Author Topic: Buffett's 50% per year on small sums  (Read 48662 times)

AzCactus

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Re: Buffett's 50% per year on small sums
« Reply #120 on: July 20, 2020, 08:37:28 AM »
https://whalewisdom.com/filer/abdiel-capital-advisors-llc#:~:text=Abdiel%20Capital%20Advisors%20is%20based%20out%20of%20New,and%20a%20top%2010%20holdings%20concentration%20of%20100.0%25.

Looks like mostly software/cloud growth portfolio. Not surprising that they did well, although still kudos for 50%+ annual (if true).
If they were a mutual fund/ETF, I might invest with them. Although likely right now is not a great time with growth names trading in the stratosphere.

Thanks Jurgis.  True that they have owned some of these names for 3+ years.  But some of the names (typically smaller positions are a bit newer including Slack. 


Vish_ram

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Re: Buffett's 50% per year on small sums
« Reply #121 on: July 20, 2020, 10:21:41 AM »
If you don't own growth and just focus on hard core value investing ,then making $ is very hard.

Over several years I gradually shifted from value to growth. I understand the absurdity of this as Buffett says they both are joined at the hip. I started making good $ for me and my clients with this approach (outperforming S&P 500 over several years).

Here are some thumb rules:
1) You need some core expertise in at least one area (like software, telecom, cloud , security etc)
2) Value investors don't lack the ability or knowledge, but lack the imagination to invest in growth. They want to see everything upfront (earnings, cash flow etc) before committing up front. The market is too smart for that. Market prices in potential upside.

Let me illustrate with an example:
Imagine Microsoft O/S that is growing well (30 years ago). If you value MSFT purely on O/S you will see that it is very expensive. The TAM may not appear to be that high. But if the company is at nascent stage of bringing ancillary products like word, excel etc then the TAM dramatically goes up over time. It hasn't happened yet, but will happen over time.

The leverage they've on one product will help them expand to others over time. There are many many examples in other companies as well. Market pro-actively prices it in.

In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.

3) Diversification is the key. This is why concentration will either produce terrible results in general. Value investors take so much pride in taking concentrated portfolio. This is the dumbest approach (you are not Buffett). Buffett should be sent to prison for few months for giving such a bad advice to his countless acolytes and ruining their portfolio.

4) Understanding of macro helps. If you have an approach of raising cash when yield curve inverts and Fed tightens, sell/trim when valuation of growth becomes really insane (like trading at 50-80 times sales) you'll do better.

5) Never get too attached to any growth stocks.

6) In growth investing, EARNINGS ARE FOR LOSERS. Bezos said if any of their subsidiary produces profit, they are not doing a good job.
You need to take an owner view. Say you have an omelette shop. Do you think of producing the max. profit? No ,you work on growth , reinvestment of all capital to grow more. The GAAP losses are sowing the seeds for future growth. the SG&A you incur now is building the foundation for future.
yes, it all depends on if the end state is something that can produce 20% FCF margin. This involves understanding the biz, industry, TAM, competition, and so many factors.

YOu constantly have to filter and refine the criteria for owning. No one understands a company fully (not even the CEO). No One knows the future. It is all calculated risk taking.

Even the greatest investor of all time, Buffett, started showing improved performance when he started paying up for growth.


Jurgis

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Re: Buffett's 50% per year on small sums
« Reply #122 on: July 20, 2020, 11:21:30 AM »
https://whalewisdom.com/filer/abdiel-capital-advisors-llc#:~:text=Abdiel%20Capital%20Advisors%20is%20based%20out%20of%20New,and%20a%20top%2010%20holdings%20concentration%20of%20100.0%25.

Looks like mostly software/cloud growth portfolio. Not surprising that they did well, although still kudos for 50%+ annual (if true).
If they were a mutual fund/ETF, I might invest with them. Although likely right now is not a great time with growth names trading in the stratosphere.

Thanks Jurgis.  True that they have owned some of these names for 3+ years.  But some of the names (typically smaller positions are a bit newer including Slack.

Yes. The newer positions are much more the "mainstream" growth/Motley Fool Rule Breakers/Robinhood/momo. Which is a possible risk, since Abdiel may have less of a variant perception and the prices they are paying are way higher.
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Jurgis

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Re: Buffett's 50% per year on small sums
« Reply #123 on: July 20, 2020, 11:38:42 AM »
@Vish_ram touched one big point that I have raised previously: the difficulty of investing into growth stocks is that the ultimate TAM is tough to know. The ultimate TAM is what makes growth investing work. But it is also one of the big risks.

For successful companies like Google, Apple, Microsoft the ultimate TAM is way bigger than what you expected when you invested. E.g. if you bought Apple for iPod TAM, it was overpriced (likely), but then came iPhone TAM. Same with Microsoft (DOS -> Office -> Windows, etc.) and Google (desktop search -> mobile search -> Android -> Ads, etc.) and Netflix (DVDs -> Streaming -> Content). This might be the argument why SHOP might have (a lot of?) growth left: they could conquer adjacent TAMs that are not visible right now.

OTOH, you don't really know if a company will successfully shift into new TAM. For each Google, Apple, Microsoft, there's a bunch of companies that did not shift/find new TAM and pretty much burned out. Paying high growth price for such companies leads to painful results. This might not be visible now after 10 years of tech bull market, but it might be visible. Let's see how Uber does, for example. Less dramatic examples might be QCOM, INTC. Pretty dead ones might be Fitbit, GoPro, etc.

So it's not that trivial to predict how the TAM will evolve. Selling on sales slowdown might seem attractive, but it would have missed you huge returns on Microsoft, Apple, Netflix, etc. OTOH, it probably would have saved you from the companies that slowed down and then pretty much died.

Although I do diversify, I disagree that diversification is key for growth investing. If you put your money into Google. Or Facebook. Or CRM. Or Netflix. You could have retired many times by now. So really diversification is - like Buffett said - for people who don't know companies in depth.

I also disagree with "Never get too attached to any growth stocks.". Once again Buffett is right: for real growth stocks the time to sell is never. Let me add Akre holdings like AMT to that list. And yeah, AKREX sells very infrequently. And there are other successful growth investors who behave the same.

But hey, people are paying for growth now. Valuations are very high. So perhaps this is not the best time to switch to growth or to hold forever.  8)
« Last Edit: July 20, 2020, 11:41:25 AM by Jurgis »
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Tim Eriksen

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Re: Buffett's 50% per year on small sums
« Reply #124 on: July 20, 2020, 11:50:54 AM »

In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.


Can I quibble here?  Most growth stocks are overvalued since growth will not materialize to level the stock price is implying; however, for the growth stocks that do grow over the long term they are undervalued because they not only meet expectations but likely surpass them.   

Subsequent returns in the short term are often due to changes in expectations not improvements in long term prospects.     

Vish_ram

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Re: Buffett's 50% per year on small sums
« Reply #125 on: July 20, 2020, 12:17:22 PM »
Yes, it depends on how you look at it.

If current revenue is a small fraction of TAM, and if the company is a leader, then it is undervalued on average.
If a companyís entire functionality is just a feature in a competitors integrated suite, then it is trouble.

I stay clear of no moat that doesnít have stickiness. I avoid of Semis even thought many have done well. Iím perfectly ok not owning many of them.

When Tesla traded at 180, I ran several excel models and thought that the present price is justified if they get 30% of world market share in 20 years. I thought it was so far fetched, but boy I was wrong. The way things are going they might end up with 50% share. As Chamath says , IC autos will eventually go bankrupt due to diseconomies of scale. Think of SHLD in action.

LC

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Re: Buffett's 50% per year on small sums
« Reply #126 on: July 20, 2020, 12:27:47 PM »
Quote
2) Value investors don't lack the ability or knowledge, but lack the imagination to invest in growth. They want to see everything upfront (earnings, cash flow etc) before committing up front. The market is too smart for that. Market prices in potential upside.

My main gripe with "textbook" value investing is the lack of understanding of the above, and also the poor ability to differentiate between expected vs. realized return.
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valueinvestor

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Re: Buffett's 50% per year on small sums
« Reply #127 on: July 20, 2020, 12:42:57 PM »

In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.


Can I quibble here?  Most growth stocks are overvalued since growth will not materialize to level the stock price is implying; however, for the growth stocks that do grow over the long term they are undervalued because they not only meet expectations but likely surpass them.   

Subsequent returns in the short term are often due to changes in expectations not improvements in long term prospects.   

+1

Vish_ram

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Re: Buffett's 50% per year on small sums
« Reply #128 on: July 20, 2020, 01:23:42 PM »
Let me restate my comment differently

99% of growth stocks are either extremely undervalued or overvalued; only time reveals the truth.

The general perception is that most growth stocks are overvalued, which is incorrect.


In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.


Can I quibble here?  Most growth stocks are overvalued since growth will not materialize to level the stock price is implying; however, for the growth stocks that do grow over the long term they are undervalued because they not only meet expectations but likely surpass them.   

Subsequent returns in the short term are often due to changes in expectations not improvements in long term prospects.   

Tim Eriksen

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Re: Buffett's 50% per year on small sums
« Reply #129 on: July 20, 2020, 06:58:31 PM »

The general perception is that most growth stocks are overvalued, which is incorrect.


What is the evidence for this?  Historical studies have shown the opposite to be true.  Has that changed recently?