My portfolio at the end of August 2020

This is my first post :slight_smile:

== A little story of my investment journey ==

I started investing in the stock market in November 2017. Before that, my investment strategy is to pay my debt asap (student loan, family-and-friend loan, mortgage, etc.) The mortgage rate went down quite a bit in 2017-2018, and at a time my mortgage rate is 30 years fixed at 4%. It was the time before the SALT deduction tax reformation where I can basically deduct my mortgage interest, which brought down my “after-tax” mortgage interest to 3%. I decided to slow down a bit on my mortgage payment (where I had planned to pay off my 30-year mortgage in 7 years and became debt-free).

Looking back, that is an important decision – not because I made a lot of money from my investment. On the contrary, my investment return was terrible until I found this forum and started to believe in Saul’s strategy around April 2020. It’s an important decision because I learned lessons when my portfolio is not significant and I’m still many years ahead of my retirement. Failure is one’s best teacher, and I’m glad that I learned it early on.

== My annual return ==

2017 0.56% (About ~2 months, not investing too much)
2018 2.30% (Mostly FANG-alike stock, technical)
2019 14.34% (Give up stock selection, switching to ETF: QQQ, SPY and keep only Amazon)
2020 42.38% YTD

A little break down of 2020

JAN 26.40%
FEB 31.91% * Decided to short-sell ETF
MAR -24.22%
APR -50.48% * Decided to switch to Saul’s strategy at its lowest point, about -60% in mid-April
MAY -9.08%
JUN 24.76%
JUL 40.15%
AUG 42.38%

The above return is based on both my retirement account and my investment account. Note that I’m much more conservative in my retirement where I use no margin and no option. If we look at my investment account alone, the return between 8/31 and 4/31 is 500+% in four months. Though, it comes with 1.5-2x leverage during the period but still, without the leverage the return is 300+%.

I made a terrible mistake around Feb where I’m arrogant. I made some fortune in 2019 after switching to ETF-based investment. I thought I could somewhat predict the general market trend. I was once at 50%+ YTD in mid-March where I did some short-sell SPY and stocks like cruise line and made a quick cash win. What caught me out of a surprise is that in April the stock market bounced back and I still thought it would go lower. I was totally wrong – not just about the stock trend but also my ability in predicting the market.

I was arrogant and I actually put my money mostly in a triple inverse ETF like SQQQ or SPXU. And a 20-25% bounce-back basically wiped out all my winning (+50%) and made me lose two-third of my (non-retirement) investment since I was short-selling a lot.

Lesson #1: never assume you can predict the market no matter how confident you think you are.

The only thing that comforted me (and that’s why I was not depressed) is that I got a promotion and a big raise at work.

At that moment, I don’t think I really care too much about “losing” another 25% so I decided to just try Saul’s strategy. My investment strategy is fairly simple – I just copied asset allocation blindly from Saul’s (and others’) monthly post with the following modifications:

  • I added more allocation on the top-tier companies where Saul or other senior investors in the forum seem to have very high confidence, for example, DDOG. I usually avoid a stock when Saul (or any other experienced investor) gives some little “experiments” or their conviction is low (<10% of their portfolio). I am fine with only keeping 4-5 stocks and I don’t see a reason to diversify by adding 10-20% in low confidence stocks, especially my strategy is to copy what others are doing.

  • I’m always 100+%. When a stock drops more than 10% and the NASDAQ also heads down 5+%, I usually add more by either moving money from my savings account or with margin. When NASDAQ is hitting a new high for the 2nd or 3rd day, I usually trim my portfolio to bring down the margin. I generally keep my investment % around 140~170%.

  • I generally avoid stocks where I can see a clear headwind in the next six months no matter how awesome the management team and the product are. An example is AYX where I decided to give it up quite early. I am confident that they are going to have a headwind during COVID. If in the earning call, the CEO/CFO says they are going to have some bumping rides (or headwind or slow-down) in the next few months, I trust them 100% because they have no incentive to lie for such a statement.

  • Recently (in August) I started to take some small percentage (5-10%) of companies that I believe will bring some disruption to the existing business model. I made mistakes (not keeping my investment w/these disruptive innovations) in the past. I once owned Amazon at $140 in 2010 and Tesla at $200 in 2019 (i.e. $40 since it split 1 to 5). I sold those stocks at a 50-100% return. After some thinking, I decided to reserve 20% of my investment in these “disruptive” companies. My definition of disruptive innovation is that a company is going to put other companies out of business (soon or in the next few years). My question to these investments are “which companies are they replacing or going to replace now?” I will share my reasoning below.

== My allocation on 8/31/2020 ==

ZM 30.07%
DDOG 22.48%
FSLY 17.65%
CRWD 15.80%

SQ 6.70%
MELI 6.03%

COUP 1.28%

P.S. Leverage 1.71x
P.S. Retirement Unit 4.75 (Target 25)

1.71x means that the margin amount is about 71% of my portfolio

One retirement unit is equal to the total annual expense I need, including everything (travel, rent, etc.) This is just some estimation I derived from the Wealthfront app and my monthly spending pattern.

I know this is a subjective number but I think it’s important to include this number here because apparently I will become more and more conservative when I’m getting older or closer to my retirement target (namely, financial freedom). Naturally, when my portfolio is getting bigger and it’s harder to recover from mistakes, I will be more conservative.

I know many writers who posted in the forum are seasonal investors while many readers here are in their 40s (or younger), trying to build up their wealth. My point here is that when I’m risk-averse, say, retired early. I will avoid using any margin or allocating >20% on one stock.

My family roughly needs 25-33% of my after-tax income. That is to say, if I lose my entire 4.75 units, I have to work 1.19-1.57 additional years to “catch up” my loss. I’m very prudent here and in reality, I need much less than my estimation, for example, I allocate a 30k travel budget per year where I can replace cruise vacation with camping to deal with any surprises. I’m targeting 25 units such that I can live with a 4% average ROI.

== Why I picked these stocks ==

ZM: I added quite a bit before the earning calls. I am very tech-savvy and I just cannot find any competitor or replacement to zoom. I saw many companies start to use zoom. I’m in the tech industry and I asked around, almost every company is switching to zoom from Bluejean or Cisco. COVID is clearly a tailwind to zoom. 30% is insanely high. But as I explained I’m still in the early stage of building my wealth and I can still easily cover the loss if I were wrong, I choose to gamble a little bit here.

Zoom is the only company that meets all my investment checklist. It has a (strong) tailwind for the next six months, and revenue growth just confirms this fact. It has almost no competitor. Some of my (business) meetings are with Google Hangout and the experience is much inferior. Zoom is killing Cisco WebEx and BlueJean. Further, after COVID, it’s likely Zoom will become the de facto standard for business video conferences. Once they win a decent market share, they create a moat that other startups will find very difficult to challenge their position. And video conference is a niche market that I expect Zoom to dominate for the next few years.

My only concern is that the stock is a bit pricey and the valuation is insanely high. Also, 30% is my maximum and I plan to gradually trim it to 25% in the next three months.

DDOG: I gradually built my position, starting in mid-April I decided to try Saul’s strategy. I read the discussion and it seems that DDOG has been a favorite for many investors. My first bought-in is around $39 and I keep adding my position. I am a bit surprised that they did not encounter a headwind during COVID. Companies probably won’t consider any unnecessary infra investment or transformation when they are having headwinds during COVID, and for that reason, I was expecting DDOG to have some headwind. It turned out that the acceleration of digital transformation and the slow down on infra investment canceled out.

I have spent years in the software industry and I can assure you that application monitoring is a hard need that every company needs. For those who are interested in learning more about monitoring choice, you can find info here: https://openapm.io/landscape

The first question I had is why not use an open-source solution which requires no license fee. The answer is simple. The complexity of installing and deploying these tools to cloud platforms (AWS, Azure, GCP). Datadog is not just faster but much cheaper. Why? If not data-dog, a startup needs to at least hire a senior engineer to do the installation and maintenance. Usually, you need to hire at least two engineers (one senior and one junior) to ensure some redundancy for vacation and attrition. And it will take months for them to figure out how to get everything to work well. This implies at least 0.5 million of human capital in a tier-1 market like the SF area to build and maintain APM. In contrast, with the native support of cloud platforms, this installation and operation difficulty is greatly reduced and much more reliable.

To me, datadog is replacing the need for hiring infra engineering to build monitoring infrastructure when they move to the cloud. As we can see the usage of the cloud is growing and digital transformation is accelerating, I am optimistic about DDOG’s future. Further, I don’t see any manager is able to reason with their executives to move away from DDOG. Where do you want to move to? Monitoring is a hard need for every internet or software company but it’s rarely a competitive advantage any company wants to build a team to make it superior. Good enough is enough and that justifies the moat of DDOG.

FSLY: it used to be my largest position (around 25%). I’m less concerned about TikTok but I just cannot find a strong reason to believe that DDOG and ZM are worse choices than FSLY.

I spent some time learning the technical side of FSLY, mostly from this article: https://softwarestackinvesting.com/fastly-edge-compute-expla…

TL;DR I think FSLY has a tailwind during COVID in that the internet usage brings the need for strong CDN and edge computing. I read their customer lists https://www.fastly.com/industries and I found many respectable technical companies like Pinterest, Airbnb, and Shopify. These are companies with strong engineering capabilities.

I don’t really feel that FSLY and NET are competitors. I think their target customers are not overlapped that much where FSLY focuses more on enterprise customers. Their revenue growth rate is also impressive and if there were no TikTok concerns, I will likely keep it at a 25% ratio.

CRWD: I haven’t spent lots of time researching their technical strength. But I somehow have a hunch that network security is going to become a thing in the next couple months. And given strong growth and other’s recommendations on the forum, I keep a moderate amount to diversify my portfolio a bit. My ideal state is to keep 5-7 stocks such that if I make a mistake, which I’m going to make one (sooner or later), I can still sleep well.

To me, the choice is between NET vs CRWD and since I already decide to hold FSLY, I decide to pass on NET and keep CRWD in my portfolio.

SQ: As I mentioned in above. I decided to allocate (no more than) 20% of my asset for disruptive innovation. I planned to select three stocks and allocate 6.7% for each of them. If I fail, which means that the stock price drops 50%, I will lose 3.3% each. But if I’m right, I’m likely to hit another big thing.

In my opinion SQ, cash app, will replace these businesses:

  • Payday loan
  • Many bank service
  • Bitcoin (competing with coinbase)

To me, I decided to add SQ because of its CASH app. I won’t be surprised if later Paypal decides to acquire Square. To me, they are direct competitors in many areas.

I think my biggest hesitation is whether I should invest in Paypal (230B) or Square(70B). I eventually go with SQ because firstly, its CEO (Jack Dorsey) is a very respectable leader. Jack is considered as a visionary leader and is willing to bet on some innovation where Paypal is more on the play-safe side. I saw many bold movements: the cash app loan to replace payday loan and the (easy) bitcoin investment. I also recalled the early days (in 2014) where the little square box forced Paypal to build a triangle device to compete in the POS market.

Ark invest white-paper: https://ark-invest.com/white-papers/cash-app-vs-venmo/

I don’t think SQ aims to compete with PayPal/Venmo. I do believe that Square is trying to eliminate payday loans and some bank services. Cash apps have been very popular in areas where bank service is not easily available. Ark Invest has a good analysis article on April 30th. Where in p.12, it shows that cash apps are dominated in unbanked or underbanked areas. I do feel that Paypal moved much slower and I feel it’s probably easier to grow 70B to 350B than 230B to 1.15T.

MELI: It’s clear to me that eCommerce is booming during COVID. To me, investing in MELI is to invest in Amazon 5 to 10 years ago.

Amazon is a formidable competitor but it seems that MELI is still leading (based on traffic analysis)

https://www.alexa.com/topsites/countries/MX (Mexico, #6 vs #12)
https://www.alexa.com/topsites/countries/AR (Argentina, #4 vs #31)

I also feel that they have a competitive advantage by being a local player. They have Mercado Pago (a copycat to PayPal) and payment alliance in physical stores. Unless digital payment becomes commonplace in Latin America, in the next few years I still believe MELI will have some advantage. Similar to SQ, I feel the growth potential of MELI is much larger than Amazon.

I’m trying to imagine a world where both Paypal and Amazon are together.

I also believe COVID is going to a tailwind to MELI and I have seen the success that local competitors beat Amazon (like JD.com in China). To me, MELI is akin to Amazon, they are going to replace lots of brick-and-mortar business.

COUP: I once owned a small portion of COUP (7%). I trimmed it down to reduce the margin when NASDAQ was hitting new high. If I want to diversify my investment, I think procurement space is another opportunity. I keep a small portion so I will pay attention to its earning calls and revenue trends.

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Leverage 1.71x means that the margin amount is about 71% of my own money. (Typo, not my portfolio)

And I just learned that I cannot edit my message after I posted it. Sorry for the mistake.

I’m pretty sure that we should not discuss how to use a margin account in this forum. It’s against the rule. And thus I won’t reply further. I feel that I have to answer it because I don’t want people to follow my path (borrowing 70+% to invest)

To be clear, I never use any margin on my retirement account (IRA). I only buy on margin in my (regular) investment account.

I’m reducing my margin usage in that 1.71x is borderline foolish. I’m cutting it soon to 1.25-1.4x. At my low point(mid-April, 20), my portfolio is only worth 4-5 months of work (my after-tax saving). I am okay if I lose everything. Now I won’t say so. I’m cutting it soon.

Today I think borrowing 20-25% at a low-interest rate to build up wealth is a calculated risk I chose to take. I do the math – if I can average a 25% return, with a 25% margin. It means that 1.25 * 1.25 = 1.56 for a year. On the other hand, if things went south, pulling-back 20% vs. 25% (1.25x * 20%) makes little difference emotionally.

Lastly, if you search online, you can easily find a margin rate between 1-1.5%. https://www.interactivebrokers.com/en/index.php?f=46376&…

If using a margin account is insane, 7% APR is ridiculous. And that’s another reason I want to invest in Square. I feel that the cash app’s idea of lending money to people will be very profitable. The payday advance loan is easily 400-500% APR today. Even cash app charge 36% APR, it will look like mercy.

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Pikatrain,

Why would you bring margins to this board when you know that is expressly forbidden for this board. If you do not know than you shouldn’t be posting. Everyone needs to read the right side of the board and realize what this board is about. This board is to valuable for people like you to come onto it and disregard what all of us have built here. There are many other boards you can go to if you wish to post about margins.

And no you really didn’t need to explain yourself because most of us know you are way out of bounds.

Andy

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Andy,

I can smell you angry, or at least some unhappiness. I don’t plan to offend anyone, and if you feel that I intend to do anything wrong, I apologize.

I read the board’s rule twice (on the right panel), and I search for the keyword “margin,” and I cannot find it. I don’t see a rule saying that people should not disclose if their portfolio is with margin. Also, if you read my original post, I hope you can feel that margin is never my focus, and I tried to avoid any discussion around it.

I mentioned margin to explain this: my portfolio’s fluctuation is high because I use margin, not because I pick some magic growth stocks between April and September.

When people mentioned incorrect information, in particular, wondering why I borrow at 7% APR, I try to correct the misunderstanding. Since I don’t want to discuss it, I will just stop here.

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I apologize in advance for contributing to a thread that has veered OT a bit

First, pikatrain, welcome to the board. Congratulations on turning your investing year around after what started off pretty rough. Your overall story/message that you shouldn’t try to the time the market and how much your fortunes turned once you started embracing Saul’s methodology is a great one to share.

I would suggest, if you continue to post monthly updates in the future, to put your username in the subject. The subject you used is almost exactly the same as how Saul titles his monthly posts, so it can get confusing when someone other than Saul names a thread “My portfolio at the end of…”.

The majority of your original post was on topic and interesting, and I don’t have a problem with you mentioning that you use some margin, regardless of how I, and others, might feel about the extremely high amount used (heck even Saul was using a small amount of margin earlier this year and noted it in at least one of his monthly reviews). Many of us that use margin or options usually try to just describe enough about it in our monthly posts so that the overall picture isn’t misleading, without actually getting into the details of those option contracts or margin used etc, which would certainly be considered way off topic on this board.

Most of the initial replies you received above were off topic and all essentially about portfolio management, which is forbidden, and probably would have been better communicated via an email, encouraging you to emphasize the margin a bit less when summarizing your portfolio here. You really don’t need to get into all of those details about your margin in order to summarize your thoughts on the individual growth companies and why you feel the way you do about the ones you own.

Anyway, I hope we haven’t scared you off as you made some good insights about our stocks above, and I hope we get to hear more from you in the future.

With that, I won’t reply any further to this thread. Hope you’re all making the most of the labor day weekend

-mekong

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Pikatrain,

Congrats on your performance and thanks for sharing your journey and thought process.

I found the whole post very interesting… you certainly have a way to quantify and think through in numbers that is less common…

I am curious about your thoughts on disruptive companies… you mentioned Square… which I have a smaller position as well… and MELI which stupidly sold last year…
do you have others in this category that you are evaluating / thinking about?

nilvest
PS: while I agree margin / portfolio discussions are not for this board, I see posts like pikatrain’s adds value and margin is mentioned just to clarify overall strategy and performance… I wish board managers take a discerning approach to encourage quality posts from new posters rather than jumping to admonish everyone with same stick…

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Rather than jumping to admonish everyone with same stick

Nilvest

Not making fun but “stick” should be “shtick”. Yiddush for “thing”, or thereabouts.

Mark, not a yiddush expert but enjoys it nonetheless.

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Hi Nilvest,

I have a few running-up, which I am still thinking and researching. I will share some thoughts about why I’m hesitant. In a word, I don’t think they are very promising to me at this point. I’m very open to hear different opinions – if you feel they are good opportunities, please share my thought.

TWOU (2U, INC): I think the education system today is outdated. I also believe online learning (and degree) is a possible future. I don’t think the current education system is effective. While everything has changed dramatically in the last decades, education is not. I do hope COVID help accelerate the digital transformation of the traditional education system.

On the revenue side, their revenue seems steadily grow. 135.5, 153.8, 163.2, 175.5, and 182.7. I won’t consider the revenue YoY meets my expectation as a growth SaaS stock. I await their next earnings call in November. I hope to see COVID become a strong tailwind to online education transformation. If so, I will reconsider the opportunity. However, I want to see clear evidence on Revenue growth before I put money on it. Note that while their revenue is growing, their net income is dropping. I can’t see the light for them to become profitable. That is concerning. I did not dig deeper to learn why, but the profit numbers are not attractive at all.

In their IPO note, they claimed they are a SaaS company. I quote, “Cloud-based SaaS solutions that enable leading nonprofit colleges and universities to deliver their high-quality education to qualified students anywhere.” Ref: https://seekingalpha.com/article/2114083-ipo-preview-2u

I think they aim at the right problem, but I am not sure about their operation and execution. Selling anything to a nonprofit education institution (and convincing them to go online) is way harder than selling a service (like DDOG or OKTA) to businesses to save costs immediately.

They seem to focus on providing technology and a platform for universities to provide online programs. I notice that UCB is partnering with them: https://2u.com/partners/uc-berkeley/
I’m still on the fence to believe whether the university will choose to partner with 2U and share revenue. I chatted with a few friends who are professors. Universities mostly asked professors to use Zoom and their existed course websites. Well, COVID is an opportunity, but nonprofit universities are hard to convince.

HUYA: Numbers look good to me. I do believe that live streaming service (on game-playing) is a new business model.

I also know online games like LoL and Honor of Kings (Tencent) are super popular among teenagers and young adults. People even consider players as “athletes” to these “new sports.”

To me, it’s a disruptive innovation where the innovation is stealing screen time from TVs. I still remember when I was in my early 20s. I care more about video games, less about sports.

I’m confident that COVID is a tailwind to online gaming. App downloads (and revenue) from Apple can easily confirm this fact. It should be a tailwind to Huya.


Revenue
2018 	134.5	156.9	185.9	218.8	
2019	243.1	292.8	317.0	354.4	
2020	340.6	381.7

Profit/Revenue
2018	15.54%	16.00%	15.17%	16.82%
2019	16.74%	16.70%	17.95%	19.84%
2020	19.67%	21.33%

I respect Saul, and I know why he decided to pass all Chinese companies. I am also scared after reading the whole story of Luckin coffee. But hey, there’s Enron and Theranos in the US as well. Bad guys are hard to predict :slight_smile:

But It’s clear to me there’s unnecessary risk to hold any Chinese companies at this moment. The current Trump administration made clear standing that they want to delist some Chinese companies. I don’t spend time researching the detail, but I just don’t like the unnecessary risk since I have so many other good investment choices.

Ref: https://www.arnoldporter.com/en/perspectives/publications/20…

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fwiw, 2U is probably positioned – technologically – to disrupt education, but I think they don’t intend to. Similar to Invisalign they are already in bed with the incumbents on pricing. They price the online degree (mostly graduate degrees, btw) similar to the in-person tuition and the schools give ~half the revenues up in the deal. The schools are sold on the idea that they do not wish to undercut their in-person prices.

Also, the idiosyncrasies of the higher education loan business incentivizes them to focus on graduate programs for the availability of loan financing for the expensive tuitions.

Just my 2 cents.

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hi pikatrain,

thanks for follow up…

Yes, I have been in and out of 2U… and agree with rtichy that they are not disruptor… at-least not in their pre-covid avataar where they decidedly left their fate in the hands of big name institutes and actually hurt themselves in the process…

2U has ofcourse changed with offering of individual courses, and specially with covid, their opportunity has gotten better even with those big names… but it still not clear… so agree to keep on watch…

I have not followed Huya, but will look into that one.

Hello Pikatrain,

Welcome to Saul’s Board.

On behalf of injured Saul and the rest of the Assistant Board Managers

Bear (PaulWBryant),
Austin (XMFALieberman),
Matt (XMF BreakerForce),
Benjamin (Locke), and
Lenny (ldigout)

let me thank you for your excellent and courageous first post. We all hope that you will continue to post and provide your insights.

As was pointed out, Margins are off topic but you are correct, they are not specifically listed in the Monday Morning Rules of the Board. I will bring this up with Saul and the rest of the crew if margins should perhaps be added to both versions.

mekong22 made excellent suggestions how to briefly include margins, options and other off-topic portfolio strategies that if not mentioned could provide a distorted picture of over-all results.

Saul has warned many times about the dangers of using margins, especially if the investor cannot afford to loose money. The most highly recommended post in fooldom tells the tale of a foolish margin user:

The DANGERS of MARGINS, https://discussion.fool.com/the-real-real-risks-of-margin-122513….

Best,
I. M. Young (imyoung), Assistant Board Manager

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It’s now in the Rules of the Board:

No option trading discussions, or other discussions of using extreme leverage, such as margins. (A recent poster described losing all of his 50% plus year to date gain, and two thirds of his account balance, just on one 20%-25% move that he had bet heavily against using margin leverage. That’s not investing, it’s gambling, as should be obvious to everyone!)

Saul

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