My post was too long and the software rejected it, so I had to divide it in two parts. this is Part 1
This is my summary of my positions at the end of September. As usual I do my summaries at the last weekend of the month. As always, I’d welcome questions or comments on what I did or didn’t do, and will try to respond.
By the way, if you have a tendency to skip through parts of my monthly summaries, feeling they look familiar from the month before, I’d suggest that you read through instead, as I constantly make changes and include new reflections, thoughts, and observations each month, even in parts which superficially may seem repetitive. Also some ideas are worth reminding yourself of, even if you’ve read them before. And this month the report is largely rewritten and revised.
Please note also that in my discussions of company results, I almost always use the adjusted values that the companies give.
If you want to learn more about what is going on with the high valuations of our companies, I suggest you reread the explanation in June’s summary.
Now, let’s get the results out of the way:
MY RESULTS YEAR-TO-DATE
I said at the beginning of this year, that I would be happy with a gain of 25% for the whole year, after the huge gains the last two years. Well, my portfolio closed this month up only 22.1% after hitting a year-to-date high of 77.4% at the end of July.
From my August close of up 64.0%, my portfolio is down about 26%. (164.0 divided by 122.1 is 0.744 = down 25.6%).
From my July high of up 177.4%, my portfolio is down 31% (177.4 divided by 122.1 is 0.688 = down 31.2%).
Basically the stocks in my portfolio got pummelled and fell 31% and 55 points from their high, and fell 26% and 42 points just this month. It’s impossible to look at it any other way. It’s been a massacre.
Here is the monthly progress of my portfolio results since the beginning of 2019:
**End of Jan +16.5%**
**End of Feb +28.0%**
**End of Mar +36.9%**
**End of Apr +40.7%**
**End of May +42.2%**
**End of Jun +57.7%**
**End of Jul +77.4%**
**End of Aug +64.0%**
**End of Sep +22.1%**
A LITTLE PERSPECTIVE
This is a little reminder for those who haven’t been through this before, and for those who have but don’t remember. Although this has been scary, it’s not unique, and we tend to forget it happens with some regularity and doesn’t mean the world is coming to an end.
For example let’s look at last year, 2018:
On Sept 11 last year my portfolio of SaaS stocks was up 96%.
On Oct 29, a month-and-a-half later, it was up just 45%.
Thus, my portfolio was down 26% from its high (145/196 = .74). It had lost 51 points. Not at all dissimilar from this current rout of 31% and 55 points in two months.
Two weeks later last year, on Nov 7, it was up 85%! It had bounced 40 points from that up 45% in two weeks. Even when the market as a whole melted away again, hitting a huge low on Dec 24, my portfolio never got as low as only up 45% again (close though). It finished the year at up 71.4%, just a few trading days later, up over 20 points in three-and-a-half trading days.
And for those saying that the SaaS stocks will never again see this year’s highs again, and other such foolishness, let’s check:
At this year’s high of up 77%, my portfolio had gained 204% from the beginning of last year, or more than twice that 96% gain that it topped out at last year. (1.714 x 1.774 = 3.04, or up 204%)
And this year’s high was more than four-and-a-half times the gain I would have had if I got scared out at up 45% last year (204/45 = 4.53)
I hope that that helps put things in perspective. This is NOT the end of the world.
A LITTLE WAGER FROM A NON-BETTING MAN
I feel that our stocks are massively oversold. I think that every mutual fund manager has been selling out of any SaaS stock in his portfolio during the last two to three weeks before the end of the quarter, so that he can show his stockholders in his quarterly report how smart he was to have sold them during the quarter.
If I was a betting man I’d bet anyone any amount that my portfolio will finish this year up 10 points, at least, from here. That means up 132.1% from the current up 122.1%. Would anyone take that bet? I doubt it. Well I’d give 5 to 1 odds, but probably there would still be very few takers. I think that the chances that the market for our rapidly growing stocks would be able to maintain a massively oversold position for three months is infintesimaly small. My guess is quite a bit more than 10 points in the three months. If you wouldn’t bet against a 10 point rise in the next three months, that means you can go ahead and relax. You’ve figured out what YOU should do: you should be fully invested in these stocks that you feel are extremely likely to rise at least 10 points in the next three months
ON WHAT’S GOING ON WITH OUR STOCKS
At the end of last month I thought our SaaS companies would have clear sailing for the rest of the year. Well that shows how little I can time the market. I was totally wrong, and the ZM and CRWD IPO’s (that I thought represented the beginning of the investing public’s acceptance of our SaaS stocks), probably meant that the investing public had already caught on.
There was a 20% to 30% fall for our stocks in September, and a lot of talk about repricing of SaaS stocks, sector roatation, recession coming, and all the rest. It’s been pretty scary, if it’s the first time for you, but it’s not really very scary. In fact, I’ve felt annoyed, but this time I’ve never been scared. What’s to be scared about? We aren’t investing in high capital expense, low margin companies, with high debt, that make things like automobiles, refrigerators, sneakers, and houses, that people can decide to just go another year or two with the old ones, or even with microchips or tech appliances, where orders can totally dry up, and revenue can actually FALL. Our companies are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud, and AI. And they sell subscriptions to the software that enterprises use to run their businesses. This software saves the enterprise costs, rather than costing it extra money. People may hold off on buying a new refrigerator in a recession, but no enterprise is going to pull out the software that they use to run their business. These companies may see their RATE of growth fall, but they are extremely unlikely see their revenue rate FALL unless we see a repeat of 1929, and half their customer companies go bankrupt .
Look, noone can really tell anyone else what to do. I can only tell you what I do:
If one of my companies is down by itself, I worry if something is wrong that I don’t know about. If all of my companies are down for no good reason, with no company specific bad news on any of them, you would have to pry the stock of those companies out of my dead hands (figuratively speaking (SMILEY FACE)).
Where else is someone going to go to look for companies growing at 40% to 90%? And which have high gross margins too? And have subscription-based recurring revenue? And over 115% net retention rates? And who reduce costs for their customers so they are valuable additions and not extravagances? But that’s just the way I see it, and you have to decide for yourselves.
Right now, I wouldn’t dream of having a large cash position. In fact I wish I had the guts to buy more shares on margin (but I don’t, so I’ve just been selling lower conviction stocks and adding to higher conviction ones).
Look, I don’t know the future, but I am surely not going to sell out of great companies because their share prices have fallen, or because the market is going down, unless to put the money in companies I like a little better. I wrote at the end of last year: …My portfolio closed 2018 up 71.4% in the midst of the biggest meltdown of stocks in ten years. Many others on the board had similar results, a little better or a little worse. We are not magicians. We just invested in great companies.
Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, they are category crushers or disruptors, they have customers that really need them, they have long runways, and they will have great futures. Investing in great companies pays off.
All enterprises, whatever industry they are in, use more and more software. Most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.
LONG-TERM RESULTS
There was a lot of worry on the board this month and I hope that some of the new investors weren’t scared out at the bottom. It was certainly scary. I posted these long-term results at the end of the year last year but I thought it was worth posting them to reassure people about the results of staying fully invested and not getting scared out by market ups and downs.
Here are some Long-Term, 10 and 20-year results:
For the last 10 years and 9 months (since the end of 2008), my portfolio is up 1,288%. (It’s at 1,388% of where it started, or almost 14 times where it started, almost a 14-bagger, for those who count baggers.)
For the last 20 years (since the end of 1998), it is up 9,383% (It’s at 9483% of where it started, almost 95 times where it started, or almost a 95-bagger.)
I can even stretch it out to 25 years (since the end of 1993) with some confidence. From there it is up 24,012% (or at 25,012% of where it started, 250 times where it started, or approximately a 250-bagger.)
Please note that those 20 and 25 year results include the 2000 bursting of the Internet Bubble, the 9/11 sell-off, various corrections, and the 2008 Great Recession. That’s what happen when you hold and don’t sell out at the bottom?
And while going from a 95 bagger to a 250 bagger in 5 years looks enormous, it’s just the power of compounding. Going from a 95 bagger to a 250 bagger wasn’t even a triple (250 divided by 95 equals 2.63), and not at all extraordinary in those five years.
Please keep in mind that those results were without leverage, just investing in ordinary stocks, no margin, no options, no penny stocks, nothing oddball. Yep, stock-picking doesn’t work. There are books written that prove it! [smiley face]
Also remember that before 2018, my biggest percentage gainers weren’t SaaS stocks at all, so those results weren’t dependent on the SaaS run-up.
HOW DID THE MARKET INDEXES DO?
Let’s look at results year-to-date. The three indexes that I’ve been tracking against for ages closed year-to-date as follows.
The S&P 500 (Large Cap)
Closed up 19.3% year-to-date. (It started the year at 2507 and is now at 2992).
The Russell 2000 (Small and Mid Cap)
Closed up 12.7% year-to-date. (It started the year at 1349 and is now at 1520).
The IJS ETF (Small Cap Value)
Closed up 13.9% year-to-date. (It started the year at 131.9 and is now at 150.2).
These three indexes
Averaged up 15.3% year-to-date. The average was up 9.0% last month, so it had a good month while our stocks were getting pummelled.
If you throw in:
the Dow, which is up 15.0%, and the Nasdaq, which is up 19.7%, the average of the five indexes is up 16.1% year to date.
Since the beginning of last year (2018), when the average of the indexes was down 8.5%, the five indexes are up 6.2%. (0.915 x 1.161 = 1.062).
My portfolio’s gain of 109.3% in those 21 months (1.714 x 1.221= 2.093), is still immeasurably ahead of the averages’ gain of 6.2%, but that doesn’t change the fact that this was a very disappointing month.
And again, my results are without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, a little more, or a little less, but about the same. So if you didn’t read my explanation in June about what’s going on with our stocks, maybe you should go back and read it carefully.
To simply state my goals, I’m merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes should give a pretty good approximation.
LAST FOUR MONTHS REVIEW
In June, believe it or not, I made almost no changes in my portfolio. I took a token quarter of one percent position in Crowdstrike at $60.80, But then, when Verizon announced its partnership with Zoom for all of Verizon’s business customers, I sold the tiny position in Crowd and added it to Zoom. That was it for the month, pretty much.
July was another quiet month which means I was basically happy with my positions. I did take back a small position in Crowdstrike at $73.06, and then grew it to 4.1% after great earnings. I got the funds for the most part by trimming my Trade Desk position and taking a little from my small Square position. Trimming Trade Desk turned out to be very bad timing as Amazon announced later in the month that it will open its platform to Trade Desk. It’s just a reminder that I don’t always get it right. However, my Trade Desk position was still twice the size of my Crowd position, so no worries and no regrets.
August. Let’s look at it alphabetically. In the first half of the month I added a little to my Crowdstrike position and it has moved up from 4.1% to 4.7%. Then Mongo, I finally started to lose patience with Mongo. I had held it for 21 weeks at that point, and it was up 7% in the 21 weeks while the rest of my portfolio was hitting it out of the ballpark. I trimmed a little, just dropping my position size from 11.6% to 10.2%. I’m well aware that losing patience is not a valid reason for trimming, but I’m human too, and when I wanted to increase my Trade Desk position, that’s one of the places I looked. I added some back to Trade Desk after their great earnings, replacing some of the shares that I had prematurely sold last month, and brought it back to a 10.1% position. Then there is Twilio. I was really a bit disappointed having been taken in by all the exaggerated hype about how Flex and Sendgrid were going to explode their revenue. I guess I was expecting a lot more than we got. So when I wanted money to add to my Trade Desk position, I reduced my position in Twilio a bit. It’s still about tied with Okta for 3rd place but at 13.1% down from 17.5% last month. I have no current plans to trim Twilio or Mongo further.
Zscaler suffered a decline due to a negative article by a boutique analyst company and I added six percent more shares even though it was my largest position at the time. I added a small amount to Smart.
I made no significant changes in Alteryx, Okta, or Zoom. And finally I took a little 0.8% position in Guardant Health after their excellent results.
And how about Square ??? You’ll remember that at the end of last month it was in last place at 2.5%. When the share price fell precipitously from $82 to $68 after earnings (dropping its position size even further) I thought that it was ridiculous and I added a goodly sized amount at about $69. But then came the warning about the Fed setting up its own payment system and it just seemed too complicated for me, and I sold out of my small position completely. Even though further excellent discussion of the Fed announcement on the board showed that what the Fed was doing was unlikely to impair Square, I didn’t look back, and it never crossed my mind to get back in. I almost felt a feeling of relief that I was out.
Why? Well, look, Square is still bouncing around where it was over a year ago, that’s OVER A YEAR AGO (!) … actually maybe even slightly lower than where it was then, while at least four of my other nine companies are up over 100% just from the beginning of this year. I seem to have been correct last December when I sold three quarters of my previously large Square position and reinvested in other positions.
My reasons at that time were: First that its customers were unbanked tiny merchants, and also restaurants, both of which would be hit hard in a recession. Second, they were really in a small niche, and while they could move upstream somewhat, there was no way they could “take over the world” the way some of my other companies could. Third, Sarah Friar left, and although she was adequately replaced, it now seems possible that, as CFO, she had a good view and she left because she saw the handwriting on the wall… perhaps that Square might continue to be a successful company, but that the glory days were over, but that’s just a speculation of course. She may have also disagreed with the focus on bitcoin. Back when she left I couldn’t understand why she would leave a prominent successful world-beating company like Square, where she got enormous exposure and became an icon in the investing world, to join a little no-name company that no one ever heard of… “CFO of Square” seemed a lot more important than “CEO of no-name.” It seemed like a terrible career decision by a very smart woman, and didn’t make any sense. Now that Square hasn’t moved in a year and two months (and is actually considerably down from where it has been in most of that year and two months), I’m speculating as to why she left when she did. It’s just a little throw-away speculation, not a determining factor in me selling. Fourthly, Square has plenty of competition (PayPal, Shopify, etc), while companies like Alteryx, Twilio, Okta, Zscaler, etc, don’t seem to have much effective competition. Fifthly, Square’s market cap is over $20 billion and that is much harder to quadruple than a company with a market cap of $3 billion. And sixth and finally, Square was (and still is), below where it was more than a year ago, which means others are seeing it the same way I am. And you can add to that two more factors, first, their relatively low gross margin compared to our other companies, and second, Jack Dorsey in the recent conference call saying “I love bitcoin!” which promises even more focus on bitcoin. Well, I probably should have listened to those reasons and put the money somewhere more profitable, but I often have to bounce around a little before I get it right.
At any rate I sold 40% of my Square at about $78.50 and about 60% at $63.50, for an average price of about $69.50. Remember that I first bought it in March 2017 at $17.50, which comes out to be just about a quadruple in under two and a half years. It is currently at $61.8, down quite a bit from my average exit price, and even down a little from my lowest sell price.
September. I sold out of my very small Guardant Health position when I needed cash to add to other positions which had had huge drops inspite of very, very good earnings and conference calls, with no bad news at all. On the drop of our Saas companies, I added a little to my Alteryx, a lot more to Crowd, a little to Mongo, a lot to Okta, to Zoom and to Zscaler. I also took a little position back in Elastic (2% or so), and, just yesterday, a little 1% position in DataDog when it briefly dipped under $32. To raise the cash, I sold a bunch from my Trade Desk position, and cut my very large Twilio position in half, and sold out of Smartsheets. The reasons I chose those are: Trade Desk because it’s part of a complicated advertising scene instead of a SaaS company, and Twilio because its relatively low margin, and because it acquired a large, much slower growing company. Comparing the combined revenue to last year’s revenue makes it look like it’s growing at 80 or 90 percent, but it grew organically at 56% and Sendgrid was growing at 20 something percent, so that in three quarters when you are comparing apples to apples it will look as if revenue growth dropped from 85% this year to 40% next year. Finally, I sold Smartsheets because I felt that they weren’t making any progress towards arriving at breakeven. Not saying I was correct with any of these sales, just telling you what I did when a bunch of super companies were on sale.
HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done year-to-date. I’ve arranged them in order of percentage gain. I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years.
**Alteryx from 59.47 to 106.18 up 78.5%**
**TradeDesk from 116.10 to 184.76 up 59.1%**
**Okta from 63.80 to 97.06 up 52.1%**
**Zscaler from 39.21 to 46.99 up 19.8%**
**Twilio from 89.30 to 106.56 up 19.3%**
**DataDog from 31.99 to 32.27 up 0.9% new yesterday**
**Zoom from 77.63 to 76.04 down 2.0% new in May**
**Elastic from 90.64 to 82.90 down 8.5% new last two weeks**
**MongoDB from 131.47 to 139.37 down 10.8% 3rd time**
**Crowdstrike 73.06 to 53.46 down 26.8% new in July**
As you can see from this, Alteryx, TradeDesk, and Okta are doing fine, each still up more than 50% so far this year, while Zscaler has lost a lot of its gains and Mongo just never got going. On the other hand, the smaller positions that I have taken since May, like Zoom and Crowdstrike, and that missed the first half of the year gains, are down, Zoom just a fraction, but Crowdstrike got hit hard with FUD this week. Crowdstrike and Zscaler seem to have been hit the hardest in the decline. I’ve been adding to both, and to Zoom as well.
Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years. You’ll note that almost all of these were tiny little try-out positions that I ended up deciding against, and don’t represent actual churn of the body of my portfolio
**Square from 56.09 to 69.50 up 23.9%**
**Docusign from 43.75 to 56.80 up 23.4%**
**Zuora from 19.80 to 24.00 up 21.2%**
**Elastic from 71.48 to 83.80 up 17.2%**
**Guardant from 37.59 to 41.50 up 10.4% 1st time**
**Anaplan from 28.75 to 31.05 up 8.0%**
**CrowdStrike from 60.80 to 64.81 up 6.6%**
**Mongo from 95.0 to 99.9 up 5.2% 1st time**
**Coupa from 91.95 to 93.13 up 3.0%**
**Abiomed from 325.0 to 334.0 up 2.8%**
**EverBridge from 73.58 to 73.95 up 0.5%**
**SmartSheets from 39.21 to 39.22 up 0.0%**
**Vericel from 17.40 to 17.38 down 0.1%**
**Guardant from 70.70 to 69.50 down 1.7% 2nd time**
**Mongo from 83.74 to 76.20 down 9.0% 2nd time**
**Nutanix from 41.59 to 36.00 down 13.4%**
**Guardant from 99.20 to 82.90 down 16.4% 3rd time**
MY HERO COMPANIES.
Alteryx, Twilio, Okta and Zscaler have all been in my portfolio for well more than a year now. The Trade Desk has now hit eleven months from when I bought it last October. In spite of this huge sell off, they’ve done all right since I bought them
Twilio is about a quadruple in a year and nine months, at 4.0 times what I paid for it in January a year ago ($25.70). It is up 315%.
Okta is 3.2 times what I paid for it ($29.95), also a year and nine months ago, more than a triple. It is up 224%.
Alteryx is up 283%. That means it’s 3.83 times what I paid for it in December 2017, a year and nine months ago, at $27.72, or almost a quadruple.
Zscaler is up 31% since I bought it a year and three months ago in June 2018, at $35.84. It got killed in this decline.
And finally Trade Desk is up 53%, in eleven months, from when I bought it at $121.0 last October
This is how you make money in the stock market, buying exceptional companies and holding them as long as the story doesn’t change. As you see just above, the great majority of my portfolio (and my profit), is invested in companies that I bought and held on to, and let them double, triple or quadruple.
And another great point from this is:
Do you think I care, or even remember, if I bought Twilio at $25.90, $25.70, or $25.50, now that it’s a quadruple and its price is $106.56? Think about that for a moment! The decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” If you have a stock that you want to buy because you believe it will triple or quadruple, and then you put in a buy order for it 25 cents, or 50 cents, or even a couple of dollars below the market, and hope that it will FALL to your price, you are out of your mind! But that’s just my opinion.
If you want to be in a company because you think it’s a great company and that its stock will go up, at least take a starter position that you can add to. Don’t wait around for the sell-off that may never come.
POSITION SIZES.
I’m still trying to keep my portfolio concentrated and streamlined. I’m at ten positions now which is still quite concentrated. My top two positions (Alteryx and Zscaler), about 20% each make up about 41% of my portfolio. The next two positions (Okta and Mongo), between 12.5% and 15% each, make up another 27% of my portfolio. Then come four smallish postions (Twilio, Zoom, Crowd, and TradeDesk) at 5.8% to 8.6% each, making up another 30%, and finally two little try-outs (Elastic and DataDog) at 1% to 2%. By the way, keeping my number of stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.
Here are my positions in order of position size. Note that the Alteryx and Zscaler positions are larger than I usually like, but they are high conviction Category Crushers. Note also that if you compare with a month ago, the top two are the same companies. The next four are the same as a month ago also, and in the same order. Of the last four, the small positions, Square, which was smallest last month, is gone, and Crowdstrike, and a tiny position in Guardant, are added. I’ve grouped them in bunches below according to size for easier visibility.
**.**
**Alteryx 22.0%**
**Zscaler 18.8%**
**Okta 14.8%**
**Mongo 12.6%**
**Twilio 8.6%**
**Zoom 8.3%**
**Crowdstrike 7.2%**
**The Trade Desk 5.8%**
**Elastic 1.9%**
**DataDog 1.0%**
