This has been torturous

Investment Analysis Clubs Saul’s Investing Discussions
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There was a time, just a short few weeks ago, when TWLO and then ZS got punished, I could at least look at AYX and COUP and ESTC and feel good about the fact that I had much profit to fall back on. There were some what turned out to be dead cat bounces along the way that gave people some short-lived hope. But the decline was relentless. Like every week. And now even the best performing of the SaaS stocks cratered.

The market doesn’t seem to care about any “good” news in the sector that many here try to cling to. In fact, a lot of the days the market does not seem to care about any news at all. Is this just FUD? I’m not sure. If it’s merely FUD, shouldn’t FUD suppose to be short-termish? So what’s really going on? Could this be the first 2 months of a long period of SaaS sector being put in the dog house?

Look at the metrics that high growth investors like to focus on: revenue growth, NRR, Gross margin, etc. I agree that there has been little “fundamental” changes to these metrics over the past 2 months (we will see now that earnings will start coming out soon), although we read about a recent analyst article predicting industry-wide slowdown and some specific concern about ZS. But it also seems that the market all of a sudden does not care about these metrics any more. Does it matter to investors if a metric looks great, if market is no longer willing to assign high value to that metric? I’m sure many high growth sector analysts who made a living calculating and comparing these metrics are in cognitive dissonance and shock.

The broader market seems to be holding on somewhat well so far, unlike the SaaS sector. Maybe the market is back to valuing P/E and earning growth? If that’s the case, then unless our SaaS companies can translate revenue growth/NRR/GM/etc into high and sustained earnings growth soon, they may not come out of the dog house for a long time.

Fundamentally, we believe our companies are “category crushers” that will replace the old guards in maybe a few years. But software industry is famously short-cycled and competitive. What if they won’t get a chance to grow into sector leader before the next new kids come along or the old guards (with their considerable financial war chest) find a way to strike back?

bashuzi
(getting really concerned)

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The following comments are not directed at any individual or particular message board participant; but at the collective “we” that have used this board for the past two months acting more like “chicken littles”, screaming that the sky is falling with each pullback, and walking around with our heads in our hands acting as if all is lost:

C’mon high growth investors…put your big-boy pants on and get back to work! You think this downturn is some sort of surprise or anomaly? You really think that this Cloud Gravy Train was going to run uninterrupted forever without a blip, a burp or a thud? The market seems to be going through a process right now where high growth, high margin, high quality, cloud based companies are being scrutinized and re-evaluated. Perhaps alternative metrics of acceptable valuations for these high flyers are being reassessed and determined by the marketplace.

Over the past several weeks there have been countless message board posts in this think tank of cloud, high growth investing that have tried to explain, rationalize or even predict these price/valuation movements. What I have discovered during this time is that there is an amazing amount of investment and analytical talent that is assembled on this message board;individuals from all walks of life, each bringing a unique and helpful perspective to this discussion and this problem that we face today that needs to be solved. Deep, critical thinkers with vision and perspective and an unmatched ability to find, analyze, research and debate the greatest growth companies in the world.

While all around our investment universe appears to be crashing; we must maintain perspective! We are investors at the most exciting time in financial history! In the midst of the 4th Industrial Revolution and looking down the barrel of the 5th Industrial Revolution, the investing world could never be at a better place, at a better time…Cloud, A/I, IoT, Robotics, etc. etc. For those willing to put in the hard work, find and invest in the category crushers and market leaders and stay the course and not be disheartened or distracted by market pullbacks or volatility; millionaires will be made of those brave soles.

We have to be in a position where confidence in the underlying thesis as well as routine assessment of our investment convictions allows us and provides us the confidence to turn a deaf ear to the machinations of the daily traders and momentum players. Most likely Cloud revenue growth will continue to grow and be the tail wind that pushes this sector straight through this “SaaS Tsunami”.

Like many of you, I have been “burned” mightily these past few weeks. My eyebrows are singed, my shirt is smoking and my ass is hot as hell. But excuse me if I am tired of hearing people tell me that my house is on fire! I know that already! Instead, stop whining, help me pick up this hose and let’s put the damn fire out!

To illustrate that I speak with perspective; here are my Purchase-to-Date returns for the following:

ZS -34.55%
CRWD -30.70%
ZM -22.87%
DDOG -21.89%
WORK -20.14%
ESTC -19.39%
SMAR -18.71%

This is the path we have chosen. A path of high growth, high margin, high quality and high VOLATILITY.

Thank you for your time,

Harley

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Very well said Harley,

It’s very important to remember the difference between risk and volatility here.

Risk is the permanent loss of capital. Volatility is normal fluctuations in asset prices. Our companies are more volatile than most others both to the upside and downside.

All of the most dominant companies of our time have had multiple 30%, 50%, and even 90% drops. Think Amazon, Netflix, Google, Apple, etc. This is part of the price of admission of owning these types of companies.

We have seen 0 signs of our businesses falling apart, taking on too much leverage, going bankrupt, losing customers, etc.

So for now, this is just normal volatility. It’s not fun and we’ve been spoiled by massive returns over the last 1, 3, 5 years+.

Who knows, we may need to be willing to hunker down, and hold onto our companies for a measly 25% return over the next year or two. We may be in for more short term pain. Maybe even a recession, who knows.

But our companies have strong balance sheets and important products for their customers. So even if/when business drops off in a downturn, it will pick back up on the other side and we will be rewarded mightily.

I’m continuing to own (and add to) the companies I want to be a part-owner of for the next 5 years+ and thinking of this as an opportunity to buy more shares at lower prices of the best companies I can find with money I won’t need for at least 3 years, but preferably 5+ years.

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Risk is the permanent loss of capital. Volatility is normal fluctuations in asset prices.

true if you are an institution like Harvard endowment, not necessarily so if you are a human with a limited lifespan.

https://www.macrotrends.net/1320/nasdaq-historical-chart

17 years or so to get your money back in NASDAQ after the peak

https://www.macrotrends.net/1319/dow-jones-100-year-historic….
1929 to 1958 to break even for the DJI average
And 30 years starting in 1965

And those are averages ,many individual stocks went to zero, And both are US , a “winning “country, many countries have failed and their stock market with them.

https://www.macrotrends.net/2574/dow-to-gdp-ratio-chart.
This interesting chart shows the rather dramatic changes 1960-1998 or so in Dow to GDP ratio. For whatever reason the stock market values a growing economy differently in different times. What happened in 1982 or so to change people’s view?

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Mauser,

Crap happens. I do not live my life by the worse case scenarios nor the best. If your older, of course you change your investment strategy. If you are younger, and are dollar cost averaging (or just buying on market crashes unrelated to fundamentals) you are not going to live the worse case scenario. You are going to live through volatility.

Every time I ride my bike on the roads there is a long history of riders being killed by cars. What can you do? I am putting a micro rear camera on. Anyone hits me, they will be filmed.

We have to live our lives, we have to save/invest whatever, or just buy t-bills that have been destroyed in times of hyper-inflation (again, worse case scenario) that would wipe out your savings bonds or cash holdings. So what you gonna do?

Tinker

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I think there are couple of lessons to remember when looking at these charts. There will always be ‘bubbles’, for lack of a better term, in the stock market. If you were fortunate enough to invest through the ‘90s AND have the temperament and timeframe to stay invested through the bursting of the bubble, you suffered through a lot of volatility, but not a permanent loss of capital. Same was true around the financial crisis. If you couldn’t stomach the drop (or better yet have the courage to invest through it) and sold, you suffered a permanent loss of capital from which you may never recover. I think this is true for the stock market in general and more so for growth stocks. I have a couple of ‘rules’ that I have followed for my 35 or so years of investing that have served me well:

  1. NEVER invest money you need in the next 5 years in the stock market.
  2. Never sell because the market goes down, regardless of the drop 10, 20, 50%.
  3. Only sell the stock of a specific company when something fundamentally changes with respect to that company (and occasionally to take losses for tax purposes).
  4. I like to keep 5-10% cash on hand to take advantage of big drops but wouldn’t argue against being fully invested at all times.
  5. On the days when the market goes up, look at your portfolio; when it goes down look at your watch list :blush:

Just some (probably OT) thoughts.

Ed

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No matter how you mask it, losing tens and even hundreds of thousand dollars (even if it only on paper) in a manner of six weeks hurts…to see your nest egg shrink somewhat will evoke a lot of emotions…

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Good and smart post. However, I would also add to be weary of to good to be true sorta deals. There have been many stocks that have just exploded over the past 1-2 years. I was in Square from 50-100. In fact I had 99% of my holdings on that. Stocktwits and other message forums were calling for a hyper growth wave to higher levels. Today its 58 and just stagnating. That was my first bubble burst and that sucked. Then I watched as Tilray, CGC, Beyond Meat go the same route.

If stocks are exploding 30…40…100%, sometimes it just might to good to be true, and to tread carefully. People might say well the growth and future growth warrant it. I just don’t buy into it. After getting burned, it sucked, and in business (I own my own business) and in investing today-whenever I hear of a to good to be true thing- I really do my homework on it. So do your due diligence and if you are convicted and know exactly what you are buying- then go for it.

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What do you all think, does mauser get the award for most off topic post of the year? Sheesh man, do you have no respect at all for Saul’s board? There’s a board called Macro Economic Risks and Trends (or something similar), why not post it there? Austin’s entire point was to focus on the business fundamentals, why reply with a bunch of worst case scenario INDEX price return charts??? I’m a new member of this board and respect the fact that more senior members should be doing the policing but this is crazy. I for one am happy as a clam BUYING MORE SHARES IN FANTASTIC BUSINESSES AT GREAT PRICES. My only concern is I can’t do my analysis fast enough to figure out exactly which to buy in size and which to trim. Yesterday I increased my AYX position by 3%, from 10 to 13. I trimmed ROKU from 14 to 13 and AAPL from 5 to 4 to finance it. The only reason AAPL hasn’t been trimmed to zero is because my cost basis is $78 and in a taxable account. Yesterday AYX reached sub 6 BB EV, with consistent >50% revenue growth, >90% gross margin, >130% net retention, and negligible debt. I could say similar about the other companies I own TTD, MDB, OKTA, ROKU, AVLR, DDOG, ESTC, and many others discussed here regularly. A chart of the nasdaq, full of pie in the sky companies laden with debt and hardly any revenue, at a point in time where (essentially) ZERO network effects were in place, hardly any major companies were SUBSCRIBING to their products with >100% retention, and lacking a fairly forecastable continued ACCELERATION to cloud services, has nothing to do with this board.

Guy (who recently changed his username to avoid being confused with another user)

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Good advice Ed.

My portfolio is already down 30%… it does become difficult to ‘not sell’ at this level.

Rocky

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“to see your nest egg shrink somewhat will evoke a lot of emotions”

Completely agree, but the ability to not act on those emotions is probably the most important skill for successful long-term investing.

My last post on this OT thread.

Ed

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Not to belabor the point, but Apple with north of $50 billion in free cash flow and a fortress like balance had an almost 40% selloff within the last year. The stock has since had a full recovery and then some. As Buffett has said on numerous occasions, if you are not prepared for your stocks to selloff 50%, you probably shouldn’t be investing in stocks, because at some point they will. I know that although at times it’s difficult to do, we cannot allow our emotions to rule our investing decisions.

Don

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I’ve not been posting much for a bunch of reasons. One, I’m still in China and connectivity is sketchy. Two, and more relevant, these threads are pretty much OT, so why add to the noise. But, oh well…

I consider long-term, historical market performance totally irrelevant. The very nature of investing in growth companies and to be more specific, the growth companies that are the darlings of this board is because they are not representative of or represented by the broad market. That being the case, exactly what value is there in the history lesson? So far as I’m concerned, close to negligible. I will not (again) go through the litany of what makes these companies different. If you are unaware or want to ignore those factors you are posting on the wrong board.

On July 26 my collective investments (3 separate portfolios due to tax status) was up 87% +/-. As of a couple of days ago that had diminished to 24% +/-. Those are approximations as I only roughly adjusted for cash withdrawals. While the erosion is indeed unpleasant, I’m still up about 24% for the year. When I first came to this board and adopted this style of high growth investing my “stretch” goal was 20% per year. I am well aware that the year is not over. There’s still time to fall below that goal. OTOH, there’s still time for things to turn around and for the value of my investments to grow above where they stand today.

But, no matter which way you slice it, we’re talking about 3 months. One really lousy quarter. Am I going to abandon my convictions based on one quarter when virtually nothing fundamentally has changed? Am I really that fickle? And if I did cut and run, exactly where would I go? To be completely honest, I’ve not studied the art of value investing, income investing, turn around investing or any other style of investing. Retreat into the safety of gold or diamonds or whatever? IMO, that’s more like cowering in fear, I wouldn’t even call that investing. And, there might be a time that cowering in fear is the appropriate posture, but despite all the macro mess in the world at present, I really, really don’t perceive that we are at that point right now.

I’m retired and fortunately have an income stream from my pension (yeah, I’m old enough to have a pension) and other sources such that most all my daily living expenses are covered. I have only recently and cautiously drawn money from my portfolio for extraordinary expenses.

IMO the only bit of actual news that I think might have a serious impact on our investments was the very recent report of a day or two ago that Google has had a breakthrough on quantum computing. I have no idea how fast that breakthrough might go from the lab to the market, and I’m not really smart enough about this stuff to know what the impact might be and which of our companies might be impacted versus benefit from commercialization of quantum computing, but IMO that’s something deserving of attention. Quantum computing (in case you don’t know what that is, in a nutshell it means orders of magnitude increase in computing power. It means computational capability that does not exist today can be made available on an industrial scale) holds a lot of threats and promise. “A force so great it can only be used for good or evil” (Firesign Theater). Will quantum computing alter the landscape of the cloud and somehow disrupt the entire SaaS platform? I don’t know. But it might.

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IMO the only bit of actual news that I think might have a serious impact on our investments was the very recent report of a day or two ago that Google has had a breakthrough on quantum computing. I have no idea how fast that breakthrough might go from the lab to the market, and I’m not really smart enough about this stuff to know what the impact might be and which of our companies might be impacted versus benefit from commercialization of quantum computing…

Hi Brittlerock, this is from the MIT Technology Review

The calculation has almost no practical use—it spits out a string of random numbers. It was chosen just to show that Sycamore can indeed work the way a quantum computer should. Useful quantum machines are many years away, the technical hurdles are huge, and even then they’ll probably beat classical computers only at certain tasks.

Saul

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The calculation has almost no practical use—it spits out a string of random numbers.

Sundar Pichai compared it to the Wright brothers 12 second flight, which itself wasn’t of any practical use, and it took years before planes were practical.

But, it’s worth remembering that despite being first to flight in 1903 and having the first kind of practical aircraft in 1905, the Wright Brothers were out of the airplane business by the 1920s (https://www.forbes.com/2003/11/19/1119aviation.html#6f24b6ee… ).

There’s another comparison to Sputnik, which just circled the earth and…beeped. A decade later man walked on the moon. But, the country that launched Sputnik was not the country that walked on the moon.

So, we’re a LONG way off from having this affect our investments in any way, and there’s nothing predictive available at this point in time anyway.

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One of the things practical quantum computing will impact is security since previously “uncrackable” encryptions will become crackable simply because the “uncrackable” designation is merely an indication that too much time is required to do the crack for it to be of practical use.

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Look at the metrics that high growth investors like to focus on: revenue growth, NRR, Gross margin, etc. I agree that there has been little “fundamental” changes to these metrics over the past 2 months (we will see now that earnings will start coming out soon), although we read about a recent analyst article predicting industry-wide slowdown and some specific concern about ZS. But it also seems that the market all of a sudden does not care about these metrics any more. Does it matter to investors if a metric looks great, if market is no longer willing to assign high value to that metric? I’m sure many high growth sector analysts who made a living calculating and comparing these metrics are in cognitive dissonance and shock.

Draw downs can be unsettling. It all comes down to conviction. Unfortunately Growth Investing is synonymous with volatility.

Perhaps the best way to put this into perspective is to look at the picture from a different angle. Suppose you sat on the sideline this past year, thinking I should get some SaaS companies but I want a better price, and you just waited and watched these rising SaaS companies going up 20%, 50%, 100% and beyond. Would you be wishing you had bought them when they were on the rise at only +20% or +50%, versus when they had already ran up >100%?

Well here is that second chance…

No stock goes up, up, up in a linear fashion, they all pause or reverse at some point. Many times I sold out at the wrong time only to see the stock explode up and leave me in the dust. I owned NFLX for over a year and it went nowhere, so I sold out at $22. The next twelve months it went to $120, and then $200, and then $300…

I can’t tell you if or when the SaaS darlings will giddy up and go, they may not bounce back for years, or maybe never. But if you believe nothing has changed fundamentally since the day you bought them, and then you bail when they give you a bloody nose, you may find yourself choking on the dust cloud as they race away from you… and that feeling of remorse as you watch NFLX scale Mount Everest without you is a real sickening feeling. I don’t know which is worse, staying with a loser as it falls off the cliff, or missing the rocket ship when it takes off?

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ZS -34.55%
CRWD -30.70%
ZM -22.87%
DDOG -21.89%
WORK -20.14%
ESTC -19.39%
SMAR -18.71%

Harley,
Thanks for sharing this. I own ZS, ZM, WORK, ESTC and some others that have gone down sharply. It’s reassuring to see other investors experiencing the same, and to get the perspective of more experienced investors.

I have gotten the message from the MF team to be prepared for volatility, but it helps to get this feedback in real-time.

Cheers,
Bill

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Interestingly, there are two articles in this weekend’s WSJ that talked about market crashes in general. Here are the closing paragraphs from each article:

“To be a long-tern investor in stocks, you have to be prepared to lose more money for longer than seems possible. Anyone who takes that risk lightly is likely to sell out, in the next crash, near the bottom.”

“The price of admission to those heady long-term returns is making peace with temporarily losing half of your money”

Ed

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Hey cloud !

Do any of you put trailing stop sell orders on your high volatility stocks ?

NOPE !! Never have — never will. They are a losers game.

I’ve done this several times and whenever I get stopped out, I’m always tempted to buy back in when I see it going back up a week or so later.

Sounds like you are trying to time the market … only fulltime professional traders can do that with any reasonable amount of success.

It is also a good idea to get an Elliott wave chart on it to see if it is projected for further downside and whether a bounce is expected any time soon.

Charts tell you only where the market has been … not where it will go. I used to chart. Waste of MY time - quillpenn is the only chartist that makes his/her presence known on these boards and seems to do a good job of it.

But it can be challenge choosing the right time to buy back in if you choose to at all.

When buying, do you look at the share price or the company? Price is not the answer.

Best,
Rich (haywool)

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