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.
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
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.