Hey Ydrasill, thanks for the write up. As someone who is in a similar stage of life as you, I related with a lot of what your wrote. I had a few thoughts on your goals I figured I would share.
First and foremost, beating the market is not easy. I would argue beating the Nasdaq specifically is even harder. As a reminder, the vast majority of fund managers are unable to beat their benchmark index.
With that being said, I still think it is a worthy goal and one I am shooting for each year. I personally compare my performance against QQQ as this is the fund I would likely plow most my capital into if I were to throw in the towel on stock picking. However, Bear makes several good points in his post and it is worth remembering you beat the S&P 500 by a solid margin this year which is what most would consider ‘the market’.
Ultimately, my goal is to achieve 20% CAGR over a long period but I admit this is a high bar. But Saul showed us that it can be done!
The last point I would make on this, is that comparing your performance versus one year is too short of a time frame. I would even argue three years is still too short. To get a clearer view on your true performance versus the market, I would suggest giving it at least 5-7 years. This should give enough time for your investments to compound and grow and give you a real representation of your performance.
My point is, you had a great year and are certainly on the right path and I am confident that you will bear the fruit if you keep with this for the next few years.
As for your second goal, I personally believe this is the most challenging aspect of investing in growth stocks. It is what I have struggled with the most and have written about in detail in the past. I have been tinkering with my strategy with regards to selling/trimming positions this year but admit I still have a lot to learn.
As it stands today, this is how I am going about it -
When it comes to entering a new position, I find this to be much easier, albeit still challenging at times. If you have done your research and found a stock you like and want to buy, I would recommend purchasing a small amount. This way it is now firmly on your radar and you can feel at ease now that you pulled the trigger.
The biggest thing I see that can hold me back from entering into a new position is the valuation. This is a byproduct of 2022 where I was crushed like everyone else. It made me realize the importance of valuation and now I am more hesitant to buy into a company if I think the valuation is out of hand. I want to see a reasonable valuation so that I can expect a solid CAGR from the business going forward.
Personally, I never invest more than 3-5% of my portfolio into a new company until I have owned it through at least one earnings report (except for on rare occasions). This is just how I handle it which is different than how most likely go about buying a new position but it helps me to warm up to a company before I invest a larger sum of capital into it.
One of the most important and valuable things for an investor to learn is the power of no. Ultimately, there are thousands of stocks to choose from and investors inevitably have to say no to most. But once you have found one you feel confident about, I would not hesitate over saving a few percent as Saul has taught. After all, you won’t care if you bought at $52 instead of $48 if the business does well and the share price jumps to $100.
As for exiting a stock, that is a much different beast in my opinion. I have been struggling with this for a long time and resonate with you here. I don’t have any perfect answer for you but this is my current strategy -
I like to group my investments by conviction and ideally, they are positioned accordingly by allocation with my top conviction companies with larger weighting. For me, these are companies like TTD and CRWD (my top two holdings). Because I have owned these for several years and have built up a stronger conviction, I tend to give them a longer leash. If they slip up one quarter and come in below my expectations, I am likely to give them a bit of a hall pass, if you will. I might trim them, but I am very unlikely to dump them and move on. After all, what company can execute perfectly every quarter of its existence? If the long-term thesis is still intact, I will elect to ride it out.
For my lower conviction holdings, I keep these on a tighter leash. For me, these are companies like AEHR, ELF or CELH. I am newer to each of these, and none of which are in my SaaS ‘wheelhouse’ so I don’t have as much confidence in these businesses. If they were to come in with a stinker of an earnings report, I will almost certainly trim but likely exit altogether. Put another way, when in doubt, get out.
Personally, I have been burned holding on to weaker performers far too often as it is admittedly very challenging to know when to give a longer leash versus exiting a position. It is a fine line that I am still coming to terms with.
Then there is the point of selling due to valuation. I have never sold out of a stock only because of the valuation, but this is something I am tinkering with as well. 2023 was the first year I started to seriously trim companies due to the valuation. I trimmed CRWD, DDOG, NET, SNOW and TTD all because I thought the multiple had expanded too far, although there is no exact equation for this.
I don’t ever anticipate completely exiting a stock due to valuation alone. Ultimately, I believe this will hurt you more than holding on to your losers. To really beat the market, you have to hold on to the best businesses and let your winners run. I know it can be hard wanting to take a quick win at times but I find that the best business tend to keep winning and selling due to the share price rising is likely to do more harm than good in the long run.
I am not suggesting this is the perfect strategy for either but it is how I handle buying & selling. And it is important to keep in mind, you will be wrong on occasion. It is impossible to be right every single time you decide to buy, hold, or sell a stock. But what I have learned is that when you have lost confidence in the company, it is generally better to exit than to hold on and hope for a turnaround. Your money is better off somewhere else.
Sorry for the long post - hopefully you can take something of value out of it. In the end, I think it really comes down to conviction - knowing what you own and why you own it. Your outlook will be different from mine and that is what makes it a market. You have to find what works best for you.
Lastly, I would also highly recommend reading Saul’s knowledgebase if you haven’t. I like to revisit it from time to time as there is a countless amount of wisdom in there, much of which addresses the topics above.
Best of luck in 2024 and I hope you achieve all your goals along the way!
Rex