Today’s Investment of the Week is the third installment in our series of occasional interviews with the expert contributors of the Dick Davis Digests. Today’s interviewee is Nate Pile, editor of Nate’s Notes, who shares his thoughts on investing and more below.
Chloe Lutts: When did you found Nate’s Notes? What made you want to publish an investing newsletter?
Nate Pile: I started Nate’s Notes in February 1995.
While I was a student at U.C. Berkeley in the late 1980s, I was lucky enough to meet - and then work for - Jim McCamant, Founder and now Editor-at-Large of The Medical Technology Stock Letter. I worked at MTSL as an assistant for two-and-a-half years while I finished up my degree in Mathematics. When I graduated, I was named associate editor of The AgBiotech Stock Letter, one of MTSL’s sister publications that was following companies using the relatively new tools of biotechnology in applications outside of medicine.
I worked for McCamant for another two years or so, and then did a short stint working in the corporate finance department of a small investment-banking firm in San Francisco.
At that point in history, a new piece of software called “a browser” was rapidly turning “the Internet” into something that was usable by techies AND non-techies alike.
Just as quickly as I was figuring out that I didn’t really like corporate finance, I realized that I loved the idea of starting my own newsletter in order to share my ideas about the stock market with the rapidly growing population of investors who were doing their own research and investing online ... rather than relying on traditional brokerage firms for information. Nate’s Notes was born a few months later.
CL: How has your newsletter changed since then? What has stayed the same?
NP: When I started Nate’s Notes, I didn’t want to compete with my old boss by starting a newsletter focused on biotech, so I decided that I would initially try to make a name for myself as a “micro-cap” analyst.
A number of seasoned investors warned me that this would be a tough row to hoe (mainly due to the patience required while waiting for a micro-cap company to grow large enough to finally make it onto the radar screen of even a single fund manager)... and they were right!
After a couple of years had gone by, I came to accept the fact that I might be better off if I allowed myself to look at companies across the entire “market capitalization spectrum” rather than just the smallest of the small, and once I started to look for companies that fit my investment criteria regardless of their market cap, the newsletter’s performance started to improve dramatically.
Another change that I made during the first few years of the newsletter that is still with me today is a greater willingness to “listen to the tape.”
Like many individuals, I prided myself on my “strong contrarian streak,” and given that Nate’s Notes has always taken a long-term view of investing, it seemed logical to me in the early days that if I loved a stock at $20 and it then slipped to $15, I ought to like it a whole lot more (and, in fact, this line of reasoning still seems logical to me today!).
However, after “riding stocks down” far more often than I care to remember—even after noting to myself “oh boy, here we go again” when experience was telling me an extended slide was about to get underway—it finally dawned on me that rather than buy more shares every time a stock dipped, I would be better off letting it slide for as long as the market would allow it to slide... and to not start buying again until the trend had finally run out of steam and reversed itself.
By making this change in my approach to investing, not only did the newsletter’s returns improve even further (because we stopped losing as much during downturns in the market), but my confidence in myself also started to grow to the point that I knew publishing the newsletter was going to be a sustainable business after all.
On the flip side, something that has not changed about the newsletter over the past 17 years is the fact that the stock recommendations (and subsequent decisions to scale in or out of positions) are always based on a very long-term view of the markets.
In fact, though it is now possible to disseminate information to subscribers several times a day if one chooses, Nate’s Notes intentionally still only makes trades once a month in order to help subscribers stay focused on the long term (however, it should be noted that exceptions have been made to this rule three or four times over the past 17 years in response to “extreme circumstances” that I felt called for immediate action on the part of subscribers).
CL: Can you give us a brief explanation of the newsletter’s investing system or philosophy? How do you pick the stocks recommended in the newsletter?
NP: Because I started in the electrical engineering program at Cal before switching my major to mathematics—and I also spent a great deal of time learning about the biotech sector in the early years of my career—many of my recommendations tend to come from the high-tech and biotech sectors; however, to help make sure that I do provide a bit of diversification for my subscribers, I always keep my eyes open for ideas from other industries as well.
The first thing I look for in a company that I may end up recommending is that it must have a very compelling long-term growth story. There needs to be something special about the company’s products and/or services that suggests it will be able to both fend off competition in the marketplace and continue to grow market share on a steady basis for several years.
In fact, I always ask myself a question I believe I first saw posed several years ago in a book on Warren Buffet’s investment philosophy, namely “if we bought the stock today and then the stock market closed for five years and we could not trade the stock again until the market re-opened, would we still be happy with our purchase?” If the answer is “yes,” then there is a chance the stock will make it into the newsletter.
Once the stock has cleared this “compelling story” hurdle, the next thing I usually ask myself is “what are the chances of Wall Street becoming enamored of the story?”
Based on my experience following micro-cap stocks when I first started the newsletter, I finally came to accept that it’s the large institutions (mutual funds, pension funds, etc.) that ultimately move stocks, not retail investors... and thus I tend to shy away from stocks that may prove to be unattractive to institutional investors (due to unresolved legal disputes, a “Hail Mary” business, plan, etc.), even if the story is a fairly compelling one “assuming it all works out.”
Finally, once a stock has made it through those two screens, I spend a fair amount of time looking at a stock’s trading history for the simple reason that (again) one of the biggest lessons I have learned over the years is that it rarely (if ever!) makes sense to initiate a position in a stock that is clearly in a downtrend—I would much rather pay a bit more for a stock when it is heading the right direction than buy it “at the low... in hopes it doesn’t go lower.”
CL: What’s one of your favorite stocks to buy today?
NP: Speaking of companies that meet all of the criteria mentioned above, I’d have to say that Cubist Pharmaceuticals (CBST) is currently one of my favorite stocks in the newsletter. When I first recommended the stock in August 1999, the company was focused primarily on developing new antibiotics to treat new strains of drug-resistant bacteria.
Cubist’s lead product in this category (Cubicin) has been on the market for several years now, though over the years, the company has also licensed-in and/or now co-promotes a number of other drugs as part of its broadened goal of commercializing products that address unmet needs in very specific acute care environments (most of which are still related to the “treatment of infection” category).
Not only is the company firing on all cylinders as an organization, the stock has also been acting well since breaking out of a multi-year trading range awhile back (and it is currently in exactly the sort of slow-but-steady uptrend that I like to see when adding to existing positions). CBST is currently considered a strong buy under $38 and a buy under $44 in the newsletter.
CL: What’s one important piece of advice you think more investors need to hear?
NP: In a nutshell, investing is a marathon, not a sprint.
In this day and age of “constant connectivity” (and incredibly low commissions for online trading), it can be very tempting to try to trade every zig and zag that a stock makes. However, experience has taught me that it is far easier (and quite a bit less stressful) to focus instead on finding companies with great long-term potential, establishing core positions in them, and then patiently adding to (or subtracting from) those positions as time goes by based on how well the company is executing on its business plan.
Though not all of my ideas have worked out as well as Celgene (recommended in 1995) and Apple (1998) for my subscribers, a great deal of wealth can still be made owning stocks that “only” go up four- or five-fold over their lifetimes in a portfolio - the trick, of course, is finding them... and then having the confidence and conviction to add more (rather than take profits) when they finally start to move!
CL: What do you see as the biggest challenge in the market right now?
NP: One of the biggest uncertainties I see for the market is the “wait and see” period that is still ahead of us with regards to the whole debt crisis/money printing “experiment” that is underway around the globe.
Unlike science experiments which can be done over and over again “from scratch,” there is only one “global economy” that can be tinkered with... and while the mathematician in me has a great deal of respect for the modeling of complex systems that can be done using today’s technology, I find it hard to believe that humanity will act anywhere near as rationally as predicted when push comes to shove in the real world.
As it stands, as long as prices are able to rise or fall in a fairly stable manner, we ought to be all right while we work through things.
However, whether it is inflation or deflation that ends up gaining the upper hand first, I believe history suggests that conditions are ripe for “the madness of crowds” to set in and cause the move to become much more extreme than predicted by the models once it finally gets underway (which, of course, has the potential to temporarily derail any stock market rallies that may be going on when “the panic” hits).
CL: Finally, what else do you like to do besides investing?
NP: I enjoy gardening (vegetable and cacti/succulents), and I also maintain a 120 gallon saltwater reef tank - I became aware of the hobby around eight years ago and have been fascinated with growing coral ever since! For eight of the 17 years I have been publishing Nate’s Notes, I also worked as a junior high math teacher... and though I am no longer teaching, I enjoyed the experience very much and currently volunteer four to six hours per week in my daughters’ kindergarten and first grade classrooms.
CL: Thanks Nate!
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
