Pikatrain's portfolio at the end of Oct 2020

Previous months:

September 2020 https://discussion.fool.com/pikatrain39s-portfolio-at-the-end-of…
August 2020 https://discussion.fool.com/my-portfolio-at-the-end-of-august-20…

== 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 63.76% YTD

A little break down of 2020

JAN 26.40%
FEB 31.91% * Decided to use margin and option to sell short stocks
MAR -24.22%
APR -50.48% * Decided to switch to Saul's strategy at its lowest point, about -74% in mid-April
MAY -9.08%
JUN 24.76%
JUL 40.15%
AUG 42.38%
SEP 83.34%
OCT 63.76%

== Account activities and why ==

My account hits an all-time high in early October like many of you. And for the last two weeks, it drops about 30% (or 23% if no margin usage).

I added DOCU during the all-time high and decide to get rid-off it two weeks later and accept the loss. I sold DOCU to control my margin and reduce my tax in that the margin ratio goes up quickly when the market goes down. I want to limit my margin ratio while minimizing my tax around the end of the year. My short-term capital gain mostly comes from my trimming Zoom or rebalancing my stocks.

== My investment principles ==

I mainly invest in these two types of companies: SaaS and Network-effect acceleration in COVID. The SaaS has been explained in the knowledge base. My definition of network-effect implies the capability of a company to dominate or disrupt the market it operates when they gain more market share. Facebook and Linkedin are some examples of network-effect companies. Right now I pick ZM, PTON, and SQ. I believe they are building a moat through a network-effect.

My tax rate is very high, so if there are two stocks to trim, I will consider tax implication, especially due to short-term capital gain, into my decision process. Namely, if two stocks are similar to me, I often sell the one I make less (or lose the most).

I added more allocation on the top-tier companies when other investors in the forum seem to have very high confidence, for example, ZM. 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 another 1-2 low confidence stocks.

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.

== My allocation on 10/31/2020 ==

ZM 31.84%
PTON 25.00%
DDOG 17.68%
CRWD 13.69%
SQ 11.79%

P.S. Leverage 1.57x (went up due to the market correction)

== Why I picked these stocks ==

Trimming FSLY to zero is not a difficult decision for me. I asked myself whether I will buy FSLY if I get extra cash, and the answer is no. The question I asked is whether FSLY can be my highest confidence company if I can invest in only one company. And the answer is very unlikely so there’s no point for me to keep it. / FSLY

I decided to diversify my investment a bit by not focusing on only SaaS companies. I predict the COVID won’t go away in the next 12 months or be exact – I believe that Gym won’t open in 2021. I also feel that the investment in digital transformation may slow down a bit (comparing to 20Q2) in that many companies might want to conserve their cash when the future is unclear. / PTON

I have been hearing from CFO/CEO during earnings calls where companies do not feel comfortable in predicting 2021 earnings, and in that case, heavy investment in digital transformation is unlikely to happen. Any CFO today will recommend their CEO to play safe, not bold, even if they are having a tailwind because they don’t know when the wind will slow down. If companies are having headwind, it only makes more sense to slow down any digital transformation investment in the next two quarters.

For the above reason, I was thinking of trimming DDOG but given my tax implication (short-term capital gain), I decide to keep it but I don’t plan to add it. / DDOG

I feel the world will be quite different when COVID is over. Many workers in high tech companies will not come back to SF or NY, they will live in a suburban area or somewhere with much reasonable rent. In a world, you don’t live in a city, SQ, PTON, ZM makes perfect sense to ease a person’s inconvenience. Their growth may slow down but the network effect they accumulate in this period will become a moat.

I’m expecting their coming earnings calls and will update my allocation based on what I see at the moment, not what I feel today. It was a quiet month for me, except for selling FSLY and adding PTON.

== Some thoughts about the market correction in October ==
This month has been the first “real challenge” to me in that it’s the first market correction after I embraced the investment concept in the forum. I might trim more “loss” to reduce my tax while reducing my margin ratio to a level I feel comfortable with if the correction continues.

Having margin usage brings (unnecessary) stress in a market like this. If I’m retired, I won’t use any margin to avoid stress. I somehow manage my stress and sanity by limiting margin usage to 1-year after-tax saving or less. It’s good learning to myself that how much stress I truly felt when with a margin during a correction period.

I’m not unhappy to have a year with a 63% YTD ROI, especially I was down -50% in March and observed a turbulent year where the S&P 500 is having 1.21% YTD. All financial experts told me that I should expect an 8-10% annual return on average and 2020 is a year one should expect the ROI to be “below the average or even negative.” I guess I should feel thankful that I did not listen to them, distributing my money to index and bond ETF.