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Investing With Puru Saxena Pt. 2 | Investing City

Check out the Investing City Episode Page & Show Notes

Key Takeaways

  • Although some tech companies may be overvalued, they now have a solid foundation with dependable revenue lines and solid growth plans
  • “I look at the story and business fundamentals first, then I look at the valuation second, and finally I look at the price chart just to see where we are”Puru Saxena
    • Puru’s valuation estimate: “I do a quick calculation in my head of what the future market cap of that business may look like 4-5 years from and if the CAGR is north of 15% then I do further research and possibly invest in the business” 
  • Although the market is efficient most of the time, it isn’t efficient at extremes 
  • “Never before in business history have companies been able to grow their revenue by 60, 70, 80 percent on a sustainable basis year in and year out because of this recurring revenue business model”Puru Saxena
    • “You have to value these companies on their future cash flows, not on their current earnings”
  • “For me, protection of the downside is more important than the upside”Puru Saxena
    • “If you have a 50% drawdown, then you need a 100% return just to break even” 
  • Effective hedging strategies don’t require incredible sophistication in order to be effective
  • “You cannot be a long term bear of humanity; you have to be optimistic” Puru Saxena
    • In the last 100 years alone we went through two world wars, a Great Depression, nuclear standoffs, and the fall of many world powers yet came out stronger 

Intro

  • Puru Saxena (@saxena_puru) is the founder and CEO of the investment firm Puru Saxena Wealth Management
  • Host: Ryan Reeves (@investing_city)

Is There Another Tech Bubble?

  • Back during the Dotcom bubble, a company’s stock price could go up parabolically, and in some cases vertically, upon a press release that stated they were becoming a tech company
    • “I don’t remember anything going up vertically and sustaining their ascent”Puru Saxena
  • When Puru mentioned the astronomical valuations to other financial professionals he was met with “you’re too young to understand” and “this is the future”
    • Puru caught his clients’ attention with his perceptive analysis of the Dotcom bubble 
  • “Although the valuations are pretty stretched, I actually think that this time is slightly different”Puru Saxena
    • Although some may be overvalued, tech companies now have a solid foundation with dependable revenue lines and solid growth plans
  • The main difference is that it’s certain tech stocks riding on euphoria rather than the entire sector 
  • “I think Zoom’s valuation is very very rich, and even Shopify” – Puru Saxena

Technology Stock Valuations

  • “Never before in business history have companies been able to grow their revenue by 60, 70, 80 percent on a sustainable basis year in and year out because of this recurring revenue business model”Puru Saxena
    • Previously, you sold software on a lump sum basis with large spikes in revenue whenever you released a new version until software as a service (SaaS) came along
  • Today’s software companies are highly valued partly because business with recurring revenue models are naturally more valuable than cyclical businesses
  • Though these tech companies can have upwards of 90% profit margins many still remain unprofitable because they are burning through cash trying to acquire new customers
    • This is a viable model because the marketing cost per customer is nothing compared to the lifetime value of a customer in SaaS
    • “You have to value these companies on their future cash flows, not on their current earnings”Puru Saxena

Investing in Tech Companies

  • “I look at the story and business fundamentals first, then I look at the valuation second, and finally I look at the price chart just to see where we are”Puru Saxena
    • Puru’s valuation estimate: “I do a quick calculation in my head of what the future market cap of that business may look like 4-5 years from and if the CAGR is north of 15% then I do further research and possibly invest in the business” 
  • Not enough people place a deserved heavy emphasis on researching a company’s management team
    • The founder remaining as CEO and maintaining a large shareholding is another positive sign
  • Although the market is efficient most of the time, it isn’t efficient at extremes 
    • Even if you have an accurate thesis, stock price action might not reflect that thesis during an extreme time in the market

Hedging

  • “For me, protection of the downside is more important than the upside” – Puru Saxena
    • “If you have a 50% drawdown, then you need a 100% return just to break even” 
  • Simply avoiding the major drawdowns while passively investing in indexes will beat the market by a lot
  • Puru’s hedging strategy is simple and doesn’t require any analysis or macro input
    • He shorts futures and ETFs using a system based on price and price-based technicals like moving averages
    • During particularly harsh draw downs Puru will beta hedge
      • Beta hedging involves buying stocks with offsetting beta (volatility in relation to the market) to your own portfolio
  • Effective hedging strategies don’t require incredible sophistication to be effective
    • That means you can effectively protect your equity portfolio without being bogged down by complicated technical definitions
  • “I sell short the $IWO which is the Russell 2000 Growth ETF because my portfolio is growth-oriented and that’s the closest fit I could find for correlation purposes”Puru Saxena
  • Puru’s hedging picks:
    • IWO for US to hedge against international exposure
    • KWEB and CWEB to hedge against China exposure
    • EWZ to hedge against South American exposure
    • Sell short S&P futures when forced to beta hedge
  • You should always remember that the stock market has a natural bias to go up 

Mindset

  • Puru doesn’t marry his investments; if he realizes he’s wrong he will change course immediately without regret
    • “I don’t have to be right, I just have to make money”Puru Saxena
  • “You have to respect risk. I cannot emphasize this enough.” – Puru Saxena
    • “If you protect your downside, the upside will take care of itself”
  • Although you should learn from your mistakes, you can’t ever get stuck in the past
    • Investing is forward-looking
  • Fear is a more powerful motivator than greed and that’s why bubbles pop faster than they are inflated
  • Puru will never size his investments so large that his future depends on a single company’s future
    • “I don’t normally invest more than 5 or 6 percent in any company from the outset” – Puru Saxena

Investment Advice

  • “You cannot be a long term bear of humanity; you have to be optimistic” Puru Saxena
    • There are guaranteed to be downturns, but we always bounce back
    • In the last 100 years alone we went through two world wars, a Great Depression, nuclear standoffs, and the fall of many world powers yet came out stronger 
  • Focus primarily on dominant, rapidly growing, and transformative companies 
    • Puru wouldn’t bother with diversification and hedging as much when you’re young
  • Anybody who says you cannot beat the market is categorically wrong
    • It’s impossible to beat the market only if the market is perfectly efficient which it isn’t

Stocks That Puru Likes

  • Shopify – online eCommerce platform
  • The Trade Desk – an aggregator for advertising data
  • Adyen – payment processing company
  • Roku – digital streaming company
  • Fastly – cloud computing services provider
  • FaceBook & Google – mature companies with potential still
  • Fintech, eCommerce, and software will continue to rise in the long term
    • This trend was only reinforced by lockdowns mandating remote work
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Notes By TD

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