Where I’ve been and where I’m going.
For a little history, I started this board about nine years ago after having become semi-famous (or notorious) after the Westport incident. Westport was a company that was being lauded on this website, and became a favorite of many people. It was selling at about $32 at the time. I pointed out that it had losses that were well more than 125% of revenue, and only had gross margins of about 28%, so that it would have to more than quintuple revenue before gross profit could give it a chance of just breaking even. But even with five times as much revenue they wouldn’t break even, not even then, because with five times as much revenue their operating costs would be way up too. And besides, it was only growing its revenue at 15%. It was impossible to ever break even! I was hated on the Westport board for denigrating everyone’s favorite, but the price kept dropping and people were “doubling up at a better price.” (I just looked at the current share price and it is 67 cents.) Anyway, after this, friends encouraged me to start a board of my own, and it has grown to this.
In my end of April report I said that I was working on making changes in my portfolio, so here I am.
I have had a successful career investing for many years. You can read about the first 34 years from 1989 through 2022 on my Knowledgebase Part 1. (Since I can edit it, I brought my annual values up to date earlier today). From 1989 to 2022, inclusive, is a lot of time for compounding to accumulate. As of the end of 2022, I had a 1745-bagger on my entire portfolio (even after subtracting the horrible 2022 losses). That’s not 1745%, that’s a 1745 Bagger. Take into account though that we’ve been living on my stock exchange earnings since I retired 27 years ago in 1996. It was our only source of income for everything from food to housing to clothes to trips to college expenses for my daughter, to theatre tickets, to vacations, to summer home, etc. While the gains compound to a 1745 bagger you have to take into account that large amounts were taken out each year so the money isn’t anything like that.
A number of people were very skeptical when I first said I had made 30% per year in ordinary markets. Some even implied that I must be lying, that even Warren Buffet couldn’t do it. (But he was investing billions of dollars, like piloting a battleship instead of a speedboat. He had to buy whole companies, for God’s sake!).
The year 2018, for example, was a slightly down market. The S&P was down 6.6%, and the Russell 2000 Small Cap Index was down 12.5%, but my portfolio was up 71.4%. Others on this board, following the principles that we discuss, were up even more. And it wasn’t magic. I’d been transparent and given all my positions and their relative size each month, and basically told you exactly what I was doing.
Stock picking does work (obviously). Especially if you are lucky, as I must have been. Some people say you can’t beat the market in the long run. They are wrong.
Please note: I wrote in the 2015 edition of the KB that it’s a lot harder to make great returns as the amount you are managing gets larger. I explained that I can no longer get in and out of a stock position on a dime as I could when my portfolio was a tiny fraction of the size it was then. I just can’t be as nimble as I was, and I said that I would be very happy now if I can average 22% growth per year instead of 32%.
Well, in the seven years of 2016 through 2022 inclusive, since I wrote that, I grew to 611% of what I started with. I compounded at just under 30% even with the horrible 2022. Again, I really don’t think that is a realistic expectation going forward.
During all those years that I was investing I mostly invested looking for growth, EPS, PE, and PEG ratios, and looking for special companies. Then in about 2017, I, and the others on the board, found SaaS stocks, who sold a perpetual subscription to software that became inbedded in the customers company and that was serviced in the internet/cloud. The SaaS companies thus had the advantage that when they got a new customer the revenue was not only here this year, but was here next year too, and the year after, and the year after that, etc. Not only was the revenue there, but it grew from year to year as the customer bought more bells and whistles or used the softwware for more of its company. It was like magic! Many of these SaaS companies were growing revenue at rates almost never seen before, like 50% to 150% per year. And they had gross margins of 60% to 90%!!! But because money spent on getting more revenue paid off in revenue forever, many of these companies spent as much as they could on growing as fast as they could and the heck with profits, they could always get profits in the future when they cut back on spending.
At first these companies were relatively undiscovered and selling at relatively normal EV/S ratios in spite of the huge advantages mentioned above, but then the stock prices took off, partly because of revenue increases but also because of increases in valuation. People from all over began reading our board and investing in the stocks just because we were. At one point, a poster on our board found an obscure statistic that no one had ever heard of on one of our companies, and two hours later a Wall Street Analyst changed his rating on that company, citing that statistic. Obviously he had been following our board.
All of this kept pushing the stock prices up, and up, and up, but it was hard for me and others to decide to exit, as the prices kept rising. For instance, in 2020 my portfolio was up 233% (to 333% of what I started the year with, more than tripling), and then in 2021, by Nov 9th, it had risen 93% ytd again, almost doubling, on top of the rise the year before. Now 333% times 1.93 equals 643%, so I had almost six and a half times what I had started with less than two years before! Up 543%! It was heady stuff! The smart thing to have done was to have taken a lot of the cash out and left the rest in to keep growing. I took some out, but I wish I had taken out more. I was slow to react to the accumulation of factors which piled up on our companies.
Because then came the inevitable slowing of growth that came with our companies getting larger (the so-called Law of Big Numbers), so that the lower percentage annual revenue gains could no-longer support the huge valuations. This was followed by a Russian invasion of a neighboring company, in which all of Western and Eastern Europe got involved, and a subsequent cut off of oil and natural gas from Russia to Europe, meaning an inflationary rise in the prices of oil and gas, with almost at the same time the worst pandemic that the world has seen in 100 years, with container ships bottled up in Chinese ports and subsequent shortages all over the world with more prices rising, and then the Fed raising interest rates at a pace never before seen in the history of our country (supposedly to fight inflation), pushing the country into an incipient recession. All of this caused the stock prices of our companies to plunge.
I admit that I was slow to react to all this, hoping naively that these excellent companies would resume their rapid growth and that all would be right with the world. I was wrong! But I have pivoted more recently. I’ve added to the cash I had permanently removed from active investing in the past, so that the proportion of my total funds that is in stocks is getting smaller and smaller. I decided that once I have enough money to get along for the rest of my life (my wife andI are pretty old), there’s no reason to risk it, and I have varied the kind of companies I’m investing in as well. If I look at the funds that I have with my broker, 36.4% of the total is in cash or equivalents. And then if I add in funds that I have in cash or equivalents elsewhere than with my broker, about 47.2% of the total is in cash or equivalents. I realize that we are probably close to the bottom, and this isn’t such a good time to be in cash, but who cares, I have enough of both, and if the investment part goes up it’s just gravy.
Here’s what my portfolio looks like now, today. I plan start lending much more of my attention to PE, EPS, FCF, etc.
I have five positions between 12.6% and 11.4%. Here they are in that order. As you can see, Monday and Sentinel are my traditional SaaS companies while Global-e, Enphase and Samsara are part of my pivot (although you could consider Samsara as a non-traditional SaaS) .
Global-e
Enphase
Monday
Samsara
SentinelOne
Then there’s a gap, and then I have four positions between 8.6% and 7.5%: Cloudflare is the only traditional SaaS company. Aehr and Trade Desk are part of the pivot. Thanks to StockNovice for Aehr, which seems to me to be a very interesting prospect.
Trade Desk
Snowflake
Aehr Testing
Cloudflare
Then there’s another gap and then I have two more positions between 4.4% and 2.8%. These are Telsa and Transmedics. Thanks to Smog for Tesla. Tesla remains Off Topic for the board though, not because it’s a bad company, but first because discussions of it always become contentious and seriously argumentative, and secondly because Tesla tends to fill up the entire posting and crowds all our other companies out. That’s just the way it is. It’s like arguing about religion or politics. I mentioned it for completeness and I do currently plan to keep my position small (about where it is).
I hope that this has been helpful. I’ll welcome comments.
Saul
