Some of you have expressed interest in my stock allocations. I will go ahead provide my portfolio composition. The information in this post is as of September 29, 2017 after the market close. Since there will be no more trading days in September, the report is also through calendar Q3 of 2017. I will provide my allocations, but I won’t report portfolio or individual securities performance numbers as Saul and Bear do. I stopped tracking my portfolio performance a couple of years ago. I do track my net worth relative to 1) the end of 2014, and 2) my net worth peak which was in early August 2015. I do this because it serves as a reminder how wrong things can go when one takes on more risk than is prudent. I described what happened when I got overly aggressive here:
Also, as I mentioned previously, I have been mainly living off of my investments since mid-2007 (although I have been consulting in my field) when I resigned from my day job:
When I report my net worth relative to December 31, 2014 and to August 2015, I do not adjust for cash withdrawals needed for living expenses. This means that these measures are not completely relative to the performance of the securities in my portfolio because I do not adjust for withdrawals and additions. Also, in mid-October, I will be starting a full time day job which will mean that I will be once again contributing to (rather than withdrawing from) my investible assets.
I have been following this board since the beginning of 2014 and I have learned a tremendous amount from Saul. I have watched and listened to his moves and his reasons for them. During the first year, I made mistakes by investing in some companies that I would not invest in today (e.g. SCTY, SLZM, and others). I believe that I am now much better at avoiding getting sucked into companies that have major problems or major unknowns that could lead to large declines in shareholder value. I am a true believer that his approach works. I know that my investing decisions are much, much better now than they were 3 years ago. Thank you, Saul!!! I think there is always room for further improvement, and I am actively trying to continue to learn.
I am also trying some modifications to Saul’s approach to see if his methods can be improved; for instance, I am trying to build up my long-term upside by buying leaps on my high conviction secular growth stocks by paying for these calls by selling near term puts around dates that have potential catalysts (e.g. earnings announcements when I think there is a high chance for a big beat). Once the puts expire worthless then I am left with the leaps without the risk of holding the short puts (this the downside risk is then gone while the upside remains intact). I am careful not to sell too many puts at once so I wait until it works out before I rinse and repeat. So far it’s been working very well. I now have leap positions in SHOP, NVDA, and SQ that were completely paid for by sold puts that are now gone (expired worthless). I had been keeping a 10% cash buffer (until recently) in case something goes wrong with the general market (i.e. correction or bear market). Recently, I have reduced my cash position because I know that I will be earning a paycheck so I don’t need to maintain a large cash cushion to cover future (multiple years worth of) living expenses in the event of a large market correction.
I will report my portfolio allocations, but I will focus more heavily on the reasons for choosing certain allocations levels on specific investments. In the past, I have not paid so much attention to my individual stock allocations. I am now more methodical in allocating by giving my highest conviction/lowest risk stocks the highest allocation. My conviction and assessment of risk is subjective and is based on a number of qualitative and quantitative factors, many of which I describe below.
- rounded to the nearest 0.1%
- time value of options is not counted in value
cash 4.3% SHOP 20.9% SHOP shares 0.6% SHOP Jan2019 $100 calls (time value of options not counted) NVDA 15.1% NVDA shares 0.4% NVDA Jan2019 calls ($150/$160/$170 strike prices -0.3% NVDA short puts (Oct $200 and Jan2018 $180 put options) -0.6% NVDA Q3 earnings options trade (Nov options: long $180 calls, short $200 calls, short $200 puts, long $190 puts) SQ 10.3% SQ shares 0.8% SQ Jan2019 $20 calls (long) 0% SQ Jan2019 $30 calls (long) 0% SQ Oct 2017 $30 puts (short) ANET 10.4% ANET shares -0.1% ANET Oct $200 puts (short) 0% ANET Jan2019 calls (long) TLND 8.8% TLND shares NTNX 6.8% NTNX shares -1.5% NTNX Oct $35 puts (short) -0.4% NTNX Oct $30 puts (short) 0% NTNX Jan2020 $25 calls (long) LGIH 6.6% LGIH shares TWLO 5.0% TWLO shares HUBS 4.6% HUBS shares JUNO 3.3% JUNO shares WIX 3.3% WIX shares NKTR 1.9% NKTR shares UBNT (no shares but have a short term options trade-see below) -0.3% UBNT Oct $65 puts (short) 0.2% UBNT Oct $55 calls (long) 0% UBNT Oct $60 calls (short) SPLK (no shares but have a long term options trade-see below) 0% SPLK Jan2019 $75 calls (long)
11.4% of portfolio value = Max loss from short put positions (assuming all underlying stocks go to zero)
39.8% gain needed to reach 12/31/14 value
90.2% gain needed to reach August 2015 value
Why are my allocations what they are?
Summary: In general, my allocations are what they are based on my view of the following:
• Growth potential. Do I think that the company has significant growth potential? This has largely to do with the market cap of the company, the growth rate of its markets, and the market share that it has yet to gain. For example, I cannot invest in AAPL because it has a huge market cap, it has captured a large percentage of its market, and growth in cell phone adoption is slowing. I look for companies that I think can grow their market cap 10x.
• Historical growth. Are they growing fast? Is growth accelerating? Do I think the growth will continue or even accelerate?
• Visibility into future growth. Do I think growth will continue for a long time into the future? Is it a secular growth story for multiple years going forward?
• Competitive position. Is the company well positioned in terms of product-market fit? Are they a leader? Are they dominating their market(s)? Are they at risk of losing share? Are they at risk of margin compression?
• Are they profitable or do I think they have a path to profitability?
• Do I think that they undervalued?
• Risks. What are the risks? Can I trust management? What are the competitive threats?
Ok. Let’s look at each holding.
SHOP (20.9%): SHOP is my largest holding. They are the fastest growing company with loads of recurring revenue. They are the leading company in enabling merchants to do e-commerce, and this market is a secular growth story with lots of growth potential left. The market cap is about $11B and I could envision them becoming a $100B company. They are located in Ottawa which provides me geographic diversification (I hold a lot of other companies which are based in the SF Bay Area); Ottawa also has a good tech labor pool with relatively little competition (employees are not as subject to poaching). The CEO seems very focused on the long term success of SHOP; he also seems incredibly ethical and trustworthy. Customer adopted accelerated last quarter with 100,000 new merchants added; is this an inflection point to faster growth? Despite it being my largest position, I do not plan on selling any shares. And I believe SHOP deserves the amount of investment dollars that I have given them.
NVDA (15.1%): NVDA is also growing incredibly fast. They are at the epicenter of AI, autonomous cars, and migration to the Cloud. NVDA has a market over $100B so you might ask can they grow 10x from here. I do not know. I do not know how big AI will get, but I think it will get A LOT bigger and NVDA is currently enabling it. They are the picks and shovels provider that makes AI possible. NVDA’s GPUs are advancing faster than Moore’s Law and the SW advances related to AI are also advancing exponentially; we have a double exponential and this makes it difficult to predict how big it will get and how fast. I follow AI advances and I am amazed how fast things are advancing in both applications and capabilities. Can NVDA become a 1 trillion dollar company? I think maybe and I certainly wouldn’t bet against them. The CEO and founder seems incredibly intelligent and he has demonstrated great vision and execution. I suspect this company will grow much faster than is generally expected and thus I think that they high P/E ratio is more than justified. NOTE: I have significant long-term upside; I also have an options trade/bet in place on a big Q3 earnings/revenue beat (downside on this bet is limited to a 0.3% portfolio loss while upside is potentially a 1.3% portfolio gain).
SQ (10.3%): SQ is still small at a $10B market cap. They have so many levers to grow and are adding new services, and a ton of recurring revenue. They are entering new geographic markets and still have a lot more to enter. What I like most about them is their focus on their customers; they talk about giving their customers more superpowers. They also talk about helping their customers’ customers. SQ’s offering is very sticky and it’s becoming stickier as they add more benefits to their customers. They are using AI to automate making their growth easier to achieve to less effort. SQ will probably be profitable very soon. I have high conviction that SQ will continue to grow rapidly. They are on their way to eventually becoming a $100B company.
ANET (10.4%): ANET is also growing very rapidly, stealing market share from CSCO. Risk from CSCO lawsuit seems solved. I like the CEO. ANET is a secular growth story. Data centers are still showing rapid growth and increased computing needs due to AI should further accelerate growth. 100G and 400G are coming and ANET will benefit. The company is worth $14B and I think it’s possible for it to get bigger than CSCO (eventually) which is a $167B company. NOTE: SQ is listed before ANET because my options positions on SQ are much greater than my options position on ANET, giving me much higher upside potential on SQ.
TLND (8.8%): TLND is another fast growing company. Customer adoption looks great. Competitive position looks solid. It’s still small at about $1B. It’s thinly traded and may not be so well know yet. This gives it some more risk but also great opportunity for growth and to become more recognized. I like the CEO’s view that growth need come at the expense of profit. My conviction is a little less than my top 4 companies so my allocation is a bit lower. I think TLND could easily grow by 10x or more. NOTE: I would like to have had additional upside potential on TLND, but options are not yet available on TLND.
NTNX (6.8%): I’ve recently added NTNX. I’ve written about them before so I won’t repeat:
The company is a $3.5B company. It’s growing super fast. Their customers LOVE them as shown by the highest NPS (90) that I’ve ever seen. In 3 years, NTNX has captured business from more than 25% (from about 0%) of the world’s 2000 publically traded enterprises!! And NTNX is continuing to win new customers at a rapid pace, increasing the customer count by 87% in the past year. I think the company is significantly undervalued and I took the opportunity to start with a large position. There’s the possibility of them getting acquired; HP and CSCO wanted them last year but the CEO thought they could do better for shareholders by growing….and that they have done in their first year as a public company. NOTE: I have pretty significant options positions on NTNX giving me potentially >50% more shares (controlled) should the share price begin to exceed $25.
LGIH (6.6%): LGIH is growing fast. They are a $1B home builder. How big can they get? Biggest 3 home builders have market caps ranging from $8-15B. I think they have executed well. I think there’s growth left but I question a few things about them. 1) They are in a cyclical industry, and 2) they have high debt level due to continue land purchasing. These 2 things make them vulnerable should the cycle shift back down or should interest rates spike up. I don’t think there is an immediate threat of either. Interest rates are VERY favorable for LGIH and for people who want to buy homes. Home ownership percentage is still well below the longer term average and millennials are now starting to buy in increasing numbers. I think there’s growth ahead still, but I plan on keeping my allocation smaller than my top 6 holdings.
TWLO (5.0%): TWLO is growing revenue very fast and they are adding LOTS of customers very quickly. I think that the loss of some of their Uber business gave investors an opportunity to get in….in fact, the price seems to me to still be very attractive at current levels. TWLO is a $2.75B company. They could become a big communications enabling company. Lots of recurring revenue. I could see them becoming a $30-50B company if they can continue to add increasingly valuable communications solutions and if they can penetrate large enterprises. I’m just not as sure about TWLO as I am about my top 6 holdings. A 5% position is appropriate for now.
HUBS (4.6%): HUBS is a $3B company. They are growing very fast and they are adding new products and services. They seem to know that they are doing. And they help their customers acquire customers which makes me believe that they should also be good at acquiring their own customers. I’m keeping this position pretty small because I’m not sure if their business is that defensible.
JUNO (3.3%): JUNO is my replacement for KITE. It’s hard for me to value this company. It’s currently worth $5B. KITE was acquired for $12B. I think JUNO has a better therapy than KITE but JUNO is still 18 months to 36 months from approval. They might get acquired….they probably will. I don’t think I’ll make 10x on this one but I’m pretty sure I’ll make at least double in the next 2 years. There is regulatory risk.
WIX (3.3%): WIX is a fast growing company with a huge customer base and lots of recurring revenue. They are also growing very fast. I don’t like their high SBC, and I have considered selling out. I’m holding them for now but I’m keeping my position small.
NKTR (1.9%): NKTR is a biotech worth about $3.75B. They have some approved products. They are a lot of partnerships with pharma. They also have several drugs in the pipeline, some in late stage clinical trials. I bought them because of their immumo-oncology pipeline which I think is pretty interesting. As with most/all small biotechs, NKTR is risky but I think it has 10x potential. Need to keep this holding small.
UBNT (0%): I don’t want to hold UBNT long term. I have a short term options trade in place because I believe that we have a short term opportunity to make a 20% return with limited downside risk. I have leveraged this with an options trade where the number of long/short calls that I own are 7x the number of short puts that I own.
SPLK (0%): I sold all my SPLK shares, but have some leaps remaining. The number of leaps that I own are not that significant, and I haven’t decided whether I should sell them back or just wait and see if the shares go up. I do not intend to buy any SPLK shares in the future.
Again, my position sizes are directly related to 1) my conviction that the company can/may/will increase significantly in value, and 2) my belief that the execution of successful growth hugely outweighs the downside risk of trouble with the business/business plan execution. Also, I believe that most of my positions have the potential to increase in value by 10x in the next 5-7 years; such an increase on any one of my top 6 holdings would provide me with huge portfolio upside. I hope that describing my reasoning behind my position sizes is helpful and maybe it will generate some additional discussion.