December is weird

I noticed a huge dip in my portfolio last year in December. I’d kind of forgotten, because it came back up before the 31st. But I was looking back through our board, and I saw some thoughts from Bert that Saul posted: https://discussion.fool.com/ot-bert39s-take-on-the-markets-34091…

A lot of them seem to hold this year too. Some highlights:

I will suggest that the share price performance lately has become completely disconnected from the operational outlook for these companies.

In the short-term stock prices are determined by supply/demand criteria, and there has been lots of supply and negligible demand from institutional buyers.

150 hedge funds are closing their doors on December 31st.

Markets are made of the constant struggle between fear and greed. While fear is in the ascendant at the moment, the operational performance of high growth companies will be at levels that ultimately change the feelings of portfolio managers. Hedge funds are paid to invest and not to hold cash.

I do not think I am a Pollyanna or that I am ignoring real risks. The Fed may not behave rationally. Some misguided government policy may lead to a problem that proves to be intractable. But that said, the IT sector is on sale now. The sale might last a bit longer. I really can’t foretell the specific event that will break the pessimistic, self-reinforcing cycle. But markets are eventually rational, even if that is not totally visible at this point.

[Bear again] Long story short, a lot of weird stuff goes on with hedge funds in December.

Bear

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Agree, Bear, the market at the back end of this year looks very similar to last in that we “peaked” in the late summer (July/Aug), had a large pullback, recovered some, then went down again in December.

The main difference I see, that makes this year a little scarier, is that last year the entire market was making those moves, whereas this year, it’s mostly just “our stocks” (high growth/SaaS/cloud/IT) that are down 20-50%, and the main market indices hit ATHs yesterday.

I say this year seems “scarier” to me because of this, the fact that the general market is at ATH, and typically a pull back for them, would also be an additional pullback for the names we’re all invested in, too.

Hopefully we see the first half of 2020 react like the first half of 2019 did. If that ends up being the case, then those of us invested in these stocks (especially those that were able to add the last few months) will have gotten a gift, because of that volatility, of better prices to have purchased these companies at.

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foodles: I say this year seems “scarier” to me because of this, the fact that the general market is at ATH, and typically a pull back for them, would also be an additional pullback for the names we’re all invested in, too.

It would be much scarier if our businesses were at all time highs too. When the market sells all stocks, all stocks get hurt. But it hurts the most for stocks that are flying high – ours aren’t now. And if the market pulls back, it will only last for a while, because as Bert says, the operational performance of high growth companies will be at levels that ultimately change the feelings of portfolio managers. Hedge funds are paid to invest and not to hold cash.

foodles: Hopefully we see the first half of 2020 react like the first half of 2019 did. If that ends up being the case, then those of us invested in these stocks (especially those that were able to add the last few months) will have gotten a gift, because of that volatility, of better prices to have purchased these companies at.

This stood out to me, because one thing I’ve been learning in 2019 is that Saul is not only comfortable with volatility…he actually seeks it out. He is, as far as I can tell, never drawn to safety (like me in buying a small Square position since I think it’s near its floor, or holding a little cash). He always goes for the highest volatility, the highest multiples, and the highest growth. I’m sure it’s the growth that attracts Saul, but I’ve taken note that the volatility nearly always comes with it.

Bear

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Yes, i agree that the end of the year can be volatile.

Somehow that notion is stuck in my mind.

On page 246 in One Up On Wall Street , Peter Lynch quips,

“If you have a list of companies that you’d like to own if only the stock price were reduced, the end of the year is a likely time to find the deals you’ve been waiting for.”
This in the Chapter titled, The Best time to Buy and Sell.

He expounds, reasoning that investors harvest profit and loss for tax purposes, margin players and institutions sell for various strictures, and combine that with any lockup period expiration (CRWD) and we have BARGAIN prices.

i am impressed with some of Saul’s ability to get out (MDB)(selling near $149 and now at $130) of a company at higher valuation/story change to get into those with lower valuation/story evolution (CRWD, DDOG).

Now i look at these SaaS companies as Smid caps and credit them with some of the similar traits as small caps.

In Beating the Street, Lynch again notes,
Bargains in small caps in November and December are reflected in the later “January effect” where, over the last 60 years, small caps have rebounded an average of 6.86% in January, compared to only 1.6 percent to stocks in general.

So i am looking forward to a profitable January, as our Smid caps return to their preholiday glory.

Not as well played as Saul and others, i have managed to add to a number of these positions in the past couple of months and actually beat Saul’s price on a couple of purchases… forget beating the S&P or another index on these companies … i aim to beat Saul, lol.

Happy Holidays.
Best, kevin c

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Hi Drew,

Yes, this has been a real drag. As you have pointed out hedge funds do weird things in December. I remember last year someone mentioning that 150 hedge funds went out of business at the end of the year (selling all their assets to reimburse investors with what was left.) And not only do some go out of business and sell all their holdings, but people who want to exit hedge funds are usually locked in all year and have an exit window to pull their money out near the end of the year as well.

Last year I went from a high of up 86.0% on Dec 3rd, to a low of up 48.5% on December 24th. That was in exactly three weeks. However three and a half trading days later, on Dec 31st (there was a weekend and Xmas in there), I was up 71.4%.

And if I had kept counting from 2018, instead of starting from zero again on Jan 1st, by the end of March I would have been up 135% (well over a double) instead of the up 48% I was up on December 31st, and even way above the high of up 86% I hit on Dec 3rd, so don’t give up hope and sell out at the bottom.

And at my July high this year, I was up 204% from my 2018 start (a triple)).

…one thing I’ve been learning in 2019 is that Saul is not only comfortable with volatility…he actually seeks it out. He is, as far as I can tell, never drawn to safety (like me in buying a small Square position since I think it’s near its floor, or holding a little cash). He always goes for the highest volatility, the highest multiples, and the highest growth. I’m sure it’s the growth that attracts Saul, but I’ve taken note that the volatility nearly always comes with it.

Here Drew, I don’t recognize myself. I’m sure I would have been happier if my stocks had just kept going up all year long. I certainly don’t want them to go down. I don’t think I go for the highest volatility and I’m sure I don’t go for the highest multiples, I’m just less afraid of them. What I do do is I try to pick the best stocks with the best businesses with the best growth, and which are moving in the right directions as far as profitability. (see my comparison of Crowdstrike’s great quarter with Mongo’s terrible one (in my eyes) a couple of weeks ago). I think I’ve learned along the way that companies which keep increasing their large losses are not for me.

Best,

Saul

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