Transparency Into My Style of Investing

Down 33% from my high, 14% YTD

As I sat down to write, I realized that my 2020 portfolio review was posted almost three months ago. When I started this Substack, I did not expect to write every week, but I also did not plan for entire quarters to pass between publishing. The lapse, however, happens to perfectly complement today’s theme: losing money.

Back in February, I wrote that my portfolio had returned 110% in 2020 and 29% YTD. In my review of 2020, I credit my success to a lack of panic as the pandemic struck. In hindsight, it was “an opportunity to get great businesses at a discount.” I also wrote, “In a market downturn, I expect that my positions would take a major hit (like the 30% drawdown last March)…When the next market pullback happens, I will look to opportunistically buy companies at a discount to their current valuations.” Who would have known that my comments on February 21st would practically kickoff a tech bear market?

Down 33%

Yes, you read that correct. I am down 33% since my portfolio all-time high in February. The decline is largely attributable to the general tech stock pullback, falling valuations, and 60%+ drops in two major positions (ACUIF and ATER). Year-to-date, I am down 14%, significantly under-performing the S&P 500.

I have no strong opinion on where the market goes from here in the short-term. Fears of inflation, rising federal deficits, global turmoil, and remnants of the pandemic continue to swirl in the air. At the same time, people everywhere are hoping for a strong summer and a return to normalcy. Instead of making short-term prognostications (I am no prophet), I prefer to invest believing in the power of human ingenuity and resilience. Over the long-term, we keep moving forward.

Not everyone can invest without considering volatility, but that is what I choose to do for now. My portfolio is intended to generate returns over the long-term. The only time I have pulled money out of my brokerage account in the last five years was to pay taxes, and I hope to continue feeding my accounts without drawing for years to come. Because of my time-horizon, I can focus on finding great companies at *relatively* reasonable valuations and holding long enough to turn today’s headlines into yesterday’s tinder. I am striving to be a great investor, but even in the event that I am not, time in the market covers many errors.

Going Forward

This market is still not “cheap” by historical standards. There are many companies that continue trading at over 30x sales…not free cash flow…30x sales. I own a handful myself (SHOP, ZM, OKTA, DDOG, RBLX). I own these stocks for a few reasons: 1. Low cost-basis in many 2. Chance for all of these business to become much more than they are now 3. I own a handful…any one could blow up, and it would not destroy my portfolio.

That being said, I do not expect stocks like these over the next few years to provide the outsized returns to which we have become accustomed. That is not to say that a few could, but these valuations make it unlikely, if not impossible, that all of the favorites of today will be favorites five years from now, which is part of the reason I choose to maintain a portfolio of 40+ stocks. As always, some businesses will thrive, and others will not.

As far as my portfolio goes, I am holding steady. I have been analyzing my positions, the recent earnings, and secular trends, and I am still proud to own the businesses in my portfolio. There may be small moves on the margins to free up some cash, but I am not anticipating selling any of my major positions. I wish I had more cash to deploy, but I am stretched a bit thin at the moment with some unexpected expenses. By June, I’ll be in a better position and looking to add to the market, hopefully still at a discount. These are the times when I like to get strategically aggressive and build a plan for deploying cash over a few weeks/months. Unfortunately, this time I have to delay my plans. When I do have cash, I expect to be adding to or starting a few new GARP (growth at a reasonable price) positions. Obviously, it is very subjective what falls into this bucket, but I have been seeing intriguing opportunities recently.

Final Thoughts

I have not written this letter to cast any sort of negative light on investing. In my style of investing, it is not extraordinary to be down 33%. In my mind, accepting short-term volatility increases my chances of achieving life-changing long-term returns. I hope I have shed some light on the reality of investing for investors who are even newer to the game than myself. There is nothing like a quick drawdown to turn “long-term” investors into tentative market-timers. I would be lying if I said this drawdown did not hurt at all, and, honestly, the larger the portfolio grows, the more painful the dips become. Despite this, I am keeping my eyes turned toward the future.

It is not the time to make sweeping changes and snap judgements. I will be reflecting on this drawdown in the future, but it is too soon to bring criticism into the equation. We have not seen how this will play out.

Trying to make adjustments mid-swing does not yield good results. It just leads to confusion while you are trying to execute. Taking the full swing, analyzing the result, and comparing it to other swings is where real improvement happens. I will be making my assessments once I complete the swing and can approach it without a mind clouded by emotion.

As always, your feedback is much appreciated. I’d love to hear your thoughts, criticisms, stories, and plans for the future.