Totally, completely and absolutely WRONG!

Investment Analysis Clubs Saul’s Investing Discussions
21

Take a look at this chart of Bull and Bear for a little perspective.

OK, let me start by saying that I’m firmly in the “invest in growth” camp. But, let’s not fool ourselves.

First, that chart is doing some kind of funky reset on Bull/Bear periods that isn’t explained. Second, it ignores inflation. But, it does show why Buffett is bullish in general and believes that for people who don’t want to or can’t deal with investment selections, investing in the S&P 500 is a good long term option.

But all is not always rosy. For instance, the Dow hit 1000 in Jan of 1966. It didn’t reach 1000 again until Nov of 1980 - 14 years later.

And then it took another 20 years for the Dow to double. But in the meantime inflation had more than doubled, so buying the Dow in 1980 and holding for 20 years was a net loss, at least in what you could buy.

So, now yeah, the Dow isn’t the best metric to use.

I’m not posting this to indicate gloom and doom - I’m posting it to show that stock selection is important. I’m sure there were plenty of stocks that did well between 1966 and 1980 - they just weren’t members of the DJIA.

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22

If one believes the Market is turning downwards, it’s worth the time to consider viable options to minimize the damage.

The problem being, that many of the proposed ways to minimize the damage actually can make things worse, depending on the nature of the downturn and recovery. Use too sensitive a trigger and one can be out of the market on big gain days. Use too slow a trigger and one sells out after much of the loss has already happened and buys in after significant recovery has occurred, potentially at a price above the exit price, thus making the loss worse than just riding it out. Any given rule may work a trick on one historical example and be worse than doing nothing on another.

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23

didn’t get frightened into getting out at the very bottom.

whether it 's the "very bottom " remains to be seen.

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https://the-international-investor.com/2011/st-petersburg-st…

staying fully invested did not work out too well for Russians in 1917 And from the chart US stocks went nowhere from about 1860 to 1900, 40 years of little return.

and then there is Cuba where all companies were nationalized without payment to shareholders in 1959. And Venezuela and many other examples.

I am not saying that things are that bad in the US.

Staying 100% invested is bad advice for those that may need cash to live on and can only get it by selling stocks just when they should be holding or buying more.
It works out for Saul because he is richer and more resistant to money based panic and fear than most. Plus his obvious talents as a stock picker. And his even harder to implement skills of knowing when to sell.

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25

an obvious and simple plan of action would be to taking a fixed amount (not a percentage) off the table every month. If the market keeps going up you will make up the loss to cash by capital gains on your remaining holdings. If the market goes down you will have the cash for living expenses or to buy stock at lower prices. Look on it as insurance.

I have nothing against Saul’s idea of staying invested if you can afford it and have the fortitude , but 50 years of investment experience shows me that most people will panic. Which is why we get those 9 or 10 to 1 down volume over up volume near ends of bear markets,

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26

I still hear all those worried voices:

But all is not always rosy. For instance, the Dow hit 1000 in Jan of 1966. It didn’t reach 1000 again until Nov of 1980 - 14 years later. And then it took another 20 years for the Dow to double. But in the meantime inflation had more than doubled, so buying the Dow in 1980 and holding for 20 years was a net loss, at least in what you could buy.

I’m sorry, but I have to ask, who cares what the Dow did between 1966 and 1980. An obsolete index of 35 or so huge, placid, stable companies, that are weighted according to stock price size, for G-d’s sake, instead of market cap, in an era when stock investing had little relation to the current time, and when the economy had little relationship to the current one.

US stocks went nowhere from about 1860 to 1900

Seriously, who the heck cares? We are talking of horses and buggies, literally. And what about the Internet stocks of the day, the railroads. They went wild. You are talking indexes, not stocks, and indexes of what exactly, in 1860?

Whether it 's the "very bottom " remains to be seen.

Always true.

Staying fully invested did not work out too well for Russians in 1917.

So you should keep all your assets in gold coins under your mattress?

The last 150 years of stock market history suggests that when this type of bear market comes, small-cap stocks, growth stocks, glamour stocks, etc often fall -70% or more, peak-to-trough.

All I can say is that I remember at the end of 2009, beginning of 2010, the financial talking heads were talking about “The Lost Decade” in the “Markets” (which were still where they had been at the end of 1999, ten years later).

At the end of 2009, when they were talking of the Lost Decade, I was at 668% of where I had been at the end of 1999 (the peak of the Internet Bubble), and I was literally wondering what they were talking about. Who cares about the averages like the Dow if you invest in well-chosen stocks?

Note that this period included the bursting of the Internet Bubble in 2000, and the decline of 2008 and 2009, the worst decline world-wide since the Great Depression in 1929 to 1932…. And yes, at the bottom of the 2008 decline my portfolio was down 68.7% for the year (you can’t imagine how scary that was!), but at the end of 2009 I was still up 568% for the decade.

And even at my personal bottom, on Nov 20, 2008, down 69% year-to-date, I was still up 165% on the decade (at 265% of where I had started) . That’s what happens if you compound gains in-between those big crashes.

So what is the point of all this??? The point is that, EVEN AT THE VERY BOTTOM of the 2008 crash, when I was down 69% on the year, I was still so much ahead of where I would have been playing it safe in cash, or putting my money in the S&P, that there was no comparison!!!

As I’ve said, many times, keep enough money to live on and for emergencies, and then buy good companies and don’t try to guess the market.

Best,

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

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27

As I’ve said, many times, keep enough money to live on and for emergencies, and then buy good companies and don’t try to guess the market. <<

Have wiser words been spoken, investment-wise? I see the key as keeping enough money out of the market to live on (1-5 yrs depending on your work/income)then stay invested. Having any short term money in the market is essentially gambling as not even Saul knows the market direction. Even more true this year as the daily swings in my portfolio are typically more than I earned in a month! Not for the faint of heart, but I won’t need those funds for the next few years, so it can ride.

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28

‘… keep enough money… then buy good companies…’.

Aye, there’s the rub. What is a good company?

What I think is a good company differs decisively from what Saul thinks is a good company (not a single one of his top six current holdings for instance!).

True, sometimes we overlap and we certainly would agree that his top six are investable.

The fun I have here currently comprises (by law) a limit of 8% of my overall pf. and ten holdings of equal book cost at any one time, and each holding never bought in less than 4 tranches. Some are Saul or Paul’s; some mine in the same Saas/cloud field.

This seems a good way to play a day at the races, investment-wise. It suits me to make much less than Saul on this game. Miss. Finch has retired, there is no back-room and I feel I would never see the sunshine or go fishing.

When we overlap, I am always there first because I screen rather than depend on, or wait for, hearsay. These are investments and get the serious money.

I currently have 28% in cash.

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29

I’m sorry, but I have to ask, who cares what the Dow did between 1966 and 1980. An obsolete index of 35 or so huge, placid, stable companies, that are weighted according to stock price size, for G-d’s sake, instead of market cap, in an era when stock investing had little relation to the current time, and when the economy had little relationship to the current one.

Well said, Saul. Not only is the Dow an AVERAGE, it in not exactly a relevant average. Here is a post that I wrote last Summer. It discussed that paying too attention to an average can lead one astray. More importantly, by focusing on individual member of a group (i.e. stocks), one can make more profitable choices, assuming one picks the individuals correctly.

http://discussion.fool.com/fooled-by-the-average-32803185.aspx?s…

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30

minor point - no dog in this hunt, but people don’t think about

If you aren’t going to be in stocks - aka businesses

then what else are you going to buy?
bonds? those are from governments and…businesses
intl stocks? those are from other businesses
money market accounts? some are government but a lot are from businesses
pure cash? then you rely on governments and banks which rely on health from…businesses
intl cash? then you rely on international governments and by extension intl businesses
real estate? then you rely on economic health, which relies on governments and businesses
People don’t think about what the alternatives mean - you don’t buy nothing, you buy something else

Course, putting short-term money in stocks is reckless (at times; if you can do it well, do it, but that’s more gambling than investing, though as Lynch suggested investing is gambling - you just distinguish between those who put the odds in their favor or not). We all know why stocks - in general - go down - when earnings streams are interrupted, as they are interrupted in recessions; and when rates or something else is a better or compelling investment; but if you aren’t going to invest in stocks, then where do you go? I had a friend ask me for a ‘safe’ investment, and all I could give him was assurances of relative safety. There is no such thing as safety in this world. You have to pick your risks.

–

Of course, we can differ on individual companies. I’m amazed at the success of these cash flow positive business models with negative earnings and pretend NG numbers which exclude share based compensation, but then again maybe you are supposed to treat the subscription numbers as an annuity and these are more like cable companies where the important numbers are the number of subscribers and the worth of those subscribers over time so traditional valuation numbers like I’m used to don’t work. Or maybe they should be valued based on what an acquirer would pay, and we got a lot of examples of tech companies in particular (hardly anywhere else) buying technology based on P/S metrics (MSFT buying Linkin; Salesforce buying Mulesoft, etc.), not traditional earnings. This is more complex, but congrats to those who do it so well…

–
watching OLLI today and hoping it will fall

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31

One of the receptionists at my office suite has become interested in investing…

THE END IS NEAR!!!

:slight_smile:

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32

I’m amazed at the success of these cash flow positive business models with negative earnings…

I wrote an essay a ways back titled “We Are What We Measure.” On what do you base the assertion “negative earnings?” GAAP? How realistic is GAAP? Is pro-forma more or less realistic than GAAP?

To answer these questions realistically you have to be an accountant. You have to be able to determine which parts of GAAP reflect reality and which parts are nanny-state or ivory tower constructs.

Financial Statements were created by business to help owners manage their businesses. Then Financial Statements became corrupted by various competing interests, for example:

Income tax: Businesses are asked to pay taxes based on their profits. This incentivizes business to report less profit.

Social engineering: Congress wants to promote growth. One way is to reduce taxes but to do it stealthily they leave rates the same but allow accelerated depreciation which reduces reported profits. Another case is the expensing of R&D which is used by most if not all current Saul stocks.

Social engineering: Congress wants to punish excessive executive pay so they disallow deductions above a million dollars annually. Business does not take it laying down, it changes the way executives are compensated. This transfers the excess cost of executives to shareholders. Congress fights back by making stock options a reported expense. They just screwed up accounting royally conflating shareholders with the business they own.

What pro-forma does is to reverse these conflicting interests and absurdities but it can be – and is – abused. Investors are not well served by GAAP. Buffett uses “book value” and “owner earnings”

Owner Earnings: Warren Buffett’s Favorite Formula

https://seekingalpha.com/article/4071626-owner-earnings-warr…

These are Buffett’s version of pro-forma or adjusted earnings!

Denny Schlesinger

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33

What seems to have been lost in this argument is the ability to listen and learn from each other.
Whoever shouts the loudest and most often wins?

Unfortunately the debate whether the squiggles up and down of stock price are worrisome or not
diverts attention from the real risk with this style of investing – permanent loss of your savings.
A business can fail just by chance – it doesn’t care how good a stock picker you are or your track
record. Your real challenge with this style of investing is to figure out how much of your savings
you want to expose to randomness, and how that choice might affect your goals in life.

Ears

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34

denny - we’ve had these discussions before, and I’m not trying to convince you to accept my view (which is pretty simple - RSUs have a cost, and I like it when companies don’t use them) but I appreciate and understand you have a different opinion. I tried to balance my own statement with a pointed reference to examples where companies, companies with actual money making actual decisions, clearly valued other firms based on different metrics, which means in essence, that my “amazement” could be simple ignorance. All I’m interested is in how to pick winning stocks, and Saul is the right person to see on that!!

Be well…

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35

Who cares about the averages like the Dow if you invest in well-chosen stocks?

I would say that it has been valuable in the past few weeks to have recognized that a substantial (maybe even 90+%) of the downward price movement for “our”-type stocks (our being folks on this board) has been a result of the overall market decline (including fear of a trade war, etc.). In a few cases, there have also been company-specific issues, like NVDA pausing their on-the-road autonomous vehicle testing.

Recognizing that there haven’t been material changes to the businesses themselves, I have had no inclination to sell any of my positions.

From that perspective, I have seen some value in recognizing what the overall market has been doing (particularly the S&P 500…I essentially ignore the Dow completely).

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(which is pretty simple - RSUs have a cost…

I’ve never said “RSUs have NO cost.” The cost is not borne by the company but by the shareholders. Expensing them on the company books conflates two sets of books that should be kept apart.

The issue is TERRIBLE BAD accounting.

All I’m interested is in how to pick winning stocks,

Aren’t we all? If I buy a stock at $100 and a year later it is quoted at $130, a CAGR of 30% does it matter if they issued RSUs? Does it matter what GAAP says?

Denny Schlesinger

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37

So what is the point of all this??? The point is that, EVEN AT THE VERY BOTTOM of the 2008 crash, when I was down 69% on the year, I was still so much ahead of where I would have been playing it safe in cash, or putting my money in the S&P, that there was no comparison!!!

I think you’ve missed the point of what I was trying to get at, which may have been
my fault. I have little doubt that youwill be able to generate returns in a way
where your account balance will be repeatedly making new highs on a rolling 3-5 year
basis, even if we get a bad bear market.

My point was that many people around here treat your investing acumen with a messianic
reverence due to the documented returns of your stock picks in recent years. Which
is understandable, but I just believe it is dangerous when you make posts trying to
influence your audience to ignore a negative analyst report about stocks you own, or to
ignore the stock market being down -2% premarket. Not because I believe you have some
nefarious motives, but because if it were me, I wouldn’t want to tell an audience of
investors to ignore a negative analyst report, and then that 1-in-500 moment comes and the analyst is right and the stock gaps down 50% overnight.

Are you responsible for other investors decisions? Absolutely not. But would you be
comfortable knowing that one of your followers had 40% of their lifesavings in a “Saul
stock” and a negative report came out which you made a post dismissing, only to see that
stock tank and that investors lose tens of thousands of dollars, at least partially influenced
by you?

I remember I used to follow a biotech investing message board in 2007. People were making
wonderful returns playing 30% pops on FDA approval announcements. All of a sudden, 2008
rolls around and the same situations that were generating 30% pops, are now generating
-10% ‘sell-the-news’ reactions, because market sentiment changed. Needless to say, many
of the locals left the experience feeling very jaded and angry after getting burned a
few times. No fault of the message board creator, just that the market changed.

I personally just wouldn’t want to carry that type of burden with me - if it were me
I’d be adding more disclaimers in my posts, that’s all. But my opinion about this is
the outlier, and your followers here on MF think the concerns I express are ridiculous -
certainly a possibility.

Regardless, no hard feelings.

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38

but Steve, nobody pays Saul

Needless to say, many of the locals left the experience feeling very jaded and angry after getting burned a few times.

angry at who? Themselves I hope - period. Everybody is a victim these days…

I for one am intelligent and careful enough to take in what I want from Saul’s posts and can make my own decisions for myself. Please - please - Saul keep posting. Please…don’t dumb down your statements, and I won’t turn into a raving lunatic and blame you for my dog urinating on my carpet.

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39

Saul has made it clear on everyone of his monthly reports and in his knowledgebase to NEVER follow what he does. That is his disclaimer and the only one ever needed.

It is up to us to make our own decisions based “possibly” on the information “freely” given by him. I understand though what you are trying to say but if one is not intelligent enough to read between the lines one shouldn’t be in this business in the first place. Just saying.

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40

Their research says nearly 100% of the market crashes are fully recovered within 4 years, so you don’t have to sell your stocks cheap to live

Well, that may be true if you ignore 1929 and 2008 and the mid-70s but retirees can’t just ignore data they don’t like, can they?

Dec 2007-2011, the S+P was still down 6.5%, and if you were taking out 4-5% each year like most suggest, you had ~25% less money.

Dec 1973-1978 [just using year ends for ease of calculation] you were down 24% and then if you were taking money out half your nest egg was gone, in just 5 years. 2 years later you still weren’t back to your peak and another 8-10% was taken out for living expenses. I’m sure someone your age remembers what those years were like.

I am a natural optimist and will always own large chunks of stocks, but to say people who advise retirees to keep 35% in bonds/cash don’t know what they are doing is plain ignorant.

Let’s look at projected returns and volatility during a given decade*: a globally diversified portfolio that is 100% stocks will suffer a 30% loss about 30% of the time. Add in retiree withdrawals and once again you hit a point in time where half your portfolio is now gone.

Versus a typical 60/40 stock/bond blend over a decade will suffer that loss around 2% of the time. A 50-1 shot against instead of 2.33-1 against.
MOST PEOPLE CANNOT STOMACH THAT SORT OF VOLATILITY ESPECIALLY AFTER AGE 50-55.

Most people - 80% or so as someone else suggested - will panic sell when markets are crashing. The ‘GET ME OUT’ fear is just so big. Even if they only sell part of the portfolio they will lock in that permanent loss because they need the cash. [And at a bare minimum, they’re taking out that 4% to live on at the worst possible time.]

It happened in 1987, and in 2000-02, and in 2008. It will happen again, and I seriously doubt most people here know what sorts of risks they are taking to make these returns.

Source: Alliance Bernstein research.

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