Interview with Saul Rosenthal: How He Makes a Living off Stocks

I started hearing about Saul Rosenthal through my subscription to Motley Fool Stock Advisor. People started saying if this stock or that stock was a “Saul stock” and I said to myself, “Who’s this Saul guy?”

And then I learned he created his own discussion board at the Motley Fool – Saul’s Investment Discussions – and quickly realized how much we had in common: we both love investing, have market-beating results, and stick to common sense.

I started exchanging emails with him, and asked if we could explore some of his investing philosophy more in-depth. I think if you’re an investor (or aspiring to be one), you’ll enjoy our conversation.

Saul, what’s your background? And why did you start investing?

My background is in medicine, but I almost went into mathematics. I had been investing amateurishly for many years but got serious in 1989, because my wife and I had a baby and I wanted to retire in about seven years (I did). My wife panicked (“You can’t think of retiring in seven years! We have a new baby!”), so I decided I had to get serious about investing.

You should know that my wife and I and my family have been living off what I make in the stock market since I did retire in 1996. That’s 20 years! I have no pension or other source of income except Social Security.

Oftentimes people feel overwhelmed and scared when they start investing. How should they approach it?

Not everybody is cut out for investing. I think you have to be someone who enjoys playing games, and thus realizes that you won’t win all the time, and someone who’s not afraid of numbers. I think you should approach it as if you are learning a new game, and start with a small investment, and while you are starting out you should try to learn everything you can about investing and the market.

My public board at the Motley Fool, Saul’s Investment Discussions, is one good source, but there are many others. If investing is fun for you, you will probably do well. If it’s an unpleasant chore, you should probably just put your money in several index funds.

What’s a good stock for beginners?

That’s a question that I can’t answer. Each stock is different and no stock is “typical.” Probably a good place to start would be several companies whose products you like and use: Amazon, Apple, Facebook, Nike, Google, or some others that you choose.

What would you recommend to someone who wants to invest, but not spend much time on it?

Invest in index funds, or ETF’s that track the market. Investing in individual stocks requires that you enjoy doing it. And that you enjoy doing it enough to spend some time at it.

From 1989-2007 you averaged 32% returns compared to the market’s 12%. What mindset and behaviors are critical to beat the market?

Probably, to start off, not worry about how the market is doing, just worry about how your own portfolio is doing. Your goal has to be to make money to help yourself and your family have financial security and have the things they want in life.

It’s also important to consider information sources as just sources of information, and not the Holy Grail. When all the talking heads are saying “Sell! Sell! Sell!” it almost always turns out to be the bottom of the market.

Remember that in general, the market as a whole goes up and down, but over time, always goes up (at least for the past couple of hundred years or so), and anyone who says that “this time is different” and that stocks will go down forever, should be treated with a great deal of skepticism.

How many stocks should an investor own to be properly diversified?

You can’t really keep track of more than 20 or so stocks, and that’s an absolute outer limit. I greatly prefer a smaller number of stocks, as they are easier to keep track of. During my earlier years of investing, when my portfolio dollar amount was much smaller, I was able to obtain better percentage results because I was able to be concentrated in 5-10 favorite positions.

You need to read all the quarterly reports, and the transcripts of all the quarterly conference calls, which gives you a busy earning season. They often say a lot more on the conference calls than in the earnings press release. Reading the transcripts works much better than listening to recordings as it takes a quarter of the time, and you can skip the forward-looking statements messages, etc. Look at investor presentations too. And get a news-feed from your broker on each of your stocks.

What are the top mistakes you see investors make?

The number one mistake is to be unwilling to admit that you are wrong. Sometimes changing your mind in the face of new evidence, and selling when necessary, is the most important thing you can do. I think that being willing to change my mind in the face of new evidence is one of the most important skills I have. And learning that it’s okay to change your mind when appropriate is one of the most important things I try to teach on my discussion board.

Let me assure you that I sometimes make mistakes getting into, or out of, a company, but that I am willing to change my mind when I see that I was wrong. And that that is very important. I’ve encountered many people who get angry (instead of weighing a contrary opinion) if you suggest that their darling stock might be a bad choice.

A second big error is price anchoring: “I really want to buy this stock, but it’s at $25, and it was at $21 three months ago, so I’ll wait until it gets back down there before I buy,” or “I know that I should sell this stock but I bought at $34 and I want to wait until I can get back to $34 before I sell.” The stock has no memory. It’s at the price it’s at. The question is: what do you want to do with it now.

What investing tools or resources do you recommend?

I really value the Motley Fool. Not because they are always right. Not even close! But the stocks they recommend at least have a full discussion of why they are recommending them, and a discussion board to follow the stock. That’s immensely valuable. Too many other places you get a stock recommendation from, it’s just the name of a company, with little or no discussion or follow-up.

If you could give your 25-year-old self one nugget of investing advice, what would it be?

Start investing seriously now. Even if you put away a small amount each year, if your investing is successful, those years of compounding will really add up.

Lastly, anything I didn’t ask that you’d like readers to know?

Don’t just believe everything I just said. Find out for yourself.


Thanks so much for the great answers Saul!

portrait credit: Steve Brookman

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