Portfolio update, December 1, 2021
Return YTD:
Portfolio: + 14% vs SPY 20%
Return 3yr. CAGR
Portfolio: 44% vs SPY 20%
Return 5 yr. CAGR
Portfolio 28.5% vs SPY 18%
Portfolio holdings:
I have total of 32 stocks down from 45 a couple of months ago. 18 out of 32 stocks were bought before or in 2019, 6 stocks in 2020 and 8 in 2021.
Top 10 holdings:
$AMZN $GOOG $BLNDX $TTD $MELI $OPSSF $TSLA $ADBE $NOW $SE
At present time, my cash holding has risen to 36%.
Commentary:
Closed positions: $NET $CRWD $ZS $ETSY $COUP $APP
I trimmed several positions in early November as it was well known that monetary environment is going to be tighter and highly valued stocks will get re-rating. I had started trimming my positions and was increasing my cash holdings since late September and October.
Recently I came across a paper entitled “The non-random behavior of declining stock prices” by Eric Crittenden. Click here. Eric runs multi-asset mutual fund ($BLNDX). He argues all weather investing is the best way to invest. He aims to achieve this my investing in multiple asset classes including futures, commodities, and by investing globally, on contrary traditional portfolio contains stocks and bonds only. I have sizable position on his mutual fund.
The paper investigated returns of 3000 publicly traded liquid stocks (54000 returns analyzed) between 1999 to 2008 and compared those returns with computer generated random returns. It turns out that huge decline in stock price doesn’t behave as random distribution. It means more stocks declined more than 75% in value than random distribution would have accounted for as shown in graph below:
One conclusion that can be drawn from this research is that when stock price starts declining it can decline wildly. While same can be said about stock going up but I will argue that stock price decline has bad consequences. No one has become poor by appreciating stock prices! After, a stock has declined 75% in value, it will need to rise more than 300% to break even!
The findings of this study were motivating factor for me to institute sell discipline as well as stop loss in my portfolio. I am moving away from just buy and hold strategy. Each stock should be evaluated case by case. I don’t have any stop loss orders or sell orders in the place, but it is more about that framework/mindset that is more valuable to me.
Pondering about macro view of the economy, I believe economy is resilient and Fed taper, and rising interest rates generally mean that the economy is booming and there is no risk of recession in near future. Generally, this economic environment is good for equities. But if history is any guide stocks tend to do poorly after Fed starts tapering although temporarily!
I view the volatility or drawdown as healthy event and it is discipline market imposes on investors that takes care of excesses in the market. While no one can time the market precisely, one can always see the history and estimate the events based on prior probability. Stock market declines 5% or more three times a year, 10% or more once a year, 15% or more once every three years and 20% or more once every six years.
We all have different style of investing, temperament, knowledge, capital and investment objectives. So, it is prudent for us to devise our own investment plan and stick to it. My plan may not suit your lifestyle and yours will not suit mine.
How am I handling this volatility?
In past, I have ridden volatility by doing nothing. But last couple of years, I have been very active during volatility. This is the real test of your portfolio and your own convictions on individual stocks. If you don’t have good conviction on a stock during volatile time, then something went wrong on selection process and sizing of your positions. If you don’t have very good conviction on a stock during drawdown it means that either you didn’t do proper due diligence, or you don’t understand yourself better. Sometimes, we believe that we can handle volatility during bull market and when everything is rising in value. This is also time to readjust your portfolio for incoming economic and monetary environment. I have eliminated the positions whose valuations were stretched and trimmed some positions judiciously to remain in cash. I had been doing that for a couple of months now.
During time like this, I read Bob Farrell’s 10 rules on market which I find very relevant on current events. I will call these rules classics because they will ring true regardless of time. Please go through this one by one. Every point rang true to me. I am sure that it will ring true to you too.
Markets tend to return to the mean over time
Excesses in one direction will lead to an opposite excess in the other direction
There are no new eras — excesses are never permanent
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
The public buys the most at the top and the least at the bottom
Fear and greed are stronger than long-term resolve
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
When all the experts and forecasts agree, something else is going to happen
Bull markets are more fun than bear markets.
Based on above rules, I believe this correction or drawdown could go down for some time. If one looks at NASDAQ composite index more than 70% stocks are below 200 moving averages which tells us that S&P 500 and NASDAQ gains in past few months were due to handful of blue chips. Excess on one direction will lead to excess on the opposite direction but they don’t correct going sideways, with 2020 run up on growth stocks, I wouldn’t be surprised if the selloff continues deeper.
Why did you sell Coup and app? They are not overvalued....
Like the ideas in this article. I feel l too have been guilty of letting runners run, and then once they come back to earth feel guilty l didn't sell when they were running. Will come back and read this again in the morning when I'm a little more awake and can better re-digest the sone of the good information. Also your notes make me realize l need to find a way to keep track of yearly growth. Thanks