Top Buys for a Long-Term, Sleep-Well Strategy
04/17/2015 10:00 am EST
Nate Pile is a true long-term investor, buying stocks with a three- to five-year time horizon and often holding positions for decades. Here, the editor of Nate’s Notes explains his strategy and highlights a trio of favorites, a video game maker, a media and theme park giant, and a closed-end biotech sector fund.
Steven Halpern: Our guest today is Nate Pile, editor of the top-rated newsletter, Nate’s Notes. How are you doing today?
Nate Pile: Fine, thanks.
Steven Halpern: You’re well known for a strategy that avoids the noise on Wall Street. Instead, you focus on long-term trends and often hold stocks for many years. How important is this approach to successful investing?
Nate Pile: Well, it’s helped the newsletter generate the sorts of returns it has because we’ve looked for great companies. When we get into a company, we always have at least a three- to five-year time horizon and some of our stocks have been in the newsletter for close to 20 years now, but it helps to, sort of, tune out the noise. We don’t try to trade every zig and zag that happens in the market.
We intentionally make trades just once a month when each issue comes out, so 12 times a year we rebalance our portfolio a bit. Having followed…I got my start in following the biotech sector in the late 80s and early 90s, so I’ve been doing this for a while.
The longer you do it, the more you realize that uptrends go on for a while and then they change and become downtrends for a while, and the most important thing to do is to be on the right side of that trend and then ride it for as long as you possibly can, again, rather than trying to trade every little zig and zag a stock makes over the course of a five-, or six-, or eight-year bull market for a sector.
Steven Halpern: In your latest issue, you emphasize two seemingly simple but very important and hard to follow mantras. Specifically, the endurance of trends—as you just alluded to—and the importance of focusing on what the market is doing, rather than wondering what the market might do. Can you expand on that?
Nate Pile: Yeah, the first one is—the mantra that we use—is that trends often go on for longer than seems reasonable. Especially, getting my start in biotech, that’s a sector that’s purely driven by emotion, at least for development stage companies, because there’s nothing really to hang your hat on.
There’s no earnings; you’re hoping a drug is going to make it from a test tube to the market and so that sector tends to go from undervalued to overvalued and back again. There’s only a little brief period in each direction when stocks are what a value investor would call fairly valued.
It sits from undervalued to overvalued. The thing that’s really struck me, as I have followed the sector longer and longer, is that once you pass that fairly valued point, they can keep going to overvalued, to extremely overvalued, to really extremely overvalued.
If you always sold once the stock became more than 10% “overvalued,” you’d miss those other doubles, triples, or even 10-timers for some of the more speculative stocks that really go through the roof. What we look for is—once a trend’s underway—we try to position ourselves and then stay with it until we have clear evidence that it’s come to an end.
That sort of leads into the second mantra there, which is, yes, the stock might be up—it might be appearing to be extensive—but unless there’s evidence that the trend is over, there’s no reason to sell the stock because you’re worried that it might go down tomorrow.
History shows you’re better off holding that position and just letting the trend continue. In fact, a lot of our big winners, we wouldn’t be in them if we sold them every time they started to seem a little bit expensive and we were worried that this might be the top.
I’d rather ride a stock up to the top, and actually, start down the backside on that downtrend. It’s fine if we miss the top by 10%, or even 15%, if in the previous six years we made 800% on the stock. That’s kind of what it means, rather than worrying that the trend’s over and selling today, we stick with it because that’s the trend that’s in place and there’s no evidence that it’s changed yet.
Steven Halpern: You also highlight a market maxim that would certainly save investors an awful lot of anxiety. You say, sell down to the sleeping point. Could you explain that?
Nate Pile: Yeah, that’s one of the ones that I really like to share with subscribers. One of the most important things to making money in the stock market is to have peace of mind when you’re making a decision.
For example, we identify ahead of time the numbers we’re looking for in some of the major industries I look at to gauge the overall trend, and so, if we have the Dow down 400 points today, we just go check that chart and see if we’ve crossed that line yet or not. We don’t try to bring any emotion into it. It’s really important to have that peace of mind.
When I ask subscribers that are anxious, that, gosh, the stock seems really overvalued and why aren’t we selling it? I encourage them to, as the mantra says, sell down to the sleeping point.
Sell enough that you can go to bed at night and fall asleep without being too anxious, but hold onto as much of the rest of your position as you can. It’s just sort of a reminder for folks that you don’t have to be fully invested if it’s making you nervous, but don’t go down below that certain level where…just sell enough that you can go to bed at night.
Steven Halpern: Let’s turn to some of your current stock ideas. One of your column favorites is Electronic Arts (EA).
Nate Pile: The story there is they’re one of the—we’ve had this stock in the newsletter for many years now—stocks that’s been through a lot of ups and downs. Currently, we’ve got a great uptrend underway.
They’re one of the leading companies that makes video games across a number of different platforms and genres, from just playing cards on your laptop—or on your tablet or something—to full-on multiplayer games you play over the Internet, shoot ‘em up games, adventure games, sports games, you name it, they’re involved in it.
As one of—what I consider to be best-of-breed companies in the industry—they’ve survived to this whole transition that’s taken place over the last four, or five, or six years, away from just desktops and consoles into the mobile gaming arena.
After a lot of transition and false starts, the company seems to be on track, and as you can see in the stock price, Wall Street’s starting to say, “Hey, I think that they are not just survivors, but are going to probably be big winners in this industry.”
Steven Halpern: Now, you’re also a long-term fan of Disney (DIS). What are your thoughts here?
Nate Pile: Yeah, it’s in the newsletter for a couple of reasons. One, it provides some diversification for my subscribers away from the biotech and high tech stocks that tend to dominate a lot of my recommendations. Those stocks wind up in there just because that’s where my background is.
Disney represents a nice break from that arena. They’re in TV, they’re in theme parks, they’re in sports, just, across the board, a well diversified and well run company.
We actually got into it because we owned Pixar way back when and Disney bought Pixar for stock; Steve Jobs was one of the largest shareholders, in fact, the largest shareholder of Pixar.
If he was willing to take Disney stock at that point in time, it seemed like a good person’s coattails to be on the back of, so we got into Disney and it’s been a great ride for us ever since. It’s a really well run company in a lot of interesting areas.
Steven Halpern: Now, we also have to touch on the biotech area, because that is your longstanding specialty. One of your favorite investments in that area is TeklaLife Sciences (HQL). Could you share your thoughts on that?
Nate Pile: Yeah, that’s something that I added to the newsletter quite a while ago. It’s actually a closed-end fund that trades on the New York Stock Exchange so it’s kind of like owning a mutual fund. Your readers, or listeners, can look into closed-end funds. They’re like mutual funds, but they trade all day long.
We got into it because it offers a one-stop shop to be invested in roughly between 30 and 40 publicly traded biotech companies as well as some private companies. Those numbers do change over time, but, I think, last time I looked, that’s what they were invested in.
When I first recommended it, I discovered it because three of its largest holdings happen to be three of the largest holdings I had in my newsletter. I said, “Hey, this guy thinks like I do, might be worth pursuing.”
Most importantly, it’s in there for some of my subscribers who know they want to be in biotech, but they really don’t like the volatility of owning individual stocks—and the risks involved with some of those—so this is a way to sort of be invested in the whole sector with a single purchase.
What’s especially intriguing about it is the fund has a policy of paying out 2% of its net assets every quarter, so you’re collecting a nice—it’s not a true dividend— but you’re getting a payout every quarter. It works out to a little over 9% on an annual basis, I think.
What’s especially nice is that you can take that dividend in new stock, so over time, we’ve established a fairly large position in the fund by taking our dividend in stock and it’s just worked out really well as a way to participate in the sector.
You can still get more bang for your buck owning individual biotech stocks, but it’s a great way to get some diversification without a lot of the volatility.
Steven Halpern: Again, our guest is Nate Pile, editor of Nate’s Notes. I really appreciate you taking the time today.
Nate Pile: Yeah, thanks for having me. Always fun to share my ideas with your readers.
Steven Halpern: Thank you.