When the Tide Rolls Out

Investment Analysis Clubs Saul’s Investing Discussions
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Only when the tide goes out do you discover who has been swimming naked"
Warren Buffet

This famous Buffet quote repurposed numerous times since the 1990’s seems a reasonable segway into our future investments in this age of accelerating returns…returns that even has the grand master on this board pondering “what the heck in going on?”.

Most here have had amazing returns on numerous stocks with triples, quadruples and beyond in VERY compressed timeframes of 3 months, 6 months or a year. Gone are the days when a double took 5-6 years…who has the time for that anymore :wink: Gone are the days of worrying about earnings when all we have are sales. Gone are the days of worrying about whether any product is on the market…we have already declared success. Yes…the tide is fully in and we are all feasting in its bountiful harvests…at least on paper.

I mentioned a while back that in this age of accelerations, we have seen many portfolios morph into more risky asset classes often with no real earnings and a few cases with no product on the market.

Consider for example Saul’s portfolio of which one stock has no product (NKTR)and most others have no earnings (SHOP, TWLO, AYX, PSTG, OKTA, NTNX, TLND, HUBS, SQ) although these two do have earnings (NVDA, ANET) and a few of the no earnings appear to have future PE’s.

We have been richly rewarded for taking the risk of these no earnings assets but instead with preferential weighting applied to REVENUE growth…that is “what the heck is going on here”…greater risk in a environment of a rising tide usually results in greater returns.

But what happens when the tide rolls out as Buffet has quipped over the past 3 decades???

There is very fine read about the age of accelerations by Thomas Friedman that describes the massive change we have been enduring since 2007 largely spawned by the “cloud”…the detail in this book are insightful and in many respects correlates with many portfolios here including Saul’s…take the cloud away and what stocks still are in play?

You can read the book here:

http://www.thomaslfriedman.com/thank-you-for-being-late/

https://www.intelligencesquared.com/events/thomas-friedman-o…

I really do think we have jumped on this roller coaster, perhaps at times, not realizing what had driven it and the amazing stock returns. We had a somewhat similar but much lower magnitude acceleration in 1999 with Y2K but nothing can compare to what has happened with the cloud.

But we also have memories of stocks gone bad…selling for wild multiples with no business model let alone product. IMO, when the tide rolls back out, and it will, we had better make sure we are not swimming naked all along.

Why would the tide roll out in the nearterm?

  1. Rising FED rates

http://discussion.fool.com/we-should-all-be-market-timers-329674…

  1. Investing in a vacuum of unreasonable asset values:

http://discussion.fool.com/investing-in-a-vacuum-32870005.aspx

  1. Black Swan

From time to time, I think it is healthy to reassess one’s portfolios and try to honestly appraise whether we have inadvertently moved to very high asset classes and what impact the tide could have on those investments.

Very few here have lived through a major outgoing tide like in 2000 or 2008…it is one thing to think/say you will ride it out and quite another to live through it. Money lost in 2000 a very long to time to recover in most portfolios.

Nothing seems to be imminent for a massive outgoing tide but we still have the above two factors ever looking…massive expanded P/S and the FED tightening in a methodical manner…the data on FED tightening is cycles is pretty solid.

What risk mitigation strategies do we have?

  1. Caution with heavy weighted portfolios to narrow asset classes
  2. Caution on heavily weighted portfolios
  3. Caution on margin that Saul has already warned against
  4. Caution on stocks with no earnings and high P/S ratios
  5. Caution on stocks with no product
  6. Caution on stocks with high debt levels
  7. Etc.

When the tide is rolling in…all of these “cautions” become like a remote memory…nonexistent to one’s investment strategy…but when the tide rolls out…they will take center stage.

I posted previously about the market valuation and like to periodically return to these numbers to see how they are progressing as detailed in the vacuum post above.

The one I remain keenly interested is the FED and the inverted yield curve:

http://stockcharts.com/freecharts/yieldcurve.php

It just keeps getting flatter but not yet inverted.

Almost all the other indicators are at high market rates approaching the 2000 levels.

Just posting food for thought and healthy dose of congratulations on your gains but awareness that tides come and go.

Best:
Duma

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Duma,
Great post. As someone burned in 2000, I am always wary of a hot market jumping the shark.

The Zscaler IPO, and even SNAP IPO, speak to head-scratching valuations being handed out like candy at Halloween.

I already started exiting some overheated or unprofitable stocks, such as PTSG OKTA and TLND. I personally only need so many of the high P/S high-growth stocks like AYX in my port. MDB would fall in that category. Trying to weigh actual growth, market TAM, exec leadership, and hopefully choose wisely.

While they seem like less chance for explosive stock price growth in short term compared to these tiny SaaS companies, I think at least showing a path to profitability will be given more of a premium at some point…whether in a few weeks or months. But I admit the good times may just roll for another year or two.

SQ seems more in the ANET category…i dont think there is doubt they can be profitable today but are reinvesting for growth. Just my opinion.

While not exciting, my eyes keep getting drawn to stocks like DIS or NOC that are entrenched and profitable but still growing. In case of DIS, the new catalyst for them will be the planned streaming services. Big changes in media underway, which is why I like the high-growth and profitability of TTD.

BIDU had a hiccup a few years back that seemed to keeo it off the same growth rate of BABA and Tencent. They are about to spin off iQiyi as a Netflix of China which they own 80% of. Leader in search/mobile in the largest middle class in the world. Pushing AI and autonomous cars too, I feel they are a baby Google with solid upside. Rather than jump in on overpriced iQiyi IPO, owning BIDU allows me to benefit if iQiyi becomes a monster.

I love NVDA…but stock is rich. Long term, i think AMZN and GOOGL will double at least once more before they break uo into pieces.

And I am staying close to 20-30% cash. When the next major hit comes, I want to enjoy and benefit from the run back up.

-Dreamer

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Excellent post, Duma (I agree with all your main points). This comment hit home:

I mentioned a while back that in this age of accelerations, we have seen many portfolios morph into more risky asset classes often with no real earnings and a few cases with no product on the market.

That’s the problem with long-running bull markets. Folks watching their portfolios grow year after year after year gradually come to accept high multiples as nothing more than the norm. As the bull market grows ever longer in tooth folks begin searching for new “investments”. All sorts of “innovative/ground-breaking/new era” companies come to the fore. Old metrics representative of value such as Price/Earnings, Price/Sales, Return on Assets/Equity, Retained Earnings, etc. fall by the wayside as folks gush about revenue growth (regardless of profitability), TAM (the sky’s the limit!), subscriptions (regardless of profits…hey, I used to belong to the Book-of-the-Month Club).

I saw similar phenomena in 1998/1999. I too, made lotsa money investing in the “dotcoms”. Those were heady days! My mistake (the same mistake made by many) was that I didn’t anticipate the end. Oh, I made a few wise moves, but not nearly enough wise moves. I lost BIG. But I learned valuable lessons, too.

My advice to those who’ve profited so handsomely lately: Take some profits off the table. Don’t put all your eggs in one “high-flying” basket. Remember the Wall Street adage: “Bulls make money, bears make money, pigs get slaughtered.”

Remember: “Bull markets make geniuses of us all”. My portfolio is almost the exact opposite of the portfolios so touted on this board, yet my returns are equal to, or better than, the profits reported by board regulars. What do I own?

Enphase (ENPH) - 60% of my portfolio (yes, you read that right). YTD return: > 700%
Micron (MU) - 20% of my portfolio. YTD return: > 300%
Metals (primarily Freeport McMoran). 5% of portfolio. YTD return: > 200%
Oils (primarily Total (TOT)). 5% of portfolio. Not much growth/good dividends. Strong base for future growth.
Optical networks. 5% of portfolio. Mixed bag of profits/losses. Building a base for future growth in about one or two years.
Cash

I did fine in past years, too. In fact, profits from Enphase, alone, have covered all my living expenses last year and this. Look, I’m not trying to brag. I’m trying to make a simple but very important point: Bull markets are great. Many, MANY people profit handsomely. The true winners are those who actually walk away from the experience with money in their pockets. Unrealized gains can deceive. Don’t develop tunnel vision. Look all around and think about exit strategies.

Good luck to all. May we all live long and prosper.

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Oooops, brain cramp. I want to correct what I wrote. I cited YTD (year-to-date) returns. What I meant was 52-week returns. My bad.

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How is Micron up that much YTD for you? Since Jan 1st 2018?

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Nevermind… :slight_smile:

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Very few here have lived through a major outgoing tide like in 2000 or 2008…it is one thing to think/say you will ride it out and quite another to live through it. Money lost in 2000 a very long to time to recover in most portfolios.

Although I was not invested in the markets till 1990, I was following the markets and witnessed the crash of 1987 when stock brokers were jumping off buildings. And I was heavily invested through both the 2000 and 2008 crashes. Gave back lots of profits in the crash of 2000, but actually made a lot of money in the 2008 crash as I bet against the market and sold out of most positions 3 months before the crash. Crashes do not warn you in advance and one day you will wake up and it has already happened. And many investors, being naturally always hopeful, keep holding on and on and on until they finally throw in the towel ad get disgusted with the markets and capitulate. Fool subscriptions get cancelled and these boards become quiet. It has happened before and it will happen again.

Nothing seems to be imminent for a massive outgoing tide but we still have the above two factors ever looking…massive expanded P/S and the FED tightening in a methodical manner…the data on FED tightening is cycles is pretty solid.

You are ignoring one big factor and that is the administration in control. With the news cycle and bombshell revelations every day, we all may wake up one day and see the massive outgoing tide. I am not making a political point but an investment risk assessment, and it is a real risk. Odds of reversal of Congress control in a November election that is now only less than 8 months away have increased tremendously given the last 2 special elections in Alabama and Pennsylvania. So we have a risk of a sudden jolt and a crashing tide, or a sustained drop that could have already started and goes on for 8-9 months until the election.

I have personally trimmed some positions and raised more cash. I think I have an overall 25% to 30% cash position in most IRAs, and reduced my cash account margin debt by 70% recently.

Mehran

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Hello DreamerDad -

You asked a very logical question. My results can’t be accurately summarized by one number. I do not simply buy…hold…sell. Depending on the stock/circumstances, I may swing trade. In some cases, I swing trade furiously to maximize profits. Enphase is a good example. It’s been quite volatile thereby lending itself to aggressive swing trading. It all depends on the stock and a whole lotta variables. It’s not a strategy I recommend for people with too little time on their hands. I’m retired, I spend 5-6 hours/day working with my portfolio. I consider it my job.

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Although I was not invested in the markets till 1990, I was following the markets and witnessed the crash of 1987 when stock brokers were jumping off buildings.

For those who take the figurative too literally…

In the week following the 1987 stock-market crash, at least two suicides in the United States were linked to the crisis, but none involved a window plunge.
http://www.slate.com/articles/news_and_politics/explainer/20…

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Hello Mehran -

Generally speaking, I agree with your commentary, but I don’t place THAT much emphasis on the administration in control as I do on Federal Reserve actions and bond market responses. Most bull runs end with the onset of recessions and those are generally triggered by yield curve changes affecting the bond market. Let’s not forget that waaaay more money is invested in bonds versus stocks.

The US market can also be adversely affected by exogenous events. The 1987 crash began in Asia. Wars, tsunamis and phases of the moon can trigger market events. All in all, my general attitude (particularly given that I’m retired and have no sources of outside income) is to enjoy what is, but be prepared for what may come. I would be far less conservative if I were still working with fresh capital arriving regularly, but retirement leads to revised ways of thinking/investing.

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All in all, my general attitude (particularly given that I’m retired and have no sources of outside income) is to enjoy what is, but be prepared for what may come. I would be far less conservative if I were still working with fresh capital arriving regularly, but retirement leads to revised ways of thinking/investing.

Hard to reconcile that with a penny stock ENPH being 60% of your portfolio. How is that conservative?

MEhran

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Government gridlock seems preferred by market.

Reagan had dem congress. Clinton had rep congress.

I think Trump being held in check by dem house would be a good thing, as tax cuts already passed.

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Hard to reconcile that with a penny stock ENPH being 60% of your portfolio. How is that conservative? MEhran

Your comment cracked me up. True, a superficial glance at Enphase would make one think I’m absolutely nuts. In fact, there were plenty of times over the course of the last two years when I seriously questioned my sanity. Enphase truly tested my business acumen and my resolve. I survived by doing research, extensive research, and more research. Even then, there were times when I knew I was gambling (several years ago mostly). My Enphase experience explains my DEEP disdain for “price-is-truthers”. Folks looking at Enphase solely from a price perspective (hey, it’s a penny stock!) missed out on phenomenal gains (and there are more gains to come). Today? I’d gladly reduce my share count (a robust 5-figure position) if I felt there were equal or better investments. I haven’t found any.

I may take the time to recap the whole Enphase story for giggles and grins. It was quite the roller-coaster ride. Then again, board regulars haven’t shown much interest in the company so I’ve been content to merely go my own way.

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Hard to reconcile that with a penny stock ENPH being 60% of your portfolio. How is that conservative?

Your comment cracked me up. True, a superficial glance at Enphase would make one think I’m absolutely nuts.

My best investment post 2000 was a penny stock, not just an ordinary penny stock but a Chinese penny stock! And it grew to over 50% of my portfolio.

I survived by doing research, extensive research, and more research.

I did research, extensive research, and more research as well. I sold (April-May 2015) when I figured the story was not going to work out after all.

http://softwaretimes.com/pics/kndi-03-17-2018.gif

Denny Schlesinger

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I read one of Friedman’s books, I don’t remember which (The World is Flat?), but I do remember that I was not impressed. He came highly recommended but on reading the book he came across as just one more journalist. I much prefer Malcolm Gladwell who helped me figure out Taleb’s option strategy in a New Yorker article.

I love Amazon’s book reviews and the first one I read is the “Top critical review” followed by positive reviews. These are the two top Thank You for Being Late: An Optimist’s Guide to Thriving in the Age of Accelerations reviews

Top critical review: https://www.amazon.com/review/RY790ZT2CJ7E7/ref=cm_cr_srp_d_…

Top positive review: https://www.amazon.com/review/R307RYPAVLF7LQ/ref=cm_cr_srp_d…

I really do think we have jumped on this roller coaster, perhaps at times, not realizing what had driven it and the amazing stock returns. We had a somewhat similar but much lower magnitude acceleration in 1999 with Y2K but nothing can compare to what has happened with the cloud.

But we also have memories of stocks gone bad…selling for wild multiples with no business model let alone product. IMO, when the tide rolls back out, and it will, we had better make sure we are not swimming naked all along.

While I agree with the sentiment, 2018 and 1999 are not comparable as can be seen in this NASDAQ 40 year chart:

https://invest.kleinnet.com/bmw1/stats40/^IXIC.html

The bubble that burst in 2000 started forming five years earlier, check for the kink in the chart at January 1995. There is no such acceleration in recent NASDAQ history. Even if the bull market since 2009 outstrips the long term trend of the market there is no similar waypoint as January 1995. What we do have is a divergence of high tech from the rest of the market.

What happened in 1995? The WWW went live in 1991 and “By 1995, the Internet was fully commercialized in the U.S. when the NSFNet was decommissioned, removing the last restrictions on use of the Internet to carry commercial traffic.[31” https://en.wikipedia.org/wiki/Internet#History

The WWW was a huge game changer in line with canals and railroads both of which spawned huge market bubbles as well.

1840 Railway Mania was an instance of speculative frenzy in Britain in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators until the inevitable collapse. It reached its zenith in 1846, when no fewer than 272 Acts of Parliament were passed, setting up new railway companies, and the proposed routes totalled 9,500 miles (15,300 km) of new railway. Around a third of the railways authorised were never built – the companies either collapsed due to poor financial planning, were bought out by larger competitors before they could build their line, or turned out to be fraudulent enterprises to channel investors’ money into other businesses.

https://en.wikipedia.org/wiki/Railway_Mania

1790 Canal Mania was the period of intense canal building in England and Wales between the 1790s and 1810s, and the speculative frenzy that accompanied it in the early 1790s.[1]

https://en.wikipedia.org/wiki/Canal_Mania

What do the three have in common? All are about transport and communication!* As I said above, I agree with the sentiment but we have no way of knowing when the top will arrive. Timing the market is futile and a bad idea but one does need an exit strategy. I see three possible scenarios in any portfolio:

1.- Going broke (Global Crossing, Globalstar). One has no business owning these stocks – easier said than done.

2.- Overpriced stocks that will become cash cows (CSCO, MSFT, ORCL). If you are in them for growth, sell.

3.- Solid, more or less reasonably priced companies that will bounce back. Hold.

That’s the best I can do.

Denny Schlesinger

  • I found out about the railroad and canal bubbles at the NPI board!

PS: I was going to reply earlier but I got distracted upgrading a web based text editor so that I don’t have to use the Fool’s. It works similar to the Fool’s but it saves my posts to my local machine. Now that TMF’s search is totally 150% bust this is going to come in handy to remember what I posted.

http://softwaretimes.com/pics/editor-03-17-2018.png

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Outbid

I am interested in ur enphase story please share. Also I’d like to know why u think there’s a lot more runway there.

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Putnid

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How would you compare Enphase with inverter maker Solar Edge (SEDG), which has had quite a run-up lately?

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Duma,

Just pointing out that NKTR does have a couple of products on the market.

Carry on…

MC

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Hello Rizzz,

I’ll gladly recap the Enphase sage and explain why I thinks its future is rosy. May take me a few days (I’m easily distracted).