Where I’ve been and where I’m going.
This is a modification of a post I made a couple of years ago, but I thought repeating it would still be useful to some readers of the board.
For a little history, I started this board about eleven years ago after having become semi-famous (or notorious) after the Westport incident. Westport was a company that was being lauded on the Fool, and became a favorite of many people. It was selling at about $32 at the time. I pointed out that its expenses were more than 225% of revenue, and thus it had losses that were well more than 125% of revenue, and only had gross margins of about 28% (it only kept 28% of revenue to pay operating expenses with), 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% per year so that it was impossible to quintuple revenue. I said that 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 45 cents (It says $4.46, but that’s because it did a 1-share-for-10-shares reverse stock split in 2023) ) Anyway, after this, friends encouraged me to start a board of my own, and it has grown to this.
I have had a successful career investing for many years. You can read about the 26 years from 1989 through May of 2024 on my Knowledgebase Part 1. From 1989 to 2024 is a lot of time for compounding to accumulate. For example, 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 17 TIMES what I started with. It’s 1745 TIMES.
Please understand though that I don’t have all that money. I’ve been retired since June of 1996 (for more than twenty-eight years) and living off my investing for all that time. That means renting and buying houses, paying for groceries, going to restaurants, buying cars, airplane rides, clothing for all the family, hotels, sending my daughter to college and other schools, medical bills, electricity bills, computers, home repairs, paying taxes, the whole works, for twenty-eight years plus.
What that compounds to is what I would have had if I could have left it all in to compound, but I took out money for our full expenses every year, as well as for emergency money set aside. Just for example, if that compounds currently to 600 times what I had in 1996 when I retired, it means that every single ten dollars that I took out for our family to live on in 1996 would mean six thousand dollars less I’d have now (600 times), and so on each year.
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 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 that it’s a lot harder to make great returns as the amount you are managing gets larger. 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 is now. I just can’t be as nimble as I was, and a number of years ago 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, 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 relatively huge gross margins of 60% to 90% !!!, because they weren’t manufacturing any physical products but were just hooking more companies up on their software.
At first these companies were relatively undiscovered and selling at fairly 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 a very obscure statistic, specific to the industry that the company was in, 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 to up 93%, 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 smartest thing to have done was to have taken some 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. Especially 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.
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 regularly pulled cash out of my investment money and added to the cash I had permanently removed from active investing, so that the proportion of my total funds that is in stocks is getting smaller and smaller. I decided that since I have enough money to get along for the rest of my life (my wife and I are old), there’s no reason to risk it, and the money is locked away where I can’t get at it even if I wanted to. If I look at all my funds, a large part of the total is in cash or equivalents. This may not be such a good time to be in cash, who knows? But who cares! I have enough of both, and if the investment part goes up it’s just gravy.
I hope that this has been helpful. I’ll welcome comments.
Saul