It’s the two year anniversary of Paul vs the Market and the Freedom Portfolio. Like last year, I thought I would take this opportunity to replace my quarterly recap with a little bit of a longer look back where I go over the performance of the Freedom Portfolio since inception.
Last year, on the one year anniversary, I wrote:
“I just wish it could’ve coincided with a better performing quarter. The third quarter of 2019 was brutal, and saw the Freedom Portfolio essentially give back all of the gains from the 2nd quarter. The Freedom Portfolio was down 10.5% for the quarter, compared to the S&P being up around 1.7%. I’m still up versus the market year-to-date 22.9% to 20.5%, but am now back to losing to the market since inception (October of 2018) -4.1% to 3.9%.”
The Freedom Portfolio – October 2019
What a difference a year makes. And what a surprising difference this year has made.
2020 is shaping up to be the best investing year I’ve ever had. I would consider either of those to be amazing returns for a single year.
- Quarterly Returns: The past two quarters alone, the Freedom Portfolio saw gains of 73% and 30% respectively compared with gains of 21% and 9% for the S&P 500. (+52 and +21 percentage points for the Freedom Portfolio)
- 2020 Returns: The Freedom Portfolio is up 115% year-to-date versus 5% for the S&P 500. (+110 percentage points)
- Yearly Returns: Since the above quote (ie, October 2019 to October 2020) the Freedom Portfolio is up 146% versus 15% for the S&P 500. (+131 percentage points)
- Returns since inception (October 2018): The Freedom Portfolio is up 143% to 20% (+123 percentage points), which is a compound annual growth rate (CAGR) of 55%
For the visual learners, here’s what those returns look like:
As you can see, the past few quarters have been simply amazing for the Freedom Portfolio, and what makes it doubly amazing is that this has happened with the backdrop of COVID-19 and the havoc it has wrought on the economy.
Because I know there are skeptics out there who think the stock market is akin to gambling or that investing in individual stocks is just like throwing darts at a dart board, I always try to be careful with my usage of terms like “luck” when I discuss my investing results. I have a lot of exposure to ecommerce companies in the Freedom Portfolio because I believe ecommerce is a trend that hasn’t played out yet and still has a long way to go, especially in international markets like Latin America and Southeast Asia. It was a conscious decision to be overweight in those types of companies. At the same time, I don’t mind at all admitting that I was fortunate that those ecommerce happened to benefit greatly from the lockdown measures enacted by governments to combat COVID-19.
It wasn’t just ecommerce. Teladoc (TDOC) and Livongo (LVGO) rode the telemedicine wave while Netflix (NFLX), Roku (ROKU), and Zoom (ZM) benefitted from people staying home and working from home respectively. Even companies like Square (SQ) and Redfin (RDFN), while initially seeming like they would be impacted by harm done to small businesses and the real estate market, seem to have rebounded with a vengeance because of their strength in digital payments and virtual home tours. About the only company in the Freedom Portfolio which was really slammed by COVID is Disney, and even they had Disney+ to help keep sentiment relatively positive during this time.
Here’s a look how each individual position performed over the past quarter and since the inception of the Freedom Portfolio two years ago.
| Ticker | Quarterly Change | Change Since Inception |
| TSLA | 99% | 602% |
| SHOP | 8% | 516% |
| SE | 44% | 375% |
| LVGO | 86% | 359% |
| ZM | 85% | 218% |
| MELI | 10% | 215% |
| JD | 29% | 199% |
| RDFN | 19% | 169% |
| TDOC | 15% | 152% |
| TTD | 28% | 142% |
| NVCR | 88% | 111% |
| SQ | 55% | 62% |
| AMZN | 14% | 56% |
| FSLY | 10% | 59% |
| ROKU | 62% | 51% |
| CRWD | 37% | 39% |
| SWAV | 60% | 43% |
| NFLX | 10% | 33% |
| AAXN | -7% | 21% |
| ETSY | 10% | 15% |
| DIS | 12% | 6% |
| BZUN | -15% | -34% |
| NNOX | 10% | -45% |
While Sea (SE), Livongo, and Zoom have been amazing performers over a relatively short period of time and that is awesome, I wanted to talk specifically about the two best winners in the Freedom Portfolio: Shopify (SHOP) and Tesla (TSLA), and how they drive home two important investing lessons for me:
- Don’t be afraid to invest in a company which has already run up
- Don’t be afraid to hold onto winners as long as your investing thesis still holds true
While the Freedom Portfolio officially started in October of 2018, I actually first bought shares of Shopify back in January of 2017 (the return since then is somewhere in the neighborhood of 2,200%). It’s been a spectacular investment for me, but it also very nearly didn’t happen. I have a very clear memory of thinking that I had missed the boat with Shopify back in 2017. The stock had already nearly doubled and I was wondering how much further it could go. I decided to take a chance with a relatively small position that in less than four years has turned into by far my largest position in the Freedom Portfolio.
I almost didn’t hold on long enough for that to happen either, though. A little over a year ago, I wrote about how I was taking a risk on Shopify because I was concerned over the huge run-up in stock price even though “the investing thesis is stronger than ever”. I ended up not selling, and it’s a good thing I did, because the stock has tripled since then. Tripled!
Lesson confirmed: Don’t be afraid to let your winners run.
Tesla taught a slightly different lesson. I first bought shares way back in 2015, with the total return since then around 680%. You might notice that isn’t too far off from the return since late 2018. That’s because the stock was basically flat for the first 4 years that I held onto it, and was even down from my initial purchase price as recently as mid-year 2019.
During that time, there was a ton of noise surrounding Tesla as a company and as a stock (some of it coming from the CEO himself). Plenty of very smart people were predicting the company would go bankrupt. There were a lot of very legitimate concerns about dilution and margins and valuation and missed deadlines. However, if you believed that electric vehicles were the future and that Tesla possessed a huge advantage over legacy automakers in terms of battery technology, self-driving software, and charging networks, then it was hard to ignore the progress that Tesla was making despite consistently missing deadlines, some erratic behavior from the CEO, and turnover in management. Finally, in late 2019 and early 2020, the market seemed to catch on that the legacy automakers were in real trouble and that it’s entirely possible that Tesla isn’t just some tiny upstart, but might be the future of automobiles (and more?).
The lesson? Sometimes it can take years for the stock price to catch up to how the business is performing. Don’t be impatient. If the company continues to execute and grow and the investment thesis remains intact, then eventually the market will catch on.
Now that that is out of the way, let’s get into some other notable performers for the Freedom Portfolio since inception.
Notable Performers
Best Performers
Sea Limited (SE): Much like with my Shopify story above, I wondered if I had missed the boat with Sea Limited when I first bought shares in 2019 because it had already tripled. At the time the market cap was around $15 billion, which seemed high for a video gaming company just starting to dip its toe into ecommerce and digital payments in a mix of countries where it was up against competitors backed by deep pockets such as Alibaba (BABA).
I’m so glad I did.
As mentioned earlier, COVID has obviously helped to accelerate ecommerce and digital payment adoption around the world, but Sea has also done an incredible job of executing across the myriad of countries that they operate in and have seemingly started to pull away from their competitors across the board. Their gaming business also continues to impress as it makes inroads into Latin America and India.
Sea is probably the company where my conviction in it has increased the most over the past quarter. Here’s a fun fact: Out of all the current holdings in the Freedom Portfolio, Sea is the company on which I have spent the most money buying shares as I have been adding to it on the way up over the past year or so. It has become a large enough position to where I probably won’t be adding to my position anymore going forward, but I am really looking forward to seeing how they execute in the coming quarters and years.
Livongo (LVGO): Livongo has been a wild ride. I hadn’t bought shares until early this year and yet in that short amount of time it has already returned roughly 360%. I was so thrilled to see how this company was growing and riding the wave of remote healthcare.
Then the announced merger with Teladoc happened.
Initially, I was crushed, and not just because both stocks dropped on the news. It seemed like such a bad fit and I couldn’t understand why Livongo was getting acquired at such a low premium. It stung all the more since it happened right as they announced an incredible quarter that I expected to cause the stock to pop even more.
Now that I’ve had more time to digest the news, I’m warming up to the merger, though, and can understand why it was done and how the companies complement each other. In fact, I’m starting to get excited about the prospect of the newly merged company being a true powerhouse in the future of remote healthcare.
I’m holding off on making any decisions in terms of buying or selling shares of either company until the merger goes through and we get some insight into how the newly combined entity is performing, but I am cautiously optimistic.
Worst Performers
Nano-X (NNOX): This comes with a major astericks considering that just two days after the close of the third quarter, Nano-X surged more than 50% on news that it was going to offer a live demonstration of its Nanox.ARC System later in the year. Now that I have sold Jumia (JMIA) and Kushco (KSHB), Nano-X is easily my most speculative investment.
The Muddy Waters short report on Nano-X is concerning to me, since they have a pretty good track record in sniffing out problems with companies. At this point, I think I will just be sitting on my position (neither buy or selling) until we get any news on FDA approval. Hopefully this works out, but if it doesn’t, the position is small enough that I am comfortable with the idea of the stock going to zero.
Baozun (BZUN): Baozun has been a baffling investment for me. It has been a perennial under-performer in the Freedom Portfolio. Not only is it down 17% since inception, but it is down even more compared to the S&P 500 during that same time period. The US/China trade war has undoubtedly been a problem, but the company has also been in the midst of transitioning to higher margin products and away from a more capital intensive distribution model. Despite all of this, the company continues to grow.
To be honest, my conviction in the company is starting to waver. However, I don’t want to make any hasty decisions (see my comments about being patient with Tesla above), and the growth story is still intact. I plan on holding on for a few more quarters to see how the transitions play out and to see if US/China tensions ease. But if an exciting new opportunity comes along, Baozun might be one of the first companies that I consider selling.
Disney (DIS): It’s no surprise why Disney has struggled over the past year or so. Despite it being a very diversified company, almost every single major revenue generator for the company has been completely shut down by COVID-19. Obviously theme parks and cruises have been hugely impacted. Their movie business has also been put on hold as theaters are largely shut down and the Mulan experiment in releasing their blockbusters straight to digital has seemingly flopped. Even ESPN has been affected by the postponement and cancellation of sports. About the only positive for Disney during this time has been Disney+, their streaming service, and that doesn’t generate nearly as much revenue as their other business lines. And all of this happens right after Disney took on a lot of debt in order to purchase a lot of Fox assets. Frankly, I’m a little surprised Disney isn’t down even more.
I’m still a big believer in Disney. I believe their theme park and movie businesses will rebound. I believe they have a ton of growth left in Disney+ and a huge international opportunity in front of them. Yes, they might not have the same amount of upside as many of the other companies in the Freedom Portfolio, but there’s nothing wrong with the occasional slower and steadier grower.
Changes in the Portfolio
In the past, I had written about the buys and sells of the previous quarter in my quarterly recaps. With this quarter, I tried something new and decided to write up short posts soon after I made any changes to the Freedom Portfolio. As a result, there’s nothing additional to share here, so I will simply link to the posts that I wrote detailing my buys and sells during the quarter:
The Freedom Portfolio – October 2020
So here is where the Freedom Portfolio stands at two years. Need a reminder of what these terms mean? Check out: Defining my Terms.
A few notes before moving on to the full breakdown:
- Teladoc and Livongo are on track to merge. While I have no reason to think the merger won’t go through, they are currently still separate companies, so I am treating them as such. If I treated them as a combined entity, they would be an Enterprise level position.
- Since last quarter, Tesla has moved from an Enterprise level position to a Babylon 5 level position. That’s what tends to happen when a stock doubles in 3 months.
- Likewise, MercadoLibre moved from a Babylon 5 level position to an Enterprise level position. It’s not MercadoLibre’s fault. It was up 10% for the quarter, which is a perfectly respectable gain. The rest of the portfolio just did a little better.
- Baozun dropped from a Serenity level to Millenium Falcon level position. While this was mostly due to poor performance, it also perfectly mimics my lessening confidence in the company (as described above).
- Lastly, Fastly (see what I did there?) moved from a Millenium Falcon level position to a Serenity level position, largely because I added to my position as I got more confident in the business.
With all that being said, here is the Freedom Portfolio as of October 2020:
| Ticker | Company Name | Allocation |
| TSLA | Tesla | Babylon 5 |
| SHOP | Shopify | Babylon 5 |
| AMZN | Amazon | Enterprise |
| SE | Sea Limited | Enterprise |
| MELI | MercadoLibre | Enterprise |
| LVGO | Livongo Health | Serenity |
| JD | JD.com | Serenity |
| RDFN | Redfin | Serenity |
| TDOC | Teladoc | Serenity |
| TTD | The Trade Desk | Serenity |
| NVCR | NovoCure | Serenity |
| SQ | Square | Serenity |
| FSLY | Fastly | Serenity |
| ROKU | Roku | Serenity |
| NFLX | Netflix | Serenity |
| DIS | Walt Disney | Serenity |
| ZM | Zoom Video | Millennium Falcon |
| CRWD | CrowdStrike | Millennium Falcon |
| SWAV | Shockwave Medical | Millennium Falcon |
| AAXN | Axon Enterprises | Millennium Falcon |
| ETSY | Etsy | Millennium Falcon |
| BZUN | Baozun | Millennium Falcon |
| NNOX | Nano-X | Millennium Falcon |
That’s the two year recap of the Freedom Portfolio! While 2020 hasn’t been the greatest year in many ways, it has at least been a pretty great run for the Freedom Portfolio. More than ever, I am excited to see what the future holds for the companies I have invested in. Thanks, as always, for following me on my journey to beat the market.
