I had not added any new money to the market this year until last week and today. I put all I had and more in October and December, which is the last time we had discussions like this. Those were called “historic” crashes by the media for whatever it is worth.
Yes, I agree to focus on the numbers and I do believe that we have selected a group of special companies. But when the stock prices run up so fast (as they have)…much, much faster than their growth rates, doesn’t it make sense to question whether this is sustainable?
That is my point. There is a time to sell. One such time is in a bubble. I objectively determined there is no bubble, but of course others may disagree and I don’t want to argue that issue. I have put out a simple example of my reasoning in regard.
The time to sell Nvidia and Arista happened early in 2018 no matter where the market was (it was near or at an all time high at the time and Nvidia and Arista both were at all time highs) so I sold. It was not the price per se, but the price accompanied with the holistic factors, with the holistic factors primarily represented by where they hit on the S curve. Thus, there were substantive reasons to sell unrelated to how the market was doing. Fortunately this was identifiable at the top. I stated I needed to do something to “turbo charge” my port so moved on.
I just do not substantively see the reason to sell Alteryx or Zscaler, as an example. In fact the opposite, I bought. The risk/reward just based on buy out value using Tableau and Mule as the multiples, which were between 12 and 16x forward revenue creates numbers to support this label. Run those numbers yourself, the floor is not real far below.
But these things aside. This is the logical fallacy I see (and trust me, I often do things just because I want to even though it makes no sense to anyone, I just wanted to do it. I’ve gotten better over time to just not do these things as they have cost me in opportunity costs - and a stupid period in September where I played earnings and thought I knew more than market - of course I did not).
But here is the logical fallacy: I agree that the businesses are doing great. I’m fairly confident that we will be near the all-time highs (assuming no massive market meltdown) for the IT software stocks sometime around the first quarter of 2021. This assumes that the current EV/Sales multiples will hold (i.e. not rise or fall much).
When I buy a stock I don’t assume any multiple, I assume what the real value is. Back in June, 2018 I calculated that Alteryx had a “virtual” PE of 28! So what is the virtual PE next year or the next year NO MATTER THE MARKET SENTIMENT.
Here, we have companies that within 12-24 months, that are huge money printers (AYX and Zscaler - just a matter of time) will be in low teens and then mid single digits in price to sale. By year 3, if the conservative expectations are met will AYX be selling at a mid single digit multiple with 30%+ expected operating margins and no competition and huge growth ahead still? Not if the business is still cruising along.
Thus what multiple the market will give does not matter. Sometimes we get lucky and it prices in 3 years of growth in the multiple. Sometimes it prices in one year of growth. In the great bubble of 2001 Juniper and QCOM had more than a decade of perfect growth already priced in. I concluded, so where is the upside? I sold. The market sentiment had nothing to do with it. The price the market gave it required 10 years or more to get back to even.
so if the multiple in the market sentiment is 1 year ahead or 3 year ahead today, what does it matter? In year 3, if the business performs, the company will at least equal that 3 year ahead multiple (even if today it is only valued one year ahead, and remains only valued 1 year ahead in year 3).. Makes for a better time to buy than when it was at a multiple looking 3 years ahead.
Sure, we could have sold at the top of this cycle and then rebought now!!! I’m sure someone did. I calculated a 25% tax rate for doing so, so I chose not to. May have been worthwhile in retrospect but no sense crying over milk that is already spilled.
Thus the risk is not the market multiple, but how the business will perform relative to the current valuation.
What Saul is saying {if I may put in my interpretation} is that all this change in market sentiment and multiple is just NOISE. You can try to trade in and out, good luck. But far more profit is made holding the best until there is a real time to sell (based on substantive fundamental factors). Thus why Arista was so quickly tossed by both Saul and I at nearly the same time. The place on the S curve unambiguously had changed and the stock bolted up on being put into the S&P 500 (or whatever index it was made part of). So good riddance and move on. Had nothing to do with the market sentiment at the time.
Tinker