Tinker's post

Investment Analysis Clubs Saul’s Investing Discussions
1

I’ve been working my way through the posts on muji’s Distillation Post, and I came to Tinker’s great post from April 2019 which was pretty far down the list and may have been missed by some. I thought its essence was beautiful, and I thought I’d reprint it here with my own paraphrasing, editing, shortening, and bolding.

Here it is:

If you listen to the conventional wisdom of the investing industry you won’t make money. You WILL revert to the mean.

We invest here in companies, not systems. If you want to invest in systems have at it. One thing learned is that the low-price on-sale growth stocks all faltered, all of them, and have never come back. PURE is one that is an enigma as its business never actually faltered but improved but yet, its multiple has contracted and contracted and remains that way.

On the other hand, the stocks that the market has chosen as the highest quality have stayed expensive and over-priced … THESE COMPANIES DESTROY THE MARKET AND MAKE THE RULES OF THE VALUE INVESTORS THAT ALL THINGS RETURN TO THE MEAN IRRELEVANT. Yes, IRRELEVANT.

This is not “things are different now,” this is how it has always been. Superior disruptive companies have always been expensive and they have always killed the market. That is what we attempt to identify and hold.

If instead you want to buy the market, or a general segment of the market, say SaaS, then you also have to hold the worst SaaS as well as the best. If chips then you also have to hold all the chips, etc. THAT IS NOT WHAT WE DO HERE. Well most of us, I am sure there are some who do. And nothing wrong with it. But that is not what most of us do here. And that is not what our conversations here are about.

What we do here is try to identify and invest in the leading hyper-growth disruptive businesses in the world. Through crowd-sourcing we do this systematically. And this is contrarian investing because 90%+ of the world calls us crazy for doing so. These market “darlings” that are extremely “overvalued” that will simply crash some day. “Enjoy the party while it lasts!”. We are enjoying the party.
If, however, you never want to find and invest in these, or the next generation of such companies, then you need to understand that for all rules there are exceptions. A very small number of all stocks create most of all the market increases. If you want to buy the market you will have mediocre returns. If you want to buy the premium businesses of the day…well use your own judgment.

Everyone, EVERYONE will take their lumps and have to lose sometimes. However, if you go into anything only responding to fear, conventional wisdom, and that everyone reverts to the mean then why even try. Settle for mediocre. We have proven that we are not mediocre here. We are the top 1% of all investors. We do not revert to the mean, never have, and we are not stuck buying the market (thus ensuring mediocrity), and we are not stuck investing in systems.

We invest in the best growth businesses in the world. A select few. And contrary to the pompous certainty of studies that show we are all idiots, the unequivocal evidence is that… we are not!

So no, things are not “different this time,” things are actually the same. If you want mediocre returns simply scare yourself into acting as if you are mediocre by investing in the mediocre or the market or a system.

Are we just lucky and a fluke? That’s what the 90% of everyone, who try to pull you back in the pack, says because you are doing better than they are? Make your own call.

Of course we understand risks. We are not daredevils! But statistics…put them into context, and then explain if those statistics are so valuable, then what is with all these outliers?

Silence. You will never hear an answer from the naysayers to explain them other than “luck”.

Tinker

87 Likes
2

That is not really true.

“One thing learned is that the low-price on-sale growth stocks all faltered, all of them, and have never come back.”

Example:

Livongo had an P/S NTM of 7.5 in March

Shopify had an P/S NTM of 5.5 in 2016

Fastly had an P/S NTM of 5 in March

All relative low.

The kicker is multiple expansion and it’s only possible, if you don’t buy at inflated valuation.

9 Likes
3

P/S of Shopify shrank to about 10 end of 2018. That made the multiple expansion possible.

Today the P/S multiple of Shopify is 38, so about 4x.

Is ist possible to repeat this 4x? So 38 x 4 = P/S of 152?

I believe not and therefore its really important when you buy.

7 Likes
4

That’s not exactly what performance is needed…

At some point we expect to see profits and free cash flow (FCF) and the appropriate metric will be P/FCF not P/S. Price/Sales is a substitute metric for the earnings we don’t have a solid handle on (yet). We only maintain the expectation that “This Management” can shift gears into flowing profits while there is still growth that the markets will be slow to let a stock get crushed, because “Earnings Growth” will be the story at that point.

Lastly, if any degradation occurs that signals slowing sales growth and/while not progressing to earnings growth, Saul “cuts bait” with no remorse and no handwringing about the big one that got away.

3 Likes
5

zerohedge12 said:

That is not really true.

“One thing learned is that the low-price on-sale growth stocks all faltered, all of them, and have never come back.”

Example:

Livongo had an P/S NTM of 7.5 in March

Shopify had an P/S NTM of 5.5 in 2016

Fastly had an P/S NTM of 5 in March

All relative low.

The kicker is multiple expansion and it’s only possible, if you don’t buy at inflated valuation.

…

P/S of Shopify shrank to about 10 end of 2018. That made the multiple expansion possible.

Today the P/S multiple of Shopify is 38, so about 4x.

Is ist possible to repeat this 4x? So 38 x 4 = P/S of 152?

I believe not and therefore its really important when you buy.

Multiple expansion for hypergrowth stocks can really improve returns but are not necessary. A company growing sales at 50% will grow its price by about 50% a year with a stable multiple. With slightly slowing growth and slightly contracting multiple, stock price appreciation may be a bit lower, but if it drops down to 25% it is still not a bad return. Clearly, when growth stalls or decreases significantly the stock price may take a big hit, but in my opinion it is better to wait for that to happen and keep riding the wave than to get off early and miss out while a great company is still executing.

Yes the multiples for all of these stocks may shrink but that is the risk we take. And presumably the multiple for other stocks with less growth would also shrink.

For Livongo and Fastly in your examples, March is not exactly a good moment in time from which to draw long term conclusions. Livongo, Fastly, and many of the other companies discussed here have benefitted greatly from the pandemic.

Clearly Tinker’s original point of cheap companies (when cheap because of valuation rather than a clear FUD event) never growing back to an expensive company is a generalization. You will find a few comeback or turnaround stories. But for a focused portfolio, devoting a significant percentage of one’s resources (time and money) hoping for that turnaround is usually not a good idea, because they usually don’t pay off or at least take so long to pay off that the opportunity cost is too high.

39 Likes
6

Here an example: Shopify.

P/S in 2016: P/S was 5,5. Without multiple expansion stock price of Shopify would be $107, instead of $750! That a difference of 7x!

Another example: Okta.

P/S in 2018: 9. Without multiple expansion stock would be $60 instead of $180 today. Difference of 3x!

Yes, a stock price can increase by 50%, if the multiple stays the same. But the multiple expansion made a big difference.

6 Likes
7

Zerohedge is making apples to oranges comparison. U can check P/S for DDOG and CRWD in March compared to now. Almost all stocks were cheaper/lower in March than now aside from perhaps Zoom based on revs expectations at that time. Tinker was referring to Duma‘s test, I bet zerohedge has not read about that among posts linked by muji.

Of course, we would all love to buy our companies 2 or 3x cheaper, but this won‘t happen anytime soon. FED says 0 rates for next 2-3 years means stock valuations will be high relative historical mean. Our stocks will trend higher from here. See u in 2022 with double or triple from current levels barring second waive or some other shocks. Saul and other board managers - sorry for off topic, but this backdrop has clearly an impact to valuations of our stocks.

Best,
Vic

2 Likes
8

“You will find a few comeback or turnaround stories.”

Important: All the companies with low multiples in P/S were still successful growing the business. But often the price moves too much ahead and then it’s not good to buy.

A lot of the stock move sideways after a drastic upward movement.

Examples:

Tesla, 7 years nothing happened. Then from $250 to $1000.

Twilo: 2019 was sideways, then since march up 100% to $200

MongoDB: March 2019 was a high, then 1 year nothing happened. Only now a new uptrend to $200

Shopify: 2018 sideway movement, then a new uptrend since jan 2019 from $120 to $800.

Summary: Most of the stocks consolidate after a strong upward movement, has nothing to do with turnaround but too high valuation.

5 Likes
9

@LearningInvest0r:

Nothing goes only up. We will see corrections in 2021 and 2022 too. Every year you can expect a correction to the moving averages 50 or 200.

I expect a correction after the summer, because the upward slope of most growth stocks is too steep.

10

Hi zerohedge,

This happens to be a board where we invest in hi-growth, overvalued companies. If that’s not your thing, no one is making you stay here. You can move on to another board where your opinions will be valued. We are doing very well however and most of us are up 70% to 90% year to date in a market where the safe stocks you like are flat at breakeven or down. (my portfolio is up over 85% right now). If you’d like to learn, you are welcome to stay, but if not, there are plenty of other boards, and no need to stay and argue with us.

As George Bernard Shaw is attributed to have said: Those who say “It can’t be done” should get out of the way of those who are already doing it.

Saul

54 Likes
11

Hi Saul,

“argue with us”

I don’t argue.

I only listed verifiable facts.

It is a fact that the valuation of the shares was lower 1 or 2 years ago.

It is a fact, for example, that the valuation of Crowdstrike in August 2019 was ahead of the trend. As a result, the price dropped to $45.

So you had the chance to get in at a lower price.

zerohedge

4 Likes
12

It is a fact that the valuation of the shares was lower 1 or 2 years ago.

It is a fact, for example, that the valuation of Crowdstrike in August 2019 was ahead of the trend. As a result, the price dropped to $45.

So you had the chance to get in at a lower price.

———————————//———//-////—-/////-

Poppycock.

I’ll give you some variable facts. Crwd was around $34.00 in March when I added. That’s this year, not last August. Also added at 48, 57 and 70! Valuation. Pooy!

Fact. Lower price… who cares over a 3-5 year time period with the right conviction Companies. A few dollars here or there, so what!

3 Likes
13

Hopefully this helps.

I believe what zerohedge12 is trying to say is that if you get the chance to buy a hyper growth stock while its EV/S is low then it can enhance your returns quite a lot.

I know this from personal experience as I purchased SHOP at $25 in 2016 when it’s TTM EV/S was around 9. Purchased MDB at $38 when its EV/S was around 11. This year I managed to purchase LVGO at $25 also in Jan and it’s TTM EV/S was around 14. Such buys produce amazing returns but there is an element of luck finding such companies before they have taken off. Me, I am just happy to be lucky sometimes !

14 Likes
14

Zerohedge, I agree that the market will fluctuate. Who would not agree to that? :)There will be ups and downs, corrections and rises. I am not good at timing, hence I cannot predict like u that the correction will come after the summer. If correction will come, I‘ll be happy to act accordingly (adding to the winners). What we are doing here is identifying and investing into winning businesses. Due to the fact that these are growing rapidly, they usually catch up to their valuations. Yes, valuations are not cheap generally, but 0 discount rates for 3 years won‘t make them (valuations) lower.

Best,
V

1 Like
15

I only listed verifiable facts.

It is a fact that the valuation of the shares was lower 1 or 2 years ago.

It is a fact, for example, that the valuation of Crowdstrike in August 2019 was ahead of the trend. As a result, the price dropped to $45.

So you had the chance to get in at a lower price.

Zerohedge12 -

Thanks for the input. If I may:

It is a fact valuations for premium growth stocks usually fluctuate between expensive and nosebleed.

It is a fact everyone here understands high valuations are often the price we must pay to play the high growth game. It is up to the individual whether or not they are willing to pay it.

It is a fact every single one of us has missed multiple chances to enter stocks we like at lower prices. Unfortunately, it is also a fact there’s absolutely nothing we can do about it.

It is a fact we are already aware of all the dangers you mention but somehow choose to grind it out anyway. In fact, many of us share details of that grind in hopes we might make it a little easier for ourselves and others.

Feel free to verify as many of the facts above as you’d like. In the meantime, thoughtful discussion is always welcome. Do you have any suggestions that will alleviate these risks or possibly help us become better investors? If so, fire away. Chances are we’d all learn something from it.

77 Likes
16

Back to Saul’s emphasis of Tinker’s April 2019 post and why this model works…

Tinker says “If you listen to the conventional wisdom of the investing industry you won’t make money. You WILL revert to the mean.”

And if you don’t have a way to work through your “conventional emotions” and/or a supportive group like this you will abandon your plan in times of difficulty…

This group helps us stay on track. As Morgan Housel says in an article titled “Investing Like a Psychopath”…

“keep [an investing] journal…[when you are]tempted to drift away from your typical investment plan, consult that journal.”

“It’s far easier to say, “I’ll be greedy when others are fearful” than it is to actually do it.”

https://www.fool.com/investing/general/2013/10/15/investing-…

And the discussion above about whether this method works when your timing is not perfect is not worthy of our time…the “perfect is the enemy of the good.” Everyone makes mistakes both in targets and in timing (see Housels’ mention of Warren Buffet embarassing [https://www.fool.com/investing/general/2015/03/05/with-the-b… Op-Ed telling us to buy american stocks in Oct 2008, when billions flew out of mutual funds immediately thereafter… https://www.nytimes.com/2008/10/17/opinion/17buffett.html)

…and while our hindsight has benefits (that is experience has lessons and can result in wisdom), it doesn’t make us perfect prognosticators. If you can improve your results by additional adjustments (in addition to investing in great companies), please do so. But if trying to time the market and get it just right is keeping you from acting, that’s another “conventional” emotion, holding you back.

Over time, investing in great companies and collaborating to create collective wisdom to further our goals has benefited many in this group. Looking back over the past 6 months, with all it’s turbulence…my results are better because this group helped with my investment decision-making; e.g. I shifted more into ZM and CRWD (and out of some conventional companies) than than if i only read SA and the Gardners, at least in part because of this group and thinking about where the economy might go over the next several quarters- that is, it appears there will be MORE reliance on technology to stay productive under social distancing restrictions, strengthening SAAS and related companies. (By the way, the number crunching done by this group is one of the unsung heroes here, without solid financials, none of this would work). Thanks to TMF, Saul, and the great contributors like Tinker.

The unconventional insights and the steady focus are unique and beneficial. Not conventional…but then, neither are the results.

Let’s keep it going.

Best,

Bill

31 Likes