rule Breaker stocks but will need your money in 1 year, then that is much riskier, but if your horizon is 10 years, there may be zero risk in a basket of rule breaker stocks. In fact, they have outperformed the S&P handily over time, so they are less risky in the long run.

I don’t know how to judge the Saul style by that measure. His returns are amazing, but the investments seem riskier than average, especially since he need money each year for living. Many people in his position might pull out 2-4 years of cash and only draw from it in bad down markets until their portfolio recovers. In other years keep drawing from your investments. But he makes it work.

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Denny,
Saul has help so many so much that I believe if any one should be disrespectful at any time, bull market or bear market, they will be just asking for it :slight_smile:

I have been investing for 42 years and have learned more in the last two years that the previous 40 thanks to this board.

Cowboy up -
Kindest Regards,
Steve

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These are excellent points. It is also worth adding in the interests of capitalism - the free market, always subject to competition and the rule of law, is now so under attack across the world that the case for it against a resurgent socialism must be constantly made - that it is investors of the type found here that enable and drive innovation and experiment for the benefit of mankind.

Although it is my own view that civilisation ended with the camera followed by mass tourism, social media being the final nail in the coffin, and talking of coffins no-one can even politely die on time nowadays, another feature of cvilisation but I digress…

  1. The scary stuff is very real. However, you will not hear what it consists of from Wall St. players or anyone incentivized to put up straw men, so superficial they are laughable, to easily shoot down. You can watch this hilarious dereliction of duty in action daily on the financial TV.

  2. I am certainly one of those who thinks it is absolutely nuts to have (an) entire portfolio in high growth smallcap companies because, er, Bear, you left out the bit about their main characteristic, cash profits, um, absence of!

  3. Agree about the ‘old safe ones’.

  4. Recurring revenue recurs until it stops recurring. I have owned a few of those. (I thought Cognizant was for ever.)

  5. It is not the case that any dip in the price of high-growth companies automatically create massive buying opportunities. That depends on the price. However high the annuity, there is always an excessive price. And even a tomato fresh from the greenhouse is probably not worth $20.

  6. I love a speculation and the market needs it. But most of all, I love it when this board’s choice or choices coincide with mine which are stricter. I would much rather add to an existing holding growing over 15% p.a. with high margins, ROIC and FCF - and there have been a few here. But the world needs daring investors: you. May you be well-rewarded! The commentary about the companies is required reading and fun, agree or disagree.

Ahem. Guilty secret: I own SHOP! Yes! I am not made of stone.

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I believe if any one should be disrespectful at any time, bull market or bear market, they will be just asking for it :slight_smile:

There is no reason to be disrespectful at any time. I believe Winston Churchill said there was no reason not to be courteous to someone just because you are going to hang him in the morning. :wink:

Denny Schlesinger

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One problem with lurkers is that we don’t even know who and how many they are. They contribute nothing, they take what they can get for free, and likely will crucify you when the crash comes.

I, for the most part, am a lurker, mainly because I have little insight to add to the board. I’m new, and I’m learning (and I’m grateful!). I’ll say, though, that anyone who crucifies Saul for any reason hasn’t really paid much attention to the wealth of information on this board, particularly the KB.

Saul has clearly laid out his thesis, and has been abnormally transparent. He’s also shown that all’s not lost even after a crash (a couple times over). He’s the poster-child for the get-rich-slowly-and-sometimes-maybe-get-really-rich-fast scheme.

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I asked her why would I want to invest in something that at best would pay me 2% a year, and at worse (or more likely) I could lose 60% of my capital when interest rates rose

This is nonsensical.

You can get a AA-rated State of PA General Obligation muni bond yielding 4.2% tax-free, or over 7.5% fully taxed, which matures in less than 10 years and is callable in 8 years.

There is not a single, solitary interest rate movement that would cause this bond to lose 60%. It’s impossible in the real world.

If this bond were to drop to 80c on the dollar in the next 2 years before maturing at 100 in 2027, I’d buy all I could at 8.55% yield tax-free or 16.1% taxable prior to Fed/State/Local taxes.

That’d be a guaranteed 16% pre-tax yield unless the state of PA went completely bankrupt in less than 8 years.

Your daughter understand bonds more than you do. I’m a bond expert, but you don’t have to be one to spot your obviously spurious bond math.

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Frequent posters most likely are learning from Saul who does a great job of teaching. But how many lurkers are there who are just tip takers?

And how many “lurkers” who do not post frequently are also learning from Saul? Why does someone have to post frequently to be learning?

As someone who posts only occasionally on this board, but reads it frequently, I have learned a lot over the last year or 2. If you want to single out the “tip takers,” that is fine, but not posting does not equate to being a “tip taker”.

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Bear, you make a good point about how high-growth companies can actually be safer, and I own many of them myself, but:

…with companies that continue to grow at 30%, 40%, 50% and faster, any dips create massive buying opportunities. if the stock drops 20% and the company grows 50%

This is slightly circular logic, as the future growth rate is by definition unknowable, and there is a vast gulf between a stock with a P/S of 13 growing at 50%, and growing at 30%.

3 years of 50% on $1Bn in revenue takes you to $3.375B in revenue, versus only $2.197Bn in revenue at 30%.

The multiple on the latter will likely compress significantly more than 20% as you buy more.

Google trades at 6.6x trailing sales, with a 60% gross margin, $100bn in cash, $25bn in free cash flow L12m, and is still growing over 20%.

FB grew last qtr at 49% FXN, 15x sales, 33x trailing P/e, 86.6% gross margin, $35bn in cash, $14.3bn in FCF L12m. But in 2 quarters the growth will drop to 40%. I think the stock will continue to do well but if the growth is under 40% prior to that there could be a significant drop overnight.

So, with SHOP at 23x sales, if their growth slows to ‘only’ 50% like FB [and their ratio would likely compress more because they are not quite as good a company with not nearly the moat] you’re looking at a 35% drop in valuation bare minimum, without any additional compression from the overall market should that be falling as well. Shop has 55% gross margins and negative FCF for the moment [which is fine given the ultra-high growth.] If you wind up with a valuation between GOOG and FB that’s a 50% haircut.

Square is growing at 40% this year but is estimated to drop to 24% next year. Now, estimates are just that, but given that bullish Wall St analysts tend to have overly optimistic forecasts, what could SQ’s multiples fall to?

Hubspot had an awesome quarter, but their annual growth is gonna slow from 34%, estimates for next year are 21.5%, again from bullish analysts who say you should buy the stock.

tl/dr; There’s safety in high-growth companies only as long as they continue to be high-growth companies.

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buffet on valuations
Warren Buffett still likes the stock market, and the reason why lies with the bond market.
“[Stock] valuations make sense with interest rates where they are,” Buffett said in an interview on CNBC’s Squawk Box on Tuesday. “In the end, you measure laying out money for an asset in relation to what you’re going to get back, and the number one yardstick is U.S. government [bonds].” “Everything in valuation gets back to interest rates,
this is why Buffett has said that if he could only know one thing about the future, he would not ask about GDP growth or who the president was, but what the 10-year Treasury yield would be

https://finance.yahoo.com/news/warren-buffett-still-like-sto…

Note he also said that if tax rates are going to fall it might some sense to delay selling

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As someone who posts only occasionally on this board, but reads it frequently, I have learned a lot over the last year or 2. If you want to single out the “tip takers,” that is fine, but not posting does not equate to being a “tip taker”.

Point taken.

And how many “lurkers” who do not post frequently are also learning from Saul? Why does someone have to post frequently to be learning?

My experience has been that by posing one discovers flaws in one’s own arguments. Having to put ideas in clear, intelligible writing is a great learning experience.

Denny Schlesinger

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anyone who crucifies Saul for any reason hasn’t really paid much attention to the wealth of information on this board

I agree with you, but when things go south (whenever that ends up being), the negative posters will abound!

Saul has clearly laid out his thesis, and has been abnormally transparent. He’s also shown that all’s not lost even after a crash (a couple times over).

Again, I agree, but it won’t matter, when the market is down 20%, or 30%, or more, and the stocks we talk about and invest in here are down even more than the market, it will get ugly even around here.

That’s when we’ll see who are true believers in individual-growth-stock-picking-modified-buy-and-hold. Those that continue with it when things are at their bleakest, not like now when everyone is winning!

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“You can get a AA-rated State of PA General Obligation muni bond yielding 4.2% tax-free, or over 7.5% fully taxed, which matures in less than 10 years and is callable in 8 years.”

CUSIP?

I don’t see any PA GO bonds with a current yield that high. Plenty with coupons of 5%, but they are priced to yields of 2 - 2.5%

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http://www.marketwatch.com/investing/bond/tmubmusd10y?countr…

despite the recent blip 10 year Treasury yields are actually down since Jan. And the yield curve is nowhere close to inverting. So from Buffets interest rate prospective this bull still has lots of vigor, despite it’s age.

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I think the answer may be different over a longer timeframe. For many reasons certain sectors and type of stocks or type of investments are performing better (or worst) now than in the past. In the future they may perform worst (or better) than they do now. The experts can only talk about the historical data.

I believe there is some correlations but no one can really know what will happen in the future.

On the end a stock rises over time if its business is performing well. The business performance over time can change and can turn for the best or for the worst. Things are very nonlinear. A stock can do well for a long time before suddenly make a turn for the worst (or vice versa). The turning can happen in a short period of time or over several years.

Watching and analyzing the business is one way to gain some confidence but no one knows about the future trajectory of a stock. Doing well now doesn’t mean anything for the future.

The experts/academics are talking about this statistically- what makes sense statistically. Statistics does not come naturally to most humans and it is difficult to really gain a feel for it. They are not wrong. They have a framework to explain things. That is what an academic do. In practice, you lose some you gain some, and some gain or lose more than others. That’s just a statistical reality.

We cannot all be above average all the time, can we? so how one can perform above average? maybe today you will be above average and tomorrow it will be another guy. There is a lot of luck involved. That is never acknowledged.

tj

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This discussion is identical to the one we had during the internet bubble. We would go, “okay now, if it grow at 50% a year for the next 3 years, it will only be selling for x times revenues, so it is really cheap…”

The fact is, the best time to buy great companies is during their peak period of growth. In fact, buying any company at its peak period of growth is great, if that growth is excellent, and the market perceives the story as something worth investing in.

But in the end, and it could be tomorrow, it could be 5 years from now, there will be a bear market, because economic activity will slow, or growth will slow, or some such thing, and all those calculations will go out the window. Even the best of companies will fall, and they might fall much lower than you think.

At that point in time, the only companies that will return to what they once were are those companies that are “great” companies, with solid CAP, continuing SAM (serviceable addressable market, not just total addressable market - only Arista is modest enough to actually use the SAM number, and not the TAM, because Arista’s TAM is on par with Cisco that has what, 40x the revenue or something like that - so TAM can be misleading and sometimes very misleading).

Qualcomm is an excellent example. It was the Gorilla of 3G. It was big up to astronomical heights, and then crashed back down. I was fortunate enough, like many wide open enthusiastic newer investors here, to be the same when QCOM had its run (and sold when it just became impossible to justify. The market was valuing QCOM with at least 10 years of growth in it, so where was the upside left? It was not fear, but greed that caused me to sell, because as an investor I want upside!). I then became a “hardened” veteran, and started buying back quality companies after the fall, so another nice triple on QCOM. Eventually 3G spread, and although the CAP continues, the SAM was grown into, no more 3G to exploit and QCOM has had a difficult run of it in all subsequent Gs.

NO, companies will not go up forever. But I will tell you, great companies, with great CAP, and with large SAMs (that can expand, and that have plenty of runway to grow into) will fall like the rest of everything, but they will also rise again, as great companies do with great CAPs and SAMs that have a long runway ahead.

There is no romanticism about it, in the end the stock market is a beast. It will eat you up, and then spit you out if you let it, and if you get emotional about stock.

EXEL as an example, I bought it, it cratered about 80%, it is now about 6x from where I bought it in 2014 despite the cratering.

The EXEL experience is something exceptional, but be ready for it with any such company. And the key is, WHAT WILL HAPPEN to the company when business normalizes? That is the key to long term investing.

Tinker

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Tried and true companies are not always the safest as technology and culture changes. I always start off my internal stock discussion with what do I want, what do I need, and what drives me crazy that I wish I could fix.

I also look at things in my life that I am amazed by and dont think I could live without or that I am saving to buy. (Or cool stuff that everyone is talking about)

Right now what I want is miniture RFID. My future want is a webpage of all my stuff that has RFID attached that I am interested in - I don’t care where my fridge is as it is not moving. For example My glasses, my purse, my car keys, my notebook that I slapped a pretty sticker on that is actually rfid. Then when I loose my stuff I pull open the ipad app and it tells me where the item is (even hot cold) that I lost. Better yet if I could scan (wide scan not item by item) my fridge and cabinets and have an app sort all I have by name and expiration date that would be useful. Even cooler if it can compare that to a standard list of what I like to have so it comes up with what is missing so I can edit it quick and then press send to have it sent to online store or peapod and have it delivered.

Yes, I am keeping an eye out for something that is trending this way.

A new company that can do that is a much better buy than Coke which is tried and true but is full of sugar and there are indications that the artificial sweeteners may induce metabolic syndrome.

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https://www.fool.com/investing/general/2004/12/16/three-smal…

RFID have been a long time in making. I cannot think of a successful stock as of yet. But the above is from 2004 when it was thought RFID might go mainstream.

https://www.wealthdaily.com/articles/investing-in-rfid-chips…

Here is a more recent article on RFID.

The problem with investing in RFID is first RFID has to be as cheap as a sticky piece of paper that was once called a price tag, or perhaps the scanner bars. It has to be very cheap because it has to be very high volume.

Second, you need differentiation, and that is tough to come by with RFID. Basically a commodity.

If there is to be an RFID breakthrough, business wise, it will be in the software, in the business model, or in the implementation, but I doubt it will be in the RFID chips themselves.

But it is a business in search of a problem for quite a long while now.

That is one reason why I limit myself to companies that are proven, but yet in their peak growth phases, with long-term sustainability such as Nvidia, ANET, and SHOP.

I am still a little iffy on Nutanix precisely for this fact. I want to be able to see the ability to produce cash, because in the end, that is what makes for a great long term investment. I understand the argument that need for sales and marketing, etc., but with Nutanix I am not seeing it (I have seen a lot of high volume software companies, growing rapidly, with large TAMs, and never able to produce cash), although with SHOP one can certainly see it.

But I will keep looking.

Anyways, a few quick hits on RFID.

Tinker

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