I’ve written a lotabout Shopifyover the past year or two, and with good reason. Not only has it been the best performer in the freedom Portfolio both since I bought it in 2017 (close to a 1400% increase) and since I started “officially” tracking the Freedom Portfolio returns in October of 2018 (an increase of almost 300%), but it continues to be on fire and has almost doubled just in the past month.
In fact, the performance has been so impressive that, over the past few weeks, Shopify (SHOP) has spiffy popped for me twice. What is a spiffy pop? Put simply, it is “When your stock gains more in one day than you paid for it”. From the Motley Fool website:
Spiffy-pop is a term coined by Motley Fool Rule Breakers that refers to a situation whereby a stock’s price increases more in a single day than the original cost basis.
When a stock in your portfolio becomes a daybagger — gaining more in one day than you originally paid for it — it has spiffy-popped.
I first bought my shares of Shopify on January 5th, 2017 for $44.55 a share. Over the past month, shares of Shopify have increased by that amount (or more!) in a single day twice. It’s pretty incredible and mind boggling to think that in a single day a stock has returned more to me than I originally paid for it.
Beyond marveling over Shopify’s performance, though, I’ve also been noticing an interesting contrast between it and one of my worst performers: Jumia (JMIA). The amount of money that I have spent buying shares of Shopify and Jumia are pretty similar, with just a little over a 10% difference between the two. But the similarities pretty much end right there.
The biggest and most obvious different is how they’ve performed / where they are now. As mentioned previously, Shopify has gained nearly 1400% and is the largest position in my portfolio (and running away with the title right now). Jumia has lost around 75% and is the second smallest position in my portfolio.
But another interesting difference is that I have only bought shares of Shopify once (my initial purchase in 2017) compared to the five (!) times I have bought shares in Jumia.
I have my reasons for this, although they’re not good ones. When I had bought Shopify, it had been roughly two years after its IPO and the stock had already almost doubled. I remember wondering if I was too late and had missed the growth. On the flip side, Jumia had their IPO in April of 2019. My first purchase was within the first month and all of my Jumia purchases were made within 6 months of IPO. Did I have Shopify in the back of my mind and have fear of “missing out” of that early low IPO price when I bought shares of Jumia so close their IPO? It’s entirely possible.
It’s not just about what happened before my purchase, but also about what happened after. While it had its ups and downs, Shopify largely went up after my purchase and never dropped too far below my initial purchase price. Jumia, on the other hand, has been on a steady march downward since my first purchase, and I’ve just kept on buying as it dropped.
Shopify and Jumia are very different companies and there’s multiple reasons why one has performed so well and the other…. not so well. But it’s hard to imagine a better example of a handful of lessons which I should have already learned (but apparently not well enough to have avoided them here):
Add to your winners / Don’t cut your flowers to water your weeds – This is the big one, but also the most non-intuitive and hardest to follow. After all, we’re constantly told to “buy low and sell high”, right? How can we buy low on something that is up big for us already? Doesn’t it make sense to buy low instead on a company that is cheaper today than it was before? The problem with that thinking is that it assumes some sort of equilibrium that all companies must return to. Great companies must eventually fall back down to earth and terrible companies must rise from the ashes like a Phoenix. That’s not exactly how things work. Instead, great companies tend to continue to excel, and bad companies tend to eventually fade away and disappear. If I hadn’t been so afraid of adding to my winners and instead took the money I invested in Jumia in May of 2019 and invested it in Shopify, I would’ve seem my money more than double instead of lose nearly 80% of its value. I need to learn how to accept that it makes more sense adding to winners than continuing to throw money at company whose stock keeps dropping.
Be very wary of buying immediately after an IPO – There’s often a lot of excitement around an IPO, and most of the stakeholders involved have a vested interest in making sure that the stock of the company does well immediately after an IPO. At the same time, there are things like lock-up periods that can cause a stock to drop in the months following an IPO. I’ve certainly gotten caught up in the excitement around IPOs in the past and wanting to get in early on “the next big thing”, but nearly every time I’ve done that I’ve regretted it. Jumia is the biggest loser of the bunch, but Shockwave Medical (SWAV) was also bought soon after IPO and has generally been a loser so far as well. Even Redfin (RDFN), a company that I continue to love, is basically flat versus the S&P since I bought it about a year after their IPO.
Don’t worry about being too late – This one is easy and obvious. I was worried I was too late to Shopify and it went on to become a ten bagger (and more) for me. Nearly all of my big winners so far were companies that it seemed like I was “too late” on because they had already run up too much. Don’t worry about what happened in the past, focus on what could happen in the future.
One amazing winner can more than make up for a bad loser – I mentioned earlier on that I had invested about the same amount of money into both Shopify and Jumia. My gains in Shopify are about 20 times my losses in Jumia. This is why swinging for the fences can work even if you have some horrible losers: because the winners more than make it up.
Shopify reports earnings the morning of Wednesday, May 6th. I can’t wait to see what they have in store.
I recently recorded a podcast for Paul vs the Market’s sister site, Rampant Discourse, where I discussed how I am approaching investing during this recent Coronavirus-induced market pullback. Below is a link, if you want to give it a listen.
This past week has seen a number of great earnings reports from companies in the Freedom Portfolio, such as: Square (SQ), Teladoc Health (TDOC), and The Trade Desk (TTD). Teladoc has been especially impressive and had a pop of around 20% in the day after announcing earnings.
Unfortunately, part of that might be due to the bigger stock market story of this week: Coronavirus. Markets around the world are collectively freaking out over the possibility of a worldwide pandemic (a phrase which I think might be redundant, but I digress). Financial news outlets are freaking out and there’s a lot of talk about how the market drop this week is historic in terms of the sheer speed at which it has happened. In this environment, there’s one message I wanted to get across:
Don’t Panic.
At least, not when it comes to your investments. I’m not a doctor, and I have no special insights into infectious diseases or pandemics. Maybe the Coronavirus is particularly contagious and deadly and we should be incredibly worried about it. Even in that case, though, panic would seem to be counter-productive. If you are concerned, then educate yourself and take reasonable precautions, but please don’t panic.
While I’m not a doctor, I am an investor. I’ve been investing in individual companies for over 15 years. I was investing during the financial crisis of 2007/2008, when I saw the value of my investments get cut in half. I am not at all panicking right now and wanted to share with you all why.
But before we go any further, and while we’re on the topic of what I am and am not: I am also not a financial advisor. I can talk about my approach to investing and what I am feeling right now and planning on doing in the near future, but I don’t know about your specific situation. I’m years away from retirement with no money in the stock market that I anticipate needing in the next few years. Things might be different if I was planning to retire next year or had invested next month’s mortgage payment or was investing on margin. I hope you find the following insightful, but please don’t consider it to be specific financial advice for you.
First of all, let me be clear: While I am not panicking, it’s not because I’m not feeling any pain. Things have been pretty fluid the past few days, with the market routinely swinging from deep in the negative to slightly positive and back, but as of the time of the writing of this post, the Freedom Portfolio has lost tens of thousands of dollars in value this week.
That sucks. It almost certainly represents the biggest monetary loss I’ve suffered in a week in my entire life and I’m obviously not happy about it. But I also know this comes with the territory. The stock market historically has provided better returns than almost any other asset because of the volatility and risk involved. Pullbacks like this are not bugs, but are part of the system.
The S&P is down around 15% this week from the recent high. While the speed at which it has fallen (all in one week) is unusual, the magnitude of the drop is not. Historically, on average, the stock market sees a 10% drop every year or so and a 20% drop every 5 years or so. This drop puts us about on track for that. Do you remember the almost 20% drop the market had a little over a year ago in late 2018? I certainly do, because it coincided almost perfectly with the unveiling of the Freedom Portfolio. Within a week of announcing the Freedom Portfolio, I felt compelled to write a post called, “A rough start for the Freedom Portfolio – But I’m not worried” and the next day I wrote, “The Freedom Portfolio is down over 5% today – I’m not even thinking of selling anything“. In my first check-in, I noted that the S&P 500 was down 14% and the Freedom Portfolio was down 22%.
Yet that massive drop is basically forgotten now. In fact, even though the Freedom Portfolio was launched right before a massive drop and is currently in the midst of another one, it is still up 20%. Let me repeat that: Despite starting and ending at almost the worst possible times in the past 2 years, the Freedom Portfolio is still up 20%. That brings me to me next point:
Perspective Matters.
Yes, this week has sucked. But it’s just one week. Even with this large and sudden drop, the market has just gone back to where it was about 4 months ago. If you have any sort of long term investing horizon like I do, that’s not a terribly important length of time. I believe that any money in the market shouldn’t be money that is needed in the next 5 years. To get some much needed perspective, try taking a look at the 5 year chart of the S&P 500:
Yes, that’s still an ugly drop at the very end, but look at everything that precedes it. The past 5 years have been a bumpy ride with a few size-able drops, but it has also been an almost relentless march higher. The effect gets even more pronounced the further out you look. If you have a 5+ year investing horizon, which I do, then this drop should be accepted as part of the normal course of events and not something to panic over.
None of this is to say that the drop is over or that we’ve reached a bottom. As I mentioned before, during the Great Recession I watched my investments get cut in half over the course of a year and a half. During that time, I was putting as much money as I had into the market. I knew that, as somebody in my mid-twenties with a 30+ year investing horizon in front of me, those lower stock prices were a gift. Whereas others saw painful drops of net worth of 20% or more, I saw sales on companies that I felt confident would be worth much more 5+ years down the line.
The drop this week could be the start of another 50% crash, or the market could rebound next week and this could be a momentary blip that is forgotten months from now. I have no idea. Timing the market is not a game I even attempt to try. It is why I stay fully invested at all times and don’t carry cash to put to use during a downturn. I’ve been asked a few times if I have sold anything this week and my answer is always the same: “No, but if I did, it would be so that I could immediately use those funds to buy something else”.
I don’t know what the future holds, but I do know that I fully intend to stay 100% invested in the stock market for the foreseeable future.
President’s Day was this past Monday and so this seemed like as good a time as any to make a brief list of some of the CEOs of companies in the Freedom Portfolio that I most admire. Why? I’ve long thought that we as a society spend too much time and energy admiring (or possibly hating) the President and oftentimes give them far too much credit for things like the economy and the stock market and even larger things like our standard of living. On the flip side, I think we don’t spend nearly enough time appreciating the entrepreneurs and business leaders who take risks and are constantly driving innovation forward.
Who has done more to improve the life of the average American? President Obama? Or Steve Jobs, without whom you might not have a tiny portable device that serves as a camera, GPS, handheld gaming system, phone, and also provides access to the entirety of humanity’s knowledge at your fingertips? President Bush? Or Jeff Bezos, who helped drive down prices, changed 2 day (and now 1 day) shipping from a luxury to something expected, and turned voice assistants from something out of Star Trek into reality? Who will do more to save the planet? President Trump? Or Elon Musk?
An argument can be made for both sides, but I personally skew a little more towards the CEOs. With that being said, here are five CEOs from companies in the Freedom Portfolio that stand out to me (alphabetical by last name):
The Five
Jeff Bezos: Founder and CEO of Amazon (AMZN) – Notwithstanding some questionable moves in his personal life, it’s hard to find a more impressive entrepreneur and innovator alive today than Jeff Bezos. He turned a tiny online seller of books into a $1 trillion company that now sells almost anything (and allows others to sell almost anything) and can deliver it all in just a few days. Oh, and they’re also the leader in cloud computing and the third largest online digital ad platform in the US. I love his “Day 1” philosophy and how he seems to be determined to never stop trying new things no matter how large Amazon gets. Truly an incredible leader.
Reed Hastings: Founder and CEO of Netflix (NFLX) – It takes a lot of guts and foresight to start a business as crazy sounding as sending DVDs through the mail and allowing people to keep them as long as they want (or on the flip side, churn through as many as they want). If that is where the story stopped, it would be impressive enough, but not only did Reed Hastings start a company which has revolutionized how we consume media, but he has also reinvented it multiple times in the process.
The first reinvention was having the guts to pivot the DVD-by-mail business into online streaming before it was obvious that it was the future. The second was having the foresight to start investing in original content so that the company wasn’t so reliant on content producers. The third is having the grand vision to not just be content with the US market, but to try to become the leader internationally as well.
Bonus points for being humble enough to be able to admit when you were wrong and to reverse course (*cough*qwikster*cough*).
Bob Iger: CEO of Disney (DIS) – I wish I had a clever pun to make involving Iger and King Midas, but it really feels like everything he touches turns to gold. Just look at the acquisitions made under his watch:
Pixar
Marvel
LucasFilm
21st Century Fox
That’s an incredible amount of content that has achieved huge box office success, critical acclaim, or oftentimes both. While the jury is still out on the last one, I’m very excited about the future potential of Hotstar and there’s little doubt that acquisition helped strengthen the appeal of Disney+ and Hulu. And that brings us to what might best define Iger’s legacy at Disney: the bold entry into streaming with Disney+, Hulu, and ESPN+. Like I mentioned with Reed Hastings previously: it takes a lot of guts to move into streaming. While the creation of Disney+ didn’t require as much foresight since the path had already been charted with Netflix, it probably did take even more guts to disrupt an even more established company and move away from what had been a pretty lucrative arrangement. I think it’s clearly the right move, although only time will tell.
Glenn Kelman: CEO of Redfin (RDFN) – Earnings calls can sometimes be dull affairs, so it’s refreshing to hear a CEO drop phrases such as “It’s on like Donkey Kong”. Those are the kinds of small gems you often get from the self-described “goofy” CEO of Redfin. From the few interviews I’ve read, he also seems like a genuinely humble, honest, and down-to-earth guy. In a world where many CEOs are often described as abrasive or hard to work with or even jerks, that’s a nice change of pace.
But all that would be unimportant if he couldn’t also walk the walk. Luckily, I’ve also been impressed by how visionary and focused on the customer Glenn Kelman has been as CEO of Redfin. They’ve gone from simply a low fee brokerage paired with a well designed website to attempting to fundamentally disrupt the real estate market with things like Redfin Now, Redfin Direct, Redfin Mortgage, Redfin Concierge Service, and much more. There are so many different ways for Redfin to win and grow moving forward and I’m excited to see how it all plays out.
Tobias “Tobi” Lütke: Founder and CEO of Shopify (SHOP) – Obviously, the fact that his company has grown 10 fold while I have been a shareholder endears me to Tobi Lütke more than a little bit. I love his vision as CEO of Shopify of “arming the rebels” against the Empire that is Amazon (despite also being an Amazon shareholder) and also love the bold initiative of creating a fulfillment center network to compete with Amazon.
The admiration goes beyond that, though. Lütke is accessible in a way that many other CEOs of his stature aren’t. He is active on Twitter and has on more than on occasion even live-streamed himself playing Starcraft on Twitch. He even offered an internship to a professional Starcraft player based on their gaming achievements alone. As somebody who still plays Starcraft despite its waning popularity, I can’t help but love that. But even beyond that, he seems to have a pretty healthy idea of work/life balance and that 80 hour work weeks aren’t necessary for success. In a world where it seems like we sometimes over-deify those who put in long hours, it’s nice to see an example of the other side.
Honorable Mention
Elon Musk: CEO of Tesla (TSLA) – Musk is obviously an incredible entrepreneur and innovator and as Tesla shareholder I am extreme grateful for what he has managed to do. However, even I have to admit that his behavior sometimes leaves a lot to desire and flirts with the lines of legality and ethics. That’s why I couldn’t quite put him on this list.
Jack Dorsey: Found and CEO of Square (SQ) and Twitter (TWTR) – Look at that title. Not only did Dorsey help start two incredibly successful companies in Twitter and Square, but he’s currently serving as CEO of both. That’s very impressive. So why didn’t he make the list? For starters, he has a bunch of odd behaviors that I have trouble relating to, like only eating one meal a day (or fasting entirely on weekends) and taking ice baths. Some have even taken to calling them disorders. But the larger issue is that I still have a little doubt regarding his abilities as CEO. Twitter still lags badly behind Facebook in most metrics despite being a highly relevant platform and Square has seemingly floundered a bit since high regarded CFO Sarah Friar left. Maybe both companies would be better off without a part-time CEO?
Shopify exemplifies the power of long term investing
Shopify (SHOP) has been on an incredible run lately, having nearly tripled in the past year before today. Expectations were undoubtedly high going into their earnings release this morning and I was prepared for even the slightest negative news to cause a big drop in the stock.
Instead, they released results which appear to have blow past even the most optimistic estimates with a beat on revenue and an even bigger beat on earnings. The stock is up big today and if the results hold will have more than tripled over the past year.
I don’t want to overly focus on Shopify’s earnings right now, though, and instead want to take this opportunity to show the power of buying quality companies and holding them for the long run.
Shopify is currently the best performer in the Freedom Portfolio with an return of over 1100%. Jumia (JMIA) is currently one of my two worst performers having lost 62% of its value. By sheer coincidence my initial position size for both were very similar, yet their impacts on my portfolio couldn’t be more dissimilar.
Shopify’s gains are currently 20 times Jumia’s losses. In fact, even if Jumia went to zero tomorrow, Shopify’s gains would still be 13 times the complete loss I would suffer from Jumia. That’s one of the incredible and under-appreciated things about investing: A bad call can only ever lose you 100% of the money put in, but a good call can earn you 1,000% or more and can more than make up for many losers. That’s something that I learned from David Gardner at the Motley Fool.
One other thing I learned from him? What a spiffy pop is. The short description is that it’s a term that describes when a stock goes up more in a single day than what you paid for it. I bought my shares of Shopify in 2017 for $44.55 a share. As of this writing, Shopify is up close to $60 a share today. If that doesn’t illustrate the power of buying quality companies and holding them for the long term, I don’t know what does.
One year ago, I made a set of bold predictions for what 2019 would bring. With the year winding down, I thought it would be fun to check in to see how I did and maybe make a few predictions for 2020 as well. First up, how did my 2019 predictions go?
Note: Some of these numbers were pulled a few days ago and thus might be slightly out of date by the time this post is published.
2019 Predictions
The race to $1 trillion – again
The Prediction: That Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) would all return to a $1 trillion market cap, and in that order.
Reality:
Microsoft returned to the club in April and currently sits around a market cap of $1.2 trillion
Apple returned in September and currently sits around a market cap of $1.3 trillion
Amazon hasn’t yet returned to the club and currently sits at a market cap of slightly under $900 billion
Have to take a loss here, although I do think I was impressively close. I ended up being very wrong about Amazon (not only were they not the first to return to an over $1 trillion market cap, they were the only one not to return at all), but at least Microsoft and Apple came roaring back to smash the $1 trillion barrier. I’m still (obviously) a big believer in Amazon, though, and am looking forward to them not only crossing $1 trillion next year, but also passing up Microsoft and Apple in the process.
Tesla doubles
The Prediction: Tesla (TSLA) will hit a market cap of $100 billion in 2019.
Reality: Another swing and a miss. The profits that were promised didn’t show up and Tesla was actually down big for most of 2019 (sitting closer to a $30 billion market cap) before a recent recovery which has put it up slightly for the year and at a market cap of $76 billion. Tesla is currently sitting at an all-time high, though (and hit the $420 “funding secured” level), so maybe I can get a tiny bit of partial credit? There’s still a few days left in the year for them to surge another 31% or so, right? Regardless of if they hit the $100 billion market cap, I’m still optimistic regarding Tesla’s outlook going forward. Hopefully increased international sales will help to boost their profitability in 2020 and finally push that market cap north of $100 billion.
Twitter gains on Facebook
The Prediction: Twitter (TWTR) gets to half of Facebook’s (FB) market cap.
Reality: My boldest prediction gets the biggest miss. Twitter has had a pretty up-and-down year while Facebook has had a pretty strong one. The end result is that Twitter is sitting at a market cap of $25 billion while Facebook is at a market cap of around $590 billion. That puts Twitter at around 4% of Facebook’s market cap, which is… uh… slightly short of the 50% I predicted.
Loyal readers will know that I ended up selling my Twitter position around the middle of 2019 because I had lost faith in the company for a few reasons. I still am amazed at the discrepancy in market caps between Twitter and Facebook considering the level of impact that each seems to have in our society, but maybe that’s just the way that things are going to be between those two businesses for the foreseeable future.
2020 Predictions
So not a great record in 2019, even accounting for the fact that they were “bold” predictions. Let’s see if I can do better in the coming year. Since next year is 2020 and my bold predictions are supposed to be at least a little fun and silly, I thought it could be interesting to have my picks for next year be based around the number “20”. As usual, I think the odds are against most of these predictions because they’re supposed to be things that are unlikely to happen, but also maybe are things I think are more likely than others might expect. Like with last year, I will be ordering them in what I consider to be decreasing order of likeliness.
Disney and Netflix both gain 20%+
A 20% gain might not seem like a super bold prediction, but I’m making it a parlay and predicting that both Netflix (NFLX) and Disney (DIS) reach that mark in 2020. Many people see streaming as a zero sum game where the success of something like Disney+ means that it has to come at the expense of Netflix. I’m not so sure that’s the case, and think that a rising tide can lift multiple streaming service boats. Disney+ and Netflix serve different demographics and being signed up for both is still cheaper than an old traditional cable package.
Netflix and Disney have had a pretty different 2019 in terms of performance. Disney is up over 30% for the year after a record smashing box office and the incredibly well-received launch of Disney+. Can they keep the momentum going into 2020? I believe they can and that Disney+ will continue to outperform expectations (which is why I predict a 20%+ gain), but there certainly are some dark clouds as well. The biggest is that there is practically no way Disney’s 2020 box office can come close to matching 2019’s. Consider that in 2020 Disney will have:
No Avengers movie
No Star Wars movie
New IP like Onward and Soul versus sequels to popular films like Frozen 2 and Toy Story 4
Live action Mulan versus remakes of Lion King and Aladdin
A potential let down for Marvel movies after the big conclusion in Endgame and with unproven IP like The Eternals
I think the market will be willing to overlook an understandable step back in 2020’s box office and will instead focus on the growth that Disney is seeing in their streaming services, but I wouldn’t at all be surprised to see at least one article written in 2020 wondering aloud if Disney has lost its magic after a drop in their box office receipts.
Meanwhile, Netflix has had a much rockier 2019 which has seen it basically flat for the year, although it is sneakily up around 30% over the past 3 months. A combination of some big subscriber target misses, slowing growth domestically, and deep-pocketed competitors (Disney+, Apple TV Plus, etc) entering the market all weighed heavily on Netflix’s stock price. I believe stories of their demise have been greatly exaggerated. International growth remains strong, and Netflix still has a clear lead in almost every market they are in. And while I have little doubt Netflix has come close to a saturation point in the US, I believe they remain in a strong position which will allow them to keep customer defections to a minimum. Netflix has managed to remain must see TV with a series of much talked about and/or well regarded recent releases, such as:
Marriage Story
The Irishman
6 Underground
Always be my Maybe
Yes, they will no longer be the only (significant) game in town, but they’re still very much a leader in an industry which I think will continue to grow.
Square will add $20 to its share price
Square (SQ) has had a rough go of it lately. Since September of last year, Square has lost about a third of its value and sits at around $65 a share as of this writing. I’m a bit flummoxed as to why Square has continued to flounder despite putting up some great growth rates (and while seeing Shopify soar in 2019). So my second bold prediction is that in 2020 Square will add $20 to its share price (a roughly 30% gain) and will get close to returning to its all time highs.
Redfin will add $20 to its share price
Now we’re talking. Redfin (RDFN) is currently sitting at around $21 a share, so a $20 increase would effectively mean the stock doubles in 2020. Redfin the stock has been treading water for years despite putting up some pretty impressive growth and taking market share in a market where things move pretty slowly. I’m going to boldly predict that 2020 is the year that investors finally realize the gains that Redfin has made and the stock responds accordingly.
Bonus Prediction #1: Bitcoin to $20k
My predictions this year felt a little tamer than last year’s, so I wanted to throw out a few more bonus ones just for run. This one is not necessarily investing related, since I personally view cryptocurrencies as pure speculation, but I admit to being intrigued by bitcoin (full disclosure: I do own a tiny amount).
In 2017, bitcoin neared an exchange rate of $20k per bitcoin before collapsing. After a bit of a rebound, bitcoin is now worth around $7k. I boldly predict that bitcoin stages a bit of a comeback in 2020 and returns to the $20k level from a few years ago.
Bonus Prediction #2: Somebody will buy Nintendo
Gaming has been a pretty hot sector for awhile now, and some deep pocketed tech giants (Apple, Alphabet, Amazon, etc) are starting to show an interest in getting involved. My second (and last) bold call is that some company acquires Nintendo (NTDOY). It would be a pricey acquisition, but it would also instantly give the acquirer a ton of invaluable intellectual property that is globally recognized. Expanding that IP into mobile games and other platforms like Xbox or Steam could be incredibly valuable.
Your Bold Predictions
So those are my bold predictions for 2020. What are yours? Let me know in the comments and we can track them together! Regardless of what happens in 2020, I want to wish you a very prosperous and happy new year. Thanks for reading!
Approximately one year ago today, I wrote about the FANG and BAT stocks: baskets of large tech companies in the United States and China. I responded with my own basket of Chinese companies that I dubbed the JIB, which consisted of JD.com (JD), iQiyi (IQ), and Baozun (BZUN). A year ago, I wrote, “over the long term, I like their chances of being big winners”. A year hardly counts as “the long term”, but I was still thought it could be interesting to see where things stand today. Over the past 12 months, the S&P 500 index is up roughly 12%. How have the FANG, BAT, and JIB stocks done during that same time? Check it out below:
FANG (18%)
Name
Ticker
Starting
Ending
Change
Facebook
FB
144.48
194.47
35%
Amazon
AMZN
1698.24
1778.00
5%
Apple
AAPL
199
261.96
32%
Netflix
NFLX
300
292.01
-3%
Alphabet
GOOG
1061.39
1298.80
22%
BAT (6%)
Name
Ticker
Starting
Ending
Change
Baidu
BIDU
183.47
121.80
-33%
Alibaba
BABA
145.01
186.97
29%
Tencent
TCEHY
34.29
42.20
23%
JIB (27%)
Name
Ticker
Starting
Ending
Change
JD.com
JD
21.92
33.57
53%
iQiyi
IQ
19.95
19.11
-4%
Baozun
BZUN
34.00
44.50
31%
The BAT stocks are trailing the S&P by a decent amount, courtesy of Baidu’s pretty miserable -33% return (easily the worst performer of the entire group of stocks). the FANG stocks are beating the S&P by six percentage points thanks to solid returns by Facebook, Apple, and Alphabet. But it’s the JIB stocks that have really excelled and more than doubled the return of the S&P. The star performer has been JD.com with a 53% return, but Baozun has been no slouch with a 31% return of its own.
I find it interesting that the 3 biggest under-performers (NFLX, BIDU, IQ) are all either primarily video streaming services or have strong ties to one (Baidu owns a large stake in iQiyi). It’s been an interesting year in the video streaming space in the United States with the escalation of the video streaming wars courtesy of Apple and Disney (DIS) launching their new offerings and other content producers beginning to pull their content to prep their own. It’ll be interesting to watch the video streaming space over the next few years to see if it will be a case of a rising tide lifting all boats, or if a few winners will emerge while the others fade away. I’m certainly looking at iQiyi with a slightly more critical eye than I have in the past, considering their slowing growth and intense competition in the space.
As I said before, a year hardly counts as “the long term”, and while I’m pleased to see the JIB outperform so far, I realize the competition isn’t over. It’ll be interesting to see if the JIB can continue to outperform 2, 3, and 5 years down the line, and I’m looking forward to checking up on all of these stocks another year down the line.
Lately, I’ve been giving a lot of thought to Shopify (SHOP), a company I scored late last year. At the time it was an Enterprise level holding in the Freedom Portfolio. That was before the stock price went absolutely bonkers in 2019:
Shopify (in green) vs the S&P 500 (in blue)
That’s right. While the S&P 500 is up an impressive 15% over a little over 6 months, Shopify is up a mind-boggling 120% during that same time. That’s incredibly, and has been enough to move it from an Enterprise level to a Babylon 5 level position that rivals Amazon (AMZN).
Additionally, Shopify is now up around 595% from where I initially bought it, which brings it incredibly close to Netflix (NFLX) as my all-time best performing position.
It’s unclear to me exactly what is driving Shopify relentlessly higher, and I can’t find any justification for it more than doubling over the past 6 months. Everything about the situation screams to me that the stock is over-priced and is due for a big pull-back on the first bit of disappointing news.
So should I be selling shares? I have no problem trimming my position in a company when I see potential problems on the horizon or my investing thesis has changed, but that’s not the case here. The investing thesis is stronger than ever and a rapidly escalating stock price isn’t exactly a “problem on the horizon” for the company. Is a big run up in stock price alone a good reason to sell?
In many ways, Shopify characterizes one of the big issues with portfolio management that I struggle with: Should the size of a position in my portfolio more accurately represent my conviction in the company or its past performance? In other words, should I let my winners run or trim the position when it gets to be too big?
I like Shopify as a company a lot, but I like Amazon (and a lot of companies with smaller positions in the Freedom Portfolio) more. It has a P.A.U.L. score of 14, which is decent but smaller than many other companies in my portfolio. Back when I profiled Shopify I even specifically said, ” I’m certainly not looking to sell right now, but if there comes a time when I want to free up some capital to start or add to another position, then I might consider trimming some of my Shopify position.”
On the other hand…
I really like the idea of letting my winners run, and I desperately want to avoid a situation where I cut my flowers and water my weeds. The situation with Shopify looks eerily similar to a situation I had with Netflix almost exactly a year ago. Netflix was on an almost identical run where it had effectively doubled in 6 months and I was torn on what to do. Every time in the past that I had sold Netflix stock I had regretted it greatly. The shares of Netflix that I have sold in the past few years alone would represent a combined position of around 18% in the Freedom Portfolio. And I did all of that even after writing about how selling Netflix in 2004 was my biggest investing mistake (side note, those 610 shares that I sold would now be worth nearly $1.5 million).
So despite everything screaming that Shopify is overvalued right now, I’m sticking with it and not trimming my position at all. I have no idea if this is something I’ll regret or not, but no matter what happens, at least I won’t regret it as much as selling Netflix in 2004.
It wasn’t too long ago that Twitter (TWTR) was one of my Freedom Portfolio holdings that I thought had the most upside and was most excited about. In fact, it was just a little over 6 months ago where one of my recklessly bold predictions was that Twitter would get to half the market cap of Facebook (FB). My thinking was that the impact of Twitter didn’t match its market cap and that Twitter as a platform was far more useful and important than Facebook or Instagram. I frankly still think that is true. So why is the headline of this piece “Selling Twitter” and not “Doubling Down on Twitter”?
There are two main reasons.
Decreased Ambitions
Part of the reason my enthusiasm for Twitter had been waning for a bit is because they no longer seem to focused on growth and instead seem focused on monetizing the audience they already have. The company seems to be getting increasingly profitable, which is good, and I wouldn’t be shocked if this was a market beater going forward, but there doesn’t seem to be any grand ambitions at Twitter anymore, and they seem content with the user base and core functionality that they have now. There’s nothing necessarily wrong with that, but it’s not the reason why I saw potential in the company. There don’t seem to be any more grand experiments like buying the rights to Thursday Night Football. Instead of being focused on adding more users, they seem more focused on purging ones that they already have. Which brings me to my larger concern…
At War With Itself
Twitter has gotten increasingly involved in the messy area of policing the content on their platform. While that’s likely a good thing in terms of cracking down on toxic and abusive behavior, it does put them in an extremely difficult spot of picking and choosing which speech is acceptable and which isn’t. I think the degree to which Twitter is now deciding which content is acceptable on its platform and which isn’t is opening up a Pandora’s Box that they’ll find incredibly difficult to close. Once you’ve banned a controversial figure, how do you justify letting them back on your platform?
But the real difficult question is: Where do you draw the line? Everybody’s line is different, and now social media companies are trying to draw a single definitive one for everybody. There is no way this ends well and is bound to end up ultimately angering everybody.
For example: Just yesterday YouTube, which is owned by Alphabet (GOOG), managed to get itself in a bunch of trouble over how it handled a conservative comedian named Steven Crowder who a Vox journalist named Carlos Maza has accused of harassing him. I desperately don’t want to delve into politics and therefore don’t want to weigh in on the merits of the charge, but what is important is how the way that YouTube handled things managed to anger both sides. In a 24 hour period, they at first they refused to do anything, since Crowder’s videos didn’t appear to violate any of their terms of service. However, they pretty quickly seemed to bow to the Heckler’s Veto and half-reversed course and temporarily de-monetized his channel. Liberals are incensed that YouTube didn’t go further and ban him altogether, while conservatives are angry that he was punished at all and are calling for leftist comedians who direct vile language at conservatives to be treated similarly. Now, things like “VoxAdpocalypse” are trending across social media.
This is the inevitable future of content regulation on social media that I am worried about. It’s an incredibly easy slippery slope to slide down. If somebody like Crowder should be de-monetized (or eventually banned), then what about people like Sarah Jeong, who had some controversy over anti-white jokes? What about the non-PC jokes of Family Guy and South Park?
Social media companies like Facebook and Twitter live and die based on content and engagement. Some of these recent moves to regulate content is putting these companies on a path to be at war with the content and engagement that they need to survive. That’s not a good place to be, and it is why I, with some reluctance, am no longer a Twitter investor.
One of my hopes when I created Paul vs The Market was that I could use it as a teaching tool. This article is part of that goal. My intention is to write a three part series where I do my best to explain the basics of investing in the stock market and why I think it’s so important. This is the first entry, “Why investing?”, where I hope to explain why investing is so important. In the following weeks, I will be releasing parts 2 and 3: “What is investing?” and “How to invest”.
This isn’t the first time that I tried to tackle the topic of why I believe everybody should be investing. A year ago, I wrote a very similar article on Rampant Discourse (the sister site to Paul vs the Market) titled Everybody Should Be Investing. Be sure to check that out if you want more information or to see video of me driving a Barbie car.
Anyway, I hope you enjoy this and find it informative. Please don’t hesitate to reach out if you have any questions or concerns. Thanks.
Financial Literacy
I believe the state of financial education in America is poor. I never had any personal finance classes in school, but I was lucky to have parents who taught me the basics about savings accounts and writing a check and paying off my credit card in full every month. I was also incredibly lucky that they encouraged me to open up and to start contributing to a Roth IRA at a young age. Not everybody is so fortunate, and many people are forced to learn the basics of personal finance by trial and error. If this website can convince just one person to start saving for their retirement at a young age, then it will have all been worth it. That’s how important I feel the stakes are.
Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
More than $102
Exactly $102
Less than $102
Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, with the money in this account, would you be able to buy:
More than today
Exactly the same as today
Less than today
Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
True
False
I encourage you to take a stab at answering the questions. When you’re ready to see how you did, compare your answers with the correct ones: “More than $102”, “Less than today”, and “False”. How did you do? If you got them all correct, great! Well done. If you didn’t, don’t feel bad, because the majority of Americans couldn’t answer all three correctly either.
There are so many ways that a lack of financial literacy can hurt people. It can lead to taking out loans that they can’t afford. It can lead to taking on more inflationary risk than people realize. It can lead to being over or under insured. For the purposes of this article, though, I wanted to focus on (unsurprisingly) saving for retirement and how important a role investing, specifically in the stock market, can play.
Why Investing?
Why investing in the stock market? I previously wrote about why I thought everybody should be investing, but if you don’t want to read the whole thing and just want the main takeaway, here it is:
That’s why many investors look forward to the annual publication of the Credit Suisse Global Investment Returns Yearbook, which provides a century-long look at 23 national markets, accompanied with a depth of historical data making sense of short-term trends.
The 2018 edition, published last month, confirms what many value investors have long believed, namely that, by and large, there is no better long-term investment than equities. Since 1900 no other investment class has consistently outperformed. In this period US equities yielded an average 6.5 per cent annual return in real terms.
In short, I believe that investing in equities (another term for investing in the stock market) is the best way to grow savings over the long term. And yet, it seems like many Americans are unaware of this, and fairly consistently rank other things like real estate and gold as better investments.
Compound Interest
The secret at the core of all saving, whether it be in the stock market or a savings account and whether it’s for retirement or for a vacation, is compound interest. Compound interest has been called “the eighth wonder of the world” and “the most powerful force in the universe”. The concept as it relates to investing is fairly simple: When money makes money, then that new money also makes you money, so you keep making more and more money as time goes on.
There are a plethora of stories out there illustrating how powerful compound interest can be, but I wanted to focus on just a few that I thought did a good job of explaining different aspects of compound interest.
The overly simplistic example
Would you rather have $1 million now or start off with a penny and have it double every day for 30 days? The correct answer (at least if you’re interested in maximizing your money after 30 days) might surprise you…. unless you’re the type of person who is on guard when it comes to questions like this with answers that seem too obvious.
Day
Value
Day
Value
1
$0.01
16
$327.68
2
$0.02
17
$655.36
3
$0.04
18
$1,310.72
4
$0.08
19
$2,621.44
5
$0.16
20
$5,242.88
6
$0.32
21
$10,485.76
7
$0.64
22
$20,971.52
8
$1.28
23
$41,953.04
9
$2.56
24
$83,886.08
10
$5.12
25
$167,772.16
11
$10.24
26
$335,544.32
12
$20.48
27
$671,088.64
13
$40.96
28
$1,342,177.28
14
$81.92
29
$2,684,354.56
15
$163.84
30
$5,368,709.12
Yes, it turns out that the measly, insignificant penny that has so little value that many people want to simply get rid of it altogether can beat a million dollars with a heaping helping of compound interest. In fact, it only needs 27 days to do it. The table above is incredible to look at. By the 10th day, or a third of the way through, the penny has only doubled to a few dollars. Look at that acceleration at the end, though. Obviously doubling every day is an exaggerated example, but you can get a really good sense of how even if it starts slow, compound interest snowballs amazingly over time.
Before we go any further, there are some important caveats that I want to address. Although there was a quote above about the stock market returning an average of 6.5% per year, I think that is incredibly misleading. Why? Because it implies a much smoother ride than it actually is. Check out the below chart from Macrotrends:
The chart shows the return of the S&P 500 each year for the past 90 years. As you can see, there have been a few years where the return for the year has been in the mid-single digits, but most years had much more extreme movements. The market isn’t a gradual and steady climb upward. The market is more like a roller coaster with dizzying highs and nauseating drops. This is why I believe in having a long time horizon when it comes to investing. If you invest $1,000 and the market drops 20% and suddenly you’re looking at a slimmer $800 account, that’s (unfortunately) not too abnormal and probably the worst thing you can do is give up and get out.
Investing is all about riding out those dramatic drops so that you can also experience those amazing gains on the up years. If you go into investing in the stock market with the expectation that your money is going to increase by 6.5% every year then you’re likely going to find yourself alternating between abject horror and absolute glee.
If you go into investing in the stock market with the expectation that your money is going to increase by 6.5% every year then you’re likely going to find yourself alternating between abject horror and absolute glee.
Below is another way of looking at it, and is one of my favorite charts. Based on the returns of the market from 1871-2012, it shows the percentage chance that the returns over a certain time period would be positive. So there was a 52% chance of the market being up on any given day, which is basically a coin flip. Extend that holding period out to a year, and you had a 68% chance of the market being up during that time, which is better, but still leaves about a third of the time where you lost money. However, it only gets better the long the time period that you look at, to where if you have a holding period of 15+ years there was a very small chance of losing money in the market.
It’s incredibly important to note that this is all historical data, and as you’ve no doubt heard, past performance is not indicative of future results. Nobody knows what the market might do in the future, and just because there hasn’t been a 20 year period where the market has lost money in the past, it doesn’t mean it won’t happen in the future. The Japanese market peaked right around 1990 and still has yet to return to that level almost 30 years later. The same thing could happen here.
The point of saying all of this isn’t to scare you away from investing in the market. The point is to brace you for the downturns that are normal parts of the market. You have to be prepared for the possibility of your investment losing money over one, two, or even three plus years. You can’t panic and sell if you see your account drop by 20%. The market is volatile. It is not a smooth ride. Look again at the charts above. Even over 3 years, there’s a 25% chance of losing money in the market. That’s the same as flipping a coin twice and getting tails twice.
There’s also a decent chance the market tanks in your first year investing. The financial crisis / great recession hit early in my investing career and I watched my retirement accounts get cut in half. But I stayed the course and my account value is now double what it was before the crisis hit. I started tracking the performance of the Freedom Portfolio right as last year’s market downturn hit and saw 20% of its value wiped out in a matter of months. I didn’t panic. I remained fully invested in the market and now the portfolio is back above where it was at the start. Having a long term mindset is critical for investing in the market because as time goes on the volatility evens out and you have a better chance of making that average 6.5% return per year.
Now that that is out of the way, let me try to sell you some more on how important investing is and why you should start now.
Importance of Time
Time is one of the most powerful variables when it comes to investing. It’s the fuel that allows the powerful engine of compound interest to work. A 10% return on $1,000 is only $100 after a single year. Over 30 years, though, it’s over a $16,000 gain. This is why it is so critical for people to start saving and investing as early as possible and holding for as long as possible. Young people might not have much money to save, but they have arguably a bigger advantage than a lot of money: time.
Don’t believe me that time can be a powerful advantage? Here’s a story shamelessly stolen from Dave Ramsey’s website which illustrates the incredible power of starting early and time in the market:
Ben and Arthur were friends who grew up together. They both knew they needed to start thinking about the future. At age 19, Ben decided to invest $2,000 every year for eight years. He picked investment funds that averaged a 12% interest rate. Then, at age 26, Ben stopped putting money into his investments. So he put a total of $16,000 into his investment funds.
Now Arthur didn’t start investing until age 27. Just like Ben, he put $2,000 into his investment funds every year until he turned 65. He got the same 12% interest rate as Ben, but he invested for 31 more years than Ben did. So Arthur invested a total of $78,000 over 39 years.
When both Ben and Arthur turned 65, they decided to compare their investment accounts. Who do you think had more? Ben, with his total of $16,000 invested over eight years, or Arthur, who invested $78,000 over 39 years?
Amazingly, not only does Ben come out on top despite having put in only around 1/5th as much money, but he comes out way ahead and has almost 50% more money than Arthur. Don’t be misled by the comment that Ben “invested over eight years”. He might have only contributed money for eight years, but his money was compounding for 46 years (age 19 to 65) versus the 39 years that Arthur’s money spend compounding.
Thanks for reading. Any questions or suggestions? Please don’t hesitate to comment on this post or email me at paulvsthemarket@gmail.com. Check back soon for part 2 of my Investing for Newbs series: What is investing?
