This is my first post 
== 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.