GauchoChris portfolio update 4/30/2020

In addition to providing a portfolio update, this write-up will also expand on what is happening in the world as I see it. There have been an unprecedented number of facts to absorb. For me, these facts are forming a mosaic that, at least for me, is revealing a clearer picture which is informing my actions. I’ll start with the easy stuff.

GC PORTFOLIO PERFORMANCE

Here are the YTD performance numbers at the end of each month:


**2020  GC       S&P500(TR)    Delta**
Jan   25.7%      0.0%        25.8%
Feb   27.7%     -8.2%        35.9%
Mar   -2.9%    -19.6%        16.7%
Apr   16.2%     -9.3%        25.5%

Clearly, the outperformance of the portfolio has continued into 2020. Below are the outperformance numbers for the previous years. Note: I use ^SP500TR on YahooFinance! because it includes S&P500 dividends in the returns which is a fairer comparison since the S&P500 pays some dividends while my portfolio does not.


      **GC        S&P500(TR)  Delta**
2020: +16.2%     -9.3%      25.5%  <<< 4 months through 4/30/20
2019: +41.8%    +31.5%      10.4%
2018: +55.9%     -5.2%      61.0%
2017: +61.6%    +21.8%      39.8%

I am, of course, very happy with these results, and, when compounded, these results are really quite amazing. The catalyst for this kind of multi-year outperformance has been me meeting Saul on this discussion board a little more than 6 years ago. Thanks Saul!

Here are some of the notable Portfolio highs and lows:


09/04/18   +111.9% YTD  2018 peak and ATH
12/24/18   +32.6% YTD   drop of 37% in 111 days
02/27/19   recovery to Sept18 peak (176 days peak to recovery; 65 days bottom to recovery)
07/26/19   +100.0% YTD  2019 peak and ATH
10/22/19   +24.8% YTD  drop of 37% in 88 days
02/18/20   +40.7% YTD (within 0.3% of the previous peak; 119 days from bottom to __*almost*__ recovery)
03/16/20   -22.8% YTD  drop of 45.2% in 27 days!!!

Now the portfolio has had three 37% or more drops in less than 2 years. Hypergrowth stocks sell off even when the businesses keep performing well, and when your entire portfolio is made of hypergrowth SaaS stocks, they can move up or down together. For those who can’t stomach these kinds of swings, a portfolio of only high growth equities is not for them. On the flip side, there are also huge rallies. I believe that investments that have extraordinary returns also have big drops on occasion. Net net I think it’s more profitable to accept the big downs that come with the big ups as the overall long run returns will likely be better.

I now track my portfolio on a weekly basis and have been doing so since early 2018. I find it to be helpful to have the weekly portfolio results over a long period. It gives me a good perspective; it makes the downs less scary; it can be helpful for some trading activities and for helping me decide when I want to add or reduce leverage. Here are the weekly YTD returns starting for the last portfolio peak on July 26, 2019:


                **YTD return**
07/26/19	 100.0%  <<< LAST PORTFOLIO ALL-TIME HIGH (ATH)
08/02/19	  85.6%
08/09/19	  87.3%
08/16/19	  81.4%
08/23/19	  78.5%
08/30/19	  83.3%
09/06/19	  73.3%
09/13/19	  46.3%
09/20/19	  52.8%
09/27/19	  37.6%
10/04/19	  47.5%
10/11/19	  49.0%
10/18/19	  30.2%  <<< TROUGH ON 10/22/19 at +24.8% YTD
10/25/19	  34.2%
11/01/19	  35.2%
11/08/19	  30.0%
11/15/19	  40.4%
11/22/19	  49.0%
11/29/19	  58.7%
12/06/19	  45.9%
12/13/19	  37.2%
12/20/19	  42.1%
12/27/19	  44.0%
01/03/20	   4.5%  <<< NEW YEAR (YTD percentage reset)
01/10/20	  14.8%
01/17/20	  19.6%
01/24/20	  22.1%
01/31/20	  25.7%
02/07/20	  28.1%
02/14/20	  39.8%  <<< ALMOST REATTAINED ATH at +40.7% YTD ON 2/18/20
02/21/20	  29.1%
02/28/20	  27.7%
03/06/20	  21.9%
03/13/20	  -4.8%
03/20/20	  -6.8%  <<< TROUGH ON 3/16/20 AT -22.8% YTD
03/27/20	  -2.4%
04/03/20	 -12.5%
04/10/20	   3.1%
04/17/20	  18.7%
04/24/20	  20.5%

PORTFOLIO COMPOSITION AND ALLOCATIONS


	**4/30**	4/3	3/31
AYX	**34.6%**	37.9%	38.3%
CRWD	**20.4%**	13.5%	 9.1%
OKTA	**14.9%**	15.4%	14.4%
DDOG	**14.2%**	13.4%	11.8%
ZM	**10.2%**	13.5%	 7.3%
NET	 **3.4%**	---	 ---
ROKU	 **0.3%**	 0.2%	 ---
TEAM	 **---**	---	 ---
PAYC	 **---**	---	 5.3%
SMAR	 **---**	 2.9%	 3.5%
TTD	 **---**	---	 4.3%
GH	 **---**	 1.2%	 1.2%
cash	 **6.3%**	 6.0%	 8.1%

The above table shows the portfolio allocations at the end of April, on April 3rd (the day I consolidated my positions significantly), and March 31st. My previous updates explain the changes that I made in the second half of March and on April 3rd. Explanations can be found in those posts for which I provide links here:

3/31/20 update: https://discussion.fool.com/gauchochris-portfolio-update-3312020…

4/3/20 update: https://discussion.fool.com/so-these-are-my-core-5-positions-wit…

Rationale for further portfolio consolidation: https://discussion.fool.com/i39ve-done-some-modeling-based-on-th…

My AYX and CRWD positions include some significant options positions that require further detail to reflect the true exposure and upside in these positions. The options are all long call options that expire in January 2022. For AYX the strike prices are $90 and $100, and for CRWD the strike prices are $50 and $60. For the AYX options, I paid around $30 per controlled share, and for CRWD I paid around $15 per controlled share. This makes the breakeven price for the AYX options either $120 or $130, the breakeven price for the CRWD options is either $65 or $75. But I have until January 21, 2022 (about 20.5 months or 7 more quarters of earnings results) until those options expire. Clearly, I think that AYX and CRWD shares will be well above $130 and $75, respectively, before January 2022. The following table shows the relative number of shares versus option-controlled shares that I own in each position. The table also shows the current relative dollar value in shares and options; for options, I am valuing them using the midpoint of the current bid/ask, and the options value includes both in-the-money value and time value.


               **Stock   Options**
AYX shares     61%     39%
AYX $ value    81%     19%

CRWD shares    27%     73%
CRWD $ value   50%     50%

Options make my portfolio more volatile compared to a similar portfolio without options. I like the risk reward profile that options add especially when I can more easily identify times to add more leverage. Often such times occur when people are the most scared. On 12/24/18 the Fear-Greed Index hit 2/100 (it was the low for both the Fear-Greed Inde and the market). On 3/12/20 the index hit 1/100 and closed at 2/100 (the low for my portfolio was on 3/16/20 and the low for the market was within a few days of that).

I’ve made some pretty major shifts in my allocations. The past 2 months seem like 2 years. In general, stocks have moved more and faster (percentage-wise) than they ever have during my lifetime and maybe even more than in the entire history of the stock market. That’s saying a lot since we had 2 world wars and we’ve moved faster than even then. I wonder if we will ever see anything like this in my remaining lifetime (my lifetime will hopefully be another 40-50 years). I will comment more on the market, the Fed, the coronavirus, and other topics that affect our companies, but for now, I’ll focus on specific allocation changes that I made since 4/3/20.

RATIONALE FOR MY POSITIONS AND PORTFOLIO CHANGES

The Big Five
These are the companies that I consolidated into on 4/3/2020. In order of allocation, they are

AYX (34.6%)
CRWD (20.4%)
OKTA (14.9%)
DDOG (14.2%)
ZM (10.2%)

Each of them comprises >10% of my portfolio, and the top 2 are more than 20% of my portfolio. I am currently happy with them all, and I’m also happy with the amounts that I’ve allocated to them. I did add a lot to CRWD in April. I didn’t change the others too much since April 3rd. I’ve previously explained the reasons for owning them. For a brief summary, here’s a link:

https://discussion.fool.com/so-these-are-my-core-5-positions-wit…

The reasons for holding them are still the same. In fact, as I get more information, I am getting corroboration after corroboration supporting my hypotheses about these companies, how they are faring, and how they will fare with or without an extended lockdown. Everything that I am hearing and reading makes me more confident than ever in them. There are two themes happening:

*** Digital transformation is rapidly accelerating
The rapid and profound changes caused by the lockdowns require rapid adaptations by businesses. Businesses are like biological species, and there has been a sudden change in the environment. The new environment strongly favors certain traits and abilities so those businesses that do not already possess the favorable traits and abilities need to rapidly acquire them or they may soon become extinct. Darwinian processes are unfolding much, much more than in normal times. Those that adapt will emerge even stronger and those that do not adapt will be weakened and may not survive. Some of these pressures were already happening before coronavirus, and many companies had already made adaptations in advance of the current crisis. These companies have a huge head start and a huge advantage. There are many examples of such advantages. Companies that have online stores. Companies that already had systems to support their employees while working remotely or from home. Companies that had moved to the Cloud. Companies that had systems in place to quickly analyze data and scenarios to create models to inform business decisions and make changes. Companies that had systems and processes to rapidly shift supply chains or product mixes. Don’t these advantages sound familiar? In essence, companies that had digitally transformed previously are best suited to adapt and compete in the rapidly changing current environment. Those companies that haven’t done this must now scramble to digitally transform as quickly as possible. This is now happening, and it is happening quickly. It is common sense that it should be happening and is happening. This week, I listened to the earnings calls of Alphabet (Google) and MicroSoft. And guess what, they are confirming that digital transformation is RAPIDLY accelerating. MSFT reported yesterday that they have seen 2 YEARS worth of digital transformation/Cloud adoption in the past 2 months. Think about that for a second. The CEO also stated that the economics (cost savings) of moving to the Cloud should be reason alone to make the shift! We’ve known this for months! Google is saying that they are seeing the same trend. So what we are seeing is a compression of time needed to adapt to survive. I expect this phenomenon to greatly benefit our companies.

*** WFH is creating specific tails winds in some sectors and stocks
There have been several IT survey reports that provide further evidence that some companies are actually benefiting from the WFH lockdowns. There was the Mary Meeker report that was posted recently:
https://discussion.fool.com/saas-in-the-era-of-coronavirus-34476…
There was a Morgan Stanley IT survey from the end of March that also provided confirmatory evidence.
There was another IT survey that also confirmed the hypothesis:
https://siliconangle.com/2020/04/26/covid-19-drags-2020-tech…

CRWD, DDOG, and OKTA fit squarely into both of the above themes. I expect them to do very well, probably much better than without this shock that is forcing the digital transformation adaptation. Definitely CRWD and DDOG, in my opinion. OKTA has given mixed signals (some positive and some headwinds) on how it will fare under the current crisis. AYX should definitely benefit from the acceleration in digital transformation. We will see how these companies performed and what they will say about the future when they report their March/April quarters between May 7th and early June.

ZM is in a category of their own. They are clearing benefiting greatly now. Some of these benefits will translate into permanent changes to how companies operate so ZM should benefit greatly. Perhaps they got 2 years’ worth of growth in 2 months. We will find out in early June.

Added NET (CloudFlare)
In April, I added a new position: CloudFlare (NET). I analyzed it in March (together with Ethan and Victor), and, at that time, I decided against investing because the revenue growth was in the high 40%s. Aren’t we so spoiled! Also, they were not making as much progress toward profitability as my big five. Why would I want to own a company growing 48% when I can buy one growing almost twice that fast? Muji’s explanation and opinion about what is happening with NET led me to take another look. Here is a post by Muji that’s worth a read if you haven’t seen it:
https://discussion.fool.com/cloudflare-net-deep-dive-34417701.as…
My basis for holding NET shares is that I expect that WFH, increased internet traffic, and increased use of eCommerce will also provide strong growth tailwinds for NET. Muji also explained some new products that should provide additional incremental growth. Some of the IT surveys are also calling out expected spending increases on NET services. Thus, I’m expecting to see an acceleration in revenue growth in the first half of 2020. Muji, I’ll owe you a beer if this one works out. My position size is 3.4% plus I am short some May 2020 put options that could bring my position up to about 5% through possible share assignments. I’m not planning on going above a 5% allocation at this time.

Sold SMAR
I sold out of SMAR. Growth has been great and very consistent (close to 60%). Growth in large accounts has been much higher so they have been adding big customers (great and very good in times where SMBs may cut back or not survive). Profitability progress has not been on par with my big five positions, but at 60% it’s ok with me. What’s been nagging at me for several quarters is the question of how essential SMAR is. I’ve always questioned it, but I have stuck with the shares because I used the growth as a guide and a reason not to sell….as long as it’s growing fast and consistently, I’d stick with it. But now we are in a crisis, and I prefer to keep companies that sell software that is absolutely essential. This is important to me because I now want to own companies that will do well with or without the lockdown and WFH. So I cut SMAR and added the proceeds to NET.

Sold GH
I had a tiny 1.2% position in GH. I decided to sell it and put the cash into more CRWD. I suppose I didn’t need a big reason to sell it. But with the FDA approval delayed a second time and potential competition, I decided just to get out.

TEAM bet
I don’t own any shares. Yesterday, I made a bet (using some options) that TEAM would have a good quarter and the stock would rise. The rationale was that Atlassian helps enable remote work collaboration which is good for the current situation. In addition, TEAM was called out in one of the IT surveys that I referenced above; the survey indicated that TEAM is retaining almost all of their customers even though the survey was conducted in April. They are a consistent grower with huge FCF. I told my girlfriend that I would buy her a new refrigerator if the trade works out. Well, TEAM reported earnings which I thought were positive, but the shares are down after hours so the refrigerator purchase will probably have to wait for now.

This is going to be one of the most interesting earnings seasons for our companies. I’m really looking forward to it. It all starts next Thursday (May 7th) with AYX and NET, and then it continues until early June for the companies that have their quarters ending on April 30th.

WHAT THE HECK IS GOING ON? THE BIG PICTURE

It has been a crazy first third of 2020. We’ve had the biggest disruption since World War II, and it’s happening faster and more forcefully than any other disruption in human history. Yet, the stock market is not down that much and the portfolios of those of us who are invested in high growth SaaS companies is up significantly. Why?

Disclaimer: this section is just my own opinion.

I’d like to revisit something I wrote on March 13th when the world appeared to be ending.

https://discussion.fool.com/gauchochris-portfolio-update-3132020…

1) Certainty #1: Fear index can’t really go lower (scale is 0-100 and it’s at 2). Many people have been scared into cash or bonds. People were already scared of stocks after dot.com and 2008/2009 and over the past 12 years the scared people’s PTSD has been retriggered over and over and over again every few months. Much of this cash and built up capital parked in bonds will need to return to the market. It will return to high growth stocks like ours.

2) Certainty #2: Governments and central banks around the world have been and are continuing to respond. The actions they are taking and the massive amount of fiscal stimulus that is coming are HIGHLY positive to stocks. Specifically, high growth stocks do the best in times of low inflation, low interest rates, and high fiscal stimulus.

3) Certainty #3: We are now seeing a massive shift in the collective behavior of the world’s population that will contribute to slowing the spread. Even though the risk of dying for my age group might be 0.4% (low), the penalty for being in that 0.4% is enormous. This is changing behavior so the worst case scenario probably won’t happen. Probably the worst case scenario will not happen.

4) Opinion #1: While stocks may have further to fall, the rebound is going to be huge.

5) Opinion #2: I expect the rebound to really start while the healthcare crisis is still really bad. If the light at the end of tunnel can be envisioned by investors then I expect stocks will rally hard and probably very fast.

I’d still believe pretty much all of what I wrote then. I’d like to highlight #2 above. The central banks did respond to a greater degree that most thought they would. They had to and probably will need to do a lot more. The Fed finished their April meeting yesterday. During the press conference, Jerome Powell reiterated that the Fed would do WHATEVER IT TAKES to keep liquidity (money available to businesses in the form of loans to they don’t become insolvent) intact and to preserve the US financial engine (i.e. that’s corporate America) solvent and poised to rebound quickly. It’s basically a guarantee but one that needs Congress and the Executive branch to also provide fiscal stimulus (which they are doing). BTW, I would give Powell and the Fed an A++++ for their response to the global pandemic. Governments really had/have no choice because without the fiscal and monetary stimulus much of the global economy would have been destroyed, and, once destroyed, it would take a LONG time to rebuild. The powers that be need to keep the world’s economic engine and financial system intact so that it can rebound once people start moving again. So the fiscal and monetary actions that have been taken are why the stock market is where it is today; it is why we are not down 50% or more.

Our portfolios are up because we own great businesses that are resilient in normal times. Many of our companies are also of a species that have adaptations that make the current environment not so bad; some of them even thrive and become stronger than they were in the pre-coronavirus world. One reason why we were/are invested in these companies is because the writing was on the wall that digital transformation and the move to the Cloud was an almost sure thing. Now this has become evident to everyone and companies that were behind the times (potential customers of our companies) are now rushing to adapt.

I am currently quarantined alone in San Francisco, but I am not bored, and I have been working harder than ever on reading, analyzing, thinking, discussing, and trading than ever before. I believe this is a time during which great wealth can be built. We don’t see these kinds of opportunities often. That is my view. I realize that it is a scary time, and I may be wrong about some things. Everyone needs to do what is best for them, and I wouldn’t want to advise anybody. I’m only sharing what I see and what I am doing; everyone should do what is best for them. I have been adding risk, adding some leverage, and concentrating my positions into a handful. I know quite a few people who have gone to significant levels of cash. I would be very afraid to have a heavy cash position right now.

I hope that everyone stays safe.

Chris

143 Likes

Hi Chris, what a thoughtful, considered, intelligent, and insightful end of the month write-up. Thanks so much from me (and from everyone on the board).

There are a lot of similarities in our portfolios.
My big 5 are the same as yours. Yours make up about 94% of your portfolio, mine make up about 99%.
My trough was also on Mar 16 when I was down 16.0% and you were down 22.8 (more leverage).

As of yesterday though, I was up 28.2% and you were up 16.2%, which surprised me, as you are often up more on the upswings due to the leverage you use. I’m not sure how to explain that. Maybe because I got into ZM earlier in the rise than you did?

I agree that I wouldn’t want a large cash position either with the Fed diluting cash, although a lot of cash will also disappear with retail bankruptcies, etc.

Thanks again,

Saul

12 Likes

There are a lot of similarities in our portfolios.
My big 5 are the same as yours. Yours make up about 94% of your portfolio, mine make up about 99%.
My trough was also on Mar 16 when I was down 16.0% and you were down 22.8 (more leverage).

As of yesterday though, I was up 28.2% and you were up 16.2%, which surprised me, as you are often up more on the upswings due to the leverage you use. I’m not sure how to explain that. Maybe because I got into ZM earlier in the rise than you did?

Thanks, Saul.

Yes, I noticed that our portfolios converged in their composition earlier in April. In this case, I think we mostly came to similar conclusions and took similar actions (rather than influencing each other). I think we agree that it should work out well.

Yeah, you have done much better than I have. The leverage helps me considerably on the upswings and hurts me more on the downswings.I do it because I think upswings are inevitable in the long run. However, for me to benefit on the upswings, I need to have leverage on the stocks that are going up. I only have options on AYX and CRWD so if those do go up big then my increases will fly up fast. Your ZM position is around twice as large as mine so that has benefitted you greatly. I bought ZM in December and January for $65-70 but I also added a bunch at around $123-125. ZM has helped your returns significantly in 2020, much more than ZM has helped my portfolio.

I’ve had the AYX options since November 2019 so they have been in place all year. I added the CRWD options in March and April when CRWD was between $48 and $60.

To get a better idea of how the leverage affects my portfolio, we can look at the portfolio highs and lows:

2/18/2020: +40.7% YTD <<< 2020 high
3/16/2020: -22.8% YTD <<< 2020 low

7/26/2020: +100.0% YTD <<< 2019 high
10/22/2020: +24.8% YTD <<< 2019 trough after peak

I think that if you were to look back at your 2019 high and the trough after that high, you would probably find that your 2019 high (as a percentage of your 2019 start) was lower than mine and your trough after that high was not as deep as mine.

Similarly, I would guess that your 2020 YTD peak (as a percentage of your 2020 start) was lower than mine. Your 2020 trough was -16% while mine was -23% so my drop was deep as we would expect.

Any other difference is returns are due to you having been better stock picker.

So the leverage adds higher highs and lower lows. If the market and our stocks are expected to go up in the long run, why wouldn’t I want to have higher highs and accept lower lows? I only need to be careful of 2 things. First, I need to make sure that my options have enough time before expiration to avoid getting stuck in a prolonged slump. The risk is not zero but it’s a risk I monitor and accept. Second, I need to make sure that the total portfolio value stays high enough relative to any margin that is utilized by selling put options. I monitor this carefully and I limit my use of short put options. Also, I don’t always use short put options.

Chris

7 Likes

Similarly, I would guess that your 2020 YTD peak (as a percentage of your 2020 start) was lower than mine.

You are correct, when you were up 40.7% in mid February, I was only up 33.2%. But I hit a new high last Friday, at 33.3% and another on Monday this week at 35.8%.

So the leverage adds higher highs and lower lows. If the market and our stocks are expected to go up in the long run, why wouldn’t I want to have higher highs and accept lower lows?

I think that what you are missing is that when the lows for the year are in positive territory it doesn’t matter so much but when you hit negative territory the leverage can kill you. For example, if I am down 20% YTD and you are down 30% because of more leverage, it will take me a 25% gain to get back to breakeven from 80, while it will take you a 43% gain to come back from 70 to breakeven (100).

And the worse the drop the greater the difference. To come back from a 40% loss it takes a 67% gain, and from a from a 50% loss it takes a 100% gain to come back to breakeven.

As I wrote in my post on margins:

Here’s another issue. If you have 20% margin, or 40% margin, and your stocks go up 50% you’ll make 60% or 70% instead of 50%, and so instead of having 150% of what you started with, you’ll have 160% or 170% of what you started with … Nice, but no big deal. Not an earthshaking difference. …(160 is only 6.7% more than 150, and 170 is only 13.3% more. Really no big deal.)

But stocks go down too. What if you lost 70% or 60% of what you started with instead of 50%.

Well if you lose 50%, you have 50 left, and it takes a 100% gain to get you back where you started from.
But, if you lose 60%, you have 40 left, and it takes a 150% gain just to get you back where you started from.
And, if you lose 70%, you have 30 left, and even a 200% gain, tripling, won’t get you back where you started. Those ARE earthshaking differences! …(and 40 is 20% less than 50, and 30 is 40% less than 50).

As you can see, the potential CONSEQUENCES on the down side are much more DEVASTATING than the benefits on the up side are rewarding.

A loss like that won’t happen often, but it can happen, and it can nearly wipe you out. Would you play Russian Roulette because five of the six cartridges are blanks??? Or even with only one out of twenty cartridges active??? If you play often enough, sooner or later you will hit the active cartridge, and get killed (financially). It ain’t worth it for the marginal gain. If you can gain 50% per year without the risk, why would you risk your financial life to make 70%?

And that’s why I avoid leverage.

Best,

Saul

48 Likes

First, thanks for this. Know that we in the peanut gallery really appreciate these action reports and especially the thoughts and rationale.

1) Certainty #1: Fear index can’t really go lower (scale is 0-100 and it’s at 2). Many people have been scared into cash or bonds. People were already scared of stocks after dot.com and 2008/2009 and over the past 12 years the scared people’s PTSD has been retriggered over and over and over again every few months. Much of this cash and built up capital parked in bonds will need to return to the market. It will return to high growth stocks like ours.

I bolded the part that threw me. I would expect that shell-shocked investors who fled to cash and bonds and gold would not invest in high-growth stocks, but when they do come back to stocks would choose larger, more established and slower-growing companies, as they would perceive them to be safer. We know that’s not true (just look at GE for instance), but the “blue-chip” mentality still exists.

4 Likes

Ken Fisher, in this book, did a pretty convincing case as to why high beta does not equate to higher long term returns.

https://www.amazon.com/gp/aw/d/047007499X/ref=dbs_a_w_dp_047…

If you take long term returns going back decades, the outsides gains of the Nasdaq 100 during bull markets are all given back in n bear markets, compared to the S&P 500. Thus the High beta NASDAQ 100 never really “pulls away” for superior long term returns.

So all beta really does is add volatility.

As for leverage with options, one doesn’t have to look any further than the he Rydex funds performance over the long term compared to the respective index they track as add beta to via leverage. Even with all that leverage they fail to beat the respective indexes they amplify due to time decay in the options they purchase.

1 Like

Hi Saul,

I just found this board about 4 weeks ago or so and this is my first post (question actually) but first off, let me thank you and the other folks here for the continuous education (especially the knowledge posts, etc), it is all very much appreciated and I am eager to one day, hopefully soon, contribute.

You say above, “And that’s why I avoid leverage.”

But in one of your recent posts you noted you did use margin, albeit a very small amount. It sounds like you look to minimize your use of leverage as opposed to avoid it <—legitimate observation, not trying to be a wise-a$$ and this leads to my question:

Why do you use it all? Are there very specific parameters that you use it within and if so, would you feel comfortable sharing what they are?

Your opinion on margin appears to be very clear to me (and personally, I am terrified of margin, mainly because of my inexperience and lack of knowledge) so I am confused as to why you would use it at all and am very curious to understand the thought process here.

Thank you in advance!

U.S.H.A.!

I bolded the part that threw me. I would expect that shell-shocked investors who fled to cash and bonds and gold would not invest in high-growth stocks, but when they do come back to stocks would choose larger, more established and slower-growing companies, as they would perceive them to be safer. We know that’s not true (just look at GE for instance), but the “blue-chip” mentality still exists.

I think the blue chip mentality is changing because of the companies that are cutting their dividends. Royal Dutch shell just cut their dividend. The first time since 1945 that they have had to cut it. Most of the Reits are having a hard time and suspending their dividends. After this is all over I think a lot of people will be changing their minds on dividends.

Andy

But in one of your recent posts you noted you did use margin, albeit a very small amount. It sounds like you look to minimize your use of leverage as opposed to avoid it

Hi USHA,
I made very clear that I consider being at 100% invested plus or minus 2% or 3% as being 100% invested period, and the 2% or 3% in cash or in margin as being trivial and not representing either a cash position which I’m taking to attempt to time the market, or a margin position that I’m taking to attempt to get leverage. They are just little irregularities around the edges of my portfolio.

I hope that that helps

Saul

2 Likes

I think that what you are missing is that when the lows for the year are in positive territory it doesn’t matter so much but when you hit negative territory the leverage can kill you. For example, if I am down 20% YTD and you are down 30% because of more leverage, it will take me a 25% gain to get back to breakeven from 80, while it will take you a 43% gain to come back from 70 to breakeven (100).

And the worse the drop the greater the difference. To come back from a 40% loss it takes a 67% gain, and from a from a 50% loss it takes a 100% gain to come back to breakeven.

The are different ways to “leverage”. There can be leverage using money that you don’t have to buy stocks. In this case, you are correct that you can get wiped out. Another form of “leverage” (I’m using the term loosely) is to buy call options instead of buying stock. In this case, you’re not really leveraged because you’re not actually borrowing money. You are basically controlling more shares by buying options instead of shares. The loss of call options on equities is limited to your investment so call options can only be worth zero. This is not like your experience with futures trading where the loss can be unlimited. There are many forms of so-called leverage and they are not all equally bad or dangerous.

As an example, I could buy 100 shares of AYX for about $10,500. Or I could buy 1 contract (which controls 100 shares of AYX) for about $3200. This contract gives the buyer the right to buy 100 shares of AYX for $105 anytime before January 21, 2022; the cost of this right is about $32 per share. So for the same price as I would pay to buy 100 shares, I could buy 3 such contracts which is roughly equivalent to 300 shares. The 3 contracts would cost $9600.

So the option holder would have between now and January 21, 2020 to buy the 300 shares for a fixed price of $105 per share.


         Cost       @$105    @$120    @$137    @$155    @$180    @$300
VALUE
Shares   $10,500    $10,500  $12,000  $13,700  $15,500  $18,000  $30,000
Options   $9,600         $0   $4,500   $9,600  $15,000  $22,500  $58,500

% GAIN
Shares   $10,500      +0%    +14.3%   +30.5%   +47.6%    +71.4%  +185.7%
Options   $9,600    -100%    -53.2%    +0.0%   +56.3%   +134.4%  +409.4%

From the table above, you can see the payoff table. I understand that I can lose my entire $9600 investment in the options (but no more than that). In this example, if AYX shares are above $152 seven quarters from now (or before), the options yield a higher return.

Chris

32 Likes

Can REITs suspend their dividend? I thought by law they had to pay out 90% of their revenue. I read somewhere that some of them were paying that out in shares instead of $.

Can REITs suspend their dividend? I thought by law they had to pay out 90% of their revenue. I read somewhere that some of them were paying that out in shares instead of $.

This isn’t the place for this discussion but I will answer your question and point you to the correct board. Yes they can suspend and then at the end of the year pay out in a special dividend the amount that they have to pay to keep their Reit status.

https://discussion.fool.com/real-estate-inv-trusts-reits-100061…

I apologize to the board and my previous post should be deleted.

Thanks,
Andy

1 Like

Hi Chris, that makes reasonable sense as you have a year and seven months, and by Jan of 2022 I can easily see Alteryx at least at $180, and anything above that would be gravy for you. Getting to $300 in a year and a half though would be a stretch as it would represent roughly tripling. I guess the key is to keep the options a small part of your portfolio. If you put your entire portfolio into those calls, and the market went into a tailspin a year from now, and Alteryx followed along and was unchanged from today, you could lose it all, but clearly that isn’t something you would risk.
thanks for the clear explanation.
Saul

8 Likes

Great post, Chris

One small correction - you said:

“This is going to be one of the most interesting earnings seasons for our companies. I’m really looking forward to it. It all starts next Thursday (May 7th) with AYX and NET”

AYX is reporting after the close on Wednesday, May 6th.

Per their website:

https://investor.alteryx.com/news-and-events/events/default…