Thoughts on our investing results

Investment Analysis Clubs Saul’s Investing Discussions
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Thoughts on our investing results.

At first I thought that this is ridiculous. At Friday’s close I was up 59.2% year-to-date, which brought my totals since the beginning of 2017 to just over a quintuple. (1.842 x 1.714 x 1.592 = 5.03) That’s up 403% in a market that has been unremarkable at all, maybe rising a little less than normal when you consider that it was down 8.5% last year.

I also know that there are quite a few others on the board doing even better than I am. (For example, Brittlerock just posted that he was up 70% year-to-date.)

So what the heck is going on? Well the truth is that what we are doing here is almost unique! No mutual fund, no ETF, no market averages, no stock advisory service, can do anything approaching what we have done! Why? The cards are stacked against them. What do I mean?

We have been able to select our 10 or 12 best picks. They may not be the same for each of us. They may change over time. But they are our choices for the BEST picks. We can pick them all SaaS companies if we please, or a wide variety of industries. But we can have a concentrated portfolio of ten or a dozen best picks. I think that that is a huge advantage.

A mutual fund has strict rules. They usually have to have 50 or more stocks in their portfolio. Often the areas they can invest in are severely limited, as is their apportioning of their areas of investment, and their requirements for diversity. Their investors pull money out at the bottoms and add at the tops, so the fund has to sell at the bottom and buy at the top. The fund is usually in a large fund family, so the fund manager also has to report to his bosses and will have to explain and justify any out-of-the-ordinary stock purchases. He could never have an entire portfolio of out-of-the-ordinary stocks, as many of us have. He doesn’t have a chance.

An ETF has to buy a fully representative assortment of the category it’s tracking. It means a lot of companies. It means an assortment of very good companies, medium examples of the category, and also companies in the category who have the poorest results. An ETF doesn’t have a chance, either.

A stock advisory service, such as the excellent one that sponsors our board, doesn’t have a chance to approach our results either, even though it is run by very bright, capable people. It has to come out with several recommendations every month. That accumulates to hundreds of active recommendations after a few years. You just can’t select a hundred best picks that are going to do anywhere near as well as your ten top picks. That’s just reality.

Then you have advisory services with a model portfolio. But they have to deal with unhappy subscribers if the portfolio goes down temporarily. They have to take into account that their subscribers will be a mixed bag, and most won’t like to have changes in the portfolio. They have to deal with “Why did you buy this?” and “Why did you sell that?” They can’t really have an entire portfolio of “over-valued” stocks.

The mutual funds, ETF’s, and advisory services of the world are aiming to equal or the S&P, or beat it by a few percent per year. They aren’t playing in the same ballpark we are playing in.

We, on the other hand, have lucked into, or made a good choice into, a family of companies that are growing incredibly rapidly (40% to 100% per year, for most of them), because they are providing the picks-and-shovels software for all the enterprises that are all finally trying to get into the cloud and into using big data, and all at the same time. Our companies also have most of their revenue recurring, on subscription, and more than recurring because of their land and expand models, and 120% or more dollar based retention rates. And all that gives them very high gross margins. And they are plowing all of their gross margin profit into S&M towards signing up all the customers they can because they will be recurring revenue practically forever.

For more on this please see:
https://discussion.fool.com/why-my-investing-criteria-have-chang…

https://discussion.fool.com/oh-this-time-it8217s-different-33123…

https://discussion.fool.com/my-explanation-of-our-valuation-expa…

And 500% later we still have people saying they never could buy our companies because they are over-valued, or not making a profit, or whatever, showing that they haven’t read or understood the concepts within the above posts.

Best,

Saul

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Saul,
Thanks for the citation, but I don’t accept a lot of credit for it. My performance is mostly a factor of following you along with the many very insightful and brilliant investors that regularly post on this board. And, there’s probably an element of just plain, old fashioned luck involved. All of my investments (save one pot stock and two other tiny positions) came from this board. My allocations are somewhat arbitrary, mostly based on my subjective confidence evaluation and a 15% comfort level, which I sometimes ignore. But, what can’t be attributed to luck in my estimation is the fact that I was up 80% in 2017, 40% last year and apx 70% so far this year. That just seems too consistent for luck to be a major factor. And of course, every expert will tell you it’s impossible without extensive risks introduced by leverage. I rarely use options, and I always keep my portfolio percentage very small.

One thing I would add to your observations about mutual funds. I’m reasonably certain that there is a lot of pressure on fund managers to see to it that their individual performance hits very close to the median for all the funds in the family. Any one manager that consistently comes in with results far above the median pushes the average up, thereby putting more performance demands on his colleagues. It is my belief that peer pressure is a deterrent to outstanding performance. As a fund manager, you go to work with the same folks every day. What would motivate you to make them all look bad when average performance is the expectation. An occasional surprise is greeted with high fives. Consistently and significantly bettering your colleagues is likely met with ostracization (is that a word?).

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Good points. Institutions are whales, and these companies are now small fish (annual sales around $400 million).
Morningstar lists ownership. For example, for SMAR (market cap $5 billion, 12m sales $200 million):

Name (Institutional Ownership of SMAR)    % Total Shares  % Total Assets
INSIGHT HOLDINGS GROUP, LLC                   14.44           23.66
Capital Research and Management Company        4.08            0.38
Capital World Investors                        3.36            0.04
Whale Rock Capital Management LLC              2.53            2.13
Vanguard Group Inc                             1.99             0
Point72 Asset Management, L.P.                 1.69            0.33
Alkeon Capital Management, LLC                 1.68            0.29
Summit Partners L P                            1.33            5.46
12 West Capital Management LP                  1.28            4.51
FMR Inc                                        1.14            0.01
Fidelity Management and Research Company       1.12            0.01
D. E. Shaw & Co LP                             1.04            0.06
Brighthouse Investment Advisers, LLC           1.03            3.54
CI Investments Inc                             1.02            0.25
T. Rowe Price Associates, Inc.                 0.88            0.01
Fidelity Management & Research Company         0.87            0.25
J.P. Morgan Investment Management, Inc.        0.81            2.77
BlackRock Inc                                  0.76             0
Capital Research & Mgmt Co - Division 3        0.72            0.01
Vanguard Investments Australia Ltd             0.71             0
Total (for Top 20)                            42.47

INSIGHT HOLDINGS GROUP, LLC appears to be a private software company.

Whale Rock Capital Management LLC stats are on https://whalewisdom.com/dashboard2/search/fund_performance_s…
AUM $6 billion, 3-yr CAGR 37%, 42 stocks.

The mutual fund American Funds SMALLCAP World A (ticker SMCWX) owns 3.68% of SMAR. But AUM are $44 billion, and so SMAR is only 0.37% of SMCWX.

You are taking on the risk of some small fish, and getting the reward from picking the correct ones. Congrats.

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I am a subscriber to several of the premium tool services, ones I paid thousands of dollars for. And I’m up only about 28% from one year ago. I only found your amazing board a few months ago and now read nearly every post. I am absolutely blown away by your analysis and performance and am so grateful to have found your board.
Now I’m in the position of trying to sell companies of fool rec’s And concentrate my portfolio, which has been very hard for me.
My largest holdings have been MDB and TTD because I’ve had the highest conviction in them all year but with the valuations we have now reached I just can’t decide if I should sell 10-20 of my smaller holdings I own, and where to reinvest at the current prices of this boards companies!

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Premium Fool not Tool!
Sorry!

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Saul:

If by “lucked into” you imply what the famous philosopher Seneca once surmised: “Luck is what happens when preparation meets opportunity” after you and some of us have reviewed and analyzed hundreds of earnings reports, toiled countless hours to assemble massive spreadsheets to dissect every part of a companies quarterly metrics and financials, paired them up against other fast growing companies, read several hours a day for many years, and refined our process for constant improvement, and don’t forget had the fortitude and conviction to take action and invest in the opportunity that was presented to us…well, then I agree with you…and I feel lucky!

I now will apologize for being in flagrant violation of one of the rules of your board, but I just want to take a moment to thank you again for sharing the thoughts, ideas, strategies and tactics that you have amassed over so many years of investing. Some have reinforced my own education, experience and learning; and some are fresh & inspiring and allow me to continue to accelerate my lifelong quest for learning.

Your desire to continually strive to learn new and better methods as you get older, to adjust your process and structure as needed, and be open to new ideas is both admirable and inspirational;

And I will reiterate that I have great respect for your continued patience and humility in the face of many who participate on this board and unfortunately sometimes don’t follow the OT rules…(perhaps including me posting this thank you publicly… but I just don’t feel everyone truly appreciates how much time and dedication you put into making this “conversation” possible). Please forgive the transgression…and Thank you, Saul. -Victor

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