mardi 4 août 2020

Another approach

Yesterday, I had an interesting discussion with Be Smart Rich, the nice chinese guy from Toronto. 

First, I have to say that, since the beginning of the year, my portfolio had a performance of 12% VS 1% for the S&P500 and -5% for the TSX-S&P500. So, I beat these indexes by 11% and 17%, which is very good in my opinion. It's not just skill and intelligence, it's also a question of chance. 

But anyway, I'm going somewhere else...

Be Smart Rich told me that his performance so far in 2020 has been close to 60%. Yes, sixty percent. That's fucking crazy. How come someone gets such good returns?

Well, I don't know the whole story, but he seems very interested by Livongo Health, Sea Limited and Mercadolibre. These three companies surged by 430%, 230% and 105% since the beginning of the year. 

Plus, if you use margin, you can magnify your returns substantially. 

It looks easy and simple, but who's really comfortable to buy stocks that grow their revenues a lot but for which EPS are very low or even negative? Actually, these three stocks have negative EPS. Investors bet that the revenues will continue to grow a lot and, eventually, the break-even will be reached (or margins will be increased). 

It's contrary to all I've learned. And, you can't value your portofolio with that kind of stocks. There's a lot of unpredictability, may it be positive or negative. 

But it works. And it works much better than what I do. 

4 commentaires:

  1. I have asked BSR a question about his style back in May. He has replied that he will make a more macro post explaining his approach in the future. I think we are all looking forward to his next post. I also included a link to Mawer podcast on Shopify, where they try to justify its valuation and why they now view it as GARP.

    I do not fully understand the growth at any price justification for many SAAS companies. It smells too much like the dot com or valeant hype. I lost 1/2 of my RRSP thanks to concordia and valeant (I'm still down 71% on VRX) so I am trying to be much more careful about such too-good-to-be-true adjusted metrics stories. They work like charm until they fall off of the cliff, when everyone suddenly sobers up. I would feel violated by being continuously diluted and having my long-term interest of being returned my capital being completely ignored for decades. Although I drink the total return coolaid, I still see value in the economic rent that a business could provide to its owner.

    Terry Smith of Fundsmith has stated in multiple interviews that he does not like Amazon and similar stories where they are selling dollar bills for 90 cents (although they do hold Mercadolibre in FEET)... Mark Leonard of Constellation Software has also been making cautionary comments about sky-high valuation of many SAAS and private equity software companies for years. The endless cash these companies can burn through for years almost question how they could ever make profit to retun the capital to shareholder, especially given their over-exagerrated TAM claims and other irrational market participants who might burn cash in perpetuity.

    Having said that, my performance from Jan to Jun 2020 was abysmal -17% (vs -7% TSX) so I should shut up and learn rather than commenting.

    The high growth companies also bring up interesting question about ROE and ROIC. Since high ROE will occur in old, dying businesses (like yellowpages) which are cannibalizing and just milking already amortized assets. New, growing businesses will keep investing too much, either making the invested capital too big (for companies with physical factories etc.) or making income artificially too small (for intangible companies which expense all software writing etc as an immediate expense rather than capital good/investment). The basic high ROE screens might make us miss true gems while tempting us into rotting turnips. This highlights that investing is more of an art rather than just pure number crunching. It would be helpful if companies would disclose their hurdle rates and actual performance of mature business and new emerging projects so they could be better compared/evaluated.

    행운을 빌어 모두 감사합니다

  2. Some are doing very well because their concentration in the smaller tech stocks. SQ, CRWD, ZM, TDOC, DDOG, DOCU, TWLO and a whole bunch of others. It helps if you're American too instead of Canadian because you won't have a bias for Canadian stocks which are mostly income stocks. Plus you're more likely to be made aware of American names if you live in America. Of course, I'm saying this because too much of my money is in Canadian bank stocks like a novice Canadian investor. "But you get a dividend"...Blah! Fortunately, a lot of my money is also in American tech stocks.

  3. Gold and Silver are the most performing assets right now and you didnt invest a dime in either Etf (GLd, Gdx or Slv), big med tier or small producer. Do you think it is a mistake ? Don't you think the QE that the Fed is doing won't have any long term consequences on the money value vs Gold or Silver ?
    I am convinced by your strategy and think you are one of the smartest blog i had the chance to read. But also I feel you have missed the train there.
    80% of my portfolio is now either in Gold or Silver. After stock rebouded in April i have made the switch to precious metals seeing the bce, fed and big banks printing like crazy mtfucker...
    You disappointed me and maybe i wont read your blog anymore.
    Or maybe i will just because you are crazy smart money fucker