That’s a Wrap – “The Whipsaw o

That’s a Wrap – “The Whipsaw of 2021”

First, Happy New Year!! May the year 2022 bring you first and foremost HEALTH & HAPPINESS…but of course, I also wish you all PROSPERITY to compliment it.

As some have figured out, it is challenging to post a blog (https://www.digitalporcupine.com) with its pictures, graphs and tables into the Motley Fool format here, but here goes my attempt with my annual 2021 results. In such, please forgive any errors or violations of the rules…I post this at the request of the boards creator and did not have time to completely re-write the entire summary to adhere to every rule. In such, I brush over a few OT items with a sentence or two, but please respect that any discussion on trading of options, company valuations and beta (market) factors are absolutely off-topic, so please do NOT respond or comment on any of those topics here out of respect for the board rules. Blog or twitter is fine if you want to comment or discuss those items OFF the board further.

I will reiterate I remain incredibly grateful to Saul for creating this incredible brain trust of analysis, discussion and camaraderie. What a gift that has helped to re-inspire and fine tune my investing protocols. It has over time transitioned to being one of my three or four primary sources I go to for new ideas, information and common analysis (followed of course by the company’s own website and SEC filings for details and financials!) and I count several new and trusted friends I have gained, visited and gone on adventures with from this experience…just a few of the many silver-linings of Covid-19 and this board!

The relatively arbitrary day that we humans have chosen to mark the end of earth’s annual revolution around the sun is as good as any day to look back on the past year and assess the portfolio’s performance, the lessons I have learned, and to review the prognostications and pontifications that I posted in the following two posts one year ago:

https://www.digitalporcupine.com/archives/642

https://www.digitalporcupine.com/archives/666

Indeed, many of the predictions came to fruition in some form during the year, but as with most things, the devil is always in the details. How and when we react to an event proves equally important on the impact it has on our portfolio and/or returns…for better or worse. While I try never to focus on stock prices themselves, and instead almost always try to drill into the performance of the underlying company, their growth metrics, evolution, story and ,of course, financials; we must also measure our own performance (in terms of % returns) as a means of assessing if we are successful and (still) moving in the right direction. The goal after all is to make a return on these investments!!

The 2021 portfolio performance of my SaaS company’s stock prices proved to be an absolute “whipsaw” of a year. Investing in phenomenal growth companies while trying to turn a blind eye to the sometimes relatively random stock price fluctuations is akin to attempting to meditate (focus), while all along your mind finds itself racing off in 5 different directions and tempted by the tumultuous emotions inevitably brought on by violent stock price swings of otherwise sound investments on a daily, weekly or monthly basis.

Breathe, re-focus the mind on the fundamentals, notice the emotions that are distracting me, and don’t let them knock me off course. The tail (stock price) currently tucked between the legs of the dog will eventually have to follow the dog that is sprinting higher!

The first prediction I posted a year ago for 2021 was for another 35% correction (we had already had 5 such corrections over the past 4 years). And the portfolio did not disappoint! In fact, it was so generous, it gave me two (or three depending on your perspective) of them by the end of 2021!?

After catapulting out of the blocks in January, the portfolio was already up +22% YTD on Feb 12, only to find ourselves down -14% YTD just one month later on March 8; it then clawed its way back to breakeven before again plunging down -18% YTD on May 12th, 2021, which would (gratefully) prove to be the low point of the year for the portfolio.

I often share that I don’t try to time the markets. I remained (relatively) fully invested during the downturn, while adding some leverage in the form of options leaps (primarily in CRWD and DDOG) and even pushed all in with the 8-10% cash I had on hand at the time set aside for taxes…I then waited and watched with as much patience as I could muster through the aforementioned two drops from March – May. In less than 2 months at the end of June we were back up +18% YTD. By September 30, the portfolio was up +50% YTD. In October it was pushing up +85% YTD and fluctuated around those highs until November 9th.

Folks, if you are keeping track, the first two fluctuations were 30-35% drops followed by a 125% surge at the high on November 9th. Growing up in logging country, you gotta be careful of the ‘ol whipsaw! I could never have timed those drops (or surges) and I’m glad I didn’t try. I might have exited correctly one time, but would have missed the fierce and roaring comeback while I sat out on the sidelines. That said, I admit that I did take the opportunity in November to take some of the options leverage off the table that I had added in early May when the portfolio had dropped more than 35%; reducing almost all of my options positions and leaving about 9% cash on the side for taxes on the gains…and to be ready to take advantage if there was another drop…though I had no idea it would be coming so quickly…

…the portfolio “whipsaw” was not done for 2021. One day after setting its YTD high mark of 85%, the portfolio dropped a whopping -10% in one single day on November 10…the single largest drop I’ve had in my portfolio in one day since 2008-2009. As inflation surged to its highest rate in 4 decades, supply chains continued to be strained, the Omicron variant reared, and most critically, the Federal reserve announced their policy reversal on interest rates and QE; almost all small and medium high growth technology and related companies (especially those high growth in my portfolio) were simply taken out to the metaphorical woodshed for repeated beatings.

Admittedly, valuations on these companies were strained as the stock prices had been bid up to some of the highest multiples we’ve seen in a long time; but beatings continued and, as the sector rotation out of my SaaS companies raged on, something of a self-fulfilling prophecy emerged as investors, traders and fund managers harvested year-end tax losses where they could (that means they sold those investments with losses to offset others with gains in order to delay or avoid taxes for the 2021 tax year) resulting in further exacerbated losses as many of them rotated out of our high growth companies and into other “perceived” safer investments (and keep in mind due to “wash sale” rules…I recommend you look this up if you are not familiar with this IRS law…one then is not allowed to reinvest in those companies for at least 30 days, so the vicious cycle becomes prolonged). I have little doubt investors and funds will be piling back into these great companies when the dust settles, but that takes 30 days minimum from the day they sold. In summary, from a YTD high up +85% on November 9, 2021 through the end of 2021, the old pirate’s verse “The beatings will continue until morale improves” haunted me.


**2021**

**Month           Monthly %	  YTD %**
**end             Gain(Loss)	Gain(Loss)**
Jan	          7.95%	          7.95%
Feb	         (2.71%)	  5.02%
Mar	         (14.19%)	 (9.88%)
Apr	          12.07%	  1.00%
May 12 Low	 (18.70%)	 (17.89%)
May	           0.57%	   1.57%
Jun	          22.32%	  24.24%
Jul	           3.33%	  28.38%
Aug	          20.86%	  55.17%
Sep	           1.33%	  57.22%
Oct	          14.91%	  80.66%
Nov 9 High	   2.25%	  84.72%
Nov	         (17.59%)	  48.88%
Dec	         (28.21%)	  29.71%

Going into last year (2021), I stated I would be relatively happy with 25-30% returns on top of the prior year 203% (3x) returns of 2020. Who wouldn’t be?! Well, I guess I was wrong, or lying to myself, as its clearly “harder to have loved and lost, than never to have loved at all”. That is to say, it has certainly been difficult the past short 6-weeks to sit by and idly watch +85% YTD gains for the year drop to only +29.7% YTD gains at the end of 2021; but that is exactly where we found ourselves on this arbitrary year-end date of measuring our portfolio returns.

On the other hand, for a little perspective, the portfolio returns still compound to a cumulative 1,219.5% returns (more than 13x) over the past 5 years since January 1, 2017. It is indeed true that:

“Compounding is the 8th wonder of the world. He who understands it, earns it. He who does not, pays it!!” -Einstein

To put this into perspective, if you had invested $10,000 into a similar SaaS portfolio on 1/1/2017, today it would be worth roughly $121,950 (Of course, this is assuming you were not taking any of the invested funds or gains out at any time or trying to live off the proceeds, and were instead leaving the entire amount fully invested the entire time).

Benchmarking: It is worth briefly comparing (“benchmarking”) the above returns with some of the common stock indexes (below), if only to see how they compare to our portfolio over time. To be clear, I simply cannot expect an entire index of 500 (S&P) or 2000 (Russell) stocks (companies) in an index to come remotely close to outperforming 10 handpicked, incredibly fast-growing, well-researched, solid companies. It would be akin to suggesting that a random herd of ranch horses could come close to beating 10 genetically bred, well-trained thoroughbred race horses in the Kentucky Derby. Granted, you might get a couple horses in the index that perform quite well in a given year, but most will not be able to keep pace. For this reason, I personally don’t invest in indexes, in which at least 50% of the companies in that index are the bottom or worst 50% of the bunch. It is not hard for me to look at 2000 companies and pick the 1000 that are performing better and thereby exclude the worst performing 1000. Most people could do similarly with a very little bit of effort. Along the same vein, I have found, why not try to pick the best 10 companies and leave out the other 1990 relative under-performers?! I will never reach perfection…and I will never stop trying!

(By all means, though, please don’t misunderstand me…it is still far better to invest in a stock index, than NOT to invest in the stock market at all. 100 years of history shows us the superior long-term average results of stocks (over most other common investments)….which are around 9% per year on average for over 100 years.)

In summary, I fully expect the underlying stock prices of my (many of our) 10 portfolio companies to continue to significantly outperform these stock indexes of hundreds or thousands of relative underperformers. Moreover, I expect the stock prices of these “best in breed” companies to eventually catch up with and reflect their superior underlying fundamentals and growth. On a macro level, we have only seen the first wave of digital adoption and I still feel we are in the early innings.


Index	       % Gain 
Dow	        18.7%
Nasdaq	        21.4%
Russell 2000	13.7%
S&P 500	        26.9%

The average of these four indexes above were up just over 20% for the year 2021. Had 2021 arbitrarily ended 6-weeks earlier on November 9th, the portfolio at 85% would have been more than 4x the average of these indexes. Given the last 6-week’s sector rotation and beta (external market) pressure from various factors on our portfolio of high growth technology companies, we instead end the year beating the average of the indexes by about 10% in 2021. Far more importantly over time, of course, during just the past 5 years, the portfolio has beaten the indexes by more than 13x or 1219.5%.

Finally, following is today’s portfolio of my 10 high growth companies as we start the New Year 2022. If you are able to read the posts I made one year ago (links are above), you will note that only 4 of the 10 companies I had at the beginning of last year still remain in the portfolio: DDOG, SNOW, NET, CRWD. Five of the other six (MNDY, UPST, AFRM, S, AMPL) are new positions this year. ZS is the only one I owned previously and have recently added back to the portfolio as they have re-accelerated their growth again to earn a spot on the “roster”, as my friend Joe would phrase it.


MNDY	18.88%
DDOG	16.80%
SNOW	 9.75%
NET	 9.24%
UPST	 8.74%
AFRM	 7.63%
CRWD	 7.41%
S	 7.20%
ZS	 5.80%
AMPL	 2.74%
OPTIONS  7.02% (All options invested on above 10 companies)

(As always: The company investments above are NOT stock recommendations or advice. Please do your own homework and invest wisely based on your own personal financial situation and your own analysis and review of the companies in which you choose to invest.)

I include my options positions (~7% of the entire portfolio) made up entirely of the companies listed above and currently have no cash position and am in fact 2% on margin as I removed some cash to pay Uncle Sam for capital gains (the majority of which are long term capital gains, as I am not a short-term stock trader). I do sometimes like to keep some tinder (cash) available when my investments have surged significantly higher, particularly so that I can add leverage to my current positions during a downward sector rotation or a correction that unduly impacts my entire portfolio and gives me an opportunity to get additional shares of my companies at a relative bargain. As such, with the recent 2nd downturn at more than a 40% drop since November 9th, I am now fully 100+% invested today, January 4, 2022. Regardless, I seldom keep more than 5-10% cash position, and I want to be clear, none of the dollars I invest in these companies are needed in the next 3 years for me to live comfortably. This will differ depending on your own personal situation, of course. As Warren Buffett famously stated, “Be fearful when others are greedy, and greedy when others are fearful.”

To be clear, sector rotations and market corrections come and go, and are usually short-term in nature; however, if you are disciplined enough to invest long-term in solid, financially stable and fundamentally sound companies with incredible growth, strong balance sheets, great and trusted management teams, an ARR model, and many of the other factors I try to capture in my analysis and in my blog, you won’t need to bail out of an investment in a great company when the stock price drops short-term; what is more, you will have the conviction to buy at exactly those times with the research, knowledge, and conviction that the company is undervalued relative to the fundamentals and growth of the company underlying it and that the stock price will eventually rebound in the long-term. Imagine if you bailed in the middle or near the bottom on all seven of the 35% drops over the past 5 years? You might have gotten lucky and jumped back in on one or two of them, but I would wager you would certainly NOT have managed to have anywhere close to 1,219.5% returns over that period.

Rather than review each individual holding in the portfolio, something I do often quarterly after listening to earnings calls and reading the Q’s and which many others have already well covered and beat me to the punch on this board, you can follow my ramblings on:

@Vnunnemaker (twitter)
DigitalPorcupine.com (blog)

I will of course continue to post here as appropriate and respecting the rules of the board.

I do hope you find this blog post useful and thought provoking as I strive to share my experiences, successes, challenges & failures…it was tough year and took every bit of my 30+ years of investing experience to stay focused…and I still made my shares of mistakes…but that is for another post. I sincerely welcome your respectful responses with any questions or thoughts, or just pointing out any errors or omissions. Like you, I’m always learning, exploring and fine tuning. “None of us is as smart as all of us!” This year has certainly been one I won’t forget.

Cheers & Happy New Year 2022!

-Poleeko

128 Likes