Valuing the market

This message probably should posted closer to the bottom of this current market cycle, but I felt like writing it now.

There are two types of investors: those who attempt to buy an asset whose estimate of its value is less than today’s price, and those who attempt to buy an asset whose price is less than their estimate of tomorrow’s price. We all have some of the second kind in us, even Buffett said that he wrongfully started out as one of those.

There are another two kinds of investors: those who believe that the market can be timed and those who believe that the market cannot be timed.

And there is yet a third group of two types of investors: those who believe that the market cannot be timed and those who believe that the market cannot be timed but that it can be valued.

If you pick and choose from those types you can shape an investor who attempts to buy an asset whose estimate of its value is less than today’s price, who believes that the market cannot be timed but that the market can be valued.

My use of market here includes both the market in aggregate, such as an index, and the market of one stock, such as Berkshire. For investors paying attention to the market here, they have an opportunity to both determine which of those types of investors they are and how well their practice is working.

There has been some discussion here of the SaaS stocks on Saul’s board. In a triumph of industriousness over my usual ennui I have prepared a table of Saul’s stock holdings at the end of the previous month. I used the 52-week high for comparison to show the full reach and consequences of magical thinking. Of course, no one person purchased all nine stocks at their 52-week high, but someone did.

Name              52 Week High      Current Price	   Dollar Drop	    Drop %
SentinelOne	            79	               26	           53	       67
Crowd Strike	           298	              168	           130	       44                   
Cloudflare	           222	               66	           156	       70
Snowflake	           405	              155	           250	       62
Zscaler	                   376	              172	           204	       54
Datadog	                   200	              110	            90	       45
MongoDB	                   590	              300	           290	       49
[Monday.com](http://Monday.com)	           450	              124	           326	       72
[Bill.com](http://Bill.com)	           348	              121	           227	       65

So, what kind of investors are these people? Some certainly do not believe in market timing; they are going to buy and hold through the entire cycle believing that they will eventually be made right. Maybe they will. Some will insist that they are value investors; they will claim that holding a money losing company that sells at 20 times current sales will still work wonderfully because they are in the right industry at the right time. In addition, sales, though maybe not profits ( the companies insist that there would be profits if they were not trying to grow so rapidly ) are growing at an incredible rate. Maybe you can’t time the market and maybe you can’t value individual stocks. But, if you could value the market as a whole, maybe you could purchase Saul’s companies at a time and price that doesn’t require paying extreme prices for their rapid growth.

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I have prepared a table of Saul’s stock holdings at the end of the previous month. I used the 52-week high for comparison to show the full reach and consequences of magical thinking.

Elias, I always nod with a lot of respect when reading one of your unfortunately rare posts, but I think this table is misleading and does not do justice to Saul’s approach. As others here did mention before he seems to be a gifted trader, one day in and the next out of a stock. For his method it’s irrelevant how much a stock dropped from it’s high. This also applies to his followers as seen from their monthly portfolio updates (“I sold X, reduced my position in Y, increased A, initiated B”).

This message probably should posted closer to the bottom of this current market cycle

So for you it’s clear that the bottom is not reached yet. The ones usually posting about “bottom” here and at the MI board are using their signals and indicators (Jim & Co.). As since decades I very much appreciate what you have to say: Would you as someone seeing things from a I think very different background and in a different light than those “usual suspects” be so kind to say a few words about how you determine that we are not there yet and what you are waiting for before you have the impression “this seems to be the bottom now”?

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said2 can you explain then, given Saul is a gifted trader, how his returns are unaffected by the plummet in his stock holdings? I state that because if you follow his postings his returns have maintained or increased during the downturns.

Recently he posed that he had made 10 times his money since 2017, his holdings have fallen a tad since then. He is either Bernie or he truly has magic, actually something far and away more than pure magic, in his formula.

Regardless any of us can proclaim returns of any sort we want. I still would wager that he is the only poster on that board with an outcome in the black.

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Also said…given what I’ve witnessed along with Saul’s (this week) stating he was up 10 times since 2017…and his out-of-this and into-that actions have been awful and increased his losses…it is implied that at one time before this sell-off he must be claiming he was up 20-25 times his base in 2017!

THAT my friend…now THAT’S a “GIFTED TRADER!!!”

chompin: said2 can you explain then, given Saul is a gifted trader, how his returns are unaffected by the plummet in his stock holdings? I state that because if you follow his postings his returns have maintained or increased during the downturns. … Recently he posed that he had made 10 times his money since 2017, his holdings have fallen a tad since then.

Delurking.

Saul’s portfolio is down 43.6% this year, hardly ‘a tad’.

said2: As others here did mention before he seems to be a gifted trader, one day in and the next out of a stock.

I’ve followed Saul’s board since about 2016 and used to participate. He almost never trades in a ‘one day in and the next out’ style. Generally, he only trims positions when they rise above a preset portfolio threshold percentage, around a 20% maximum, and usually puts those funds into another current position that is a smaller percentage of his portfolio. He also closes positions when he loses confidence in the rapid growth rate of a company or if some unusual facts change. Otherwise, his portfolio selections are pretty steady. His only new positions in April were MDB, purchased at 387.16, now $299.71, and CRWD, purchased at 231.39, now $164.81. He added BILL in March, purchased at $226.25, now $121.00.

As Saul concluded when he posted his April update: “All in all, it’s a really ugly picture.”

https://discussion.fool.com/my-portfolio-at-the-end-of-april-202…

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Chompin, an example: Elias writes that Crowdstrike fell 44% since it’s 52 weeks high.

Theoretically Saul nevertheless might have made a profit with it since it’s 52 weeks high, as Crowdstrike did not fall every single day since then but also had days and periods with a rising price, and Saul sold and bought Crowdstrike several times. Whether he made a profit with this stock therefore depends on the timing of his transactions.

For somebody willing to invest a lot of work it’s possible to find out as Saul posted every month what and how much of it he sold or bought.

Said2,

I used information from the SaaS board because (1) it has been discussed on this board, and (2) Saul provided a list of his holdings as of 4-30-22. So, I used them as representatives. I do not know Saul’s investing process, but that didn’t matter to me since I was not commenting on him in particular, only using his list of stocks. I could have made this clearer.

What I was trying to do was discuss the danger of buying assets that were selling for absurdly high prices on an individual basis and also doing so in a market that was in aggregate grossly overvalued. It is possible to both value an individual asset and the market as a whole.

We get a new generation of investors every 20 years or so who have not had any skin in the game during the last great bear markets. It was a warning of what could happen when value information is ignored.

Why do I think we are not at a bottom? Of course, I don’t know, I can only guess. But I am old enough to have seen this before. I started investing in the stock market in the mid 1970’s. In 1973 we saw the collapse of the nifty fifty which was kind of that period’s version of the type of stocks Saul is promoting. It did not matter how high of a price was paid for these stocks. All you need do is hold on to them and experience the joy generated by their growing prospects. Sounds kind of familiar.

The period of 1973 to August of 1982 was in total hard on the stock market. I remember how 1974 felt. I remember the start of the great bull in August, 1982. It was like they shot off a cannon each day – it was that obvious. My highly analytical reason for believing that this is not the bottom is because it doesn’t feel like August 1982 before the cannon fire.

I remember 1999. Everyone and his dog who invested in tech.com/tele/new-paradigm stocks were making huge bundles of money during that year. I, however, refused to change my investing philosophy and was doing very poorly. I remember how the market felt in late 1999 and early 2000: the giddiness and annoying overconfidence in the air. I don’t know how it felt when the tech.com/tele/new-paradigm stocks finally hit bottom because it took years to get there. But, I remember what it felt like in late 1999 and early 2000, and it has felt that way now for years. Once that feeling was gone in 2000 they couldn’t get it back, and I don’t believe that they can get it back this time either. It is too large an emotional switch.

Let us skip over October 19,1987 when the market fell more than 20% in one day, leaving shaken punters, muttering cautions of dark humor while they shuffled slowly towards the open window.

I had no premonition of the disaster that was 2009. The unfolding events caught me flat-footed, but the market was not so horribly overpriced then. But, it would be hard to feel much worse than the day in 2009 when the financial system all but shut down for a few hours. I remember that.

I don’t believe that we have hit bottom because bear markets demand a certain amount of suffering, and we have not given it enough yet. According to people who study stock market history, we were in one of the three most overvalued markets in the last 100 years. One was 1929, and we know what happened then. The second was 2000 and I know from experience what happened that time. The third was, what, a few months ago. We have yet to descend enough. The bear demands at least 50% of us. After that I will recognize that old feeling, and feel safe to buy again.

Of course, except for a few objective facts, all of the above may be BS plus an old man reminiscing about his feelings. But, that is what I think. However, I also know that I may be completely wrong once again.

But don’t completely discount the role of temperament here. It is why people act. At times like this, emotions may trump facts. I also believe that the stock market, informed by the temperament of its millions of punters, has its own collective temperament. I was not kidding about the bear demanding its due.

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Elias, Thank you!

I should leave it “Thank you!” as this is the best comment I have with respect to your post (other than “Pls don’t wait again that long before you post again”) but I have a little comment to

I don’t believe that we have hit bottom because bear markets demand a certain amount of suffering, and we have not given it enough yet.

I think to understand. You do not regularly follow Saul’s board but I do. And their suffering, emotions and right now desperation are completely different from the atmosphere here or on the two other boards I follow.

Just for your information as you do not follow said (I love this word joke with my own name) board: As you know since 6 months their stocks get more and more slaughtered.

Since I think Feb there were more and more “OT” posts of desperate people, expressing their feelings, stating their retirement now is delayed for years etc.

Saul and his assistants did their best to maintain the (anyway extremely enforced as you know from reading about it here) discipline of the board, removing sceptical posts from external board outsiders like me and PP, and at least stopping threads where board members complained about their losses.

Saul & Co actually posted the way one would post here, on this board, with the same reasoning as any of “us”. They asked everyone to not be ruled by their emotions and to instead focus solely on the numbers, on the results of their companies instead of the price: “It’s about the value of X, not about it’s price”. Even (just shortly ago) quoting Buffett: “Voting versus weighting machine”, highlighting the long-term. That their companies growth if continued means they would grow into their lofty valuations and in hindsight would look cheap right now.

Saul regularly underlined that by saying although he too is down currently X% and that in his career he several times had extreme drawdowns, once 62%, that he nevertheless is up 1150% or so while the S&P or this and that value fund is up a meagre Z%.

So they did appeal on the perseverance, stamina and patience of their followers, saying that this kind of investing and companies is not suitable for everybody but kind of promising that the ones willing and having the mental capability to stick to it while suffering in between will be richly awarded in the end.

That worked for a while. Many not officers but normal board members wrote supporting posts like “Surely it hurts but it would be a mistake to give up now”, “I pity you, but those stocks are not suitable for everybody”, “This will change too”. So it was all about the German word “Durchhalteparolen” (Mr.Google says “perseverance slogans”) while their stocks did sink more and more.

Then “everything” changed! 2nd half of March their stocks recovered typically 25%-50%. This naturally was THE sign for them. They felt huge relief. Their beliefs were justified “in the end” etc. They were triumphant, jubilant: “I told you!”. Now it would pay that they endured this suffering and did stick with their investment route.

As more bitter it is for them what happened then, from the beginning of April. The carnage continued with even greater speed. I fully understand their feelings and really pity them. They endured so much since Dec. It was so painful. Then finally they saw themselves vindicated, there was the light at the end of the tunnel. And then, exactly then, being hit with this, at the very worst possible time, when you are convinced “Finally! It’s over. I could not have stand more of this!”. Just imagine this (not you, Elias; you of course know all that). So now it’s really desperation and hopelessness over there, with a long thread “I think I’m done”.

Elias, my impression from your post is that those are the atmosphere and the feelings you mean when you talk about “bottom”. The ones dominant over there for the (not so much anymore) silent majority which are missing for the rest of us (yet).
.
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P.S.: As I just had a look at said (again :slight_smile: board I want to add that I am shocked! My impression of Saul, the person, long was that he is kind of brutal because it’s often not exactly nice what he says to sceptics, being very quick to label them “idiotic trolls”.

But that he really means well, honestly wanting to teach investors to become better ones and to improve their lives. After 2021 with 200% or more gains for them he even reminded his followers to not forget the ones less well off, to give to charity etc.

Shortly ago I was very impressed by a very personal post of him in which he gave “life advice” in a way I thought could have been Warren or Charlie speaking (“… relationship… if you constantly feel under tension and unwell it is time to leave” or similar). So I thought he has the best intentions and while his outer shell is rough his inside is actually much softer and likeable.

What shocked me? That yesterday’s poll from tecmo is pulled!

tecmo yesterday had an ingenious idea: He posted a poll there, asking how
much the board members are up or down with their Saul portfolio. A poll that clarifies how many Saul followers came early or late to the party.

The preliminary results I saw were highly interesting. I don’t remember the “up” votes exactly but they were roughly this:

+200%: 6
+100%: 9
+20%: 15

The number of the down ones:

-20%: 11

20%: 58

Resulting in over 2/3 being down, with the vast majority down a lot, versus a small minority up a lot.

Should I for whatever reason not see the poll any more why it is still there I apologize for the following words:

!!! That they removed this important poll is dishonest !!!

Whoever actually did remove it, whether Saul himself or an assistant, it’s Saul’s responsibility, and especially after his personal “life advice” post which I really found great and highly respectable I am utterly disappointed.
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P.P.S: Elias, after this endless post, in case you still read it: Again, thank you so much and please keep posting from time to time!

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said the feeling it seems on the Saul’s board is excessive flattery, the best word I can think of is fawning, over Saul himself. Again Saul will repeatedly break his set of rules, the most often is when he states emphatically that the board is not a place to compete and he then he states he’s up 10 fold compared to Buffett (he means Berkshire) being just over a double.

It is downright embarrassing to read the posts, the latest of which is one where they cut and past legendary value investors in their efforts to suggest the market is mispricing their value picks. Saul’s board is based on Saul’s premise that stocks with rapid sales growth are as a whole worth 30-100 times sales. He’s much more of a switcher, his portfolio has none of the stock it held just a few years ago.

Any non-liner growth is axed immediately, his followers follow; he states his previous record (no I absolutely do not believe it); plunging occurs; he switches and the stocks he sold hold up while his new picks go thru the floor; rince, repeat.

Posters state losing their life savings and…

…his picks are still 30 times sales.

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So, what kind of investors are these people?

The datapoint we don’t yet have is how these investors will react if the growth in their high-growth stocks starts to deteriorate before the share prices recover to their past highs. Will they maintain discipline and sell those losing positions in favor of higher-growth stocks? Or will they go counter-strategy and become momentum investors, or fall prey to price anchoring and other pitfalls?

Based on their stated results, some of those investors could put on a master class on unrelated topics like how to take advantage of big price swings in premarket/after-hours trading. But it’s off-topic so no one will ever learn about that there.

good luck,
dan

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You wrote “he states his previous record (no I absolutely do not believe it)”

This is a serious charge even for a public board. What facts do you base this conclusion on and bear in mind that he has posted his holdings monthly.

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<Saul’s board is based on Saul’s premise that stocks with rapid sales growth are as a whole worth 30-100 times sales. He’s much more of a switcher, his portfolio has none of the stock it held just a few years ago.>

If revenue is growing at 200%, in mere 5 years, revenue would be 32 time as big, and with larger economic scale, earning could grow faster, say 50 times as big. So it is not wrong to value the business 1000 times earning or 30-100 times revenue. The question is how long it can sustain that growth rate and its continuing earning power after that. Buffett answers this question with ‘moat’, sustainable competitive advantage, it’s a qualitative judgement. It could be argued that Saul’s fast switching method is a quantitative ‘fault’ judgement.

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I meant “If revenue is growing at 100%…”

DDOG - good company, less competition, PE forward 152. Will do fine from here.

NET - road kill, going against AWS which lowered its data egress costs

SNOW - growing and gaining traction, will do fine. PE forward is 950. BRK got in at $120, price now is $155. I use and understand their product. Slow incremental progress.

CRWD - don’t understand. competitive space.

SentinelOne, Zscaler- Don’t know much. Avoid.

MDB - good company, will do fine. Watching for capitulation.

Monday, Bill - Terrific products, growing rapidly. Not sure about valuation. Watching for capitulation. Might buy.

My own…

APPS - I am slowly accumulating. Growth is coming from acquisitions. Low Gross Margins. PE forward 13.

UPST - I am accumulating, Mr. Market is jittery over delinquencies. PE forward is 35. 5x potential in 5 years from here.

COIN - I am watching and waiting for capitulation. High risk. Trying to understand the crypto economy. PE forward is 25. Might buy.

These are all exceptional companies but not a monolith.
Each has their own story and valuation.

I like how Ron Baron referenced Bezos from 2000 report: Ouch. It’s been a brutal year for many in the capital markets and certainly for Amazon.com shareholders.
As of this writing, our shares are down more than 80% from when I wrote you last year. Nevertheless, by almost any measure, Amazon.com the company is in a stronger position now than at any time in its past.

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You do not regularly follow Saul’s board but I do. And their suffering, emotions and right now desperation are completely different from the atmosphere here or on the two other boards I follow.

Since I think Feb there were more and more “OT” posts of desperate people, expressing their feelings, stating their retirement now is delayed for years etc.

Certainly the mood has swung somewhat over at Saul’s, but I don’t see any sign of widespread capitulation/bottoming of Saul stocks.

  1. the guy who posted “I’m Done” says he’s done buying more, but is not selling what he owns. That’s not capitulation, even for this one guy.

  2. most responses were (and recs for): maybe this style isn’t for you, advocate ‘stay the course’ and ‘opportunity of a lifetime’.

i.e. 182! recs for this response to the “I’m Done” OP: https://discussion.fool.com/sorry-my-friend-i-have-little-sympat…

"
Sorry, my friend, I have little sympathy. Empathy? yes, sure–tons, but sympathy, no.

Please consider this: Most of us are down, way down this year. So, now, how are you going to recover? S&P index funds? Yes, they surely will, but likely (hopefully) growth stocks will get there faster; at least, they always have.

if I could magically be 33, I would be ecstatic. I would be dancing in the streets. I would be singing “Happy Days!” with Buffett and Munger. Great companies are getting cheaper every day.
"

Getting cheaper, yes, but are they anywhere near bottom? There could be a long way down from here. After a 70% drop from its all time high in November, NET is still trading at ~29 times trailing revenue, IINM, and is losing money, so there certainly seems like there’s a lot of room to drop.

Another recent thread drew a bullish comparison of growth stocks today to Amazon in 2000, quoting extensively from a newsletter. https://discussion.fool.com/lessons-for-us-from-ron-baron-quarte…

As Jeff Bezos and his shareholders found out in 2000, that is a tough environment to be overinvesting and underearning in. But stock prices aside (just for a moment), the fundamentals of many of our businesses resemble and “sound” just like Amazon did over 20 years ago.

I don’t think many grasp just what that comparison could mean … yes, if, for example, NET has the incredible growth going forward 20 years like Amazon, the stock will inevitably have wonderful returns, but if we compare today’s NET to AMZN circa mid 2000, July 3rd Amazon was at $37, down from $106, comparable to NET’s drop so far. AMZN owners could look forward to another year and almost 3 months of the stock dropping to an eventual low of ~$6 Sept. 28th 2001, another 84% loss.

And, sadly for Saul-style investors, they never would have held on to be rewarded with the remarkable growth and returns in decades to come, because in the recession of 2001 AMZN’s growth finally faltered and a Saul-style ruthless pruning of companies that falter would have sold out.

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“ It could be argued that Saul’s fast switching method is a quantitative ‘fault’ judgement.”

What’s the difference between fast switching and momentum trading? Is it that he uses changes in revenue growth rates as the signal to get in and out rather than price movements?

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<sadly for Saul-style investors, they never would have held on to be rewarded with the remarkable growth and returns in decades to come, because in the recession of 2001 AMZN’s growth finally faltered and a Saul-style ruthless pruning of companies that falter would have sold out.>

If they hold on to every high growth company they invested, they would likely lose big time at the end, because for every Amazon, there are probably 10 false Amazons that turn to 0. Buffett’s circle of competence and baseball swing analogy is the most reliable method so far.

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<What’s the difference between fast switching and momentum trading? Is it that he uses changes in revenue growth rates as the signal to get in and out rather than price movements?>

I think momentum trading is purely based on price movement. Saul’s method is based on revenue growth rate, which likely changes slower than price movement and allows him to act faster than the community.

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If they hold on to every high growth company they invested, they would likely lose big time at the end, because for every Amazon, there are probably 10 false Amazons that turn to 0. Buffett’s circle of competence and baseball swing analogy is the most reliable method so far.

Yeah, Saul would have never ridden AMZN all the way to its bottom of $6 in Sept 2001. There is the possibility he would jump back in the stock after revenue growth picked up again after the 2001 recession. Entirely possible, he seems good about not holding onto emotional issues with prior holdings.

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I don’t think many grasp just what that comparison could mean … yes, if, for example, NET has the incredible growth going forward 20 years like Amazon, the stock will inevitably have wonderful returns, but if we compare today’s NET to AMZN circa mid 2000, July 3rd Amazon was at $37, down from $106, comparable to NET’s drop so far. AMZN owners could look forward to another year and almost 3 months of the stock dropping to an eventual low of ~$6 Sept. 28th 2001, another 84% loss.

And, sadly for Saul-style investors, they never would have held on to be rewarded with the remarkable growth and returns in decades to come, because in the recession of 2001 AMZN’s growth finally faltered and a Saul-style ruthless pruning of companies that falter would have sold out.

This is the key criticism of the method (that and the fact that there is no attempt to value future earnings) and the reason I would call this a momentum trading strategy. Acknowledging and understanding this key insight into the “Saul Method” is essential to pursuing it successfully (if success is even possible in a deflating bubble), however the conversation is a third rail on that board and would never see the light of day.

This censorship is the biggest problem I have with Saul and why I think he is personally responsible for the ruin of so many. Many unskilled investors were attracted to the board because of his braggadocio about his investing success, but once captured on the board they were denied access to critical perspectives on the method.

I’ve wondered what his interests might be in running the board for free, because it seems altruistic. I’ve also wondered why it was spun out of the Motley Fool paid site, as their interests cannot be served by allowing a free investment advising service (which the board functions as practically speaking). The answer, I believe, is in the price momentum running a social media herding service potentially creates. I saw the power of the board when a prominent member posted a negative evaluation of Upstart a few months ago and the price immediately dropped. The criticism he offered was published by an analyst a monthly earlier, but his reposting the criticism is what appeared to move the markets.

If the investment strategy is truly a momentum strategy, then exciting buy side enthusiasm is an excellent way to get rich. Until it isn’t.

I hope a few people on his board make there way over here to hear some reasoned criticism. It was the Berkshire board that educated me in the nick of time during to go go nineties.

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