Othalan's 2019/Dec. Portfolio Summary

This is my year-end summary for 2019.
Some highlights for this tumultuous year:

• January: up 21.4% YTD
• July 26: up 90.7% YTD
• November 7: up 22.8% YTD (down 35.6% from the high)
• December 31: up 38.6% YTD (year finish)
• Average Annual Return since 2019: up 39.2%

Mistakes were made. Big ones. I learned, I moved on, I will be a better investor in the future for having made those mistakes.

Even with those mistakes and the big drop in the second half of 2019 I am thrilled with my performance this year. I have achieved a rate of return on my investments I never could have conceived of 4 years ago. I have a high degree of confidence that my returns are thanks to a combination of my own personal skill and the mastermind effect of the discussions on this forum, and not any form of gambling. I was able to watch my portfolio drop almost 35% while never loosing a night’s sleep thanks to my confidence in the quality of companies I am invested in and the cushion provided by investing in high growth companies the past few years. I am retired and living comfortably off my investments at an age when retirement is ordinarily never considered.

All thanks to the simple wisdom Saul has so generously shared with the world.

Thank you Saul for your continuing generosity!

On Using Margin

I use margin in one of my investment accounts and put my best ideas there. While I do not recommend the use of margin in general, I am comfortable in its use even through the “SaaS meltdown” we have experienced in recent months. However, I did learn one important lesson this year related to use of margin: Pay attention to my instincts when it seems valuation is getting too high and reduce (or eliminate) my use of margin! In June I began to think this rate of growth was astounding and could not continue, but I stayed fully invested. In July I was certain this rise in price cold not last, but still I stayed fully invested.

As I look back at those thoughts I have no regrets about staying fully invested as I could never have timed what happened this year. After all, why not sell at the end of January after the astounding +21.4% start to the year? However, what I would do different next time is to reduce my use of margin when I get that feeling “this is too good to be true, it cannot last”. In the long run this failure to listen to my instincts will be a minor footnote to my investments. Yet not using margin would definitely have had me feeling better the entire second half of the year … including during the price run up in July!

To be more succinct: I should have been more fearful when everyone was greedy.

Story vs Reality: 2016 vs 2019

I was reminded this year of the importance of paying attention to real performance as opposed to the story of why a stock should do good in the future. I resisted investing in Zoom (ZM), Coupa (COUP) and Crowdstrike (CRWD) because I did not understand how the story showed spectacular returns even though the numbers for all three companies look great. I stayed invested in Twilio far longer than I should have thanks to the story management spun on the potential of the merger with SendGrid while not paying sufficient attention to the abysmal quarterly results.

This reminds me of when I started with Saul’s style of investing at the beginning of 2016. At that time, the companies being talked about were all well established with a history of high earnings (by the standards of the time) from which we could easily calculate a variety of interesting numbers. The story of a company was very clearly far less important than the reality of those numbers.

In 2019, just 3 years later, “Saul type investments” have changed in nature. Today I am invested in companies with spectacular growth rates and far too short of a history to get an idea for the comfort of my previous 2016 style analysis. The companies are often operating at a loss in order to grow fast, a trait which would never have been accepted in 2016. Valuations can easily leap from terrifyingly overvalued to absurdly undervalued and back again with a rapidity that I would never have believed possible three years ago.

In the face of this type of uncertainty I have seen the finances of companies being analyzed in innovative new ways and new business models being accepted as sound investments which barely existed in 2016 and did not exist at all not long before that. Yet still there are fewer concrete numbers being discussed in 2019 than I remember from 2016 and a lot more discussion of how to compare companies to determine which is the best investment.

Filling this gap I see a rise of consideration of the story of each stock. Questions such as: Why will this software product be “sticky” preventing easy change to competitors? Why will companies need this product thus leading to rapid growth? And many more questions, all seeking to understand if the high growth rate is justified and sustainable.

While these are not bad questions and the uncertainty in this new style of investing needed to be accounted for, I am also delighted to see that as 2019 evolved there was a distinct trend back towards concrete numbers.

I see this as by far my most important lesson of the year:

Let the numbers justify the story, not the other way around!

2019 Performance YTD by Month
(as of the last day of the month)

January    + 21.4%
February   + 33.6%
March      + 44.8%
April      + 52.4%
May        + 50.4%
June       + 69.3%
July       + 80.0%
August     + 74.7%
September  + 31.9%
October    + 27.3%
November   + 53.3%
December   + 38.6%

**2019 High:** + 90.7%

Position Sizes as of 2019/12/31

AYX 21.0%
DDOG 16.5%
OKTA 14.7%
TTD 14.3%
CRWD 13.4%
MDB 7.9%
ZS 7.8%
SMAR 3.8%
ZM 2.1%
COUP 1.2%
PAYC 1.2%

The astute reader will note that this totals 103.9%. This represents 3.9% margin.

Historical Context

No matter how I look at my performance this year or over the past 4 years, I am thrilled with the results. Here is a summary of my investment portfolio and relevant indexes over the course of my investing based on Saul’s philosophy. Note that in addition to Saul’s preferred indexes, I also look at the vanguard fund VSMAX which tracks the CRSP US Small Cap Index. This was my primary investment before discovering Saul’s methodology.

Year    Portfolio  |  S&P 500     VSMAX    R2000(*)   IJS ETF   IDX AVG(**)
====    =========  |  =======   ========   ========   =======   ==========
2016     +  9.8%   |  +  9.5%    + 20.8%    + 19.5%   + 31.2%      + 20.3%
2017     + 77.1%   |  + 19.4%    + 12.3%    + 13.1%   + 11.4%      + 14.1%
2018     + 31.2%   |  -  6.2%    - 12.7%    - 12.2%   - 12.8%      - 11.0%
2019     + 38.6%   |  + 28.8%    + 11.9%    + 23.6%   + 21.9%      + 21.6%
====    =========  |  =======   ========   ========   =======   ==========
AERAGE   + 39.2%   |  + 12.9%    +  8.1%    + 11.0%   + 12.9%      + 11.2%

(*) Russel 2000
(**) Average of Indexes

Note: This is an imperfect comparison!

I am not including dividends and my portfolio accounts for deposits/withdrawals while index returns do not. I use these numbers as a sanity check against my own performance, not as a direct comparison. Having looked at a better comparison including these factors, I consider the difference small enough to ignore for my purposes.

Select Comments on Stocks

The Trade Desk (TTD)

I am uncertain if TTD has a lot of potential to grow or is overvalued and likely to drop. It seems the market expects a lot of the company based on the shift away from traditional advertising models and the extra revenue likely to occur because of elections in the USA in 2020. If this is accurate, I fully expect the stock price to drop drastically at some point but it may rise significantly first.

MongoDB (MDB)

I share Saul’s view of the last quarter when he said, “Everything was worse and going in the wrong direction.” I also see a lot of future potential for the company as has been discussed on this board in numerous previous posts. This indicates to me that at best MDB has (at least temporarily) finished its period of hyper growth and will be a more typical growth company over coming years. It seems a potentially sound long term investment for a style of investing I no longer follow. I have thus sold half my position over the past month and will sell more in January.

Zscaler (ZS)

I like Zscaler’s product and see a potential for them to redefine internet security, but they seem to be facing some major challenges at the moment. Existing security companies are fighting back against the change Zscaler represents. Easy growth has been exhausted (lengthening sales cycles). Management does not seem to be running the company as well as when it was smaller (or perhaps flaws are more apparent). I have some hope for the company still in 2020, but I will likely be reducing my position, cut in half already from earlier this year, until numbers show a change.

Paycom (PAYC)

I have been in and out of Paycom multiple times this year. Not the most amazing growth compared to my other stocks but it seems to just keep going. I put money here when I don’t have better ideas.


OOPS: I missed a ‘pre’ wrapper around my position sizes. Here is the proper formatting for ease of reading:

AYX    21.0%
DDOG   16.5%
OKTA   14.7%
TTD    14.3%
CRWD   13.4%
MDB     7.9%
ZS      7.8%
SMAR    3.8%
ZM      2.1%
COUP    1.2%
PAYC    1.2%


Perhaps a better benchmark to measure against given your holdings would be:

Fidelity Software and IT Services Fund…?

Almost none of your holdings are smallcaps, so that comparison isn’t apt.

The above fund holds many SaaS and similar stocks like Adobe, Autodesk, CRM, MSFT, WDAY, PANW, ATVI, HUBS, TWLO, PVTL, Slack, TLND, Cloudera.

Just a suggestion,