GolfCaddy4PLynch Portfolio Update

Read the full post here, with links and all.…

Year To Date Portfolio vs. Benchmarks:
-NASDAQ -10%
-S&P -6%
-Leverage Point Portfolio -21.5%

So much for beating the S&P this month.

What’s fascinating is how stock investors on Twitter have gone from euphoric futurists to nihilistic misanthropes in only three months. I am sure the reality is somewhere in the middle.

I know drawdowns are tough. But if I look at the big picture, I am still ahead by a significant amount over the long term (+168% since Feb 2020). I think what really scares people is the prospect that their stocks won’t ever come back. There are many who try to exasperate this feeling by posting total non-sense about the Japanese stock market superbubble and other examples of stocks that hit an all-time high and never recovered. Let me address both of these fears:

  1. Why is the U.S. is not in a Japanese-style superbubble? The simple answer is demographics. If you look at the dependency ratio, which is the number of dependents per 100 people of working age in the U.S. it’s almost evenly split. In the U.S. there are 53.9 dependents for every 100 that work. But in Japan, there are 69 dependents for every 100 that work. Now, if you break out this number further in Japan the youth portion is 21 but the elderly is 48. For the U.S. this is reversed with youth representing 28.3 and elderly 25.6. The U.S. has a strong pipeline of young people who will become productive, more than any other advanced nation. I know people want to push the gloom and doom when the market is down but the U.S. is not Japan. If you believe demographics drive markets then we are in a bull market for at least the next ten years or more.

  2. What about stocks that never return to their ATH like Cisco? It’s true there are stocks that just never return to their highs. This makes a great case for why I believe in stock picking. I always thought Zoom (ZM) would be the Cisco Systems of the pandemic and I sold out of it last year because of this. This negative association will influence investor sentiment, plus everyone is competing with ZM. There is no strong moat. I don’t believe ZM will ever go back to its pandemic high. Peloton is the same situation. But there are plenty of other stocks that I think will go on to grow even bigger and this is what I have positioned my portfolio for. Besides, I can always reallocate based on quarterly performance and will do so to ensure I own companies that are in accelerating businesses. If you look at total return across a portfolio, you can easily accept some losses and position for growth, just as I have always done.

What is the Purpose of the Stock Market?
At a time like this, I like to remind myself that the stock market is a system to allow for public ownership of businesses. When I own a stock I own a piece of a business. The stock market emerged as a method for businesses to gather investment to fund expansion. They needed to ‘go public’ because in the old days there weren’t enough wealthy capitalists to fund significant expansion, like overseas exploration. The only way to do it was to crowdsource the money.

Over the years there has been a lot of financial innovation or shenanigans (your perspective may depend on how cynical one is) but it hasn’t changed the fact that when one owns a stock, you own shares in a business. If that business expands and earns more money the shares are worth more. Profits are returned as dividends or used to fund more expansion and drive up the overall value of the business. This is still how the stock market works, and this underlies my basic principle for investing. I look to invest in a business that I think will be worth (a lot) more in the future.

But what makes investing so confounding, is determining how to value a company. While many think it’s purely a quantitative exercise, I prefer to side with the heretics who believe markets are mostly psychologically driven, and that valuation is an art form, not a science. This doesn’t mean I don’t use math. I just accept that valuation methodologies come and go. It’s also why I prefer linguistic deduction to complex mathematical approaches.

Now, if you accept the purpose of the stock market is to fund businesses, then it’s important to understand that crypto coins, beanie babies, NFTs, gold, paintings, and even houses are not fractional ownership in a business.

The financialization of the modern world has brought with it a lot of good, like mortgages which let you buy a house now, instead of saving up an entire lifetime to buy it when you’re near retirement. But it has also abstracted out the underlying asset from its financial performance, confusing many on how investing works. For markets that are not stocks, there is really only one mechanism to create value, and that is supply and demand. There is no real way to calculate the intrinsic value of the asset other than what someone else will pay for it. This is why I don’t invest in crypto coins. They are not fractional shares in a business. I do own a house, but I live in it. I do buy art, but only art that I love. Do I expect these things to hold their value? Yes. Do I believe they are investments? No.

For stocks, enthusiasm for one particular company, sector, or investment thesis may run its course for no other reason than it has fallen out of fashion. One needs to pay close attention. If you don’t have the time or the stomach for stock picking you should buy an index. For me, I believe that investing in a great business through the stock market will always be a sound and logical thing to do if you want to build wealth. And it’s fun, even in a downturn.

No Big Moves
I didn’t see any point in making a lot of moves as everything I am interested in all trended in one direction this month, down. I am just going to hold and wait for February earnings before making changes.

I did sell AMPL early into this drawdown just because I wanted some cash and I had no idea what the catalyst would be to help accelerate their business this year. It still could recover and do well. I added those funds to SNOW and SOFI.

SoFi has a Bank Charter
The long-awaited bank charter has been approved. This is significant as it will make SOFI a lot more profitable. They can now do all the lending themselves, set interest rates, and perform other core banking features that they were outsourcing to partner banks. It’s crazy that the stock price hit an all-time low after this announcement. Obviously, I don’t think that makes any sense. As part of the bank charter approval, SOFI is not allowed to offer crypto services and that’s fine with me. I think crypto is a Ponzi scheme of epic proportions.

The other big SOFI catalyst for this year:

Biden extended the pause on student loan repayment through May 1, and that is when the SOFI student loan refinance business will take off.

(I wrote this paragraph last month and boy was I right about HOOD) This is a high-growth company with a great consumer brand and a lot of room to scale. The membership model is compelling and I think their new app is excellent. With the demise of trading pure-plays like Robinhood, I think there is a large cohort of people looking for a more trustworthy alternative like SoFi. While not growing as fast as other companies in my portfolio, they have been profitable on an EBITDA basis for the past five quarters.

Just in case you forgot what a good business this is, here are select stats from their latest quarterly ER:
-Added 377,000 New Members, Second-Highest Quarterly Increase in History.
-Total membership is 2,937,000.
-Record Adjusted Net Revenue of $277M (28% YoY Growth) and 5th consecutive quarter of positive Adjusted EBITDA of $10M.
-Expect to deliver $1.002-$1.012B in adjusted net revenue, exceeding our original 2021 full-year guidance of $980M.

Are You Still Seriously in RealReal?
Yes, I am. This has been a hard one. I might just be wrong, which is also known as early. But I haven’t thrown in the towel yet. I believe the market is crushing all retail, regardless of the merits of the business. I still believe REAL is a differentiated, fast-growing, high-margin business. They don’t have much debt. And if we are headed for a slowdown or a recession, REAL will thrive as people will want to sell high-end goods to raise cash. REAL has a supply problem, not a demand problem.

Will I be vindicated with earnings? I hope so. REAL continues to release monthly updates that show the business is on fire, so I have some data to back up my beliefs. But will the market agree? What’s my opportunity cost? These are good questions.

Leverage Point Portfolio YTD by Month:
-Jan: -22.5%

Core Portfolio Holdings:
DDOG 28%
REAL 19%
SNOW 13%
AFRM 13%
SOFI 10%
MNDY 10%

Summary of Investment Thesis by Company
Below is a concise summary of each company and why they are in my portfolio, in my own words. No corporate jibber-jabber, or regurgitating of marketing.

What they do: Consumer fintech company that offers a full suite of digital-first banking services including student loan refinancing and stock investing.
Why I own it: Profitable on an EBITDA basis and they continue to scale member growth at over 90% YoY for the past four quarters.
What’s unique about them: The membership model is compelling as it should reduce churn and increase LTV.
When would I sell: If customer acquisition slows for any reason it would be problematic for the stock. I want to see it stay at 60% to 70% or more YoY.
Notable News: Still waiting on bank charter approval which should lower operational overhead and increase profitability.

Monday (MNDY)
What they do: Cloud-based office productivity suite that includes project management software optimized for remote work.
Why I own it: Sustained revenue growth at over 80% for the past three quarters and a steady increase in customers spending over $50K.
What’s unique about them: Others have a similar vision but Monday executes extremely well and is able to roll out new product functionality fast.
When would I sell: If growth in customers spending over $50K was too slow significantly I would be concerned.
Notable News: The launch of Workdocs was the most significant product announcement Monday made in 2021.

Snowflake (SNOW)
What they do: Cross-cloud data warehouse services that make it easy for companies to manage large-scale datasets with less overhead.
Why I own it: They are on track to meet their goal to grow to $10 billion in annual product revenue by fiscal 2029.
What’s unique about them: Snowflake’s success as a cross-cloud tool has a network effect that drives more developers and partners to the platform.
When would I sell: The company remains richly valued and while the growth is tremendous, the stock may languish.
Notable News: The announcement regarding their Media Data Cloud is an interesting example of Snowflake’s ability to aggregate key partners.

What they do: A full suite of tools to manage and grow organic traffic to a website across a variety of search engines.
Why I own it: Steady growth is just under 50% and I think there is potential to accelerate as more marketers adopt search in 2022.
What’s unique about them: No competitor offers the full suite of tools in one package and a competitive price point like SEMRush.
When would I sell: It’s possible that growth slows as adding new customers in 2022 gets harder as they increase market share.
Notable News: They launched an App Center that allows other third-party integration to market their tools to SEMRush customers.

Affirm (AFRM)
What they do: Affirm is the market leader in BNPL (Buy Now Pay Later), an alternative to credit cards with better rates and instant approval at checkout.
Why I own it: Massive growth from recently closed partnerships with all major U.S. e-commerce players including Shopify, Amazon, Walmart, and Target.
What’s unique about them: Technology is superior to competitors and the pipeline of product updates is strong most notably Affirm Card offers.
When would I sell: I am closely following active customers and the average number of purchases. I want to see those two grow substantially.
Notable News: Announced Target is now a partner and offers the ability to use BNPL on all the items in a given e-commerce shopping cart.

DataDog (DDOG)
What they do: Observability platform for engineers to monitor systems, databases, and other technologies to get data to improve performance.
Why I own it: Core infrastructure data products like this have high switching costs and once implemented rarely are removed.
What’s unique about them: With more than 350+ integration options competitors don’t seem to be able to offer the same level of extensibility.
When would I sell: The company is now approaching a $50B market cap and that could just make hyper-growth harder to sustain.
Notable News: There is a great post here on Software Stack Investing detailing all the new updates and features.

The RealReal (REAL)
What they do: Largest market for reseller market for authenticated luxury goods that operates both online and physical locations.
Why I own it: Revenue growth has been at 50% and average order value continues to increase, in December it hit $518 per order.
What’s unique about them: While there are many reseller markets, The RealReal is the largest that exclusive to authenticated luxury goods.
When would I sell: If growth were to drop below 30% or AOV declines significantly I would be concerned.
Notable News: They continue to open up new retail locations and with only 15 stores in the network there is a lot more room to grow.

About Me
I have worked in internet media and technology on the business side my entire career. I live in the SF Bay Area and focus on investing in what I know, high-tech growth companies. I try my best to stay in my circle of competence.

Investing Style
I like to buy small positions, this gets me focused to learn about a company. Then I sell, or I add to it over time in small increments depending on a variety of factors. Some positions I hold for years, others for only a few months. My goal is CAGR. Not 10-baggers and I try hard not to fall in love with a stock. My aim is to maximize my returns and I have no allegiance to any particular method or style of approach.

My portfolio is concentrated and I aim to hold a maximum of 10 stocks at the same time. The fewer the better. I consolidate around my highest conviction picks while looking for new opportunities to cycle into.

I sell on a dime. Which is a massive advantage of retail investing. If there is something I don’t like, I don’t take any chances and I just sell. This is why I take a small position at first and test drive my ideas. If for whatever reason I change my mind, I just take the loss (or gain) and move on. Sometimes, I just decide I want more cash for peace of mind and sell. I can always get back in at a later date if I want.

I have an obvious bias to SF Bay Area high-tech companies and for good reason, it’s an ecosystem that I know well and like. I think it gives me a slight edge, beyond the numbers when investing.

Things I look for in a business to invest are:
Sustainable competitive advantage: This can be superior technology, but it can also be brand, business strategy, or even company culture.
Massive growth runway: The companies I like to invest in have a large total addressable market (TAM) and no obvious ceiling or limit.
Great management with a clear vision: While not exclusively founders, I like management with a track record who can clearly articulate their vision.
Are in hyper-growth mode: Revenue should be growing at least 50% YoY and can be sustained. If it can accelerate, that’s even better.
I have unique insights into it: I look for businesses that I have a personal connection with. Maybe a product I use? Or management I have met and liked.
A business vertical I know well: I focus on businesses and eco-systems I understand intimately and it’s why I have avoided areas like biotech.

And what I avoid:
No open-source companies: I think the open-source model is flawed when it comes to building a strong scalable business.
No Chinese companies: The SEC’s own guidelines say they are limited in their ability to enforce regulations in China.
No penny stocks: I avoid companies that are under $1B in market cap. Those stocks are too easy to manipulate given the low volume and float.
No stocks on non-U.S. exchanges: Maybe I just haven’t found the right pick, but in general, I avoid foreign listing as they are harder to manage.
No crypto or NFTs: Coins are not fractional shares in a business and have no underlying value other than what someone will pay you for them.

Overall Returns Since February 2020
Portfolio returns since I started closely tracking it in February 2020 is 168%.

This post is simply an end-of-month summary. Positions can change immediately. With or without notice. Do not make decisions based solely on my writings. Do your own due diligence and make your own investment decisions. Rember that predictions are hard to make, particularly when they are about the future.