GauchoChris portfolio update 3/13/2020

GauchoRico · March 14, 2020, 2:24am

I just posted a portfolio update one week ago. It sure seems like a lot longer ago since things are changing so fast. The portfolio as sustained a very steep decline over the past week, and I’ve taken the opportunity to make a couple of significant changes which I will discuss below. Here’s my portfolio update from last week.

https://discussion.fool.com/gauchochris-portfolio-update-362020-…

ANOTHER REOCRD

Last Friday (3/6/20), my portfolio had an all-time record dollar drop and an all-time percentage drop in one day. On Monday, the following trading day, the portfolio fell another 15% breaking Friday’s all-time percentage drop and all-time dollar drop records. The very next day??? WOW! Tuesday was a nice rebound day, but Wednesday there was another 8.8% drop and on Thursday another 11.4% drop. In 5 trading days, my portfolio had fallen from +21.9% YTD to -11.0%. Wow! I’ve never seen such a steep drop before. We had a nice rebound again on Friday (3/13/20) so I ended the week -4.8% YTD. Now my portfolio has some leverage with options so my swings are bigger to the upside and bigger to the downside than portfolios with no leverage. But I like it this way since mathematically I will come out ahead if the stocks that I own manage to average annual returns that are strongly positive (as Saul has done for 30 years). So why not have a little leverage?

Another interesting thing that happened on Thursday is my portfolio fell 37% from 2/18/2020 to the closing low on Thursday. If you recall, in my last portfolio update, I mentioned that the peak to trough drops of the last major declines in my portfolio were also 37% (9/4/18 to 12/24/18 and 7/26/19 to 10/22/19). If Thursday turns out to have been the low then that would be an interesting coincidence! But I do believe that it is just a coincidence. And I think we may not have hit the low yet, but no one can really know that. But just look at the time it took to go from peak to tough:

111 days from 9/4/18 to 12/24/18: -37%
88 days from 7/26/19 to 10/22/19: -37%
23 days from 2/18/20 to 3/12/20: -37% (but may not be the bottom)

MAJOR PORTFOLIO CHANGES

On Thursday, I sold about 50% of my MDB and the remainder of my ZM shares in my tax deferred account and put all those proceeds into PAYC, a new position for me. MDB was about 10% of my portfolio so this was a significant change for me. ZM is my coronavirus stock (i.e. it is my only company that actually benefits from the coronavirus), but I think that it is richly valued and I think it is likely to see a drop when the overall stock market recovers. Those are the reasons I reduced ZM (and because the other seem like great bargains). I cut MDB for three reasons. I like MDB for the long run, but I have had concerns about their slower growth for a while (reason 1). Earnings are coming out next week. It was the huge unrealized gain and tax hit that was previously holding me back from selling. The big drop in ALL stocks (and specifically in MDB) made the swap out of MDB and into something else a less painful tax consequence (reason 2). So the big drop contributed to me finally pulling the trigger. MDB is now 4.4% of my portfolio which is an allocation I like because it still gives me exposure to my belief in their long-term success. The third reason for selling half my MDB was that MDB’s highly negative cashflow in uncertain times like we are in today adds an extra layer of risk. What if financial markets freeze up and MDB can’t raise cash? What if this coronavirus leads to a prolonged recession? Would I really want 10% of my portfolio in a company that has these extra risks, especially right now? I decided that I wanted to replace some of my highly negative cashflow company with a company with lots of free cashflow. A company that can survive in rough water indefinitely. I chose PAYC because it has enormous FCF. It is a money machine. And it had been sold off so hard, down from a high of $342/sh to the low $200s/sh. Slower growth in revenue than MDB but huge FCF, great FCF growth, decent revenue growth, and a stock that will likely show a fast, nice rebound. I did not get in at the lows on Thursday but I got a great price at $204. Still, I think my timing was completely lucky, and I in no way expected an 18% rebound today.

My second big move was implemented today before Trump’s press conference which sparked a strong rebound. Unlike my MDB+ZM > PAYC move, I see this move as a temporary tax loss harvesting move. Through Thursday, I had already accumulated a very large amount of realized capital gains for 2020 YTD, and Thursday’s MDB sale didn’t help that cause at all!. I sold all of my CRWD in my taxable account which took my position to 1% from about 13%. In addition, I closed (at significant losses) all of my short put positions on CRWD. I immediately redistributed all of the proceeds into AYX, DDOG, and OKTA. I need to wait 30 or 31 days to avoid a wash sale before I reverse this trade. I chose AYX, DDOG, and OKTA because 1) they are among my high conviction stocks, 2) they are showing positive free cashflow, 3) I think they will likely move in a similar fashion to CRWD, and 4) they are also beaten down like CRWD. I realize that CRWD is reporting their Q4 results next Thursday so I risk losing the opportunity of a stock spike on great earnings. However, since I purchased all my CRWD between about $45 and $55, the loss is currently significant and outweighs the potential gain from earnings.

So after these 2 major moves and some other small moves and a little day trading, here are my portfolio allocations as they stand as of 3/13/20:


	3/13/20	3/6/20	1/31/20	
AYX	40.8%	36.7%	34.6%	temporary add
OKTA	12.9%	 8.6%	 8.4%	temporary add
DDOG	 8.3%	 5.0%	 3.6%	temporary add
ZM	 5.6%	 6.8%	 5.5%	trimmed
TTD	 4.6%	 4.5%	 6.1%	
MDB	 4.4%	10.0%	10.5%	sold half
ROKU	 3.6%	 3.5%	 1.2%	
SMAR	 3.6%	 3.2%	 4.2%	
GH	 1.3%	 1.1%	 3.4%	
CRWD	 1.0%	13.0%	15.4%	temporary sale of 92% of shares
Cash	11.8%	 9.7%	 7.3%	increase due to share price declines

ADDITIONAL THOUGHTS

We are in rare and unprecedented times. The CNN Fear & Greed Index hit 1 out of 100 on Thursday. After the market close on Thursday, it was back up to 2, the same level as it was on 12/24/18. I’m not implying that we hit a bottom on Thursday. No one can know that. Despite my leverage, my portfolio is prepared to withstand more declines, much more. I’ve net added starting last Friday, but in small amounts. I’m stocked up on rice and beans and prepared to go on my low cost diet should we see another major leg down. I’ve already cancelled or decided not to go on vacations totaling 8 weeks so my spending for 2020 is going to be way down compared to what I was expecting. I see what is happening as a MAJOR long-term opportunity. I intend to keep adding on big down days with some selling on rebounds (but net buying on a continued drop). If I have to I will go on a rice and beans diet so I can invest more. I’ve stopped going to bars and restaurants to help stop the community spread and to avoid the chance that I might contract the virus. This is also reducing my expenses because eating out is normally a big part of my household budget.

Saul today reported that he has gone on 2% margin (out of a 4% maximum for him) so we know what he thinks. Also, Saul never sells out and never tries to time the market. Even if we haven’t hit the bottom (and I think that we probably haven’t), I expect that our stocks will be much higher than today’s levels when this is all over. Because I see an eventual recovery as an extremely high probably outcome, I’m ok missing the bottom. I prefer not to miss an opportunity that we might not see for another 20 or 30 years. Some say that the outbreak is inevitable and is going to get much, much worse. I agree that this is the most likely outcome. But not a certainty. What is a certainty (note this is my opinion) is the following:

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

These are just my thoughts and opinions. Everyone should be prudent and not get themselves into a situation where they can’t sustain a much further drop (50% more down might not be impossible) or pay their bills.

Chris

draj · March 14, 2020, 12:34pm

GC Thank you for a well reasoned explanation of events and your response to them. I have made a few similar moves but much more cautiously.For example, the week before last I sold a few things to establish a strong cash position which I propose to slowly return to the market as the situation stabilizes. I’m chancing that there won’t be a major permanent spike upward.

Among my purchases have been AYX,DDOG and OKTA. I note that you have added to those position temporarily. Isn’t this likely to negate any tax loss savings from your sale of CRWD given your assumptions about the future course of events?

PAYC has been mentioned a few times on this board. 10% in one fell swoop seems heavy to me even for those less risk averse that I am. Could you summarize at greater length or provide a further reference to data on PAYC?

Thanx

branmin · March 14, 2020, 12:57pm

Great Post Chris as usual. My only comment would be your utter commitment and faith in AYX. Your allocation is on the high side?

XMFMonkey · March 14, 2020, 8:39pm

Friends,

[Written below is a reply to Gaucho Chris directly, because his post has 70+ recs and is not deemed OT. But there is some OT stuff below, even if it does directly circle around our stocks implicitly. Monkey feels completely fine if it needs to be deleted, but it’s such a momentous time that he thought it’s better to speak and be deleted than not speak at all. Saul, if this offends, know I respect you and your board beyond measure and zero offense will be taken if the delete button is pressed.]

Monkey has been perched in his hammock high in the jungle and has been cogitating more than is good and healthy for him, and consequently has arrived at a conclusion he’s never before made in his 24+ years as an investor. His mantra during those years has always been the same mantra as what all y’all follow: do not sell during times of panic.

But Monkey, for the first time ever, is going to do just that sometime this coming week. It shocks him to even write that, but one of the things Saul et al. from this community has taught him, is that first principle thinking and flexibility of mind, and not being married to anything, no matter how long the marriage, that’s the way of the courageous, bold, free-thinking and intelligent investor. Of course, this might be a mistake, and the old adage might prove the correct one as it always has been in the past. So why would it be different this time?

Chris has written a well-reasoned analysis above that gives Monkey a structured rebuttal. Note: the respect and down-right awe at this board’s intelligence is higher than those fancy buildings y’all got in Burj Kalifa, so Monkey’s reply is in no sense whatsoever personal. In fact he’s deeply worried that he’s seeing things differently than some of the best minds around in the investing world. But see paragraph #1: Monkey has to call it how he sees it given his own particular view from the the top of the tree line rather than being tied down by history or the bias towards his favorite people.

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.

Probably true. But also true is that “the fear index” is a human construction and human constructions are stories, and stories don’t actually exist. What if it turns out the fear index can go down to -78? It did take the Egyptians some time to invent the 0 right? Maybe we just never new there was a whole 'nother side to this fear thing?

Personal anecdote: here in the jungles of Austin, some people don’t even think there’s a thing going on yet. Others are running out of the grocery stores with toilet paper stuffed under their arms and cans of beans stuffed into their underwear. Monkey tried to buy 6 packets of spaghetti (banana flavored) but was told he could only buy 3. Shelves were quite picked apart by the vultures already. At the moment, there are only a handful of cases here and this frenzy is already taking place. An yet almost no one is actually sick yet.

If some of the scientists are correct, and if Germany is correct, then 70% of people will actually be infected. Which means when that happens, the shelves will actually be literally empty. Exhibit A: Italy. What will the fear index be like then? When people begin to worry about where their next meal will come from? When restaurants are all closed? When there’s nobody on the streets?

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.

True. But recall in 2008 you were able to buy some companies for less than the cash they had on hand!!! If the Fear Index does go to -78, then it doesn’t matter what the economic foundations and mathematics are: humans are first and foremost animals with a primal reactivity button and these economic stimuli will shore up things for a while, until they don’t. When the panic damn bursts, the little economic lever canoes will be in for quite the wild ride. Eventually this might help. But humans are not always rational, and economics, too, is yet another human story. At some point, a good chunk of people might stop believing it.

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.

Monkey is a happy critter. He takes Joy in being alive and Joy in helping others, and loves to play and dance and throw bananas at unsuspecting passerby. So he’s actually a fearless optimist. But his reality goggles tell him the worst case scenario is more likely to happen than not happen.

Potential Off-topic thought bubble, so skip ahead if need-be: the reason being is that the USA is the economic center of the world. And that given what’s already come before, in the face of the governmental policies not executed in time it’s already too late––there are already enough people infected that we know about, thousands who don’t even know they’re sick yet, and thousands who even if they do become sick, don’t have insurance and so won’t go to the hospital, or will continue to go to work because they can’t afford not to, etc. that American exceptionalism won’t work here. The numbers are what they are. NYC is infected. Quarantines are not yet in place. And the US medical system is behind in terms of structure of countries like Italy and Germany. And look at their tragic fate: having to choose who will die and who will live. We are worse, not better prepared. [Please skip this next sentence if you hate political anything.] And Monkey has a -78 confidence in the current leadership because it’s fundamentally allergic to taking responsibility for anything that happens just to look good for the moment; crises do require genuine courage and fearless compassion and the ability to say and do the hard thing for the greater good; our leadership at the very top only knows self and self-image. This is hard to quantify mathematically, but Monkey knows the difference between an Abraham Lincoln and a Used Car Salesman.

Secondly, the countries that are already on complete lockdown and taking draconian measures are much smaller in size and population than the USA. Many Americans own guns because it is their right to own guns and nobody can tell them otherwise. This is their American freedom. How will these same folks, and others, respond when the government orders them to do something they’d rather not do? How will they respond to being told they can’t travel to see their family in the next town or the neighboring state? How will America contain its hugeness and deeply embedded sense of “right to whatever we want because it says so in the constitution?”

When Character was still a primary concern for Americans, our breadth and ambition and we-can-do-it-attitude helped us build all the things, put mankind on the moon. Every Greek story, however, has the same end: arrogance kills more effectively than anything else.

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

True. But only eventually. And to take advantage of the rebound, capital will be necessary. And the more of it you have, the more rocketship-like the rebound. So if Monkey’s own thesis is even partially correct, then when two weeks from now, the USA will be facing the same peak of infection as Italy/S.Korea/Japan/Iran/German are and did, and hospitals literally are overflowing and refusing patients, the it’s hard for Monkey to see stocks rebounding as the infections become more exponential and more visible. Italians, from a wealthy part of the country no less, are leaving their dead without burial! Maybe this is Monkey’s over-active imagination, but he can’t begin to imagine a scene even remotely like that one leading to a stock market rebound during this short-term period that may or may not be “short” exactly.

Monkey’s thesis #2 is therefore more concretely this: it will be at least 3-6 weeks from now that the peak panic will happen and when Americans begin to see this virus in real-bodied terms, as opposed to the financial crisis which in theory was invisible, then the peak selling will overwhelm any rational mathematical understanding of business and business models and cash flow projections. Monkey’s own blueprint is, and he can’t believe he’s writing this, to “market time” for the first time ever in his investing career, and sell now with the explicit intention to begin getting back after the reality of this virus is fully known and experienced by the entire nation. That seems to be like it will be towards the end of April. But no, I’m not a soothsayer and nobody but fools aim to find bottom. But the risk/reward ratio of the market being higher in April than it is today is a conjecture Monkey is taking. Monkey might be wrong. For the well-being of all creatures, Monkey hopes he’s wrong. But he’ll be betting with his own bananas that he’s not.

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.

If only the first 4 of the above opinions fall in favor of Monkey and not Chris’s views, then Monkey might still stick to the old “I’m not selling ever” tattoo on his left butt cheek. But consider these conjectures:

-Nobel prize winning economist Robert Shiller says this economic disruption is different: https://qz.com/1818061/robert-shiller-says-the-coronavirus-d…

Some economics article Monkey read that he can no longer locate talks about some very strange macro-economic indicators that are HIGHLY unusual, like the convergence of bond rates and interest rates, which usually move in opposite rather than similar directions. Or some such. The technicalities don’t matter in much the same way as we don’t need to understand the exact technologies of our companies. But some skillful economics professionals are noticing odd patterns. Monkey prefers his patterns not to be odd and unprecedented, in much the same way as the 2008 financial crisis unfolded–we began to feel that “something isn’t right here” and the markets kept ignoring it over and over and over. Until they didn’t.

-More specifically, Monkey’s thesis isn’t that it’s the bug itself that will “kill” us (so sad to say that unfortunately it will also kill, literally, more of us than it “should” and is “fair”) but that the following chain is, again, from Monkey’s purview–one which does include an advance collegiate understanding of viruses, based on his seven advanced classes in Biology from a fancy-pants college, as well as a class called “Virology” which was about as fun to take as being infected with an actual virus, believe you Monkey, but that the following chain is likely to happen:

-Many More people are infected than they know, including NYC, where Monkey lived and knows that it’s nearly impossible not to touch all kinds of dirty public things
-The invisibly sick will continue to infect more people in the next few days and weeks because they aren’t paying attention or think “sucks for them”
-The virus follows the exponential pattern as we’ve seen it follow the rest of the world
-Because of American exceptionalism, it actually spreads even farther and faster in the USA than the rest of the world
-People stop going out to eat in restaurants
-Restaurants begin to close
-Small businesses like martial arts studios begin to close
-Some small businesses with lots of debt begin to miss payments
-Banks begin to feel their shoes being squeezed
-Some gov’t levers are pulled but the virus is still spreading because there’s enough uninsured people in the US who won’t go near hospitals to get tested
-Some US citizens recall their President saying “this is not a big deal and a Democratic hoax” and continue to not take medical preventive measures
-Quarterly numbers are excellent for our companies but growth rates decline to some unknown extent for the immediate few quarters; will the market reward or punish AYX for let’s say slowing down it’s incredible performance by 10%? Hard to tell.
-Some companies like ZM might thrive more than others, but with the immense pressure on small businesses, even the middle tier businesses start becoming prudent about their spending (Maybe Monkey should invest 100% of his bananas in ZM instead? Hmmmm… In fact, a reasonable alternative to simply selling out might be to invest it all in ZM for the immediate future; not exaggerating and worth thinking about)
-Some people stop going to work and making things, and therefore begin to fall behind on bills
-Banks squeeze their credit lines a bit
-The least financially sound of us, who literally can’t just “go get a job” when the streets are empty and Uber and Lyft start being a threat themselves, really begin to enter a world of financial pain
-Does Starbucks stay open? Does Chipotle? What about Apple? How about factories that make essential components to all kinds of gizmos? Do they stay open? Do subscribers start cutting Netflix to save as much as they can? Monkey’s cutting his StichFix orders, that’s for sure. Etc. Sure, those are not what we talk about on this board, but it’s an interconnected world. Growth rates even for AYX and CRWD will fall at least a little because it’s hard to upsell when everything is literally in quarantine.
-Temporarily. Yes. But how do you define temporarily? 3 weeks? 3 months? The next year?
-What happens when hospitals are over capacity? And health-care workers themselves start dying?

Income inequality; a fractured health care system; less than truthful leadership; actual viruses that spread easily and are more deadly than most; it can’t happen to us attitude; the window to prevent the worst having already passed. These are the thought bubbles that have kept Monkey up sleepless in his hammock.

But he hopes he’s way wrong. He hopes that y’all who read this as finger-waving fear-mongering prove Monkey wrong and that this is all indeed blown out of proportion and History is what it is and there are not exceptions to Do Not Sell. If that’s the case, then lives of the most vulnerable around us will have been spared. And in that case, Monkey will have missed out on huge gains and will have to satisfy himself with nothing but ramen and some now rotten bananas and the brutal tattooed reminder on his left hind quarters that reads “Do not sell during a panic and do not try to market time.”

But for the first time ever, he will do just that. Maybe he’ll be blessed to buy twice the number of shares with what capital he saves from the even more precipitous fall in two month’s time. Or if the financial system starts to creak and a recession hits hard, then he’ll continue to get incredible buy-back opportunities for the next 6 months. Or maybe even a year. But since the USA is only at the very beginning of actually seeing and feeling the reality of this thing, at the very least, he’ll be on the sidelines come early next week and for probably until early April at the earliest. If he misses some big bounce, so be it.

These are just my thoughts and opinions. Everyone should be prudent and not get themselves into a situation where they can’t sustain a much further drop (50% more down might not be impossible) or pay their bills.

Monkey has zero qualms whatsoever with this here above Gaucho logic.

When the selling goes crazy––under the logic outlined above––Monkey will get back in for as many shares as possible of all our most finely scrutinized companies, which, yes, will be even stronger once the rot has made the soil even more fertile. Shocking as it is to say, it doesn’t quite seem like the time to be greedy yet; rather, it seems like the time to admit to ourselves that the water has grown and the times, they are a’ changin’.

With Love to all of you and immense Gratitude for all your hard work and community and care,

Monkey

P.S. In terms of conviction about which companies are safest and which Monkey will rebuy most quickly at the peak of the panic, roughly estimated, they are currently:

ZM
AYX
CRWD (depending on the 3/19 earnings call to which he’ll be listening with ears very wide open)
OKTA
DDOG
TTD
TSLA
SHOP
MELI
10)PAYC
MDB
ROKU
TEAM

qazulight · March 14, 2020, 9:46pm

Monkey,

Yes, you are running on fear.

Yes, the world is going to get weird.

In fact I am short the market.

The above statement is the best indicator ever posted that you should be long on everything.

https://docs.google.com/spreadsheets/d/1yEMUF_6bqogxxBigR6l1…

I have spent the entire day playing with this spreadsheet and have written a post on the METAR board about it. The numbers can be alarming. However, I have noticed that about day 11 every society infected has responded. Every society has bent the curve when they responded.

I have not included the end game because there is not one yet. China is getting close though. If they make it quickly they will have gone through the fire and came out standing in 60 days. If this is the case the United States could be having 4th of July parades and this entire thing would be behind us in time to start complaining about politics or something.

Open the spreadsheet. Play with the numbers. Make a copy with your name if you like. Send me and email and I will send the Excel version. No matter how I slice it, this looks like a 60 to 90 event with maybe a follow on recession. However, it could be 60 to 90 day event with a follow on boom due to pent up demand. I don’t know and neither does anyone else.

My guess is the that right thing to do is to keep looking at good companies and buying them at good prices, IF you have the fortitude to watch the red. I don’t.

Know thyself.

Cheers
Qazulight

OrmontUS · March 14, 2020, 10:23pm

To summarize a long section of Monkey’s post:

A serious global recession is VERY likely and stocks (including the ones followed here) are likely to, having left the stratosphere of many being overvalued to cross the mean and many will become seriously undervalued.

Supply chains have been destroyed and manufacturing and services will suffer as populations become quarantined and local businesses close. More importantly, social destruction will accompany local deaths caused by the coronavirus world-wide.

As has also been pointed out, the influx and exit of vast amounts of funds into the financial system is distorting the expected correlations.

In short, there is no particular reason to assume that the vast majority of stocks will not drop lower before they start heading up sometime in the future.

Jeff

BrianKnittel · March 14, 2020, 11:39pm

Hi Monkey,

Please realize that pulling your money out of the market is like not socially isolating for the virus. It makes the situation worse the more people that are pulling money out of the market.

Enjoy,
Brian

tdonb · March 15, 2020, 12:20am

Brian,

An inyeresting reply, and one I hadn’t thought of before. I don’t know though if the next few weeks will pay to be valiant.

Tdonb

wiseisnice · March 15, 2020, 12:53am

Thank you Monkey for that incredible post and sharing.

I am a silent lurker that has benefited from this board the past 2 years and I would like to offer my observations which I hope may be helpful. I am a foreigner who has been living in Southern China for the past 3 years and we just went through all the different phases of denial, fear, panic, calm and acceptance and hope that is now spreading across the globe. We are coming out of it (there has been virtually no new cases in most of China since 3 weeks ago and most of the new cases are being imported from overseas now.)

I was initially very skeptical of the Chinese government’s response and thought it was either overkill (why not let the ‘flu’ spread like the USA) or so deadly that it was a huge problem. It turns out that what the chinese government did was correct, for China. It is very clear now that there would be far more casualties if they did not do what they did. The main problem is the shortage of ventilators and medical staff. Imagine if the entire country experienced Wuhan. People dying at home and no one coming to help. Even if the virus exhausted itself after 3 months, the morale of the country would be totally gone. The worst outcome for China would be a total collapse of society and revolution, which has happened many times in history and would end up in far more needless deaths.

I think there are a few fallacies going on in the investment world right now:

People expect there will be a surge in online entertainment revenue (netflix) or e-commerce.
This turned out to be mistaken, at least in China. Alibaba orders actually shrank in 1Q because the logistics network was shut down and merchants could not ship. IQiyi subscriptions actually went down because people cancelled their subscriptions and just watched the free version or news instead. Every platform’s ad revenue went down because all the small merchants stopped advertising or shrank their ad budgets. I think it is an illusion to think netflix revenues will go up in 1Q with this virus going around. Roku and TTD ad revenue? People switched to cheaper alternatives. People retreated to buying necessities (food, sanitation supplies, etc) and cut everything else, cut all discretionary spending. Yes some of it is coming back now but it is going to take another quarter for people to replace their lost income.
People expect software subscription revenues to be virus proof and keep growing. Some may be but many won’t.

A friend runs a training business and this downturn is going to force him to downsize his business and cut costs for the next 2 quarters. Thank goodness all these software subscriptions are so easy to cancel. Shared office space? Thank goodness its so easy to cancel those desks they signed up for last month.

Another friend works in one of the largest Private Equity firms in the world. They just killed all deals, fundraising is dead for the year, and they are actively going to all their investment companies and telling them to cut costs, focus on cash flow and conserve cash. Thank goodness all these subscriptions can be cancelled so easily. All the tech disruptor companies that they invested in the past 3 years? Told to shift focus from growth to survival. Cut marketing spend. Cut new hires.

After two months, the world will be back to normal just like China.
Well I was quite hopeful that this would indeed be the case, and while China has indeed gone back to work, I am also starting to realize that life is going to be different for longer than we all had hoped and thought. Everyone is still wearing masks. The schools will reopen in 2 weeks time, but people are nervous and any school or factory will be shut down again the moment a case pops up. We are deferring all unnecessary consumption and downsizing where we can. I am sure everyone else is too. It is perpetual summer in SE Asia and while the warm weather helps slow the spread (UV kills viruses) it is still spreading there. So the world will continue to be in a heightened state of response until a vaccine is found or until the virus mutates into a mild strain that is more flu-like. This will happen but it takes time. There is a ‘New Normal’.

But there is good news and hope in all this. We have had incredible family time. People are coming together to help each other out instead of being glued to a screen and thinking about money all day. You appreciate your old folk more when you can’t meet them in person for fear of infecting them.

Good luck and happy investing to all.
wiseisnice

tdonb · March 15, 2020, 2:18am

Thank you for sharing what the situation is like there after passing theough the phase we are just entering.

GauchoRico · March 15, 2020, 3:17am

2. People expect software subscription revenues to be virus proof and keep growing. Some may be but many won’t.

A friend runs a training business and this downturn is going to force him to downsize his business and cut costs for the next 2 quarters. Thank goodness all these software subscriptions are so easy to cancel. Shared office space? Thank goodness its so easy to cancel those desks they signed up for last month.

Another friend works in one of the largest Private Equity firms in the world. They just killed all deals, fundraising is dead for the year, and they are actively going to all their investment companies and telling them to cut costs, focus on cash flow and conserve cash. Thank goodness all these subscriptions can be cancelled so easily. All the tech disruptor companies that they invested in the past 3 years? Told to shift focus from growth to survival. Cut marketing spend. Cut new hires.

wiseisnice,

There are nuances and every company is different and should be examined independently. Blanket statements spread fear. Let’s just look at 4 of my companies.

OKTA: embedded deep in their customers with something the customers can’t live without. Secure sign in for all their employees, vendors, customers. The evidence that they are here to stay is that typical contracts with their enterprise customers are something on the order of 4 years! Who would sign up for 4 years if they thought there was a chance that they would switch. OKTA now has built in connections with something like 7000 apps/services; this takes time and money to replicate and is a reason why OKTA is dominating its space. OKTA is CFFO positive and improving that. They have $1.4B in cash. This means that they are basically self sustaining now and even if they fo FCF negative they have enough cash to ride things out. I currently have have 12.9% of my portfolio in OKTA.

AYX: huge ROI for customers. average contract length is 2 years. Automates business processes and workflows means saved money. Listen to the CFO interview from the week after the last earnings. AYX has become the standard for many workflows. It’s not going to be removed. Here’s another thing that I think will protect AYX: aren’t the number of people who know how to use AYX in short supply? Assuming they are then it is competitive for companies to get them so they won’t want to lay them off as it would be difficult to find a replacement when things return to normal. And assuming that they don’t lay them off the company may as well keep them productive and working on projects. And AYX is basically FCF positive now with a cash balance of $975M so they can easily survive even an extended difficult time. I have 40.8% in AYX but I expect I will be reducing it since it’s too high of an allocation.

PAYC: the customers love them and they’re in HR software which is necessary even (and especially) when companies hire and downsize. The have enormous FCF margins (>35%) so they are completely self funded and just increased their share buyback 2 days ago (tells us they are very confident in their future even with what’s going on). I have a 7.4% position in this one.

ZM: will only do better in this environment and they are solidly FCF positive (and increasing fast) with $844M of cash. I have a 5.6% position in ZM.

I have about 2/3 of my portfolio in the above four and I don’t see any long-term danger with any of them even if the economy runs into some serious headwinds for a while.

I’m not going to sell these long term winners (and pay a bunch of taxes) just so I might be able to buy back in lower. I might not get the opportunity and they might not drop low enough for me to cover my tax bill from realized capital gains. Just the way I see it.

Chris

remmdawg · March 15, 2020, 3:21am

Thanks Gaucho for your summary and thoughts.

This ultra rapid bear market has also taken a huge chunk out of my portolio and has made a similar dent in my confidence in the market. But I also stay invested while making some adjustments based on the changed landscape. As for my perspective on your certainties/opinions:

1) Certainty #1: Fear index can’t really go lower - Yes, but I think it could stay low for some time. Personally, as an experienced emergency physician, I believe the actual threat from this virus is likely to be much lower than other every day risks and other disease risks (including the flu). But the numbers will continue get bigger because viruses spread. That’s what they do. And they will look bad for awhile since we are just starting to test in a large way here in the US. The media and politicians will talk about how the virus is spreading and that it is “escalating.” Of course, that will be an exaggeration since the rapid increase in number will be an artifact due to the onset of testing. Many people here have it and just don’t know it. And there will be horror stories - many people will die. But many more people will continue to die from the flu, traffic accidents and many other things - if they covered those the same way, it would be seem like everyone is dying too. Fear might depress our stocks for awhile.

2) Certainty #2: Governments and central banks around the world have been and are continuing to respond. Yes, this will counteract #1 but I’m not an expert on these effects - I doubt anybody is.

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. Yes, this is happening and while it might slow the spread of the virus (still not certain for some changes), it comes at a cost. The relative risk of threats such as the flu are likely much greater than the coronavirus. Are we going to adopt the same behavior for these threats or every viral outbreak longer term? This could be very economically damaging. It might damage travel and entertainment industries - they are certainly suffering severely in the short term. It will help certain industries. Certain behaviors may permanently change. Personally, I believe this will make ecommerce even more of a long term winner. And it might very well help many of our tech companies which enable remote work by computer in some way.

4) Opinion #1: While stocks may have further to fall, the rebound is going to be huge. As I stated in #1, the negative news might keep coming for awhile. The reality probably won’t be nearly as negative as it is portrayed but that won’t matter. So a lasting large rebound will take awhile. And there will be lasting economic damage from our reaction to this threat which will take awhile to resolve. But we will have positive catalysts. I am confident that there will be a vaccine by next year, possibly sooner. And I’m optimistic that the worst case scenarios are unrealistic - this virus typically causes serious illness in only the elderly and those with compromised immune systems. We will probably learn over the next few months that very few of us will be severely affected.

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. Yes, once there is a light at the end of the tunnel, I would expect the same. The first glimmers will be news of progress on a vaccine or the decrease in new cases (peaking of the spread) or even a slower rise in fatalities. These can be hard to predict so I will stay invested to catch the upswing.

Overall, while I’m concerned about a recession’s impact on growth companies in the short term, I don’t think their longer term prospects are adversely affected while some are strengthened. I remain long AYX, SHOP, TTD ,MDB, OKTA, ESTC, CRWD, HUBS, VEEV, ZEN, DDOG, PINS and some other non tech companies. I sold a couple (SPLK and LVGO) on strength to focus on higher conviction positions. I recently added SE which I think will be a long term ecommerce winner. I don’t own anything related to the travel industry and don’t plan to - there should be some long lasting damage.

As my opinions suggest, I am optimistic about the outcome of this pandemic - at least relative to other health risks. But I believe our response to this threat has caused significant economic damage and changed the investing landscape. Asset prices were inflated by easy money. And we were overdue for a bear market - investor confidence will take some time to recover and start another bull. A recession seems likely and our growth companies may hit some bumps or fall further out of favor - before they come roaring back.

Dave

JoeChristmas · March 15, 2020, 4:38am

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

Why? I can see a massive realignment within the market, definitely. And I think SaaS stocks are going to be relative winners. But why will “stocks” in general rebound in a huge way anytime soon? I am seriously looking for some insight here, as I see a very bleak period ahead. Someone give me the optimistic scenario!

I think people are underestimating the macro economic situation. I know that’s out of scope for this board, but it is relevant when you speak about revenue numbers in 2020 and 2021 at a minimum.

Why am I so negative? China was shut down for two months, and continues to be operating at less than capacity. But slowly ramping up. But ramping up for whom? Europe is now shutting down in ways we’ve never seen. Italy’s initial quarantine measures were ineffective (where the USA is right now, trying to implement “quarantine lite”), so they and other parts of Europe have introduced draconian measures. It varies by country, some are more serious than others, but it’s only a question of time. These draconian measures should last for many, many weeks. My guess is for 2 months minimum. Schools shut down completely (almost certainly until the summer). Bars and restaurants closed or with very limited hours and other restrictions. Curfews in place. Borders shut down to non-residents. Gatherings over 30 people illegal. Yes, it varies in scope across Europe, but the trends are clear. Draconian measures are where all countries are heading here (I’m writing this from Europe), although at different times.

The USA is about 10 days away from Italy like numbers without major changes. Some very positive measures are now in place in the USA, and people are starting to take it seriously, but it’s very late. And it’s not good enough in some areas, e.g. NYC, Chicago, LA, and other big cities. It reminds me of what Italy did for 5 days (“recommendations” to say home, etc.), until they realized they needed to shut it all down. The USA is still not there, yet. It’s inevitable it will come. Look for NYC to announce more draconian measures over the coming days, and other cities will follow.

And God knows what is happening in India and Pakistan, Brazil, Russia, etc., right now. In other words, this is going to come in waves across multiple continents, with the end result being major economies shutting down for months, one way or another (either proactively, or by force). Just when one major economy starts to slowly ramp back up (e.g China), we’ll see another major economy go down (Italy, soon Spain and France, etc.). And it will play out over the next several months, perhaps all through 2020, depending on whether warmer weather can slow this down, at least in the northern hemisphere.

With so many companies awash in debt, having used their cash to buy back shares, what happens when their revenues fall off a cliff in Q2/Q3? I suppose bail outs can help, but at some point, it’s not sustainable. And I haven’t even mentioned what impact all of this will have on the consumer. Including long term behavioral changes. You yourself said you are saving a lot of money now in quarantine to plow back into stocks. Great! My family has probably reduced its monthly budget by 30% over the past month, too. But multiply that out by 200 million Americans, 250 million Europeans, Brazil, India, etc., etc., etc. You see where this is going? And these behavioral changes can become permanent, or at least partially so (“Why did we eat out so much before” or “Why did we travel on business so much before?”).

I just don’t think markets have truly begun to process what will be happening over the next 6 months, and the fundamental changes it will bring to the world economy. I think there is still the false hope that this “isn’t all that bad,” or “we’ll shut down for a few weeks and then everything goes back to normal,” etc., etc.

Of course, I could be way wrong. And you never know how stocks will perform in light of changing market conditions.

I really would like to hear the counter argument. Again, knowing this is not a macro economic board, but also understanding that even SaaS companies need actual customers, and businesses are about to see real impact on revenues in the coming months, if not years.

GauchoChris (and others): You are sure the rebound is going to be huge. Again, why?

mooo · March 15, 2020, 5:37am

I just don’t think markets have truly begun to process what will be happening over the next 6 months, and the fundamental changes it will bring to the world economy. I think there is still the false hope that this “isn’t all that bad,” or “we’ll shut down for a few weeks and then everything goes back to normal,” etc., etc.

Wait…
The five indexes went down year-to-date by

-38.1%
-32.7%
-25.7%
-23.2%
-19.7%

Also the stock market has its worst day since 1987. I think the market is very well pricing in every possible worse case scenario. The Market hates uncertainty. In times like this the market is the pessimist and it rarely - if every - gets to the absolute worse case scenario.
That’s why I just love Buffets quote be fearful when others are greedy and greedy when others are fearful. And that’s what I am going to do.

PaulWBryant · March 15, 2020, 8:09am

Mooo’s short post is the most valuable one in this thread. We avoid conversations like this for a good reason: NO ONE KNOWS THE FUTURE, AND NO ONE KNOWS WHAT THE MARKET HAS ALREADY PRICED IN.

I cringe for those of you who have sold out of the market. You are very likely Monday morning quarterbacks at this point.

Write it in stone: If you think you know what the market will do next, you’re wrong.

Let’s stop trying to predict what will happen next, please. I urge patience and vigilance. My approach is what it always is: stay mostly invested and be attentive to both buying and selling opportunities.

Don’t outsmart yourselves.

Bear

SaulR80683 · March 15, 2020, 10:11am

This is ENOUGH. Because of the extraordinary times, we’ve accepted these market timing discussions, but we’ve all said our pieces and we are just repeating ourselves. As Bear just said, none of us know what’s going to happen, and arguing how long the disruption will last, and how severe or mild it will be, is not only off topic for the board, but is like arguing about how many angels can dance on the head of a pin.

Let’s get back to discussing stocks, for instance which of our stocks will get through this the best, and WHY?

PLEASE END DISCUSSIONS OF THE CORONAVIRUS! PERIOD!

Thanks for your cooperation.

Saul

BrianKnittel · March 17, 2020, 12:30am

An inyeresting reply, and one I hadn’t thought of before. I don’t know though if the next few weeks will pay to be valiant.

And that is the “tragedy of the commons”.

“If we don’t hang together, then we will surely hang separately.“ -– Benjamin Franklin

Enjoy,
Brian

buynholdisdead · March 17, 2020, 12:54am

An inyeresting reply, and one I hadn’t thought of before. I don’t know though if the next few weeks will pay to be valiant.

And that is the “tragedy of the commons”.

“If we don’t hang together, then we will surely hang separately.“ -– Benjamin Franklin

Hi All,
If any of you are thinking that you all are investing together then you all are missing the point of what Saul is trying to teach you. This is all about everyone thinking for themselves. Brittlerock, you shouldn’t think that you are a traitor. You are learning some very important lessons on your own ability to handle volatility. Now you need to think what might make you able to hold through the next down turn. (Maybe more cash so you can buy instead of selling).

For all of you that think you can hold a stock up by following anyone, that is not the correct way to be thinking. Everyone should be looking at your stocks, selling the ones that are weak, and buying the better stocks at their lows. This will juice your portfolio as it comes out of this. Investing isn’t about group thinking but individual thinking. Investing for your future and the future of your family. Think for yourself and invest accordingly.

Andy