Hello again. I know it has been a while, but I wanted to make sure that I got my 2021 portfolio posted. The last few months, I have not been as active on Twitter or posting to this Substack as I expected. I have been kept busy by other projects including my work on Chit Chat Money (check out the podcast here).
I have also been working on a new project that I will be releasing very soon. It is a tool for creators, influencers, field experts, coaches, and mentors to help earn a living off of their time and knowledge. If you are interested in learning more about the project, I would love to give you a demo and/or give you beta access. Send me a message or sign-up for a time using this link: https://calendly.com/merlyn-ian/demo.
But enough about that, you are reading this to see my 2021 performance. I will not sugarcoat it, it was not a good year. Many of my large positions to start the year were small-cap growth and those positions got hammered as the year went on and drove much of the underperformance.
I am in my sixth year of investing, and I am aware that I have not seen a full-cycle, but I have seen a number of significant pullbacks in my own portfolio (December 2018, March 2020, March 2021). They are never an enjoyable experience, but I try to take the long view and not focus on the current results, instead reflecting and looking for the larger lessons to be learned. I try to stay fairly unemotional in the market.
Reflection is the major reason for this post. Writing my thoughts helps me clarify the results and gain deeper understanding. I also highly value feedback. This format lets me share my thoughts and learn from others in a transparent manner. Knowing that feedback is one of my major reasons for sharing, please share your feedback with me. I will be forever grateful.
2021 Performance
My Portfolio Return: (13.1%)
S&P 500 Total Return: 28.7%
2020 Underperformance: (41.8%)
Top 10 Stocks Weighting: 67%
# of Stocks in Portfolio: 45
YTD Performance
(as of February 4th, 2022)
My Portfolio Return (16.8%)
S&P 500 Return: (5.5%)
YTD Underperformance: (11.3%)
Top 10 Stocks Weighting: 67%
# of Stocks in Portfolio: 46
My Philosophy
I try to keep my investing philosophy simple. In the past, I have written that I want to be invested in companies that are “changing the world, even if it is only their small piece of it.” I still believe this, but I admit that it may be a bit overdramatic. Perhaps a better, yet still frustratingly ambiguous articulation is that I want to be invested in companies committed to excellence. I am not looking for companies that are struggling to stay afloat that I think I can flip for a quick buck.
I will confess that a few of my investment decisions lately bring this commitment to excellence into question, and that is one of the errors that I wish to correct moving forward, but more on that later.
I have traditionally not been particularly focused on valuation. I prefer to analyze the business on its own merit, and follow that up with an assessment of whether I am willing to pay the price the market is setting. This past year, I found it increasingly difficult to come to terms with the prices the market was setting, particularly in early 2021. As a result, I found myself looking toward GARP-ier names (growth at a reasonable price).
At times in my investing journey, I have almost entirely ignored valuation in investment decisions and merely used it to determine position size. I understand that such an approach appears wildly irresponsible on its face, and I cannot entirely disagree with that sentiment. Nevertheless, the approach did help me overcome a degree of timidity and indecisiveness as I began my investing journey. In my opinion, it is much easier to determine whether a business is of high-quality than it is to determine what someone would be willing to buy it for a year, three years, or five years from now.
My style is to start by dreaming big. I want to hear what management has to say, combine it with my own expectations, consider what smart people are thinking about the company, and imagine what any given company can become. Sometimes, the company does not have the requisite upside, and I move on to analyzing another opportunity.
If it does pass this first stage, however, I begin poking holes into my thesis. “What are all of the reasons that this vision might not come to fruition,” I ask myself. I then analyze the counter-points and determine whether I am willing to take on that risk in order to have a share in the upside that I envisioned.
Finally, after months and years, I reflect on my decisions. It is easy to become irrationally optimistic when you dream big and listen to management’s plans. I have found that the best way to combat this is to regularly assess my own decision making. That is what this post is for, an assessment of my decisions, style, and results.
I am excited to hear your critiques and suggestions as well, particularly in a year where there are clearly many critiques to be made. I find that it is rather easy to garner encouragement and congratulations and much harder to find people willing to share critical feedback. I am eternally grateful for everyone who disagrees and challenges me. I thank you in advance for your feedback.
If you want to learn more about my style, check out this post: Inaugural Letter to Investors.
Key Moves in 2021
Sold:
Tesla (TSLA)
Activision Blizzard (ATVI)
Acuity Ads (ATY)
Teladoc Health (TDOC)
Bought:
Sprouts Farmers Market (SFM)
Acuity Ads (ATY)
Aterian (ATER)
Vitreous Glass (VCIGF)
Pinterest (PINS)
Izea Worldwide (IZEA)
1847 Goedeker’s (GOED)
Teladoc Health (TDOC)
MercadoLibre (MELI)
Shopify (SHOP)
Roblox (RBLX)
Callaway Golf (ELY)
Azek (AZEK)
Moves in Review
First, I am going to analyze my sales. I tend to be slow to sell. I never want to get shaken out of a position for emotional reasons. In this case, I had what I consider to be valid reasons for each sale.
For Tesla, I initially bought the shares for two main reasons:
Back in early 2019, the market seemed to be undervaluing Tesla’s brand and its ability to produce vehicles at scale. The risk-reward made it enticing to me.
I wanted balance my AV/EV exposure. I had placed an earlier bet on GM, and I decided I wanted to balance my bet by matching my GM exposure with Tesla.
Over the past year, I decided that I did not see the same risk-reward profile with Tesla. At nearly a $1 trillion market cap, it appears to me like Tesla has already won. I am not confident that there is a path to future meaningful returns, and if there are, I do not want a lot of exposure to the risk required for those returns. I did not sell my entire Tesla position this year, but I did sell 80% of it. I kept the remaining shares to continue to provide a bit of balance to my AV/EV bet and to give Elon Musk a chance to prove me wrong. I am willing to hold a few shares for the ride, but I no longer wanted it to be a top five position.
I also sold Activision Blizzard this past year. In this case, I did exit the entire position. I still believe the gaming thesis is intact, and I suspect that video games, esports, and the metaverse will continue to grow over the next ten years. Despite this, I no longer wanted to be invested in a company that had a clearly broken culture. The more I read about the culture at Activision Blizzard and the involvement of key executives, the more I knew I had to exit the position, which I did on September 28th.
The Teladoc Health and Acuity Ads sales were partial sales and tax-related. I still own both stocks, and Acuity is still a top ten position of mine. I decided to take some losses when I had the chance, and I needed to generate a bit of cash.
Now, I will turn toward my buys for the year. Since I was working a couple of jobs, I had regular income and was making fairly regular purchases. As you can see above, I bought a wide variety of stocks in 2021. As the year progressed, I found myself tending toward companies that had clearer valuation cases. I think Sprouts Farmers Market was the clearest example of this. I bought it at a reasonable valuation and saw a clear path to returns. That is not to say that there is no risk involved in my Sprouts Farmers Market investment, but I do feel like I have a clear sense of what is driving value in the business and what it will take to succeed.
Lessons Learned in 2021
As I have discussed in previous posts, there are certain areas of life where I want to learn lessons slowly, and investing is generally one of those areas. Clearly, there are certain mistakes that need to be corrected quickly, but I want to be sure that I do not whip back and forth fueled by emotion. I am willing to “pay tuition,” and I would rather sit on my hands observing for too long than get emotional and never arrive at deeper understanding.
That being said, there are a few lessons that I have learned in 2021. First, the importance of position sizing. It is clear to me that I got greedy in late 2020 and early 2021. The clearest example of this was investing more in Aterian (previously Mohawk) than I had ever initially invested in a single stock. Maybe I am stupid, but I think I would still invest in Mohawk with the information I had at the time. The problem, however, was that I had an irrational amount of confidence in the company and sized my position according to the potential upside rather than keeping the downside at the top of my mind. If I could go back to 2020, I would remind myself to limit my position sizes, no matter how confident I was, and clearly, I should not have been as confident as I was in Aterian. I ran into similar issues, though not as extreme, with Acuity Ads and Izea Worldwide.
The second lesson that I learned is how much price matters. I would have always said that I knew this, but I got to experience it this year in a much bigger way. Fiverr, Teladoc, MercadoLibre, Shopify, and Pinterest all proved this to me at various moments in 2021. I still believe that buying great companies is important, and I still believe that over long periods of time, lofty valuations have a way of seeming much less lofty. Even so, this past year reinforced how much better it is to buy great companies at great valuations. Going forward, I am going to try to be more disciplined. There are a lot of great companies out there, but I do not need to buy every great company I come across. I can be selective about the ones I actually add to the portfolio. This is not to say that I want to avoid every high multiple stock. It just means the high multiple must be justifiable. I do not want to be scared out of a great business just because its 30x EBITDA and not 25x.
As I have looked over my best investments, I realized that a common theme of attractive valuation emerges (outside of a couple special cases). A few examples:
AAPL at 7.5x EBITDA
NVDA at 15x EBITDA
ATY at 15x EBITDA
WMT at 8x EBITDA
Going forward, I want to focus on opportunities like these. It takes more work, but I think it is worth the effort.
Looking Forward to 2022 and Beyond
With the drawdown in 2021 and to start 2022, I am starting to get more interested in a variety of companies. I have some cash that I will be looking to deploy in the next few weeks, and I expect my cash balance will near zero within the next couple of months.
I also am going to be assessing my portfolio with a critical eye as I do each year and potentially selling out of some positions. If I find new opportunities that are clearly better, I am happy to sell out of positions that I have more doubts about. Ultimately, those sale decisions depend on having somewhere clearly better to allocate the capital.
My strategy remains the same but with an increased focus on attractive valuations.
Positions
(as of February 4th, 2022)
Positions in order of allocation:
AAPL
NVDA
AMZN
PAYC
PYPL
DIS
ATY
SQ
GM
HD
SHOP
MELI
WMT
ISRG
MKL
ZM
TSLA
ZS
SE
PTON
DDOG
ATER
TTD
SFM
IZEA
VCIGF
FVRR
SFIX
PINS
APPN
TDOC
OKTA
AZEK
ELY
DOCU
LSPD
NNOX
BL
RBLX
KBH
TWLO
CRSP
JMIA
GOED
FSLY
SRG
Thank You
Thanks for making it all the way through the post, and again, any feedback you provide is much appreciated!
Like I said at the top, I am excited to be launching a new service for creators in the next few weeks. Send me a message and sign-up for a time slot if you would like to get a demo and be one of our early users.
I hope you have a wonderful week!