Othalan's 2018-ish Portfolio

For my own continuing education, I regularly evaluate my own investing performance, look at my successes and mistakes, and seek to find lessons I can learn in order to improve my investing skill in the future. As always, I offer this here for my own accountability and any edification or amusement you may glean from my experience.

2018 Results

**Month         YTD Value**
January       10.12%
February      10.03%
March         15.66%
April         15.89%
May           24.68%
June          25.11%
July          21.69%
August        50.48%
September     49.66%
October       31.73%
November      39.76%
December      31.17%

January 2019  21.45% (2019 YTD)

All recorded on the last trading day of the month and calculated as per Saul’s recommendations detailed in “Saul’s Knowledgebase” linked on the right hand column of every post in this forum.

HISTORICAL PERSPECTIVE

I began investing through retirement accounts in 2004 but only took control of my investments in January 2016 when I began following Saul’s methodology which I found perfectly suited to my personality and goals. Recent Year Performance and Year-End Summaries:

**Year    Change**
2016  +  9.82%  2016 Review: [http://discussion.fool.com/Message.aspx?mid=32537556](http://discussion.fool.com/Message.aspx?mid=32537556)
2017  + 74.60%  2017 Review: [http://discussion.fool.com/Message.aspx?mid=32904595](http://discussion.fool.com/Message.aspx?mid=32904595)
2018  + 31.17%

GOALS AND COMPARISONS

As a retired permanent world traveler, I have decided on two simple criteria for evaluating my investing performance: Can I live off of my investments and is the return high enough to justify investing in individual stocks?

Can I live off of my investments?

I am delighted to say that I am successfully living off of my investments while simultaneously increasing my portfolio size. I have ensured I will be able to live a more comfortable life next year and provided sufficient padding in my gains that a large drop in my portfolio will not cause me any stress in my chosen lifestyle.

Is the return high enough to justify investing in individual stocks?

For this, I compare my returns against the investments I used before 2016: The S&P 500 and the mutual fund VSMAX which invests in small-cap stocks. Here is the comparison for 2018, all adjusted for the same deposits and withdrawals as in my portfolio:


S&P 500:      - 7.41% *
VSMAX:        -11.75% *
My Portfolio: +31.17%

_* (S&P500 and VSMAX returns adjusted to match portfolio deposits and withdrawals)_

Result: Wild Success

I am very satisfied with the above results. In addition to surpassing my criteria by a wide margin, I feel my skill as an investor has improved significantly over the past year.

CURRENT POSITIONS (as of 2018-12-31)


Twilio         (TWLO)    16.8%
Alteryx        (AYX)     15.5%
MongoDB        (MDB)     12.3%
Square         (SQ)       9.6%
Zscaler        (ZS)       8.3%
Okta           (OKTA)     8.2%
The Trade Desk (TTD)      5.5%
New Relic      (NEWR)     2.6%
Elastic        (ESTC)     2.5%
Abiomed        (ABMD)     2.1%
Nutanix        (NTNX)     1.9%
PayCom         (PAYC)     1.5%
Cash                      1.4%
Shopify        (SHOP)     1.2%

* The astute observer will note this adds up to 103.8%, representing the use of 3.8% margin.

January Adjustments

Sell: Shopify (SHOP)
Buy: DocuSign (DOCU)

BRIEF INVESTING THESES

Here is a brief statement of why I am invested in each company, why it receives its position in my portfolio relative to other companies, and any current thoughts. Note that all companies below 5% I consider low confidence and may be sold at any time.

Twilio: Revolutionizing customer communication. No meaningful competition.

Alteryx: Data Analysis for the non-technical user and an amazingly well run company. Users love them and the competition does not seem to be a significant risk to their growth.

MongoDB: NoSQL Data Storage. Leader in its field and creator of the concept of NoSQL. Beginning to face competition with uncertain consequences moving forward and I am considering decreasing my position size.

Square: Providing point-of-sale and financial solutions to small businesses previously only available to large corporations. As small business accounts for the majority of the economy in the USA, the potential market is enormous. I am concerned at the recent addition of lending money and the consequences of Sarah Friar leaving are uncertain. These concerns have me watching the stock carefully, however the finances continue to be amazing. In particular, revenue growth continues to accelerate.

Zscaler: Revolutionary alternative to VPN security which is fast gaining in popularity. Will not add because I consider security stocks to have a high inbuilt risk factor in the form of hackers.

Okta: Revolutionary alternative to internal corporate security which is fast gaining in popularity. Will not add because I consider security stocks to have a high inbuilt risk factor in the form of hackers.

The Trade Desk: Revolutionizing the advertising industry for the digital age. I consider this unusually risky for my investing style for two reasons: (1) I distrust advertising companies and (2) They will likely saturate their own market at some unknown point.

New Relic: Application Performance Modeling. Finances look good and the company seems well run, however the market seems continually underwhelmed by the company’s performance. I see nothing wrong with the company yet also do not see any prospects matching up to my other investments. Probably selling soon.

Elastic: Enabling internal search functionality in applications (not user search). New addition in December. Looks good yet I am still not convinced so I am keeping my position small at least until the lockup period expires (2019-04-03).

Abiomed: Biotech creating a single-use miniature heart pump for use during heart surgery. Invested to continue my education on Biotech stocks so keeping it small.

Nutanix: Hyperconverged Infrastructure. Like Saul, I’ve come to view this company as too complex to understand … in spite of my technical expertise. More on this company below.

PayCom: Online human resources company. Growing fast, customers love them. I was invested previously and returned in December seeing a potentially good investment point.

Shopify: The company which revolutionized online sales via custom web sites. I had sold out earlier in the year but bought a small position in December seeing a possibility for upcoming growth, but sold in order to buy DocuSign.

DocuSign: Revolutionizing document signatures. Bought in January after taking into consideration some very good analysis by other members of this forum. Lots of people love the product, however I am uncertain as to the financial growth potential and am thus keeping this position small until I have a more clear understanding understanding of growth prospects.

MISTAKES WERE MADE

The above satisfactory results came with a few opportunities to learn from my mistakes, some of which cost me a very large quantity of money.

LGIH (LGI Homes)

As of the end of November 2017, LGIH was 23.2% of my portfolio. At this time I knew the stock price was not likely to rise significantly for several months, however I left the majority of these funds invested in LGIH for two reasons:

(1) I figured the risk of the price dropping significantly was minimal.

(2) I wanted to focus on life away from the internet and did not mind a stable stock.

While I have no regrets in this choice (it was a truly amazing three months), I realized later this was a massive mistake from an investing perspective, mostly because of the opportunity cost of leaving money in a stock I knew would not move. In addition to this mistake, I compounded the mistake by not selling out fast enough when I did finally sell, which meant a portion of my shares dropped in price when 2018 turned out not to be as promising for the company as 2017.

VRNS (Varonis Systems)

One of my best performers in 2017 and the first half of 2018, I made the same mistake as with LGIH: I held on past the point where I knew the price would be rising. My notes indicate I was considering future returns to be minimal after the middle of May and I should have sold at that point. What I did not guess at was the sharp drop on earnings at the end of July. I then compounded this mistake by selling at the bottom when I knew it was a massive overreaction and could have easily recouped a significant portion of that drop by waiting a week. There was no analysis in this decision to sell, simply an emotional reaction to the price drop. One of the few times I have let emotion get the better of me in my investing decisions. Yet even with this price drop, I made a significant amount of money on VRNS. No regrets, lessons learned.

NKTR (Nektar Therapeutics)

The mistake here was a simple misevaluation of the company: I know little about biotech stocks and invested in NKTR in order to focus on the company and learn more as it was being talked about heavily in the group. End result? I bought at a very high price and sold at a low price. I learned a lot along the way and mitigated the pain by keeping my position small.

NTNX (Nutanix)

While I am still uncertain of the future for this company I can only classify my investment in it as a mistake. I realized the mistake when I saw my investment with this perspective:

Nutanix is such a complex company, the only way to understand it is to create a story. Doesn’t matter how good the finances look, I was still investing in the story instead of the real company which I have always found to be a mistake. I never had a clue why the stock price was moving in the direction it was (up or down), and I would have been better served by investing in a different company.

I have maintained a small position in the company as I continue to study the situation yet I am hesitant to increase the size unless I gain a better understanding of the products and finances.

INVESTING STYLE CHANGE: Risk Mitigation and “Safe” Investments

In past years I have talked significantly about risk mitigation in my investing style. In particular, I maintained a significant quantity of money in relatively investments in order to mitigate the risk of my own ignorance while learning this new style of investing I have learned from Saul. Through my continuing self education of investing over the past three years, I no longer feel the need for that form of safety net.

LESSONS LEARNED

Looking back at 2018, three lessons stand out:

From LGIH: Don’t be too slow to move money out of an investment when I see performance is likely to suffer.

Don’t be too fast to sell companies that have proven themselves to be high quality investments.

Any company too complex to understand is too complex to invest in. Even the most complex companies should be explainable in simple terms.

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Nutanix: Hyperconverged Infrastructure. Like Saul, I’ve come to view this company as too complex to understand …

I don’t think this statement is correct as Saul just stated he has added to his NTNX position … the expectation is for growth rates to show up much improved as comparatives get easier with HW sales reducing from prior period numbers

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