GauchoRico portfolio update 12/31/2020

The year 2020 was unlike any other. Certainly within my lifetime, this past year was the most disruptive. The number of deaths and personal turmoil felt by millions around the world were and continue to be tragic. Fortunately, we can all look to a better and brighter future in that respect. While things are currently at their worst, the end of this pandemic is within reach. For most, life should return to a semblance of normal this year. We will be able to travel freely without fear, go to the movies, eat out, and socialize with friends, family, and even strangers. I know for me, having isolated myself since March, it will probably be the most liberating feeling I have ever felt. Last year was also disruptive to companies within industries that require human-to-human contact to function properly; these companies really got hammered.

On the other hand, companies that enable digitization and remote interaction flourished. It was clearly an uneven year for companies. In 2020, the S&P 500, which I usually consider a pretty good proxy the overall stock market, had an 18.4% return (this includes dividends as well as stock price appreciation). That sounds like a pretty good year, clearly above the average annual return for the index. Digging deeper, I went through the list of S&P 500 component companies and manually counted the number of companies that had positive and negative returns for the year. I tallied 319 companies with a positive return and 179 companies with a negative return; this adds up to only 498 companies so I must have miscounted. The best performer was TSLA (+743%), and the worst performer was CCL (-57%); it was a disastrous year for the cruise ship industry. The S&P 500 is market cap weighted so the largest companies contribute proportionally more to the index’s overall return, and, thus, it comes as no big surprise that the stock market did better than the economy; we know that, as a group, small businesses really suffered in 2020 whereas large companies weathered the storm, or in many cases gained share, because they had strong balance sheets and more resources to adapt to changes in people’s behavior. So, financially speaking, 2020 was a year of tremendously unequal financial fortunes.

Since I was invested primarily in publicly traded SaaS companies, my portfolio’s performance last year was by far the best of my lifetime. I venture to say that it would be highly unlikely that any future year could come close to matching my 2020 portfolio return. Even better, the 2020 return of 245.6% compounded on top the very excellent returns of 2017, 2018, and 2019 provided a total 4-year return of +1135% compared to the S&P 500’s 4-year return (including dividends) of +81.3%. This is a staggering difference. Considering a $10,000 investment at the start of 2017, the funds if invested in the S&P 500 would have grown to $18,125 whereas the funds invested in my portfolio would be worth $123,463 (pretax value). Of course, I had to pay more capital gains taxes because I make frequent adjustments to my portfolio’s composition, but I’ll gladly trade more taxes for much higher returns!


**Year	Return		Cumulative Return**
2017	  +61.6%	   +61.6%
2018	  +55.9%	  +152.0%
2019	  +41.8%	  +257.3%
2020	 +245.6%	 +1134.7%

PRIOR 2020 PORTFOLIO UPDATES

01/31/2020: https://gauchorico.com/2020-01-31-portfolio-update/
03/06/2020: https://gauchorico.com/2020-03-06-portfolio-update/
03/13/2020: https://gauchorico.com/2020-03-13-portfolio-update/
03/31/2020: https://gauchorico.com/2020-03-31-portfolio-update/
04/03/2020: https://gauchorico.com/2020-04-03-portfolio-consolidation/
Rationale for Consolidation: https://gauchorico.com/rationale-for-further-portfolio-conso…
04/30/2020: https://gauchorico.com/2020-04-30-portfolio-update/
06/05/2020: https://gauchorico.com/2020-06-05-portfolio-update/
06/30/2020: https://gauchorico.com/2020-06-30-portfolio-update/
08/07/2020: https://gauchorico.com/2020-08-07-portfolio-update/
09/30/2020: https://gauchorico.com/2020-09-30-portfolio-update/
10/31/2020: https://gauchorico.com/2020-10-31-portfolio-update/
12/04/2020: https://gauchorico.com/2020-12-04-portfolio-update/

PORTFOLIO PERFORMANCE

YTD Performance


	**GR port	S&P500TR**
Jan     +25.7%	  0.0%
Feb     +27.7%	 -8.3%
Mar      -2.9%	-19.6%
Apr     +16.7%	 -9.3%
May     +64.7%	 -5.0%
Jun    +110.3%	 -3.1%
Jul    +144.7%	 +2.4%
Aug    +144.3%	 +9.7%
Sep    +187.0%	 +5.6%
Oct    +172.6%	 +2.8%
Nov    +231.7%	+14.0%
**Dec    +245.6%	+18.4%**

Overall, the portfolio was up 4.2% in the month of December. After no new all-time highs since October 13th ATH of +250.3%, December produced 4 ATHs on consecutive trading days between 17Dec and 22Dec, inclusive. The highwater mark was achieved on 22Dec at +287.2% YTD. The year was closed out at +245.6 which is 10.8% below the ATH.

Some portfolios with similar allocations have seen different performances. I began options trading in April 2020 sort of as an experiment. Of my portfolio’s 245.6% increase, 22.7% was produced from options trading and 222.9% was from investing. In other words, had I not engaged in my options trading experiment, my portfolio would have gained only 222.9% in 2020. For a post on my options trading results please see the following link:

https://gauchorico.com/2020-the-year-i-became-an-options-tra…

The year was anything but a smooth ride. At the start of 2020, the portfolio was still recovering from a brutal sector rotation out of SaaS between 26Jul2019 and 22Oct2019. The portfolio rallied for 9 straight weeks from mid-December 2019 until mid-February 2020 before getting rapidly sucked down in the pandemic panic. The portfolio dropped 45% in a matter of 27 days, which I believe may have been the most rapid large fall in US stock market history. The world’s central banks’ and governments’ fast monetary and fiscal stimulus packages averted financial armageddon and sparked one of the most monstrous rallies ever. It was one of the worst times to be on the sidelines with cash. My portfolio hit a new all-time high on 12May followed by 34 more ATHs by the end of 2020.

In a concentrated growth stock portfolio a lot of volatility comes with the territory. Some people can’t stomach volatility and opt for more consistency with lower expected long-term returns although this approach may not have worked so well in 2020. I prefer higher long-term returns with a tolerance that my portfolio will probably have wilder swings and occasional massive drops. The table below shows some of the larger swings over the past few years plus some smaller swings that occurred in 2020:

**PEAK—BOTTOM	          % DROP	Days: Old Peak to New ATH**
Sep18 - Dec18 		  -37%	        176
Jul19 – Oct19		  -37%	        207/291*
Feb20 – Mar20 		  -45%	         84
9Jul20 – 16Jul20	  -14%	         25
5Aug20 – 11Aug20	  -25%	         27
13Oct20 – 10Nov20 	  -27%	          5	

                                        *Intraday recovery/Closing price recovery

The portfolio has dropped 10.8% since the last ATH of +287.2% YTD on 22Dec. Especially after a new ATH, I’m always prepared for a 50% drop in my portfolio. The overall market was rising during the last few days of 2020 while my portfolio was falling off of the ATH.

Below I’ve appended new portfolio highs onto the table that I posted in my last update. The entries from 02/18/20 through 12/03/20 are reposted and the entries after 12/03/20 (bolded) are new.


02/18/20	 +40.7% <<< YTD high prior to lockdowns
03/06/20	 +21.9% <<< portfolio down 10% on the day
03/09/20	  +3.6% <<< portfolio down 15% on the day; Fear index=3
03/11/20	  +0.6% <<< portfolio down 8.8% on the day; Fear index=4 
03/12/20	 -11.0% <<< portfolio down 11.4% on the day; Fear index=2 (1 intraday)
03/16/20	 -22.8% <<< portfolio down 18.9% on the day; Fear index=3
05/22/20	 +61.0% <<< new all-time high (ATH)
05/27/20	 +47.5% <<< portfolio dropped 15% (intraday 5/27) in 3 trading days
05/29/20	 +64.7% <<< new ATH (end of May 2020)
06/03/20	 +78.8% <<< another ATH; day after CRWD and ZM earnings
06/10/20	 +79.4% <<< another ATH
06/15/20	 +84.6% <<< another ATH
06/16/20	 +89.4% <<< another ATH
06/17/20	 +92.1% <<< another ATH
06/18/20	+101.7% <<< another ATH
06/19/20	+103.3% <<< another ATH
06/22/20	+111.4% <<< another ATH
06/25/20	+114.6% <<< another ATH
07/01/20	+119.7% <<< another ATH
07/02/20	+121.4% <<< another ATH
07/07/20	+125.7% <<< another ATH
07/08/20	+139.9% <<< another ATH
07/09/20	+147.0% <<< another ATH
07/13/20	+118.6% <<< portfolio down 10.5% on the day (biggest $ drop ever)
07/16/20	+113.1% <<< July trough
08/03/20	+156.9% <<< another ATH
08/04/20	+158.7% <<< another ATH
08/05/20	+158.8% <<< another ATH
08/07/20	+108.3% <<< OUCH! Biggest dollar drop ever (and -19.5% in 2 days!)
08/11/20	 +94.6% <<< August trough
09/01/20	+177.9% <<< another ATH (day after ZM reported)
09/22/20	+187.1% <<< another ATH
09/24/20	+169.5% <<< trough
10/01/20	+196.6% <<< another ATH
10/05/20	+200.7% <<< another ATH
10/07/20	+209.3% <<< another ATH
10/09/20	+223.0% <<< another ATH
10/12/20	+234.8% <<< another ATH
10/13/20	+250.3% <<< another ATH (portfolio peak)
11/09/20	+173.8% <<< -14.75% in one day and largest $ drop ever (ouch!)
11/10/20	+155.1% <<< -6.8% on the day and -20.6% in 2 days; November trough
11/30/20	+231.7% <<< end of November
12/01/20	+195.2% <<< day after ZM reported (-11% on the day)
12/03/20	+212.3% <<< day after CRWD reported (+7.3% on the day)
**12/17/20	+251.2% <<< another ATH**
**12/18/20	+263.3% <<< another ATH**
**12/21/20	+273.9% <<< another ATH**
**12/22/20	+287.2% <<< another ATH and 2020 peak**
**12/31/20	+245.6% <<< current portfolio reading**

Below is the weekly portfolio YTD performance.


                   **GR            S&P    Delta**
01/03/20	    4.5%	  0.1%	  4.4%
01/10/20	   14.8%	  1.1%	 13.7%
01/17/20	   19.6%	  3.1%	 16.5%
01/24/20	   22.1%	  2.1%	 20.0%
01/31/20	   25.7%	  0.0%	 25.8%
02/07/20	   28.1%	  3.2%	 25.0%
02/14/20	   39.8%	  4.9%	 34.9%
02/21/20	   29.1%	  3.6%	 25.5%
02/28/20	   27.7%	 -8.3%	 35.9%
03/06/20	   21.9%	 -7.7%	 29.5%
03/13/20	   -4.8%	-15.7%	 10.9%
03/20/20	   -6.8%	-28.3%	 21.6%
03/27/20	   -2.4%	-21.0%	 18.5%
04/03/20	  -12.5%	-22.6%	 10.0%
04/10/20	    3.1%	-13.2%	 16.2%
04/17/20	   18.7%	-10.5%	 29.2%
04/24/20	   20.5%	-11.7%	 32.1%
05/01/20	   13.8%	-11.8%	 25.6%
05/08/20	   37.7%	 -8.7%	 46.4%
05/15/20	   47.8%	-10.7%	 58.5%
05/22/20	   61.0%	 -7.8%	 68.8%
05/29/20	   64.7%	 -5.0%	 69.7%
06/05/20	   67.4%	 -0.3%	 67.7%
06/12/20	   74.8%	 -5.0%	 79.8%
06/19/20	  103.3%	 -3.2%	106.5%
06/26/20	  107.8%	 -6.0%	113.7%
07/02/20	  121.4%	 -2.1%	123.5%
07/10/20	  144.2%	 -0.4%	144.6%
07/17/20	  115.4%	  0.9%	114.5%
07/24/20	  113.2%	  0.6%	113.5%
07/31/20	  144.7%	  2.4%	142.3%
08/07/20	  108.3%          4.9%	103.3%
08/14/20	  102.9%          5.7%	 97.3%
08/21/20	  124.4%          6.5%	118.0%
08/28/20	  135.5%         10.0%	125.6%
09/04/20	  142.9%          7.5%	135.4%
09/11/20	  143.6%          4.8%	138.8%
09/18/20	  161.7%          4.2%	157.5%
09/25/20	  181.0%          3.5%	177.4%
10/02/20	  192.0%          5.1%	186.9%
10/09/20	  223.0%          9.2%	213.8%
10/16/20	  230.7%          9.4%	221.3%
10/23/20	  204.8%          8.9%	195.9%
10/30/20	  172.6%          2.8%	169.8%
11/06/20	  221.2%         10.3%	210.8%
11/13/20	  173.1%         12.8%	188.0%
11/20/20	  199.9%         12.0%	169.8%
11/27/20	  224.9%         14.5%	210.4%
12/04/20	  229.4%         16.5%	212.9%
12/11/20	  230.9%         15.4%	215.5%
12/18/20	  263.3%         16.9%	246.4%
12/24/20	  276.3%         16.7%	259.6%
12/31/20	  245.6%         18.4%	227.2%

ALLOCATIONS


     **12/31/20**    12/04/20     11/30/20
CRWD	**31.5%**    25.3%	      22.3%
NET	**17.8%**    19.1%	      18.3%
DOCU	**16.4%**    19.4%	       9.5%
ZM	**11.0%**    14.8%	      28.2%
DDOG	**10.4%**    11.2%	      10.8%	
PTON	 **4.2%**     3.3%	       3.3%
LSPD	 **3.3%**     ---	        ---
GOLD	 **3.0%**     3.2%	       3.1%
BAND	 **1.5%**     --- 	       --- 
BPRMF	 **1.4%**     1.3%	       1.2%
NEM	 **1.0%**     1.1%	       1.1%	
Cash	 **0.7%**     3.3%	       4.6%

The above allocations include leaps on CRWD, DOCU, and NET. I won’t get into the details on the breakdown of options versus shares, but these options amplify the upside and the downside of the positions. Also, 2.8% of my portfolio’s total value will used as an estimated tax payment on Jan. 15, 2020, meaning that I will need to either sell something or go on margin.

PORTFOLIO CHANGES

Changes since 04Dec2020

I had previously sold a lot of my ZM position during the first week of December after the Q3 earnings results. I sold a little more on 14Dec. I had intended to sell more ZM to bring the allocation down to around 9-10%, but I played with selling some covered calls against these shares. Now ZM shares have dipped below $350, and I am reluctant to sell at these prices so I’m still holding out for a rebound. Also, my allocation is dropping without needing to sell more shares.

I bought LSPD, a new position, several times between 7Dec and 14Dec.

I trimmed a small amount of the CRWD position in my tax deferred account on 22Dec. I had been resisting trimming CRWD despite my oversized position.

I bought BAND, another new position, on 22Dec.

My cash position dropped down to 0.7% from 3.3% on 4Dec. The cash allocation dropped from new purchases (see above) and because the positions in the portfolio grew creating a larger denominator.

PORTFOLIO COMPANIES

CRWD (31.5%)

CRWD sits 7% below its ATH. The company continued to execute incredibly again and has a multitude of growth drivers pushing business forward: international expansion, new modules/cross selling, an expanding market/TAM, and now a heightened urgency for effective cyber security protection in the wake of the highly visible SolarWinds attack. It sure seems as if CRWD is the best positioned company to capitalize on increased cyber security spend that surely has already started. CRWD’s revenue growth has been steady in the mid-80%s for many quarters. All the other important financial metrics that I track for CRWD are phenomenal. I previously have pondered whether the company would have experienced revenue growth deceleration if not for the pandemic. I now wonder if CRWD can actually accelerate revenue growth. All the stars appear aligned for CRWD to continue its hypergrowth and domination of the Cloud-based cybersecurity market, and, despite having a 31.5% allocation, I feel a reluctance to reduce my oversized position.

NET (17.8%)

NET is 14% below its recent ATH. The company revenue growth is quite a bit lower than CRWD’s, but it has been accelerating. In addition, NET has some products and services that it has been giving away for free on a trial basis; customers are now paying for these offerings so revenue should see an additional boost. NET’s recent, rapid-fire launch of new products, services, and enhancements gives me extra confidence that NET is winning in its market. Despite it recent share price rise and its high valuation multiple, I’m not planning on selling any shares as I await to see how well NET will execute in 2021.

DOCU (16.4%)

DOCU shares are 23% below the ATH that was reached just before their Q2 FY2021 earnings. It’s business metrics, except for a deceleration in customers added in the most recent quarter, are continuing to improve. Other investors seem to fear that DOCU’s business growth may slow down in 2021. Management told analysts to expect that. I think they may be overly conservative. I also see international expansion and the eventual addition of the new product revenue streams coming on line. By comparison, DOCU shares seem less expensive than most of my other holdings. I’m planning on maintaining my allocation.

ZM (11.0%)

ZM shares have been falling ever since their Q3 earnings release and now sit 43% below their 19Oct ATH. Expectations for ZM were lofty, as were mine, going into the Q3 earnings announcement. I shared the reasons for my disappointment and for slashing my allocation in my 12-04-2020 portfolio update [ADD LINK]. I was waiting until 2021, a new tax year, to sell all the shares that I planned on selling. I also expected somewhat of a rebound in the shares after they dropped to the low $400s; so far I have been wrong about that, but we’ll need to wait and see what happens in early 2021 now that all the yearend profit taking, tax loss selling, and hedge and mutual funds’ portfolio rebalancing is complete. The Q1 FY2022 earnings release is due out on or around March 1, 2021.

DDOG (10.4%)

The last trade has DDOG shares 17% below their ATH. I had cut my allocation a little in November, and I’m currently holding off on making further changes until I see how their December quarter went. I expect their Q4 results out on or around 11Feb2021.

PTON (4.2%)

PTON is only 9% below their ATH. I previously shared my thoughts about PTON after their 5Nov earnings release in my last portfolio update. The big news since that report is the Precor acquisition. In my opinion, this acquisition is a great long-term fit because 1) it should help alleviate PTON’s supply constraints by adding a very large manufacturing space in the United States, and 2) it should enable easier penetration of the hotel and gym markets to PTON; the Peloton community is very engaged and I believe that not only tracking of workouts and goals but also competition among friends are important aspects that are only possible if everyone is using a standardized Bike from Peloton. People have their Bikes at home, but, when herd immunity allows for travel and gym visits, Peloton members will be very pleased to see the same standardized Bike in the hotels and gyms that they use. I think that the availability of Peloton equipment will be an important selection criterion for booking certain hotels and joining specific gyms; therefore, since hotels and gyms compete for customers, having important amenities, such as Peloton Bikes (and Treadmills) will be an important differentiator. Precor’s relationships with the hotels and gyms should boost penetration of those market segments. Finally, Precor’s business was really struggling, so PTON got an excellent purchase price only having to pay about 1% of its market capitalization! What a bargain! I am now more enthusiastic about keeping my PTON shares as they have partially addressed my top concern: the short-term supply constraint.

LSPD (3.3%)

LSPD is just 1% below its ATH. It’s a new position for me. ethan1234 (username on TMF) introduced me to the company after he took a position. LSPD is SaaS company that helps SMBs manage their operations. They focus on SMBs, retailers, restaurants, and golf course operators. The customers/companies in their markets were crushed by the pandemic, and some of them may well go out of business. LSPD is one of many competitors in a fragmented market, and they have a strategy to consolidate that market somewhat; they’ve already completed 4 acquisitions in 2020 for great prices because times are so tough. LSPD may be able to cross sell services to their newly acquired customers which could provide significant synergies as the integrations proceed. Q2 2020 was a horrible quarter for restaurants and retailers, but LSPD’s results were not so horrible as they managed to help many their customers with solutions that enabled them to sell online. Their September quarter was better than the June quarter, but, with the resurgence of COVID-19 in the Fall, the December quarter could be very ugly. The results of the December quarter are expected to be announced in early February 2021, and I will reassess my allocation after I see those results. Last, another reason for investing is the expectation of a strong rebound in business after the post-pandemic reopening.

BAND (1.5%)

BAND is trading 23% below its 52-week high. It’s another new trial position. My reason for trying it out include a low valuation, management’s focus on profitability, and the recent acquisition of some very high-profile customers. BAND also recently acquired Voxbone for a great price; the acquisition will be immediately accretive to gross margins and non-GAAP net income. The top competitor in their market is TWLO, and I don’t usually invest in lower tier competitors so I may decide to sell this one.

BPRMF (1.4%)

BPRMF’s stock is only 3% below its 52-week high. My position is up about 57% since my purchase in July. I own it because I like the space, and the top competitor, UiPath, is not yet available for me to buy because it’s not public. Blue Prism seemed to be undervalued, and I thought that the stock could see some nice gains with the upcoming hype of UiPath’s IPO. In fact, UiPath just filed their draft registration for an IPO a couple of weeks ago.

ADDITIONAL THOUGHTS

What might 2021 have in store? At or near the end of each year I like to ponder what might lie ahead. Let’s go back and revisit what I wrote in each of the past several years before we think about what 2021 may bring.

Here’s what I wrote on 03Jan2018 after my portfolio returned 61.6% in 2017:
2017 was a phenomenal year. Some people say this can’t be repeated in 2018. I wouldn’t go so far to make that statement. Will 2018 be a repeat performance for the stocks that we have picked? I really have no idea. But I think it’s feasible and I think it’s certainly possible. It might even be somewhat likely. I know that I tend to be optimistic, but here are some things to consider:

1) If you look at my stock picks, you will see that 9 of 11 are in tech (or at least related to tech). The other 2 are biotechs that have some pretty interesting pivot events likely in 2018. Techs were sold off in December 2017. I think that a bunch of institutional investors rotated out of tech. I think it’s highly likely that there will be (maybe it’s already started in the first 2 trading days of 2018) a rotation back into tech. Investors will look for growth and growth is in these companies.

2) Tax reform has passed and the analysts (and the companies) have not yet have time to revise their earnings forecasts. This will happen soon. Cramer also said this today, and I agree with him. I think it’s highly likely that we will see a rally into earnings and during the earnings reports (late January through February).

3) The Fed raised rates in December. Will they raise 3-4 times in 2018? The real question is whether there will be evidence of inflation. Maybe we will see some movement there or maybe it will be less than the Fed and economists think (due to the deflationary pressure of technology). I’ve posted about my view of inflation and how people over estimate inflation and underestimate the speed with which technology advances. Technology advancement is happening faster and faster every day and it continues to accelerate. This is difficult to observe. Yes, the Fed has increased rates a few times….the pressure on the gas pedal has been lighted but with current rates the gas is still being pressed and the brakes have not been applied. Monetary policy is still VERY favorable to stocks and to growth stocks specifically. Now, with tax reform, fiscal policy will give stocks a very big boost in 2018.

4) Will there be additional fiscal policy that will favor large corporations? That might be infrastructure spending. I think it will be more difficult to get through than the tax reform. However, an infrastructure bill would further fuel growth.

The end of 2018 was unusual because we had just had a large 2-month market drop that culminated on 24Dec2018. My portfolio had fallen by 37% from the 4Sep2018 peak and the S&P 500 closed out 2018 with a 5.2% decline. Yet, my portfolio managed a 55.9% gain in 2018. Thus, it was sort of obvious that 2019 would probably be pretty and I didn’t have any “wise” words. I didn’t post a portfolio update until 19Jan2019 and here’s what I wrote:

What’s happening in the market? The market low was December 24 and the Fear Greed Index was at 2 out of 100 on that day. The Fear Greed Index is now at 51 which means that the market is neither Greedy nor Fearful. What a turn around and what a buying opportunity December 24 was! 2019 is certainly turning out to be another very interesting year.

Here’s what I wrote on 23Dec2019, a little more than a year ago:
All in all it was a great year even if it seems a little disappointing after the July highs. Looking back, after 2017 most did not expect another spectacular year. And again after 2018, many people did not expect another spectacular year. What do people think is in store for 2020? I think the tendency is to expect a return to the 2019 high, so perhaps, unlike our thinking at the end of 2017 and 2019, we may be expecting a big 2020. Interesting how that works, huh? I’m kind of expecting another great growth year for 2020 and a return to the 2019 high would be a 40% increase in 2020. Anchoring? Maybe. Will the 2020 presidential election cause turbulence? Maybe. Will 2020 finally be the year that FOMO returns? It’s been so long since we had the FOMO that we saw in the late 1990s so it almost seems like we may never see such FOMO again. Maybe the millennials (as a general group) are permanently scarred by 2000/2008. Who knows. Currently, I do not fear a big drop in our stocks (even with the stock market at all-time highs) because multiples in our companies have compressed and because the financial results are improving every quarter which will lead to further compression due to business fundamentals growth.

Here we are after an unbelievable 2020 for the portfolio. I think FOMO has been coming back, finally, after 20 years. There is a whole new generation of fearless “investors” trading stocks and even options. Perhaps, it required the new Generation Z that was never scarred by the dotcom crash and the great recession of 2008/2009 to spark a renewed interest in stock investing. Perhaps those in the older generations (Boomers, GenX, and the Millennials) who had the double dose of PTSD are getting dragged back into stocks because of FOMO created by some of the specular returns since the March 2020 bottom. Or perhaps they have little choice to park their capital in stocks because bond yields are so very low. FOMO may have only just started, and as we saw in the mid-1990s, FOMO can last several years before the next crash. I will be paying attention to how many people start talking about stocks. It’s been so long since this was a main topic of conversation in taxis (it’s been so long that there were no Ubers then), at cocktail parties, and at the barbershop. Money is cheap with historically low interest rates. The government money printing presses are going nonstop. Fiscal and monetary stimulus injections in 2020 have been massive on the order of about $20 trillion on a global GDP of about 87 trillion. Fiscal stimulus was needed to prevent the complete collapse of the global economic system. And there’s still a ton of cash that’s on the sidelines available to be invested in the markets. With a backdrop like this, how could the overall stock markets not rise? I’m expecting a big stock market rally in 2021.

But what about my stocks? I’m in the stocks involved in the digital transformation and shift to the Cloud. These are the stocks that have done so well in 2020, and in 2019, and in 2018, and in 2017. It’s a fair question to ask whether they are overvalued as enterprise value to sales multiples of these stocks have expanded considerably. The stock prices have risen, and part of that rise is very much justified due to the huge increase in business/revenue that these companies have posted. Another part is justified because the revenue growth rates are still so high. And yet another part is justified because my companies have improved their dominance in their markets such that their chances for disruption have been vastly diminished. But, again, the multiple have grown. During 2019 and 2020, we’ve also seen sector rotations from these SaaS companies to so-called “value stocks”. One sector rotation lasted about 3 months from 26Jul2019 until 22Oct2019, but most of such rotations were mini-rotations that often lasted just a few days; we had lots of them in 2020. Each time I wondered whether we were just starting another multi-month, prolonged sector rotation. But they were all head fakes in 2020. On a daily basis, many commentators on the financial networks talked, and continue to do so, about the overvalued software sector and the expected rotation into the value stocks and the reopening stocks. Yet, I have remained invested in these high growth stocks for 4 years now.

Yes, while I’m very confident that stocks in aggregate will be up significantly in 2021, I’m not sure if my portfolio will double in 2021 or whether it will drop 20 percent. I think either scenario is within the realm of possible outcomes. Will there be enough money pouring into the stock markets to rise all boats? I think the answer will be yes. Will SaaS companies get rotated into other investments? Maybe. But for how long I do not know. I would guess though that the 2-year return (from here on) for my portfolio will outperform the market again. How can I predict this? Well, of course, I can’t be sure, but here’s my thinking:

First, I would say that the digital transformation and cloud adoption is probably 25-30% complete with 70-75% to go. This means that there is still a lot of hypergrowth ahead. Once I see that these megatrends are about 75% complete, I will consider a shift to the next thing.

Second, starting in March 2020, we have heard tech CEO after tech CEO say that they have seen several years or more of digital transformation occur in a few months; yet, in Q2 2020, we did see the purveyors of digital transformation and cloud adoption match these statements/observations with a corresponding acceleration in revenue growth. In Q3 2020, we began to see a glimmer but not enough to match the rhetoric conveyed in the Spring of 2020. I and others, like Jamin Ball from Redpoint Ventures, have hypothesized that there is a lag between stated intent of adoption and actual implementation of move-to-the-cloud and digital transformation projects. I think of implementation of these megatrends that were accelerated by the disruption force of the pandemic as coming wave. I don’t think that this wave will hit at the same time but rather that the wave has a multi-quarter thickness to it. The aspects of digital transformation with the highest urgency, such as remote communication, ecommerce, and cyber security, will show financial metric acceleration first. The backend of the wave would consist of products, services, and infrastructure improvements, that are not as urgent but still deliver positive ROI (for customers) and improved business competitiveness. If this hypothesis turns out to be correct then we could see some nice upside surprises in the coming quarters.

Third and related to the second point, the coming replacement of 4G with 5G with its leap in data transmission speed will enable new applications that have not yet been imagined. Past technology leaps, such as the Internet in the 1990s, provided the infrastructure for new industries and the spawning of new companies that have evolved into some of the mega cap titans of today. Thus, there will always be new hypergrowth companies into which we can reallocate. The idea is to stay invested in the dominant hypergrowth companies until they begin to show signs of slowing. Some or all of the portfolio companies that I hold today will probably not be in my portfolio in 2-3 years. Always analyzing and reassessing the companies in the portfolio, as well as alternatives, is one of the hallmarks of successful concentrated growth portfolio investing.

Last, I will say that continued hypergrowth offers a high degree of protection against multiple compression because every high growth quarter that elapses automatically lowers the multiple. The companies in the portfolio are still growing very rapidly, and based on my analysis, I believe that the signs for continued hypergrowth are intact. Therefore, even if there is a sector rotation that compresses the multiples of my SaaS companies, I am currently confident that it is only a matter of time until the companies grow into their valuations.

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Excellent write up.

My little sister was in the big middle of the Katrina relief efforts in New Orleans. She wore a shirt. It said,”Everywhere is ground zero”.

You mention 5g replacing 4g. When I look all across the communications spectrum is see advances world wide at accelerating speeds.

Moreover, I see this acceleration taking place across all industries across all cultures in all counties.

I do not think that what is coming is like the 90’s. It is more like the 1920’s but on steroids. The avalanche of wealth that will be pouring down the arroyos will make everywhere seem like ground zero. Just don’t be invested in buggy whip
makers.

I am looking forward to reading more about how you are using LEAPs. I cannot seem to get you website to be user friendly on my Iphone so will sit down in front of my computer and study your methods there.

Thanks and Cheers
Qazulight

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GauchoRico: Third and related to the second point, the coming replacement of 4G with 5G with its leap in data transmission speed will enable new applications that have not yet been imagined. Past technology leaps, such as the Internet in the 1990s, provided the infrastructure for new industries and the spawning of new companies that have evolved into some of the mega cap titans of today. Thus, there will always be new hypergrowth companies into which we can reallocate. The idea is to stay invested in the dominant hypergrowth companies until they begin to show signs of slowing. Some or all of the portfolio companies that I hold today will probably not be in my portfolio in 2-3 years. Always analyzing and reassessing the companies in the portfolio, as well as alternatives, is one of the hallmarks of successful concentrated growth portfolio investing.

I foresee a shift to satellite in 5G - no more (ugly) poles with clusters of transmitters. Thinking of Starlink. This seems like a game changing eventuality, controlled so far by Elon Musk.

I wonder if there is a way for us mere mortals to invest in satellite 5G now?

CNC

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I wonder if there is a way for us mere mortals to invest in satellite 5G now?

CNC,

Ever try to find a roof leak. The water dripping is never right under the roof leak.

Just know that money is being made. Then look at companies the way Saul looks at companies and invest in them.

AT&T and Comcast and Verizon built the telecom systems that made cloud computing possible. VMware built the software, Amazon and Microsoft built the data warehouses, but the money is captured with CRWD, DDOG and such.

Where the money starts is not where you should put your bucket to catch it.

Cheers
Qazulight

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AT&T and Comcast and Verizon built the telecom systems that made cloud computing possible. VMware built the software, Amazon and Microsoft built the data warehouses, but the money is captured with CRWD, DDOG and such.

Where the money starts is not where you should put your bucket to catch it.

Qazulight,

I think you’re spot on. The fortunes will likely be made by derivative companies that benefit from the building out of 5G. Also, I think the time to make money off of this infrastructure improvement will likely be in 2022 or later (probably nothing much in 2021); and that’s with existing companies that take advantage. For new companies, it will be several years after that IMO.

GR

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Amazon has been heavily working on 5G satellite deployement for some time now:

https://www.forbes.com/sites/jonathanocallaghan/2020/07/31/a…

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Other investors seem to fear that DOCU’s business growth may slow down in 2021. Management told analysts to expect that. I think they may be overly conservative

I usually take good notice of any management statement that lowers expectations. I have a mid-sized position as DOCU’s growth seems to be accelerating again, but it is one to keep an eye on

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the coming replacement of 4G with 5G with its leap in data transmission speed will enable new applications that have not yet been imagined.

I’m TMF’s unofficial 5G contrarian. The hype around 5G is enormous, but I don’t see the financial justification, at least not yet.

For instance, one piece of often-mentioned hype is 5G for autonomous vehicles. That 5G enables vehicles to talk to an edge compute server that talks to other local vehicles. But, since the main application is purportedly crash avoidance, we not only have a multi-decade adoption curve before enough vehicles have it to make it worthwhile, we have the issue of how to avoid crashes with bicycles, pedestrians, and even animals, not to mention runaway tires and the seemingly ubiquitous ladders on freeways. So, it can NEVER be primary, only a secondary or backup mechanism. Yet, it’s too expensive and complicated for that. None of the top autonomous driving companies (Waymo, Cruise, Zoox, Mobileye or Tesla) are using 5G or DSRC or any kind of inter-vehicle communication technology today.

Then there was talk about 5G enabling remote surgery. The problem there is that it’s not an edge compute use case - yes 5G might get the signal to the internet backbone faster, but the speed of light is still a physical limitation, and so the latency for doctors working on a patient 1000 miles away remains the significant factor.

And remember, 5G technology itself has very real limitations. Everyone talks about 5G’s improved latency, bandwidth, and speed, but they forget the distance and obstacle issues. Ironically, most of the IoT world would be better off with 2G than 5G or 4G or 3G because these small devices need to send/receive only a limited amount of data in most cases (images/video are the main exception). The law of physics is that to get faster speeds and lower latencies you need higher frequencies, but the higher the frequency the shorter the range and the more susceptible to interference the signal is. Now, 5G covers a range of frequencies and the allowable power has been increased (leading some to worry about health effects), so even this is somewhat fuzzy.

At any rate, I’ve yet to hear of a real-world application for 5G that justifies all the hype and money being thrown at it. Watching videos on your smartphone doesn’t qualify, especially since it’s likely the origin/edge servers for the videos are the real bottleneck. There is a use case for running 5G data packaging on 4G frequencies to increase bandwidth/data density, but that’s just new firmware.

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Smorgasbord1,

While I agree that distance/interference can be issues with 5G, you’ve lost me with the speed of light comment.

186,200 miles/sec (roughly) is the speed of light.
It would take ~ 5 milliseconds (1/200 second)
Even going around the entire earth at the equator would be only 1/10 of a second.

Supposedly it takes a human 250 milliseconds to react to an event.

Rarely is the speed of light a problem, except maybe achieving it via human transportation :slight_smile:

Rich

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Smorgasbord1,

I am not necessarily a 5G enthusiast, but certainly I am not a contrarian. You have made some claims based upon physics, so let’s look at some of them with a scientist’s eye:

For instance, one piece of often-mentioned hype is 5G for autonomous vehicles. That 5G enables vehicles to talk to an edge compute server that talks to other local vehicles. But, since the main application is purportedly crash avoidance, we not only have a multi-decade adoption curve before enough vehicles have it to make it worthwhile, we have the issue of how to avoid crashes with bicycles, pedestrians, and even animals, not to mention runaway tires and the seemingly ubiquitous ladders on freeways. So, it can NEVER be primary, only a secondary or backup mechanism. Yet, it’s too expensive and complicated for that. None of the top autonomous driving companies (Waymo, Cruise, Zoox, Mobileye or Tesla) are using 5G or DSRC or any kind of inter-vehicle communication technology today.

I have not read where inter-vehicle communications is to avoid crashes per se. I did read where it will allow tighter clustering of vehicles, especially in long-distance situations like on interstate highways. The vehicles will rely upon sensors, not 5G-based communications, to detect potential collisions. They might then broadcast the location of the object to nearby vehicles that may not have a clear sensor image of it, but that would be the only role for 5G in collision avoidance.

Then there was talk about 5G enabling remote surgery. The problem there is that it’s not an edge compute use case - yes 5G might get the signal to the internet backbone faster, but the speed of light is still a physical limitation, and so the latency for doctors working on a patient 1000 miles away remains the significant factor.

Internet signals don’t actually travel at the speed of light. They do only when either transmitted via radio waves, or inside the fiber optic lines (and even that is slightly slower than the speed of light, due to the index of refraction of the glass). But signals must be routed, which involves packets being converted to electrical signals, processed, boosted, and then sent on a new path to their destination. But even so, let’s assume that internet data travels at 10% of light speed. That would be 30,000,000 m/s. At roughly 1,600 meters in a mile, a “slow” signal would traverse almost 20,000 miles in a second. So, the latency for a doctor working remotely 1,000 miles away would be 1/20 of a second. Not sure that is “significant”.

Ironically, most of the IoT world would be better off with 2G than 5G or 4G or 3G because these small devices need to send/receive only a limited amount of data in most cases (images/video are the main exception).

Actually, from what I read, video and image transmission IS the “key” to unlocking IoT. Remote sensors and cameras are what will enable smart cities, smart factories, smart gas pipelines, smart roads, etc. Of course, it also enables the surveillance state, so I have deep misgivings about this.

The law of physics is that to get faster speeds and lower latencies you need higher frequencies, but the higher the frequency the shorter the range and the more susceptible to interference the signal is.

I am a physicist by education, but this is getting more into signal processing, which I claim little expertise in. But the physics of light I do understand, and the speed of light is a constant for a given medium; higher frequencies do not travel any faster than slower frequencies unless there is a HUGE gradient in the index of refraction. There are issues with range and interference to deal with, which is why 5G has so many ‘microtowers’ instead of the big, but spaced-out cell towers used today.

I worry somewhat about the health effects of intensifying the amount of ambient radiation we absorb every day, and I worry about the ‘look’ of all those microtowers. But all in all, I am in favor of more bandwidth and speed. I eagerly await the innovations that we will see as 5G is rolled out, with the clear expectation that policies and protections of our liberties and privacy will be build-in.

Tiptree, Fool One guide, scientist and IT geek.

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on the discussion on 5G - here is a view that can help.

if you see 5G industry consortium material (Look at Qualcomm, Ericsson website… not just verizon or at&t website) , you see ambitions on three vectors

a) 10x data rate (speed / throughput / 10Mb phone connection going to → 10Mb etc.) this is classic vector we know from 4G (4G was primarily about this dimension… today it may seem that 4G data is good enough, but remember, we were happy with being able to make a phone call through an operator few decades ago… it was when tech was available, we started using in many more ways…

early examples that can use the 5G speed are mobile gaming and interactive video with AR / VR - apps like Snapchat… these capabilities are increasingly more data hungry and many more applications will come

b) 10x reduction in latency - this matters for latency specific applications - while self driving car and remote surgery are often cited as potential application that can benefit from low latency, these are just catchy examples that get attention (and criticism from more discerning observers)… however, these may not be the primary applications that matters.
What I have seen so far is applications around AR (augmented reality) … a lot of these are currently panning out in industrial domain but also in retail, transportation etc will show up in very near future…
e.g. engineer is looking at a machine through his phone camera and on his screen and relevant data about the machine shows up - machine’s age, potential issues, amount of current it consumes… and this happens as your phone conveys the picture to the network and pulls in relevant data from a database to and overlay on the machine on your screen… to do this effectively, you need lower latency…
… or a consumer is scanning a sun glasses at retail aisle and the phone shows different online and off line options to purchase such sun glasses…
. and you can imagine huge number of applications which are feasible today with 4G but become much more practical with 5G due to lower latency…

c) 10x number of connections (or may be 100x or higher) - this is about connecting IoT devices… a lot of them are low bandwidth sensor connections… and again, yes those IoT devices are connecting today using 4G or even 3G, just the number of connection is exploding requiring 5G architecture to cost-effectively support this high density of connections… specially for mobile, asset tracking applications - a great example here would be tracking each box of covid vaccines as it leave the plant till it reaches the hospital / nurse administering the dose… such tracking may include monitoring storage temperature and raising alarm as needed…

Once you think of these three dimensions and let your imagination run, you suddenly see all kinds of possibilities including holographic communication, managing drones remotely, remote yet real time combat guidance… and yes, those remote medical attention in cases of emergency / mass causality events…

and yes, every one of these applications today are being pursued by multiple companies and some of them being tested as well…

In summary, I believe there will be more applications (and therefore more companies) that will leverage 5G than all previous wireless generations combined… and it is not really far

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I am not an expert on this but I would think one of the key use cases of 5g would be AR/VR. Think Apple finally releasing its augmented reality glasses in the next couple/few years or Facebook’s Oculus growing up or business use cases. Among other technologies, Apple may be waiting for 5g to be widespread. Here is article and quote from Ericsson’s website that alludes to this:

"Enabling AR/VR experiences with 5G and edge compute
As we have been touching upon, the new immersive experiences enabled with AR and VR will transform the way we consume and interact with content, both from a consumer perspective and from an industrial perspective.

However, creating AR and VR experiences does not come without technical challenges. Combining and synchronizing the real world and the motions of the user with a digital world requires a massive amount of graphical rendering processes. Because the graphics require heavy rendering, on-device processes are augmented by splitting workloads between the AR/VR device and the edge cloud. Graphics rendering on the edge cloud augment latency-sensitive on-device head tracking, controller tracking, hand tracking and motion tracking to photon processing. This concept is called split rendering. But when the rendering is done in the cloud, and not on a mobile device, you also need a fast and reliable 5G connection to deliver the final experience to the user. Both AR and VR use cases require stringent network requirements such as low latency, high reliability and high bandwidth."

https://www.ericsson.com/en/blog/2020/4/how-5g-and-edge-comp…

Jeff

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Tiptree,
I have no idea how to even spell physics but I do understand the problem of 5g since I have worked in the telecommunication field for over 30 years.

5G needs to have antennas within 1000 feet to get the full affect. So Verizon is very aggressively building out their network. They are digging up streets trying to get the antennas in place. Here is the problem, they have to do this all over the country. Why? Because the local telco, last mile, realize that once 5G is in place that it will extremely hurt their business. Right now the last mile is hanging onto the broadband because the telephone(dialtone) has been disrupted from them. So Verizon is trying to build out their own network, but, what about AT&T, Sprint/Tmobile. Well they have to do the same thing also. They are not sharing the fiber and why would they? As far as I know AT&T and TMOBILE are not being aggressive. My thoughts is that 5G is really going to take years. Sure you could have 5G in maybe Washington DC but does that really mean that 5G is here? It has to be ubiquitous, it will be spotty. I worked for a local telco company /National company. They were unwilling to build out their fiber network and I think probably it was to stop the Cell companies from overtaking them. There is a lot of resistance within the industry. I wish there wasn’t because I truly want the speeds but people that think it is around the corner are just wishfully thinking.

5G is coming but it will take years. You have a lot of forces working against and for it.

Andy

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While I agree that distance/interference can be issues with 5G, you’ve lost me with the speed of light comment.

The speed of light varies based on what it’s traveling through. The 186,200 miles/sec number is for a vacuum - it’s slower through anything else.

Here’s a good paper on remote surgery: https://arxiv.org/pdf/1803.03586.pdf It claims that 0.2 seconds has a “mild” impact. Note that that’s a round-trip delay. Remember, the surgeon does something, that something needs to happen, and then the video picture of what happened has to go back to the surgeon.

At any rate, robotic surgery won’t be the “hot” application that drives 5G.

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Hi TipTree and others that feel 5G is a still years out.

To put this into perspective, no less than a few years ago the thinking was the same regarding electric vehicles and autonomous driving. It was going to be too far out and too many things regarding infrastructure needed to change.

While there isn’t a strong visionary leader within 5g like Tesla’s Elon Musk and EVs…we will still likely see gains in that industry ahead of the actual infrastructure changes. This is just like what we are seeing right now with electric vehicle penetration into the market and charging stations, etc. Its investing in the future and the confidence in that which will drive the share price - its going to come back to individual conviction in the story.

TexasTitan

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Unless someone has the compelling, driving use case for 5G?

The most compelling to consumers is when you want to send gobs of data, like super-resolution video or your whole library of Congress in a relatively short time. And you get to do it in a small physical package. 5G frequencies are up around 27 billion Hertz (cycles per second) and 30 billion Hertz. You can pick a center frequency and modulate a carrier wave (the transmitter signal) with 100’s of millions of data bits per second and not crosstalk into the next channel. The physics of high frequency radios are small, so the antennas are small and the radio circuits are small. The upside is that you can send a lot of data with a small package like a phone or camera.

The downside of transmitting at those frequencies is that the energy in radio waves is absorbed by the atmosphere at higher rates with higher frequencies. It becomes like you trying to swim through honey instead of water. You need to be really close to the base station antenna because the energy losses are so high. Also, the higher frequencies need to be “line of sight”. They can go through many building materials but not around corners like your AM radio stations. So the antennas have to be closer to each other and have a straight line between you and the base station.

Conclusion: 5G promises lots of wideband data, but it will be expensive because at those high frequencies you need lots of stations within view of your 5G device.

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The physics of high frequency radios are small, so the antennas are small and the radio circuits are small.

Being an avid hiker and outdoor person and seeing more and more news announcements about lost hikers/skiers, many of which have lost the signal to their phones, I can’t help but visualize a search team hauling a 5g transmitter on a trailer to the area in question and thus providing “bars” for the lost person’s cell phone.

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