BABA – Paul Vs The Market

The Freedom Portfolio – January 2021

January 7, 2021 paul.essen Comments 3 comments

Between the kick-off of Fantasy Investing 2021, my recklessly bold predictions for 2021, and just things like being commissioner of fantasy football leagues which are winding down and enjoying the holidays with my family, the end of December is already a pretty busy time for me even without having to write up a new quarterly recap. Also, I feel like it’s still fair to use the excuse of a newborn baby sucking away time.

Anyway, I apologize in advance that this one is a little short. You can probably expect a little bit more of an abridged quarterly recap in the fourth quarter going forward.

Let’s start out with updated performance:

And here’s a look how each individual position performed over the past quarter and since the inception of the Freedom Portfolio.

Ticker	Quarterly Change	Change Since Inception
NNOX	90%	6%
ROKU	66%	164%
TSLA	57%	1053%
NVCR	54%	227%
MELI	50%	387%
CRWD	48%	114%
DIS	47%	54%
TTD	44%	273%
SWAV	38%	95%
ETSY	35%	67%
RDFN	30%	270%
FVRR	30%	-2%
SQ	29%	116%
AAXN	28%	63%
SE	24%	512%
JD	12%	238%
SHOP	7%	580%
NFLX	3%	44%
AMZN	1%	61%
TDOC	-9%	130%
FSLY	-11%	48%
ZM	-30%	128%

I’ve run out of ways to describe how 2020 was in terms of investing performance for the Freedom Portfolio. It was simply amazing and I don’t expect to ever be able to replicate those results again. So instead of focusing on the positives, I wanted to touch on a few (investing) negatives from 2020.

Magnite (MGNI): I was pretty excited about Magnite (formed by a merger of Teleria and the Rubicon Project) at the beginning of the year, so much so that I made it one of my picks for my fantasy investing 2020 portfolio. At the same time, my conviction in the company was low, so it was a pretty small position for me. Some poor performance earlier in the year along with some management changes shook my conviction and I ultimately sold in June. About 6 months later, the stock now is sitting around 4x where I sold it. It’s possible I was too quick to sell Magnite, and it might be time to take another look at the company.

Jumia (JMIA): Jumia is a very similar story. I had high hopes for the “Amazon of Africa” since many of my other ecommerce companies were thriving during COVID related lockdowns. I sold in September after some mediocre results made me question if the company would be able to seize the opportunity. Since then, the stock has gone up 5x. I’m still not convinced I necessarily made the wrong call, though. Time will tell. I’ll be keeping my eye on it, but have no plans to buy shares again any time soon.

Notable Performers

Just going to briefly touch on the best and worst performer this past quarter.

Best Performer

Nano-X (NNOX) – 90% gain: Interestingly, Nano-X was on my “worst performers” list last quarter. There’s honestly not much to say here. A series of short reports pummeled the stock in Q3 and the stock bounced back from that in Q4 (thanks in part to a live demonstration that was streamed in December). This is still a highly speculative company where so much rests on FDA approval to disprove the majority of the short thesis. I’m still optimistic, but the plan is to hold off making any buys or sells until there is more clarification from the FDA.

Worst Performer

Zoom Video (ZM) – 30% loss: This is almost the reverse story to Nano-X. Zoom peaked a few months ago (shortly after the start of Q4) after some absolutely incredible earnings reports. Since then, it has dropped a fair bit, presumably on positive vaccine news and because people are worried about Zoom’s place in a post-COVID world. I am not worried at all, and Zoom is on my list of companies I am interested in adding to if/when I have cash available.

Changes in the Portfolio

The Freedom Portfolio – October 2020

Here is where the Freedom Portfolio stands going into 2021. Need a reminder of what these terms mean? Check out: Defining my Terms. A few notes:

Mercado Libre moved up to a Babylon 5 level position on the back of an incredible 50% gain over the past quarter
Crowdstrike moved up to a Serenity level position on the back of some additional buys and a nice 48% gain during the quarter
Fastly fell to a Millennium Falcon level position after falling 11% during a quarter where the rest of the portfolio increased almost 30%.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
TSLA	Tesla	Babylon 5
MELI	MercadoLibre	Babylon 5
SE	Sea Limited	Enterprise
AMZN	Amazon	Enterprise
RDFN	Redfin	Serenity
TTD	The Trade Desk	Serenity
TDOC	Teladoc	Serenity
SQ	Square	Serenity
NVCR	NovoCure	Serenity
ROKU	Roku	Serenity
DIS	Walt Disney	Serenity
JD	JD.com	Serenity
ETSY	Etsy	Serenity
NFLX	Netflix	Serenity
CRWD	CrowdStrike	Serenity
FSLY	Fastly	Millennium Falcon
FVRR	Fiverr	Millennium Falcon
ZM	Zoom Video	Millennium Falcon
NNOX	Nano-X	Millennium Falcon
SWAV	Shockwave Medical	Millennium Falcon
AAXN	Axon Enterprises	Millennium Falcon

That’s the 2020Q4 recap of the Freedom Portfolio. Thanks for following, and here’s to a prosperous 2021 for all!

The Freedom Portfolio – October 2020

October 5, 2020 paul.essen Comments 4 comments

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.

The Freedom Portfolio – July 2020

June 30, 2020 paul.essen Comments 4 comments

Wow.

2020 has been such a crummy year in so many ways, but when it comes to investing returns, I don’t know if I’ll ever see a quarter quite like the second quarter of this year.

This might be the best investing quarter that I will ever have.

The Freedom Portfolio was up 73% this past quarter alone. That is a ridiculous return for a whole year, let alone a single quarter. Granted, some of that is coming off of the Coronavirus-induced lows, but that’s just a tiny part of it. The Freedom Portfolio is still up 64% year-to-date and is now up 81% since inception, for a nearly 40% annual return. During that same time period, the S&P 500 is up only 10%, giving the Freedom Portfolio an outperformance of 71 percentage points.

For those who prefer visuals, here’s what it looks like:

Two years is still a pretty short period of time in the grand scheme of things, and I’m sure that gap will narrow at some point in the coming years, but at the same time I do believe evidence is starting to emerge that it is possible to beat the market… and that I’m doing it.

Here is the performance broken down by position over the past quarter:

Ticker	Percent Change
RDFN	169%
LVGO	163%
SE	144%
SHOP	128%
TTD	116%
TSLA	106%
SQ	100%
MELI	99%
JMIA	86%
YEXT	61%
JD	48%
FSLY	43%
SWAV	41%
AMZN	40%
BZUN	38%
ROKU	33%
AAXN	31%
TDOC	22%
NFLX	21%
SPOT	19%
DIS	15%
CRWD	1%
NVCR	-13%

Notable Performers

Best Performers

Not to brag (too much), but this list was nearly impossible to trim down. Two companies had stocks that appreciated over 150% this quarter alone. Another six appreciated 100% or more. Amazon (AMZN) had an incredible quarter that saw it gain 40% and yet it was (relatively speaking) a disappointment compared to the rest of the Freedom Portfolio and in fact dropped from a Babylon 5 level position to an Enterprise level position.

Anyway, to avoid going on for too long, I’m going to just stick to a top 3:

Livongo Health (LVGO): I first bought shares in this company last quarter and I am really glad I did. Livongo seems to be riding the telemedicine wave in the wake of Coronavirus, but I honestly thought this was an impressive company even before the pandemic. Their growth rates were incredible before and their model of health nudges and delivering medical supplies directly to the consumer should only benefit from a new normal that sees people visiting doctors and pharmacies less often. Few companies have gained my trust in terms of future performance more than Livongo over these past few months.

Sea Limited (SE): Although if any company could challenge Livongo’s claim to that title, it would be Sea. I’ve had my eyes opened to the potential of the Southeast Asia region and I was already a big fan of eCommerce and digital payment companies in developing regions (see, Mercado Libre (MELI)). Sea is following a slightly different path with their gaming business, and the competitive landscape is a little different with Alibaba looming, but I’m still really excited to see if Sea can become the dominant player in eCommerce and digital payments in Southeast Asia over the coming decade.

Redfin (RDFN): One of my favorite investments, and finally the performance is catching up to my conviction in the company. Early in 2020, Redfin looked to be on track for having a great year, before the stock got whacked hard by Coronavirus. I was confident that the short term challenges would be a long term gain for Redfin, though, as they had an advantage with virtual tours and low mortgage rates could heat up the housing market. It looks like I was right, and I’m thrilled to see people are finally realizing what a great investment Redfin can be.

Worst Performers

Again, not to brag too much, but it’s hard to find any contenders here. Only four positions under-performed the S&P, and two of those (Crowdstrike (CRWD) and Spotify (SPOT)) were only owned for a few weeks so it’s an unfair comparison. Thus, the only companies it makes sense to write about are…

Disney (DIS): It’s not at all a surprise that Disney hasn’t been the best performer this past quarter considering how almost all of their business lines have taken a major hit from Coronavirus induced lockdowns. Amusement Parks and Cruises are shut down. Movie theaters are shut down. Live sports are shut down. Short term, things will be messy for Disney, but assuming life ever gets back to some semblance of normality (which I believe it will), then I still like the long terms prospects. Disney+ is still killing it and they still have an amazing library of IP to pull from.

Novocure (NVCR): It makes some sense that Novocure is down a tiny bit this part quarter, as it sounds like Coronavirus is causing some delays in the clinical trials that were hoped to show how their Tumor Treating Fields could be effective with other types of cancers. I’m absolutely not worried at all, and even added to my position, as I see this as purely a short term speed bump and no challenge to the long term thesis.

Changes in the Portfolio

It was an unexpectedly active quarter for the Freedom Portfolio, as I closed out some lower conviction positions and added some new positions as well. Stock prices were also so volatile that there were some instances where I both added to my position AND trimmed some in the same quarter (Sea Limited).

Going forward, I’m hoping to try to write short pieces explaining my trades within a week of me making them, instead of saving them all up for the quarterly recaps. So if you don’t see this section in the next recap, that will be why.

Sells

KushCo (KSHB): It was long past time to sell. Too many things had happened to ruin the bull case and the company had gotten reduced to issuing more stock at depressed prices just to stay solvent. I don’t regret the initial investment because I thought it was worth the risk, but I do regret having held on for so long.

The Rubicon Project (RUBI): You might be asking yourself where this company came from since it wasn’t in the Freedom Portfolio last quarter. Teleria merged with the Rubicon Project and the combined entity took on the latter’s name. That’s not the reason I sold, though. The main catalyst was that the former CEO of Teleria, who had become the COO of the combined entity, ended up leaving the company soon after the merger was completed. That was enough of a red flag for me to exit for now, although I will keep an eye on the company to see how it executes going forward.

iQiyi (IQ): This one hurt for a few reasons. The first reason is that selling my entire iQiyi position effectively breaks up The JIB. The second reason is that just a few weeks after selling my shares, the stock popped big on news that Tencent (TCEHY) was planning on investing in the company, which makes it a lot more interesting. I have no plans to buy back into the company yet, but I will keep an eye on it.

Invitae (NVTA), Guardant Health (GH), CRISPR Therapeutics (CRSP), and Editas Medicine (EDIT): I group all of these together because my reasons for selling them were pretty similar. I was looking to reduce the number of positions that I have, and all of these were lower conviction holdings because they score so low on the “Understanding” level of my P.A.U.L. scoring system. I personally find it difficult to grasp what kind of advantages and moats and optionality these companies possess, and so I felt it was better to re-deploy those funds to companies I had higher conviction in.

I can’t help but note that Invitae made sure to get a parting shot in at me, though. One month after I sold, they announced an acquisition which caused the stock to jump 60% in two days. That hurt, but I consoled myself by remembering that I used the proceeds to buy shares of Sea Limited, which had almost doubled in that same month.

Trimmed the following positions: Teladoc (TDOC), JD.com (JD), Shopify (SHOP), and Sea Limited (SE). I trimmed all of these positions because many of them had appreciated a ton and I wanted to free up some money for some new ideas. Selling shares of Shopify really hurt, though. Why? Because up until then, I hadn’t sold a single share from my original purchase at $44.55 a share despite watching it skyrocket and increase by 1,800% (that’s not a typo). Because of my past experience with Netflix, I had sworn I wouldn’t sell my winners too early again, and I am worried I might be doing that here. Still, Shopify was approaching 20% of my portfolio and I only sold a small percentage of my position (less than 10%), so I resigned myself to trimming a little bit.

Buys

Axon Enterprise (AAXN): I kept hearing good things about the moat that this company has from some investors I really respect on Twitter, so I started digging into it more. This company is basically the old “Taser” company, although the exciting part of their business now appears to be body cameras and the fees they charge police departments to store the video generated by those cameras. I spoke to a friend who is familiar with the product and they gave a fairly glowing review, so I decided to dip my toe in with a small position. We’ll see how it performs in the coming years, especially in the current “defund the police” environment.

Zoom Video Communications (ZM): It sounds bad, but I feel like I was basically begrudgingly pulled into this position. I struggle so much seeing what kind of moat this company can possible have when so many other huge tech giants also offer video conferencing (and have been for years), but I also know a lot of investors I really respect really believe in the company, so I decided to start a small position. It’s already up 70%(!) from where I bought it two months ago, so I guess I have been proven wrong so far.

Spotify (SPOT): I keep darting into and out of a position in Spotify because I really like the moves they are making in acquiring deals with major players in the podcast space, but I also struggle with how they are going to successfully monetize them. I decided to jump back in after hearing about the deal they made with Joe Rogan. I’m going to try really hard to just hang on for at least a year this time to see how this podcast experiment plays out.

Fastly (FSLY) and Crowdstrike (CRWD): Much like some of the companies above, I’ve been hearing a lot of good things about these companies from investors that I have a lot of respect for, so I decided to open some small positions while I do some further research. I’m looking forward to learning more so that my conviction can grow and I can become just as bullish on these companies as they are.

Additions to already existing positions: Disney (DIS), Livongo Health (LVGO), Novocure (NVCR), Redfin (RDFN), Sea Limited (SE), The Trade Desk (TTD), Yext (YEXT), Roku (ROKU).

The Freedom Portfolio – July 2020

Obviously a lot of this is influenced by the incredible performance this quarter, but I’m really excited where the Freedom Portfolio sits right now. A couple of positions (Shopify and Tesla) have seen huge run-ups and will likely see periods of under-performance over the coming quarters and maybe even years, but I really like a lot of the Serenity level holdings I have and am looking forward to them taking off and being the next big growers in my portfolio.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
MELI	MercadoLibre	Babylon 5
AMZN	Amazon	Enterprise
TSLA	Tesla Motors	Enterprise
TDOC	Teladoc	Serenity
RDFN	Redfin	Serenity
NFLX	Netflix	Serenity
SE	Sea Limited	Serenity
LVGO	Livongo Health	Serenity
DIS	Walt Disney	Serenity
TTD	The Trade Desk	Serenity
SQ	Square	Serenity
NVCR	NovoCure	Serenity
JD	JD.com	Serenity
ROKU	Roku	Serenity
BZUN	Baozun	Serenity
YEXT	Yext	M. Falcon
ZM	Zoom Video	M. Falcon
AAXN	Axon Enterprises	M. Falcon
SWAV	ShockWave Medical	M. Falcon
FSLY	Fastly	M. Falcon
SPOT	Spotify	M. Falcon
CRWD	CrowdStrike	M. Falcon
JMIA	Jumia Technologies	M. Falcon

Thanks, as always, for reading. I hope you’ve been having as much fun following along with me as I’ve had doing this so far.

The Freedom Portfolio – April 2020

March 31, 2020 paul.essen Comments 2 comments

I don’t know how to start this quarterly update.

Just a month ago, I was watching the Freedom Portfolio have a scorching start to the new decade thanks to the incredible run of companies like Tesla (TSLA). I was even wondering if I might be able to talk about how the portfolio had managed to double over a mere 15 months. That kind of thinking seems patently ridiculous now.

For those unaware, this past month has seen the fastest market drop in history as COVID-19 (aka, Coronavirus) has brought the US economy to a screeching halt. The volatility has been extreme, and it has gotten to the point where I don’t even blink when multiple positions in the Freedom Portfolio are up (or down) 20%+ in a day. Redfin (RDFN) was recently up 20% and 30% in back-to-back days and is still down something close to 50% in the past month alone. So I’ve very quickly had to shift my mindset from one of, “Isn’t the market an amazing way to generate wealth?” to “Don’t panic! This kind of thing happens sometimes”.

After some consideration, I decided that I wanted to get one main point across with this quarterly update: That I am completely and utterly unfazed by what the stock market has done this quarter.

I laid out most of my thoughts in my previous article: Don’t Panic (and also: COVID-19 Update: What a month), but the short version is this: I was investing during the Great Financial Crisis. I know that markets often go down and the drop is often much faster than when it goes up. Volatility like this is the price paid for superior long term returns. I don’t know where the market will go over the coming months or even year, but I am very confident that over the next 5+ years (which is my investing time frame), that the market will be up from where it is now. Throughout this entire market drop, I only sold one position and immediately re-allocated those funds to another (new) position. I stayed invested in stocks the entire time and even increased my 401(k) contribution and shifted some of my emergency fund money from CDs to the market. I am not calling a bottom, but I am absolutely convinced that stocks are on sale right now for anybody who has a 5+ year time horizon like I do.

Before I get to the results for this past quarter, I want to make a very important note. The market has been extremely volatile lately, and it hasn’t been uncommon for the market to move more in a single day than it has in some previous months or years. I saw one stat that said, “In 2017 the S&P had daily moves of more than 1% 8 times. In the last 27 trading days it’s happened 21 times.”

All this is to say that the numbers contained below are very tentative and could easily be out of date by the time you read this. I typically like to write these quarterly updates a week or two in advance, and most of these numbers will be coming from March 26th/27th, but who knows how things might change by the time April 1st comes along. If things change too much, I suppose I can always write this article off as an April Fool’s Day joke.

So basically, treat the numbers below as very tentative.

With that being said, it looks like the Freedom Portfolio will end up down around 6% for the first quarter of 2020. That’s not good, but still far better than the S&P 500, which is down roughly 21%. Since inception, the Freedom Portfolio is now convincingly beating the S&P with a positive return of 4% versus a negative return of 11% for the S&P. That’s an outperformance of 15 percentage points over a year and a half.

In terms of beating the market, that’s a pretty great quarter for the Freedom Portfolio. Obviously, it’s a bit of a mixed bag because my portfolio has lost tens of thousands of dollars over a mere 30 days, which is almost certainly the biggest loss of wealth I’ve ever experienced in my life in that short of an amount of time, but I am pleased that my portfolio has held up better than the market overall during these trying times and has opened up a convincing lead. Here’s hoping the Freedom Portfolio can expand that lead as the market rebounds.

Here is the performance broken down by position over the past quarter:

Ticker	Percent Change
TDOC	80.7%
TSLA	24.0%
JD	17.3%
SE	13.2%
SHOP	13.1%
NFLX	9.9%
AMZN	4.2%
MDB	0.5%
NVTA	0.0%
IQ	-7.0%
LVGO	-7.0%
SQ	-11.4%
GH	-11.4%
BZUN	-12.1%
RDFN	-14.7%
MELI	-16.6%
NVCR	-20.2%
TTD	-20.9%
SWAV	-23.0%
YEXT	-23.2%
DIS	-27.6%
CRSP	-28.4%
TLRA	-29.2%
EDIT	-30.0%
ROKU	-32.2%
KSHB	-34.2%
JMIA	-51.6%

Notable Performers

Best Performers

Teladoc (TDOC): It should be no secret why Teladoc had an amazing quarter. I don’t want to make light of a situation which is killing people and obviously Teladoc management would never want to phrase it this way, but you couldn’t have written up a better script for Teladoc than a highly contagious pandemic where the government is encouraging people to practice social distancing. I had invested in Teladoc because I thought telemedicine would be big in the future and COVID-19 seems to have only accelerated that future to now.

Tesla (TSLA): Tesla shows up as a big winner, but it almost feels like a loser to me. Why? Because just around a month and a half ago, Tesla was above $900 a share and absolutely crushing it with early Model Y deliveries and promises of shoring up their balance sheet with secondary offerings and actual profit. Now, the stock is barely above $500 a share and factories are (begrudgingly) being shut down. It has still been an amazing run for the company over the past six months, though, and the future still looks bright.

JD.com (JD): It’s probably a surprise to most people, but China’s stock market has been one of the best performing (if not the best performing) market in the world in 2020. JD.com was basically born during the SARS epidemic when its founder decided to take advantage of the opportunity to sell things online and it sounds like it has been able to come through this COVID-19 crisis stronger as well.

Worst Performers

Jumia Technologies (JMIA): Another quarter, another appearance on the “worst performers” list. I’ve run out of things to say about Jumia. It has flat out been an awful investment so far. I’m probably holding on for now, especially since it has shrunk to such a small position, but I’m definitely not looking to add any more shares.

Kushco Holdings (KSHB): Everything from above can be said for Kushco as well. There’s a possibility of a rebound if/when vaping bounces back and/or marijuana becomes legalized at the federal level in the United States, but those hopes aren’t big enough to buy more shares. Like with Jumia, I am tempted to close out this position.

Roku (ROKU): I’m not sure I understand why Roku has sold off as much as it has this quarter. My best guess is that it has less to do with the company itself and more to do with the sector it is in: connected TV and advertising focused companies. Not only was Roku down big this quarter, but so were companies like The Trade Desk (TTD) and Teleria (TLRA). Perhaps the market is concerned that there will be less money spent on advertising during a recession? Regardless, I’m unconcerned about this drop so far.

Disney (DIS): While it’s a mystery to me why Roku is down big, it’s no mystery at all why Disney has been crushed in the wake of COVID-19. Their amusement parks have been shut down to help prevent the spread of the disease and movie theaters have also been shut down, meaning they can’t release movies like Mulan and Black Widow. Even their TV properties are likely struggling with ESPN having so little professional sports to cover. Maybe they’re seeing a slight bump in Disney+ adoption due to social distancing, but it’s not nearly enough to offset the damage being done elsewhere. No wonder Bob Iger jumped ship early. Disney is going to have some tough earnings reports coming up (especially compared to the incredible year they had last year), and the timing is rough since they just spent a ton of money acquiring Fox and ownership of Hulu, but I still believe in Disney over the long term. I’m holding tight.

Changes in the Portfolio

It’s worth noting that the majority of the moves below were made before the market tanked. Since February 21st, the only moves I have made are the MondoDB sell and the Livongo Health buy. All of the other changes were made earlier in the year and were mostly focused on trying to concentrate my portfolio down into fewer positions (something I alluded to wanting to do in my previous quarterly recap).

Sells

Abiomed (ABMD): I was beginning to lose hope in the promised turnaround and was beginning to wonder if the damage had already been done and would ever fully get reversed. Once the seed of doubt is planted that a medical device might be unsafe, how many studies is it going to take to remove that doubt? Does Abiomed have a second act to rely on? I had lost my conviction in the company, and decided that meant it was time to sell.

StoneCo (STNE): I had bought StoneCo because I loved the idea of buying the “Square of Latin America” and also liked seeing that Berkshire Hathaway had a position in the company. However, I kept struggling with the fact that I hardly knew anything about the company outside of earnings reports. Also, one of the main reasons I love Square is their Cash App, which is something that StoneCo doesn’t seem to have (but possible competitor and other Freedom Portfolio holding Mercado Libre (MELI) does have). This was a lower conviction holding, and I felt like the money was better invested in another company I had a higher conviction in.

MongoDB (MDB): There’s a saying that I like that says, “you can’t borrow conviction”. MongoDB was increasingly feeling like a stock where I was trying to borrow conviction from others. A lot of smart investors I know are high on MongoDB, which is why I had dipped my toe in with a small position. However, I always struggled to understand what gave it an advantage over similar offerings from Amazon (AMZN). It has eternally languished as one of my lower conviction positions and this year I finally decided to close it out to put the funds to better use in higher conviction picks.

Alibaba (BABA): One of my initial reasons for investing in Alibaba was because I liked a lot of the opportunities they seemed to have expanding their eCommerce operations outside of China (specifically Southeast Asia). With my recent purchase of Sea Limited (SE), that itch has been scratched, and there was one less reason to invest in Alibaba. I liked the Chinese exposure that I was getting from the JIB stocks, so it felt like the time to put those funds to better use somewhere else.

Buys

Livongo Health (LVGO): This is a buy from last quarter’s watchlist. I was really interested in their business model, which uses AI to provide “nudges” to people dealing with chronic diseases like diabetes and high blood pressure. It’s a subscription model that appears to be growing nicely and has some good data to back up how it helps improve health outcomes and also save money. They also have held up surprisingly well over the past month for some reason, which is a nice bonus.

Additions to already existing positions: Roku (ROKU), Teleria (TLRA), Yext (YEXT).

Watchlist

I’ve been pretty inactive in terms of buying and/or selling positions in the Freedom Portfolio during this COVID-19 induced market drop because I don’t like to make rash decisions. However, seeing a lot of my positions losing 30%, 40%, or even 50% of their value has really illuminated which companies I really believe in (and want to buy more of) and which have me worried (and make me want to sell). There’s a decent chance I purge some of those companies in the coming quarter in order to load up on some of those companies that I believe i more. In addition to possibly adding to positions I already have, here is what is on my watchlist to buy or sell in the coming quarter:

Luckin Coffee (LK) – China has a lot of people, and they’re not nearly as obsessed with coffee as Americans are… yet. I’m intrigued by this China-based, mobile app / kiosk focused coffee company. The stock is down about 50% from its recent highs, and I’m tempted to dip my toe in now. If it drops more (presumably after some pretty bad earnings reports due to China’s lockdown) then I’ll be even more tempted.

Spotify (SPOT) – Spotify used to be in the Freedom Portfolio, but I sold because I lost conviction in it. I never stopped being intrigued by the company, though, and continue to be impressed by the moves they are making to become the Netflix of audio. Purchasing The Ringer (and their stable of popular podcasts) could be huge and could give them something that differentiates them from things like Amazon Music and Apple Music. I’ll be watching with interest to see what their next moves are.

KushCo and Jumia – See above. These two companies have been awful performers over many quarters, and I’m not sure I can see daylight at the end of the tunnel anymore. I have no plans to sell right now, but the thought has crossed my mind a few times.

Crispr (CRSP) and Editas (EDIT) – It’s really hard for me to have that strong of conviction when it comes to areas I know so little about. Everybody tells me that CRISPR is going to be huge, and I believe them, but I don’t have a strong sense of how to judge which companies are best positioned to take advantage or even how to measure how progress is going. Since I am trying to concentrate my portfolio on my higher conviction picks, then, these two have to be under consideration for being on the chopping block.

Guardant Health (GH) – Similar to the above, I’m far from a healthcare expert, and so it’s hard for me to judge just how good of a moat Guardant Health has and how susceptible they are to disruption. Another company I might consider selling to raise funds to buy something else.

The Freedom Portfolio – April 2020

Due to the incredible volatility in the market the past month or so, the Freedom Portfolio has seen more change than usual. Former Babylon 5 sized position Mercado Libre has shrunk back to an Enterprise level position. Former Serenity sized positions Teladoc, Tesla, and Netflix have surged into Enterprise level positions, and there has been a lot of switching up between Serenity and Millenium Falcon sized positions as well. Will things return to normal once everything related to COVID-19 settles down? Or will Tesla and Teladoc be permanent fixtures among the Enterprise and above levels? I guess we’ll find out.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
AMZN	Amazon	Babylon 5
MELI	MercadoLibre	Enterprise
TDOC	Teladoc	Enterprise
TSLA	Tesla Motors	Enterprise
NFLX	Netflix	Enterprise
SQ	Square	Serenity
DIS	Walt Disney	Serenity
NVCR	NovoCure	Serenity
JD	JD.com	Serenity
RDFN	Redfin	Serenity
BABA	Alibaba	Serenity
IQ	iQiyi	Serenity
CRSP	CRISPR Therapeutics	Serenity
BZUN	Baozun	Serenity
TTD	The Trade Desk	Serenity
ROKU	Roku	Serenity
TLRA	Telaria	Serenity
YEXT	Yext	M. Falcon
NVTA	Invitae	M. Falcon
SE	Sea Limited	M. Falcon
EDIT	Editas Medicine	M. Falcon
SWAV	ShockWave Medical	M. Falcon
GH	Guardant Health	M. Falcon
JMIA	Jumia Technologies	M. Falcon
KSHB	KushCo	M. Falcon

Thanks, as always, for reading. I hope you all manage to stay safe during these extraordinary times. And remember: Wash your hands.

The Freedom Portfolio – January 2020

January 15, 2020 paul.essen Comments 6 comments

2019 is in the books! It’s time for another quarterly Freedom Portfolio update. Sorry this update is a little late. Over the past few weeks I’ve been juggling the typical holiday hecticness, setting up the next season of Fantasy Investing (new post coming soon!), trying to stick to a New Year’s Resolution to workout more, and dealing with 3 separate cases of flu in the family.

The fourth quarter was a pretty great one for the Freedom Portfolio, which was up a strong 16% versus roughly 9% for the S&P 500. Since inception, the Freedom Portfolio is now up 11.2% versus 10.4% for the S&P 500. It’s not a huge amount of out-performance, but it’s still a relatively short time frame when it comes to my investing horizon.

Here is the performance broken down by position over the past quarter:

Ticker	Percent Change
TSLA	71.0%
CRSP	58.1%
SWAV	46.4%
TTD	41.5%
EDIT	34.3%
IQ	32.6%
RDFN	32.0%
GH	31.3%
ROKU	30.8%
TLRA	29.6%
SE	28.5%
BABA	28.4%
SHOP	26.9%
TDOC	25.3%
JD	25.0%
NFLX	20.0%
STNE	16.8%
NVCR	14.5%
DIS	11.6%
MDB	9.2%
AMZN	6.5%
MELI	3.9%
SQ	1.5%
ABMD	0.2%
KSHB	-4.1%
YEXT	-6.8%
JMIA	-8.9%
NVTA	-11.5%
BZUN	-22.5%

Notable Performers

Best Performers

Tesla (TSLA): Even for a volatile stock like Tesla, the fourth quarter was a little crazy. Positive news regarding Model 3 deliveries in the US and deliveries in China ramping up earlier than expected seemed to be enough to send shorts scurrying for the exit. Even the widely panned (at the time) Cybertruck demonstration didn’t seem to hurt the stock momentum much (possibly because of the higher than expected number of reservations that Elon Musk announced?). There are still plenty of risks with Tesla, but much like the end of the year last year, they seem to be going into the new year with the good news outweighing the bad… for now.

CRISPR Therapeutics (CRSP): The fourth quarter of 2019 saw some promising news in terms of the types of benefits people were hoping to see from CRISPR (the technology, not the company). That appears to be the biggest reason why CRISPR (the company, not the technology) and Editas (EDIT) both saw big bumps over the past few months. In the case of CRISPR, it was enough of a bump to push it from a Millenium Falcon position to a Serenity level position.

ShockWave Medical (SWAV): It’s a little unclear to me exactly what happened with ShockWave Medical over the past quarter, since there didn’t appear to be any significant news which should’ve moved the stock. My best guess is that, because the IPO lockup period ended on September 3rd, it’s possible a lot of insiders sold their shares (which depressed the price of the stock) and once the selling was over (coincidentally right around the start of the quarter), the stock rebounded some.

ShockWave is actually an interesting case study regarding the dangers of investing in recently IPO’d companies. I typically try to wait before investing in recent IPOs, but broke my rule twice in 2019 (Jumia and ShockWave) and got burned both times. It’s easy to get caught up in the euphoria surrounding an IPO and then get caught owning a stock that plummets once that euphoria wears off. The same pattern happened a lot with IPOs in 2019 where the stock went crazy in the first few months before crashing back down to Earth. Just look at Beyond Meat (BYND)!

The lesson learned for me? Don’t get caught up in the excitement around an IPO, and especially don’t get caught up in feelings of FOMO when an interesting stock keeps going up to ridiculous heights. Chances are good there will be a better entry price once the lockup period ends and the excitement wears off. I’m still bullish on ShockWave, but I do wish I had waited longer to start my position.

The Trade Desk (TTD): Another head-scratcher. While The Trade Desk was up 40%+ the past quarter, if you zoom out a little more you would see that appreciation just about brings it back to where it was in the middle of 2019. A number of high-growth, high-valuation software as a service (SaaS) companies saw some dips in the third quarter of 2019, so this rebound seems like it’s just a recovery from that previous dip.

Worst Performers

Baozun (BZUN): Baozun’s most recent earnings report was pretty good, and contained some strong growth across the board, but it also contained forward guidance which seemed to disappoint investors. I knew that Baozun was likely to be a volatile stock, and the past few years has likely been tough in terms of a slowing Chinese economy and the trade war, so I’m not overly concerned. Still, I’ll be interested to see what their next earnings report looks like. If it looks like there are signs of permanently slowing growth, then it might be time to consider selling.

Invitae (NVTA): Invitae is another stock that I expected volatility from. As of mid-2019 it had almost doubled, so I’m not surprised to see it give some of those gains back later in the year. No huge concerns for me here.

Jumia Technologies (JMIA): Jumia falls squarely into the “recent IPO that I should’ve waited longer to invest in” camp that I mentioned above. I’m still a believer in the eCommerce opportunity in Africa, but in retrospect Jumia was clearly way overvalued and is now sitting considerably below its IPO price. I should’ve waited to see how the company performed for a few quarters instead of jumping in so soon. I excepted a ton of volatility from Jumia (even more than from the companies above), so the drop in stock price doesn’t concern me, although I’ll definitely be keeping an eye on how the company continues to perform. They’re burning through a lot of cash and profitability seems very far away. This remains possibly the riskiest position in the Freedom Portfolio.

Changes in the Portfolio

There was a saying I came across recently which essentially said that every new addition to your portfolio should be better than what you already own, or else you are diluting your returns. It was something that really spoke to me. I always envisioned the ideal number of positions for the Freedom Portfolio being somewhere between 20 and 25, even though I knew that would be hard to stick to. Sure enough, the Freedom Portfolio had ballooned to over 30 positions as of the last check-in. As a result, for the past few months I’ve tried to focus on reducing the number of positions I have by eliminating those I have lower conviction in. You’ll probably see that reflected below.

Sells

Twilio (TWLO): One concern that I have had over the past few months is the performance of software as a service (SaaS) stocks possibly getting ahead of the underlying businesses. I sold my entire position in Twilio because it was one of my lower conviction SaaS companies where I felt like I didn’t fully understand their competitive advantage enough.

Intuitive Surgical (ISRG): Another lower conviction positions that I sold completely out of. I’m still really interested in the robotic assisted surgery space, but there are other opportunities I’m more excited about right now.

Illumina (ILMN): It’s a similar story with Illumina. They’ve run into some slower growth and some speed bumps with their Pacific Bio acquisition. There are enough dark clouds around the company right now that I just didn’t want to have to deal with.

Prosus (PROSY) and Naspers (NPSNY): Prosus was a spin-off of Naspers that happened earlier in the year. Both were intended to be indirect ways to invest in Tencent while getting some exposure to other companies as well. It’s hard to think of a better way to simplify my portfolio than to drop Prosus and Naspers. It helps that I have become concerned about the Chinese government’s increasing scrutiny of Tencent’s gaming business.

Buys

Roku (ROKU): Most people probably only think of the small hardware devices when they think of Roku, but they also have a growing advertising business. With the streaming video wars seemingly heating up with the release of Disney + and Apple TV +, I’ve become more interested in different ways to invest in the connected TV space and Roku seems like a good one.

Telaria (TLRA): Like Roku, Telaria is another way to invest in advertising in the connected TV future. It’s a small company, so I’m starting with a small position right now while I see how the company performs and learn more about the business.

Yext (YEXT): Although it’s a new position, Yext has been on my radar for a few years now. I used to work with some people who now work at Yext, so I was familiar with the company even before they went public. Some investors that I really respect are pretty bullish on Yext, and that has played a big role in why I have opened a small position.

Additions to already existing positions: Sea Limited (SE), NovoCure (NVCR), Abiomed (ABMD), Guardant Health (GH), Baozun (BZUN), CRISPR Therapeutics (CRSP).

Watchlist

One thing I want to improve on in 2020 is being less impulsive in terms of starting new positions and selling current ones. One idea I have of enforcing that is to have a watchlist of stocks every quarter that I am considering buying or selling. Ideally I wouldn’t buy or sell any stock unless it was on my watchlist from the previous quarterly update. I don’t want to make it a hard and fast rule quite yet, but wanted to give it a try to see how it works. Here is my first watchlist:

Livongo Health (LVGO) – Interesting looking healthcare company which uses AI to provide “nudges” to people dealing with chronic diseases. Has a relatively unique subscription model as well.

MondoDB (MDB) – One of my lower conviction holdings (and I’m trying to concentrate my portfolio more). I’m still concerned by their ability to grow in a world with big players like AWS (Amazon Web Services). A contender for selling to deploy capital elsewhere.

Alibaba (BABA) – Another lower conviction holding. It’s already a big player in China. How much larger can they get? How do they perform with a possibly slowing Chinese economy?

Roku (ROKU) – I know I just started this position, but I hadn’t added it to the Freedom Portfolio until now because I had concerns about its ability to differentiate itself in the connected TV future. I’m not sure they have a defensible moat and am willing to sell if it looks like they’re losing ground to competitors or the landscape is changing.

Abiomed (ABMD) – Again, this was a position I just added to, but I think there are a lot of questions swirling around Abiomed that will get answered in the next quarter or two. Can they turn things around and get growth back on track? I think so, but if I end up being wrong then I want to be able to get out quickly.

The Freedom Portfolio – January 2020

So where does the Freedom Portfolio stand going into 2020? Well, thanks to the incredible performance of Shopify and Mercado Libre, it’s interestingly top-heavy with 3 Babylon 5 level positions yet no Enterprise level positions. I don’t expect this to last for too long, however, as Disney and Netflix are right on the cusp and both feel primed to have a strong 2020. Need a reminder of what these terms mean? Check out: Defining my Terms.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
AMZN	Amazon	Babylon 5
MELI	MercadoLibre	Babylon 5
DIS	Walt Disney	Serenity
NFLX	Netflix	Serenity
SQ	Square	Serenity
NVCR	NovoCure	Serenity
TSLA	Tesla Motors	Serenity
JD	JD.com	Serenity
RDFN	Redfin	Serenity
TDOC	Teladoc	Serenity
BABA	Alibaba	Serenity
IQ	iQiyi	Serenity
CRSP	CRISPR Therapeutics	Serenity
BZUN	Baozun	Serenity
TTD	The Trade Desk	Serenity
EDIT	Editas Medicine	M. Falcon
NVTA	Invitae	M. Falcon
ROKU	Roku	M. Falcon
ABMD	Abiomed	M. Falcon
STNE	Stoneco	M. Falcon
SWAV	ShockWave Medical	M. Falcon
SE	Sea Limited	M. Falcon
MDB	Mongo DB	M. Falcon
GH	Guardant Health	M. Falcon
TLRA	Telaria	M. Falcon
YEXT	Yext	M. Falcon
JMIA	Jumia Technologies	M. Falcon
KSHB	KushCo	M. Falcon

Thanks, as always, for reading, and here’s to a prosperous new decade for all investors.

The Freedom Portfolio – October 2019

October 11, 2019 paul.essen Comments 4 comments

It’s the one year anniversary of Paul vs the Market and the Freedom Portfolio! 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%.

Which brings me to something different that I want to do for this update: Instead of talking about the past quarter, I want to take a slightly longer term view and look at the performance since inception, which in this case is one year ago.

Below is table of the performance of the current positions in the Freedom Portfolio for the past year. For positions that I owned prior to October 2018, the starting price is the price on October 1st, 2018. For the positions that I acquired afterwards, the starting price is the price from the earliest date of purchase (since in some cases I bought shares multiple times). Here are the results:

Ticker	Start Price	Current Price	Percent Change
ABMD	191.68	177.89	-7.2%
AMZN	2021.99	1735.91	-14.1%
BABA	192.37	167.23	-13.1%
BZUN	49.3	42.7	-13.4%
CRSP	38.89	40.99	5.4%
DIS	117.28	130.32	11.1%
EDIT	23.43	22.74	-2.9%
GH	93.87	63.83	-32.0%
ILMN	369.15	304.22	-17.6%
IQ	27	16.13	-40%
ISRG	575.17	539.93	-6.1%
JD	26.03	28.21	8.4%
JMIA	18.91	7.93	-58.1%
KSHB	5.97	1.48	-75.2%
MDB	155.01	120.48	-22.3%
MELI	343.84	551.23	60.3%
NFLX	375.85	267.62	-28.8%
NPSNY	40.16	29.96	-25.4%
NVCR	52.94	74.78	41.3%
NVTA	17.6	19.27	9.5%
RDFN	18.56	16.84	-9.3%
SE	32.51	30.95	-4.8%
SHOP	166.44	311.66	87.3%
SQ	100.8	61.95	-38.5%
STNE	41.69	34.78	-16.6%
SWAV	53.12	29.93	-43.7%
TDOC	86.78	67.72	-22.0%
TSLA	305.77	240.87	-21.2%
TTD	214.75	187.55	-12.7%
TWLO	140.44	109.96	-21.7%

First, I want to point out an omission that I had trouble accounting for in the table above. Naspers (NPSNY) had an interesting (and complicated) quarter where they effectively spun off part of their business into another company called “Prosus” (PROSY) which is listing on the Amsterdam stock exchange (versus the Johannesburg stock exchange that Naspers is listed on). I won’t go into the details, but for each share of Naspers that I owned I now also own a share of Prosus as a result of the spin-off. However, when the split happened, the price of Naspers shares dropped a great deal (as one would expect). Therefore, the performance of Naspers above isn’t nearly as bad as it may seem.

Secondly, when looking at the performance of my positions over the past year, some of the numbers surprised me. There are typically three ways I look at the performance of my stocks: Daily (checking in on performance during my lunch break), Quarterly (during Freedom Portfolio check-ins), and Lifetime (since I bought the stock and not just from the beginning of the Freedom Portfolio).

So while I obviously know Netflix (NFLX) has had a rough past 6 months or so, it was still jarring to see the nearly 30% decline since the inception of the Freedom Portfolio. Why? Because I originally bought my shares of Netflix many years ago and so I’m used to thinking of it as a 400%+ out-performer and not an under-performer like it has been recently.

Netflix was probably the biggest discrepancy, but the story was similar across the board: Amazon (AMZN) was down 14% instead of being 300% up like I am used to seeing. Illumina (ILMN) down 17% instead of up 100%. There was even a big difference in the winners over the past year as well: Shopify (SHOP) was “only” up 87% instead of 600%+. It really drove home to me the important of a long term mindset that goes well beyond a single year. If I were to judge Netflix or Amazon on the performance over a single year, I probably would’ve sold it well before it had time to double, triple, and quadruple.

The first year I started closely following my investment returns, I just barely beat the S&P, but in the two years after I more than doubled the S&P 500’s return. I have consistently said, “I fully expect that there will be years where I lose to the market, sometimes badly.” While I didn’t lose to the market badly this first year, I did lose to it. Obviously I would’ve rather had a different outcome, but I am absolutely not deterred. I like the companies in the Freedom Portfolio right now even though many have seen pretty severe drops recently. I’m confidently that many of them will outperform over the next 5+ years and that some of them will outperform by a lot. I have a long term time horizon and that hasn’t changed at all with one disappointing year.

Now that that is out of the way, let’s get into some notable performers over the past year.

Notable Performers

Best Performers

Shopify (SHOP): It’s not a surprise to see Shopify as the top performer over the past year, as they’ve had quite an amazing run which saw the stock nearly triple in 2019 before giving back some of the gains in recent months. An 87% gain in a single year sounds impressive, but what’s even more impressive is that it’s up 600%+ since I bought it in 2017. The best might still be yet to come, too, with third party vendors looking for alternatives to Amazon and the building out of their fulfillment network. Looking forward to this being a major part of my portfolio for many years to come.

MercadoLibre (MELI): Also not surprising to see Mercado Libre up here, as it has also had an incredible run in 2019. The unrest in Argentina has hit the stock some recently, and the geo-political risk is as present as ever, but Mercado Libre still keeps finding a way to grow despite all the headwinds. I love being able to get an eCommerce play and digital payments play in the same company, and I also love getting exposure to the developing markets of South America. Can’t wait to see this company really soar once the situations in places like Argentina and Venezuela stabilize.

NovoCure (NVCR): This one might be a little bit of a surprise, since I don’t recall writing too much about Novocure in the past. The science fiction fan in me was initially attracted to the idea of fighting cancerous tumors with forcefields (or at least that’s how I prefer to think of them), but the investor in me loves how they continue to execute in getting their devices approved for more and more conditions.

Disney (DIS): A 10% gain might not seem that impressive, especially considering the ridiculous record breaking box office that Disney has had and all the hype around Disney+, but it was enough to make it a top 4 performer. Disney has weathered the market volatility better than most of my positions, and I’m excited to see what the next 12 months brings. Next year’s box office will almost certainly be considerably lower than this year’s, which could weigh on the stock, but we’ll also see the launch of Disney+ in November and start getting some subscriber numbers. I expect Disney is going to crush it with their numbers and beat even the optimistic expectations. We’ll find out in a few months.

Worst Performers

KushCo Holdings (KSHB): Thank goodness KushCo started off as one of my smaller holdings. The stock has gotten crushed recently, losing half its value in just a few months. The main culprit seems to be the sudden backlash to vaping, but I also have some slight concerns about solvency based on some of the recent actions the company has taken. I’m still holding on for now, as the long term thesis could still be intact assuming we don’t see a full on ban on vaping and the movement towards marijuana legalization continues, but the risks have definitely increased with this one.

Jumia Technologies (JMIA): Jumia is the poster child for not getting caught up in a recent IPO and waiting a few months before jumping in. Luckily, I didn’t buy anywhere near the high of around $40 a share because I realized it was an absurd valuation for such an unproven company. Still, I’m down on all of my purchases so I should’ve been even more cautious. Also, maybe I should give more thought to when lock-up periods end. Still, I am a sucker for eCommerce and developing markets, so I’m still holding onto my shares and looking for better days (and years) ahead.

ShockWave Medical (SWAV): Another cautionary tale of buying a recent IPO too soon. This time I unfortunately bought much closer to the high. I suspect I saw a lot of similarities to NovoCure (one of my top performers above) and got too carried away. Both are medical device companies with really innovative solutions to widespread problems. I still like the future prospects of the company and plan on holding, I just wish I had been more patient so I could’ve bought shares cheaper.

iQiyi (IQ): I suppose iQiyi could also be considered a relatively recent IPO (early 2018) that in retrospect I should’ve waited longer to buy. It’s hard to disentangle how much of iQiyi’s performance lately is due to the performance of the company or larger concerns over China. I haven’t seen anything in the company’s performance which overly concerns me yet, although the competition remains a concern.

Square (SQ): This one is a head scratcher to me. I’m having a hard time understanding why Square has floundered so much recently, especially in comparison to Shopify, which has soared. Square seems to be in a great position, with their Cash app, to appeal to the un-banked and under-banked and be a major player in the digital payments space. Hard to see how this is anything more than just a temporary setback.

Changes in the Portfolio

Sells

Uxin (UXIN): The short story is that I found other investments that I preferred having my money in. I still think Uxin is an interesting story and will keep tabs on it and may return at some point in the future, but there were more interesting companies that I wanted to be invested in. As a result, I sold my entire position.

Markel (MKL): Similar to Uxin, I saw better opportunities elsewhere. I do think Markel will be a market beater long term, but there are other companies that I think will beat the market by an even larger margin, and I wanted to invest in those instead. I sold my entire position.

Netflix (NFLX): This one hurt. Netflix has been one of my longest term holdings and is a company that I have a long and storied history with. At points I even swore that I would never sell any shares ever again. I only sold a part of my position, and it still remains a sizeable holding for me. I still believe it will be a long term winner, and I also think the recently correction is overdone, but I do worry that lower cost competition from Disney and Apple will hurt Netflix’s ability to raise prices, which will hamper their growth prospects some.

Intuitive Surgical (ISRG): I sold about a third of my position largely because I wanted some cash to purchase something else and this was one of my lower conviction ideas at the time.

Illumina (ILMN): Similar to Intuitive Surgical above, I also only sold about a third of my Illumina position. I had a more specific reason for Illumina, though. Their most recent earnings report had some warning flags in terms of slowing growth that had me worried.

Buys

Alibaba (BABA): Nothing fancy. Alibaba has been pretty flat for the past year despite posting some pretty nice earnings reports during that time and continuing to grow at an impressive rate. Once sentiment on China turns away from being so negative, this feels like a stock that could really rebound nicely.

Jumia Technologies (JMIA): It wasn’t surprising to see Jumia fall so much after the crazy run-up in the immediate aftermath of their IPO. Even though my initial position is down almost 50%, I’m still intrigued by the potential of the so-called “Amazon of Africa”, and so decided to add a little to my position. It remains one of my smallest positions, though.

The Trade Desk (TTD): The Trade Desk continues to grow like gangbusters, even if the stock has been relatively flat recently. I still like the long term story, though, so I added to my position.

Square (SQ): Square had a rough quarter which saw the stock price plummet after what looked like a pretty good earnings report. I’m not sure I understand what the market is thinking here, and still like a lot of the things they’re working on like the rumored stock trading functionality to the Cash app and acquiring a banking license. I added a bit to my position.

Shockwave Medical (SWAV): Similar to Jumia, Shockwave has also had a big pullback after a huge run-up post-IPO. I see nothing which changes my original investment thesis, and I suspect this is just a little post-IPO enthusiasm wearing off, so I lowered my cost basis some.

Abiomed (ABMD), MongoDB (MDB), Twilio (TWLO), Guardant Health (GH), Sea Limited (SE): All new positions, and all small ones at that. They range from more medical companies (ABMD and GH) to Software as a Service (SaaS) companies (MDB and TWLO) to another eCommerce play (SE). I might write more about some of these later depending on how things go, but for now they’re too small to spend too much time discussing.

Other

Naspers (NPSNY) and Prosus (PROSY): As mentioned previously, I acquired shares of Prosus as a result of a spin-off by Naspers. I plan on holding both for now, although at some point I might end up simplifying things by selling one or the other.

The Freedom Portfolio – October 2019

So where does the Freedom Portfolio stand at one year old? Take a look below. Need a reminder of what these terms mean? Check out: Defining my Terms.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
AMZN	Amazon	Babylon 5
MELI	MercadoLibre	Babylon 5
DIS	Walt Disney	Enterprise
NFLX	Netflix	Serenity
SQ	Square	Serenity
JD	JD.com	Serenity
TDOC	Teladoc	Serenity
NVCR	NovoCure	Serenity
BZUN	Baozun	Serenity
BABA	Alibaba	Serenity
TSLA	Tesla Motors	Serenity
RDFN	Redfin	Serenity
IQ	iQiyi	Serenity
ISRG	Intuitive Surgical	Serenity
TTD	The Trade Desk	Serenity
NPSNY	Naspers	Serenity
ILMN	Illumina	M. Falcon
NVTA	Invitae	M. Falcon
CRSP	CRISPR Therapeutics	M. Falcon
EDIT	Editas Medicine	M. Falcon
STNE	Stoneco	M. Falcon
MDB	Mongo DB	M. Falcon
SWAV	ShockWave Medical	M. Falcon
PROSY	Prosus	M. Falcon
TWLO	Twilio	M. Falcon
JMIA	Jumia Technologies	M. Falcon
ABMD	Abiomed	M. Falcon
SE	Sea Limited	M. Falcon
GH	Guardant Health	M. Falcon
KSHB	KushCo	M. Falcon

So that’s my year one recap of the Freedom Portfolio. The past 12 months hasn’t seen the out-performance that I was hoping or expecting, but as I mentioned earlier, I remain undeterred. Thanks for following me on my journey to beat the market. Here’s hoping for a better year two.

The Freedom Portfolio – July 2019

June 30, 2019 paul.essen Comments 5 comments

Another really solid performance for the Freedom Portfolio is in the books. For the 2nd quarter of 2019, the Freedom Portfolio returned 9.5%, more than doubling the S&P’s 4.3% return. Since inception, the Freedom Portfolio is now up 7.3% compared to the S&P being up 2.2%. Again, it’s still an incredibly small sample size, but I’m heartened to see that the portfolio is doing what I expected it to do based on previous performance: under-perform when the market is going down, but also out-perform when the market is going up.

Here are the numbers from last quarter:

Ticker	April 2019	July 2019	Percent Change
SWAV	33.25	57.09	71.70%
SHOP	208.43	300.15	44.01%
JMIA	18.95	26.42	39.42%
NVCR	48.58	63.23	30.16%
CRSP	36.25	47.1	29.93%
DIS	111.59	139.64	25.14%
MELI	516.28	611.77	18.50%
TDOC	56.25	66.41	18.06%
ILMN	314.45	368.15	17.08%
BZUN	42.69	49.86	16.80%
TTD	201.56	227.78	13.01%
MKL	999.03	1089.6	9.07%
AMZN	1800.11	1893.63	5.20%
NFLX	359	367.32	2.32%
NPSNY	47.49	48.43	1.98%
EDIT	24.73	24.74	0.04%
NVTA	23.85	23.5	-1.47%
JD	30.93	30.29	-2.07%
SQ	75.59	72.53	-4.05%
BABA	185.09	169.45	-8.45%
ISRG	575	524.55	-8.77%
RDFN	20.67	17.98	-13.01%
KSHB	6.075	5.07	-16.54%
IQ	24.9	20.65	-17.07%
TSLA	282.62	223.46	-20.93%
STNE	41	29.58	-27.85%
UXIN	3.88	2.2	-43.30%

The big story this past quarter was the performance of the Enterprise level positions, or perhaps I should say the former-Enterprise level positions, because two of them (Shopify and MercadoLibre) did so well that they got upgraded to Babylon 5 level positions. That’s a great segue to talking about…

Notable Performers

Best Performers

Shopify (SHOP): Shopify has been on an absolute tear recently. Not only was it up 44% this past quarter, but it has more than doubled year-to-date. Shopify alone accounted for about a third of the Freedom Portfolio’s gains this quarter. It has gone up so far so fast that I even wrote about my concerns regarding how Shopify seems to have gotten ahead of itself a bit in terms of valuation.

MercadoLibre (MELI): While not quite as impressive as Shopify, MercadoLibre has also been doing very well in 2019. While it was “only” up 18% this past quarter, it was still good for almost 20% of the Freedom Portfolio’s gains and also good enough to move MercadoLibre into Babylon 5 level territory. Like Shopify, MercadoLibre has also been an amazing performer year-to-date and has more than doubled.

Disney (DIS): A gain of 25% in the quarter might seem relatively modest, but it was a welcome sight considering Disney shares have been fairly flat for the past 4 years or so. I was glad to finally see some life in the stock. Disney’s 25% gain this quarter was good for around 13% of the Freedom Portfolio’s gains.

ShockWave Medical (SWAV): A clarification here. While ShockWave is up 72% this quarter, I didn’t buy it until later in the quarter and thus my own position is actually basically flat right now.

Worst Performers

Uxin (UXIN): The smallest position in the Freedom Portfolio continues to struggle mightily and is now down over 50% from where I bought it. Clearly I’m not happy with the performance, but I expected this to be a very volatile position and that’s why I only invested a small amount of money. I’m still holding on to see how Uxin performs when the situation in China becomes a little more stable, but this is clearly a big miss so far.

Tesla (TSLA): Down around 21% for the quarter and it could’ve been a lot worse had it not rallied in the last few weeks. I’m not shocked by the poor performance, as I suspected Tesla could have a rough few months (which is why I sold some of my position previously), but even I didn’t expect it to be this bad. I think brighter days are ahead, so I have no intention of selling any more shares at this time.

Changes in the Portfolio

Sells

2u (TWOU): A few months ago, when I started my position in 2u, I mentioned believing that there is a bubble in higher education costs and that I was looking out for companies trying to disrupt the education market. I’m no longer convinced that 2u is the company to do that. I’m worried that they are too tied to the current higher education institutions and that could make them too resistant to cutting deals with disruptive upstarts. In short, I worry that a bursting bubble in higher education might take them down too. I’m still on the lookout, but have decided to sell my entire stake in 2u (for a modest gain).

Activision Blizzard (ATVI): The writing has been on the wall for this position for a bit. In the previous Freedom Portfolio update, I said, “The company remains on my watch list for potentially selling, as there has been a lot of negative news around the company recently that has wiped out some of the investing thesis behind it.” That’s pretty much all there is to say. There are no new big franchises in the pipeline, the company seems to be doubling down on existing franchises and on mobile, and there are rumblings of the once great Blizzard losing its shine. I would love to be wrong about this, since Blizzard has made some amazing games and I want them to keep making amazing games, but I’m worried about the ability of this company to beat the market over the long term. I sold my entire position for a modest gain.

Twitter (TWTR): I had enough to say about selling my Twitter shares that I wrote a whole post about it recently.

Spotify (SPOT): When I started my position in Spotify, I was intrigued by the idea that they could become the Netflix of podcasts. I’m less convinced that’s a huge opportunity now. The reasons are varied, but strangely enough one of the biggest ones was listening to the Spotify CEO on an episode of the Freakonomics podcast. It was then that I realized that the vision that the CEO had for the company wasn’t one that I necessarily shared, and that seemed like a great reason to decide to no longer be invested. I sold my entire position for a modest gain.

Altaba (AABA): Altaba recently announced a “Plan of Complete Liquidation and Dissolution“. They are effectively planning on selling the assets that the holding company owns and distributing them to shareholders. It’s all a bit complicated, but as near as I can tell this ends the dream that the company will ever be able to close the discount to net asset value that I was hoping for when I started my position. As a result, I decided to sell my entire position for a modest gain in order to buy…

Buys

Alibaba (BABA): Pretty straightforward buy here: I wanted to retain exposure to the Chinese eCommerce company and not have to deal with whatever process Altaba was going to go through.

Stoneco (STNE): During the last Freedom Portfolio update, I mentioned dipping my toe in with a small position in Stoneco. Well, I ended up buying at near the all-time high and it has ended up coming down a fair bit since then. I ended up adding a bit more on the way down because I like the exposure to the digital payments space in developing markets. I’m down on all my purchases so far, but it’s still a small position so I’m not worried.

Jumia Technologies (JMIA): Described as the “Amazon” of Africa, this company has had a wild ride in the past few months. They IPO’d in mid-April and have already traded between $18 a share and $49 a share. I initially thought it was way overvalued when it skyrocketed immediately after the IPO, but ended up dipping my toe in with a tiny position after the price crashed soon after. I’m a sucker for eCommerce stories in emerging markets, and I’m sure my experience with MercadoLibre influenced my decision making a bit. I fully expect this to be very volatile, which is why I am starting with a small position.

Tesla (TSLA): Earlier in the year I sold some of my Tesla shares because I was concerned with their short term outlook after the reduction in the federal tax credit and pulling forward a lot of demand at the end of last year. Apparently the market agreed, as Tesla stock plunged from over $300 a share earlier in the year to under $200 a share this past quarter. That seemed like too much of an overreaction to me, so I added to my position a bit.

The Trade Desk (TTD): The Trade Desk has been on my radar for around a year now and I’ve seen it pop up on many people’s lists of companies that they believe have a crazy amount of upside. I’ve been kicking myself for not having bought it a year ago since it has nearly tripled in the past year alone. That kind of crazy appreciation is one reason I’ve avoided it so far. I keep thinking I missed the bus and keep waiting for a pullback that hasn’t really come. The other reason I’ve held off? I’ve never been able to fully grasp what gives them a significant competitive advantage in the world of online advertising. How do they compete with behemoths like Alphabet and Facebook? I still don’t know if I have a definitive answer to that question, but I finally decided to open a small position in the company to motivate me to find out more. Hopefully I like what I find.

iQiyi (IQ): iQiyi has had an up and down 2019 so far, but has generally trended down over the past year. I’m still a big believer in the long term prospects of this JIB member, so I decided to add to my position somewhat. I believe the stock will see better performance once all of the concerns over trade wars and a slowing Chinese economy are in the rear-view mirror.

NovoCure (NVCR): NovoCure continues to do a good job in expanding the number of afflictions that their Optune system is cleared to treat. I added to my position to reflect my increased optimism in the size of their future addressable market. I wouldn’t be surprised to see this company being bought out at some point in the near future, as they’ve done a good job demonstrating the effectiveness of their treatments, but that’s not part of my buy thesis and I actually hope they aren’t bought out because I still feel like there’s a lot of upside left.

ShockWave Medical (SWAV): I believe I first heard about ShockWave Medical on a Motley Fool podcast and was immediately intrigued. The company produces a device which uses sonic waves to break up calcium deposits in arteries. As somebody with an extensive family history of heart disease, I felt a strong personal connection to the company and I was also attracted to their unorthodox approach to solving a common problem because it reminded me a bit of the position I just talked about above: NovoCure. ShockWave IPO’d just a few months ago and is already up big. I’m intrigued by the potential of their new treatment, and so I started a small position.

Markel (MKL), Uxin (UXIN), Intuitive Surgical (ISRG), Naspers (NPSNY): I added a small amount to each of these positions mostly to take advantage of lower prices or to moderately increase my exposure.

The Freedom Portfolio – July 2019

So here’s the new Freedom Portfolio! Click here for last quarter’s review.

Need a reminder of what these terms mean? Check out: Defining my Terms.

Ticker	Company Name	Allocation
AMZN	Amazon	Babylon 5
SHOP	Shopify	Babylon 5
MELI	MercadoLibre	Babylon 5
NFLX	Netflix	Enterprise
DIS	Walt Disney	Serenity
TSLA	Tesla Motors	Serenity
TDOC	Teladoc	Serenity
SQ	Square	Serenity
BZUN	Baozun	Serenity
ILMN	Illumina	Serenity
RDFN	Redfin	Serenity
JD	JD.com	Serenity
ISRG	Intuitive Surgical	Serenity
BABA	Alibaba	Serenity
IQ	iQiyi	Serenity
NPSNY	Naspers	Serenity
MKL	Markel	Serenity
NVTA	Invitae	Serenity
NVCR	NovoCure	Serenity
EDIT	Editas Medicine	M. Falcon
CRSP	CRISPR Therapeutics	M. Falcon
STNE	Stoneco	M. Falcon
KSHB	KushCo	M. Falcon
UXIN	Uxin	M. Falcon
SWAV	ShockWave Medical	M. Falcon
JMIA	Jumia Technologies	M. Falcon

So that’s my July 2019 recap of the Freedom Portfolio. It’s been a great 2019 so far, with a 37% gain so far year-to-date. Here’s hoping it keeps up.

How to prevent anchoring from sinking your portfolio

March 14, 2019 paul.essen Comments 1 comment

One tricky thing with investing is that things are always changing. An indestructible monopoly one day (can you believe that Microsoft (MSFT) was almost broken up by the government over the bundling of Internet Explorer with Windows?) can find itself suddenly behind the times and struggling to catch up a mere decade later. Similarly, sometimes all it takes is one or two amazing products to turn a tiny and irrelevant company like Apple (AAPL) into the largest publicly traded company in the world over the same time period. Check out the turnover among largest companies just in the last 20 years or so below:

https://www.visualcapitalist.com/chart-largest-companies-market-cap-15-years/

Some companies like Exxon (XOM) and Microsoft (MSFT) are still going strong or have even rebounded, but others like General Electric (GE) have had a much worse time. It’s even more amazing if you go back a few decades more and see companies like Sears, Eastman Kodak, and Polaroid on the list.

While this constant change is tricky and challenging, I also find it incredibly exciting as well. Yes, dominance in the market can be fleeting, but that means there are smaller, fast growing disruptors ready to replace the old dinosaurs. My biggest winners so far haven’t been from huge companies that seem to have monopoly on some huge industry. My biggest winners have been the companies pushing forward creative destruction and disrupting those industries or even creating entirely new ones. Everybody thought Walmart (WMT) had an iron grip on retail in the United States until Amazon (AMZN) came along with eCommerce operation with an obsession on customer satisfaction. Nobody could compete with Blockbuster Video until Netflix (NFLX) put them out of business.

This constant churning and disruption and the speed at which it happens has some important implications for investing for me. For starters, it gives me an aversion to investing in those largest companies. Yes, I know Amazon (AMZN) is the largest holding in the Freedom Portfolio and I indirectly own Alibaba (BABA) as well, but that aversion has kept me out of companies like Apple (AAPL) and Facebook (FB) and Microsoft (MSFT) and played a role in me selling my position in Alphabet (GOOG). It’s also why I tend to avoid large established financial institutions. I’m always trying to be on the lookout for how companies can be disrupted both in terms of companies to avoid and for the challengers to potentially invest in.

The enemy to all of this is anchoring. What is “anchoring”? According to Wikipedia, anchoring “is a cognitive bias where an individual relies too heavily on an initial piece of information offered (considered to be the “anchor”) when making decisions”.

There are two main ways that I’ve noticed anchoring affecting my investing. One, is when I invest in a company with a thesis that gradually gets disproven over time without me noticing. Oftentimes this happens because there were a number of parts to the thesis that get knocked off one-by-one and not all at once. For example, maybe I invested in Alphabet because I saw a number of compelling opportunities for them:

Entry into the Chinese market
Smart home devices
Increased hardware sales from the Pixelbook and Pixel phones
Waymo and self-driving cars
Cloud computing
Youtube

Looks like a plethora of potential, right? Fast forward a few months later and how do things look?

Project Dragonfly shut down after internal revolt by employees
Google continues to lag behind Amazon in smart home devices
The Pixelbook might be on its way out and Pixel phones haven’t exactly taken the world by storm
Waymo doesn’t seem much closer to making money
Google continues to lag in the increasingly competitive cloud computing race
Ditto for Youtube

There was no single day where Google dropped a bunch of news that it was killing off Pixelbooks and Project Dragonfly. No company will brag about not being leader in a segment or lagging behind. As a result, it’s easy to just continue holding a position for months or even years without even second-guessing if the original thesis that caused you to buy it in the first place is still intact.

The other way that I’ve notice anchoring hurting my investing is when I get too irrationally hung up on some price per share. Oftentimes this takes the form of either the price I paid or maybe a recent high that the stock has pulled back from. Let’s take Activision Blizzard (ATVI) as an example. Just a year ago it got as high as $80 per share before crashing back down to $43 a share now. Let’s say I bought shares for $50 about two years ago and so am looking at a loss of $7 a share now. Maybe I no longer believe in the company (there has to be some reason the stock has dropped nearly 50%) but I’m a prideful person and just can’t stand taking a loss, so I decide to hang onto it until it gets back to $50 a share so I can break even. Or perhaps I bought for $40 a share and so am still up $3 a share now, but really can’t stop thinking about that $80 price point from just a few months ago and how I should’ve sold then and maybe if I hold on longer it will get back there.

Both of the above are examples of anchoring. There’s nothing magical or special about the $40 and $50 price points that I bought at, yet somehow I’m letting those arbitrary numbers influence if I still want to own the company. Owning a position in a company should be about whether or not you like the company’s prospects for the future. It shouldn’t be about what price you paid for shares or the most recent high.

So what is an investor to do? There’s a mental trick to combat anchoring that I use which I really love and I wish I could remember where I heard it so that I can give credit where its due. The trick is a simple one: Imagine that you wake up tomorrow and somebody has hacked your brokerage account and sold every single one of your positions and everything is now in cash. What would you do with that money?

Obviously this an imperfect and overly simplistic exercise since there would possibly be tax implications and fees associated with everything which might color your decisions. Still, just framing the situation this way can help illuminate any underlying biases that you may not realize that you had. If somebody forced you to sell a particular position, would you buy it back? If not, then that’s a pretty compelling reason to consider going ahead and selling it yourself.

I like to run this exercise a few times a year, and with the weather warming up and spring right around the corner, now seemed like as good a time as any. I did my best to take a dispassionate look at the Freedom Portfolio and decide, if Thanos snapped his fingers and every position was sold tomorrow, which positions I would buy back. Below are the decisions that I made, along with a brief explanation of why.

Sells

Axos Financial (AX) – I originally bought Axos financial back in 2013 when it was called “Bank of Internet”. The original idea was that, as an exclusively online bank that didn’t have to deal with the overhead of brick and mortar locations, they were better positioned to succeed. That lack of brick and mortar overhead allowed them to offer better interest rates on things savings accounts and CDs to gain market share while still allowing them to be more profitable than their legacy competitors.

It turned out to be a good investment, as the stock would go from around $10 when I purchased it all the way up to over $40 in the following 5 years. However, over the past 6 months or so the stock had pulled back some to around $30. While re-evaluating I realized that part of me was still anchoring to that $40 price and I even found myself thinking, “if only it could get back to $40 then I can sell it”. I realized then it was time to sell if the only thing keeping me from selling it now was a psychological attachment to a previous high.

nVidia (NVDA) – It’s been a rough few months for nVidia which saw it lose close to half of its value. While the immediate reasons for the drop should be relatively short term and something the company can recover from, I realized that I now have enough doubt about their edge in the competitive and constantly changing industry that they’re in that it felt like time to sell. My experience with chipmakers like nVidia is that it’s incredibly difficult to build any kind of sustainable competitive advantage or moat and that while you might have the best tech one year, there’s very little preventing an upstart competitor from overtaking you next year. I’m not saying that is going to happen with nVidia this year or next, but I would rather get out before it happens rather than after.

Bladex (BLX) – This one is simple. My original thesis for buying Bladex is that I wanted some exposure to the growing Latin American market and it felt like a good way to get it. Now? I can’t think of a single reason why I would own this instead of MercadoLibre (MELI), so it was an easy call to sell Bladex and use those funds to buy more MercadoLibre.

Baidu (BIDU) – There were three main points behind my original idea to buy Baidu:

The threat of Google (GOOG) entering the Chinese market was being overblown
They owned a large chunk of iQiyi (IQ), which I was pretty excited about
They were making big investments in AI which should pay off in the future

Re-evaluating now, it seems like the concern over the threat of Google has passed, and I’ve become a little more skeptical of exactly how investing in AI is supposed to magically result in increased profit (whenever I think about it, I just imagine the Underpants Gnomes from South Park with a sign saying: “Invest in AI -> ? -> Profit”). I still really like iQiyi, but I’ve gradually been adding to my position in that company directly and there doesn’t seem to be a compelling reason to own the parent anymore.

Tencent (TCEHY) – A few months ago, I sold a part of my Tencent position to buy some Naspers, which is a South African company that owns almost a third of Tencent yet trades at a discount to Tencent’s valuation and offers some interesting diversification since they own some other companies as well (in fact, they just recently spun one of them off). Given that Naspers should provide about the same amount of exposure to Tencent in addition to some extra upside with their other businesses, I decided it made sense to just sell my Tencent position and transfer those funds into more Naspers.

Buys

Baozun (BZUN) – Speaking of the JIB, I continue to like the trio of companies and all three are up since I wrote the article. Baozun was the smallest position of the three and has performed the worst, so I decided to add a little more. There could be some short term turbulence with the trade war and a possible slow down in China, but I still like Baozun over the longer term.

CRISPR (CRSP) and Editas (EDIT) – I’ve long struggled with investing in biotech and pharmaceutical companies because I have a hard time understanding how much of an advantages certain companies have. I’m really tempted by the incredible promise of gene editing, though, and wanted to dip my toe in with Millennium Falcon positions in two of the leading companies in the field. I can’t remember who said it, but there’s a saying that basically says that the moment you buy a stock is when you least understand the underlying company. It may seem counter intuitive but I’ve found it to be true. Buying a financial stake in a company naturally incentivizes me to learn more about the company, so I look forward to just learning more about these companies in the coming months.

MercadoLibre (MELI) – As I mentioned last week in my MercadoLibre write-up, the more that I wrote about how much I liked the various avenues for growth that MercadoLibre has, the more amazed I was that I hadn’t added to my position since the original purchase. I finally decided to remedy that and added a fair amount, bringing the size of my position closer to my conviction in the company. As of today, it is now an Enterprise level position.

Teladoc (TDOC) – This is simply a situation where I started with a small position in a company that looked interesting and now I’m ready to commit a larger portion of my portfolio to it. Teladoc has hit some speed bumps recently, but I still believe the underlying trend towards telemedicine is intact and I’m ready to back up that belief with a larger position.

Naspers (NPSNY) – See Tencent above.

Spotify (SPOT) – Up until about a month ago I had very little interest in investing in Spotify. They just seemed like one more company trying to thrive in the difficult music streaming business. Not only did I not think they had any competitive advantage over their rivals, but I also wondered how they expected to be able to compete with huge tech giants like Apple and Amazon who also have music services.

All of that changed when they went out and bought Gimlet Media and Anchor amid a heavier push into podcasting. Suddenly I understood what their strategy is going forward and I find it to be an intriguing one. If Spotify can get exclusivity for some of the more popular podcasts, then that could be a powerful differentiator which could allow them to draw subscribers from other services or provide the ability to raise prices. The idea of paying for podcasts might sound silly to many, but I’ve come to realize that I probably spend more time listening to podcasts now than I do watching TV and if my favorite podcasts started charging a low monthly fee to listen, it would be something I would give some serious thought to. I have no idea if this new strategy will work out, but I’m intrigued enough to start a small position. A little off topic, but have I mentioned that my friends and I have started a podcast of our own?

So that’s what I do to try to prevent anchoring from sinking my portfolio. Do you have any similar tips and tricks? Thoughts on any of my buys or sells? Hit me up in the comments!

Why Amazon is my largest holding

November 28, 2018 paul.essen Comments 2 comments

It seems like an eternity ago that Amazon (AMZN) was above $2,000 a share and was the second US publicly traded company to hit a $1 trillion market cap. In reality, it was a mere two months ago. Since then, the market has taken a tumble, with Amazon falling particularly hard, losing about a quarter of its value to sit at around $1,600 a share.

During that time, Amazon released its third quarter earnings. There was a lot to like:

Earnings per share was $5.75 versus an estimate of $3.14
Operating income was $3.7 billion versus an estimate of $2.1 billion
Total revenue increased 29% year over year
Amazon Web Services (AWS) sales increased 46% year over year
Their “other” category, which seems to be mainly comprised of their advertising business, increased a whopping 123% year over year

So why did the market react negatively to the news? It largely seemed to be due to weak fourth quarter guidance. Wall street was hoping for $73.79 billion in revenue whereas Amazon guidance was in the range of $66.5 billion to $72.5 billion in revenue: a difference of about 2% for the high end of their range. Call me crazy, but the resulting 10% drop in the stock price seemed like a bit of an overreaction to me. I’m still a huge believer in Amazon over the long term. Some perspective is also in order. Even with the recent huge drop, Amazon is still up around 30% for 2018. I would be seriously considering adding to my position if Amazon weren’t already the largest position in the Freedom Portfolio.

As of the writing of this post, Amazon is a Babylon 5 level holding and is the largest holding in the freedom portfolio. It is also the second best performer to date in the freedom portfolio. I initially purchased my shares of Amazon for $256 a share in April of 2013. Shares are currently trading near $1,600, which is an increase of around 480% and a huge outperformance over the S&P 500 during that time (see the flat-looking blue line below).

Amazon (in green) versus the S&P (in blue)

Amazon is the company that I have the highest conviction in and I believe it has a truly enviable combination of high upside and low risk. Below, I will lay out the reasons I love Amazon as an investment, along with potential areas of concern and conclude with the P.A.U.L. score.

Pros

Leadership

I’m not sure there is a more universally respected businessperson alive than Jeff Bezos. His singular vision has managed to propel Amazon from a tiny online seller of books to a global behemoth with a market cap of $1 trillion (although it has given back a lot of that lately). His obsession over customer satisfaction and his Day 1 philosophy are hugely responsible for the success that Amazon has seen. I can’t imagine somebody I would rather have leading the company that is my largest holding.

E-commerce dominance

When it comes to United States e-commerce sales, Amazon is completely dominant with close to a 50% market share. The next closest competitor doesn’t even have double digits. Even scarier? They’ve been gaining market share. Accounting for 50% of e-commerce sales might make it seem like there’s not much room for growth, but consider that even with that dominance, Amazon still only accounts for 5% of total retail sales in the US. There is still a lot of opportunity for Amazon to grab a larger market share of total retail sales, especially if they start expanding their physical store presence.

AWS – Amazon Web Services

It feels like I’ve been hearing about things “moving to the cloud” for decades. In recent years, it finally seems to be happening, and Amazon is one of the leaders. Amazon Web Services now provides the majority of Amazon’s profit, which allows them to keep their margins small in their e-commerce operations while still investing heavily in new ventures. IBM (IBM) spent $34 billion to acquire Red Hat and one of the major narratives was that it was an attempt to play catch up in cloud computing. That should give you an idea of the opportunity that the cloud represents, and Amazon is one of the leaders.

Prime

While Amazon Prime is beneficial in that it provides consistent recurring revenue for Amazon, the perhaps less obvious benefit is how it helps to lock people into the Amazon ecosystem. There’s plenty of music streaming services, but why choose Apple or Spotify over Amazon Music if you’re already a Prime member? Want a smart home device? Being a Prime member might be a tie-breaker when deciding between competing Google or Apple products.

Streaming Video

While Netflix is the big name in the streaming video space and the clear leader, Amazon is certainly no slouch. While their originals haven’t quite earned the same critical acclaim as Netflix yet, they’re well positioned to continue to ride the wave of cord-cutting and the transition to online video streaming.

eSports

Speaking of online video streaming: One of the big trends that I have been keen on following is eSports, where people watch other people play video games the same way they watch players play football or baseball. A few years ago, Amazon bought Twitch, one of the leading video game streaming sites. While it’s difficult to say how much it might be worth now, there have been some estimates that say it could be worth $20 billion in the very near future. While eSports is still in the early innings in many ways in terms of recognition among the general public, it already has some surprisingly large numbers associated with it in terms of prize money and viewership.

Traditional Sports?

Amazon has bid on the 22 regional sports TV networks that the justice department has forced Disney (DIS) to sell as part of their takeover of Fox assets. With the entire entertainment industry in flux due to cable cutting, video streaming and the entrance of deep-pocketed tech companies, live sports could be something else that gives Amazon an advantage over the traditional media companies going forward. Paired with eSports, this kind of live entertainment could also give Amazon a leg up over Netflix in the future.

Whole Foods

While on the surface it would seem to be an odd pairing, the Whole Foods acquisition opens up a lot of possibilities for Amazon. Americans spend a lot of money on groceries, and if Amazon can develop a better way for people to buy groceries, it gives them another massive opportunity. They’ve already been experimenting with grocery stores without checkout lines. That doesn’t even touch on the opportunity for grocery delivery or a meal prep service like Blue Apron.

Amazon Delivery Services

Speaking of delivery, Amazon has also started working towards their own delivery service. In fact, just today I saw two Amazon Prime delivery vans on the road and a week or so ago I drove by a parking lot lined with dozens of them. It’s not necessarily their biggest opportunity, but it is an important one. Amazon spends billions of dollars on shipping a year. Getting more involved in delivery gives them greater ability to control shipping costs and greater quality control over shipping as well. I’m also hoping it is one step closer to the drone delivery service they teased us with a few years ago.

Connected Home

Everybody probably knows about the Amazon Echo family of products and Alexa, but Amazon hasn’t been content to stop there. Did you know Amazon has an Alexa powered microwave? While some of these ideas might seem ludicrous, and I’m sure many will end up failing, it’s worth reflecting on just how far we’ve come in terms of the connected home. Just a decade ago, this type of voice interaction with digital assistants seemed firmly in the realm of sci-fi, like the computer from Star Trek. Now, it seems a whole lot more feasible. I’m by no means a cutting edge adopter of smart home technologies, but I recently tried out a few smart plugs to go with my Echo Dot at home. Now, instead of having to manually plug in Christmas lights all over the house, I can simply say, “Alexa, turn on Christmas lights”, and all of the lights magically turn on (accompanied by Christmas music if I wish). It may seem like a small thing, but the kid in me still found it pretty magical, and I can’t wait to see what’s next.

Advertising

Can you name the top digital ad sales platforms in the United States? I imagine most of you would guess Google/Alphabet and Facebook. Some of you might even get Microsoft and Verizon. And because I’m asking the question here, I’m sure you’re expecting Amazon to be up there, but would you have expected them to be 3rd? This is a huge opportunity for Amazon because it’s such a high margin business and because they have so much information on customers who are often on their site because they’re ready to buy. That’s invaluable for marketers.

India

China has been largely closed off to Amazon thanks to some strict Chinese government regulations which have favored domestic companies. However, India’s massive population and growing economy presents an opportunity which could be just as big, if not bigger. Amazon seems to recognize this, and has been investing billions of dollars in their operations there. Amazon doesn’t have nearly the dominance in Indian e-commerce as it does in the US, as Amazon and the Walmart backed Flipkart are basically tied for first. However,

Cons

Bezos stepping down

Just as Bezos’ leadership is a big benefit for Amazon, it’s only fair to also count the possibility of him someday leaving as a potential risk as well. Bezos is only 54 years old, which is relatively young (especially compared to 88 year old Warren Buffett), and he has shown no indications that he is thinking of stepping down anytime soon. However, Bill Gates stepped down as CEO of Microsoft at the age of 45, so being young is no guarantee against leaving a business. Bezos also notably has other interests, such as space flight company Blue Origin, the Washington Post, and now also his Day One Fund. I don’t see Bezos leaving Amazon anytime soon, but at the same time, it wouldn’t completely shock me to see him step down to a smaller role in the next 5 years. Will Amazon continue to be as relentlessly innovative when that happens? Hard to imagine it will.

Government intervention

I’m old enough to remember when people were terrified that Microsoft was an all powerful monopoly that was going to dominate the world for forever because they bundled Internet Explorer with Windows. While that might seem silly now, it didn’t stop the government from suing Microsoft and there was a real concern at the time that the government might force Microsoft to break up. There haven’t been many serious rumors about the government taking action against Amazon, but it’s hard to ignore just how intensely the President seems to dislike the world’s wealthiest man. Amazon has also come under attack from the left as well. Amazon’s percentage of total retail sales is probably small enough to keep them safe for now, but it’s a situation worth keeping a wary eye on. Concern over government action might’ve played a role in why Amazon decided to place one of their new locations (hard to call it a headquarters when there’s three of them) so close to Washington DC.

Foreign competition

Amazon is a big deal in the United States, but it’s had more mixed success overseas. As mentioned above, Amazon is in a pitched battle with Wal-Mart (WMT) owned Flipkart. In Latin America, they’re playing catch-up to fellow Freedom Portfolio-er Mercado Libre (MELI). In China, Amazon has virtually no presence at all. Furthermore, there are some pretty big Chinese companies like Alibaba (BABA) and JD.com (JD) which could conceivably compete with Amazon quite effectively outside of their own home markets. Ultimately, the biggest threat to Amazon might not come from domestic competitors, but foreign ones.

P.A.U.L. Score

Protected: 4

As mentioned above, Amazon has a pretty unassailable lead in the e-commerce space which is continuing to grow. Their growth into other areas like video streaming, tablets, and Alexa-enabled devices just continues to grow their ecosystem that people get more and more attached to. It’s difficult to see how anybody disrupts them in those areas anytime soon.

At the same time, Amazon isn’t invincible. Microsoft has made big gains in the cloud computing space and Amazon hasn’t been nearly as dominant overseas. Therefore they get a good, but not perfect score.

Alternatives: 5

You may recall in my explanation of the P.A.U.L. System that I used Amazon as the textbook example of a company that has not only a proven track record of trying to new things, but also a lot of optionality going forward as well. Amazon does so many things, but there’s still so much more it could do. They’re just starting to dip their toe into physical stores or fully automated grocery stores. Maybe in the future they get into meal kits or food delivery. They’ve started working on their own delivery service. Could drone delivery be in the future? Amazon has gotten into movies and music and TV shows, along with streaming eSports, so why not get into video games? The possibilities almost seem endless.

Understandable: 4

Despite being involved in so many different businesses, I find Amazon to be relatively easy to understand because they all largely work on the same basic model of finding ways to make things easier/cheaper/better for the customer and making money that way.

Long Runway: 5

As mentioned above, while Amazon dominates the US e-commerce market, they’re still a small player in terms of total retail sales. As people get more comfortable with ordering stuff online and as Amazon gets more and more efficient with reducing the time from order to doorstep, I have to imagine their market share for total retail sales will rise. The Whole Foods acquisition and expansion of physical stores should only accelerate things.

What’s more impressive than the long runway ahead of them for total retail sales in the US, though, is the sheer number of other runways they have in front of them in other areas. Amazon’s eSports and cloud computing and streaming video offerings should only continue to expand and the opportunities in India and the connected home seem like they are still in their infancy. I can’t think of any other company that has so much opportunity in front of them in so many different areas than Amazon has.

Total Score: 18

An incredible score, considering the max is 20. Truly a score befitting my only Babylon 5 level holding. Amazon has certainly taken it on the chin recently, along with all of the FAANG stocks, but I’m still a big believer. If it wasn’t already my largest holding, I would certainly be thinking about adding to it here. It’s hard for me to imagine a world where, 5 years from now, Amazon isn’t a dominant player in some way.

I like the cut of this JIB

November 12, 2018 paul.essen Comments 6 comments

F.A.N.G.

Have you heard of FANG before? It’s a common acronym for some of the largest technology companies in the United States that have had massive gains over the past few years. The acronym has gotten a little messy thanks to the desire to add Apple and the re-naming of Google as Alphabet, but here are the companies traditionally thought to be a part of the “FANG stocks” :

Facebook (FB)
Amazon (AMZN)
Apple (AAPL)
Netflix (NFLX)
Google/Alphabet (GOOG)

You might recognize a few of those names from the October edition of the Freedom Portfolio. Investors who have held any of the above companies for any length of time over the past decade have to be pretty pleased with the results.

But I don’t want to talk about those companies right now.

B.A.T.

There’s an equivalent acronym for Chinese companies that is a little less commonly know: BAT. Like with the FANG companies, the BAT companies are some of the largest technology companies in China (and the world). Thankfully, the acronym is a little cleaner in this case. The BAT companies are:

Baidu (BIDU)
Alibaba (BABA)
Tencent (TCEHY)

Again, a lot of these companies are in the Freedom Portfolio. For Americans who don’t have much (if any) experience with these foreign companies, it can sometimes be difficult to wrap their heads around what exactly these companies do. For that reason, it has become common to associate the BAT companies with American equivalents as a shorthand. It’s not ideal, as oftentimes there are just as many differences as similarities, but it can be a good starting off point for understanding what these companies do. Here are the common equivalents given to the BAT stocks:

Baidu – Google
Alibaba – Amazon
Tencent – Facebook

It should be repeated that these comparisons are far from perfect. I would argue that in many ways Alibaba is more similar to Ebay (EBAY) than Amazon and Tencent is far more involved in gaming than Facebook is. If you find yourself interested in any of these companies, I would very strongly recommend digging in deeper to learn more and discover how the companies differ from the companies they are often compared to.

But I don’t want to talk (too much) about these companies, either.

J.I.B.

No, I want to talk about a even less commonly known acronym: JIB. I know it’s less commonly used because as far as I can tell, it’s an acronym that I am coining right here, right now, although I’m sure it will be spread like wildfire and be used worldwide in a matter of months. JIB refers to three more Chinese tech companies that I believe have some interesting growth potential:

JD.com (JD)
iQiyi (IQ)
Baozun (BZUN)

Like with the BAT stocks, there are some commonly used equivalents.

JD.com – Amazon
iQiyi – Netflix
Baozun – Shopify (SHOP)

JD.com

Just like with the BAT stocks, I want to stress how imperfect these comparisons are. That should be evident with the JD / Amazon comparison, considering that Alibaba was also listed as “the Amazon of China” above. How can two companies be the Amazon of China considering how dominant Amazon is in e-commerce in the United States? The short answer is that the competitive landscape is simply different. In most ways, JD.com is actually an underdog to Alibaba in China. Alibaba has a larger market cap, has a bigger share of the Chinese e-commerce market, and has more cash on its balance sheet.

So why is JD.com like Amazon? Their business models are very similar. Like I mentioned before, Alibaba is more like an eBay in that it is largely facilitates transactions between two parties instead of directly selling things. Their consumer-to-consumer business is like traditional eBay where the seller and buyer are brought together on the platform, but then the seller is responsible for inventory and order fulfillment. They also have a business-to-consumer business where Alibaba again acts more like a middle-man. JD.com, on the other hand, has invested much more in terms of building out fulfillment centers and a logistics network. This gives it a lot more control over the quality of both the products being sold and the delivery of products which could give it an advantage long term over a company like Alibaba, despite currently being the underdog.

Another similarity/difference worth noting, especially recently, is leadership. Just as Jeff Bezos has played an integral role in the rise of Amazon and continues to be an incredibly important leader, the same can be said of Richard Liu for JD.com. Unlike Jeff Bezos, though, there are some dark clouds hanging over the JD.com founder and CEO. A few months ago he was arrested over a rape allegation. As of the time of this writing, the case is still under investigation. While JD.com is larger than any one person, it would definitely be a blow to the company if he was forced to step down.

iQiyi

To carry on the theme of imperfect comparisons: While iQiyi is called the Netflix of China because of its subscription streaming video service, it isn’t nearly the leader to the same degree as Netflix is in the United States. They do, however, have another interesting connection with Netflix in that they have a licensing agreement with them. It seems like a good win-win scenario for both companies right now: Netflix gets some of their content exposure in China and iQiyi gets some presumably appealing content that other Chinese streaming services can’t offer.

Another way that iQiyi differs from Netflix is that it also has a fairly popular free, ad-supported video service that is more similar to YouTube. That’s a little interesting because iQiyi was recently spun out of Baidu (the aforementioned Google of China) and YouTube is a division of Google.

Lastly, while the Netflix comparison is the more popular one, iQiyi prefers to think of itself as being more similar to Disney (DIS). Why? So far Netflix has focused solely on video content, while iQiyi offers games, novels, and other merchandise which makes it more similar to a company like Disney, which does a great job of finding different ways to monetize their various properties through toys, clothing, amusement parks, etc.

One last point of interest is iQiyi has a partnership with fellow JIB member JD.com. JD.com has a membership program somewhat similar to Amazon Prime and one of the perks that were recently added was a membership to iQiyi’s program. Like the Netflix licensing deal, this seems like a win-win for both companies in that it makes JD.com’s membership more appealing while also giving iQiyi a greater membership base.

Baozun

Baozun might be the hardest of the group to describe what they do because unlike Netflix and Amazon, many people might not have heard of Baozun’s commonly named equivalent: Shopify. Luckily, I wrote something just last week about Shopify and what they do.

As with all of the companies discussed so far, while Baozun is similar to Shopify in many ways, it also has some differences. One of the larger differences is that while Shopify tends to focus on small companies trying to set up an e-commerce solution, Baozun has a lot of larger, more established companies as clients who are trying to get access to the Chinese market. The Motley Fool has a good article that explains some of the similarities and differences.

Baozun has some big names as clients: Nike (NKE), Microsoft (MSFT), and Starbucks (SBUX). Why would these massive companies feel like they need a company like Baozun? Because Baozun can help those non-Chinese companies quickly set up online stores on all of the biggest Chinese e-commerce sites and apps, like fellow JIB-er JD.com, Alibaba’s (BABA) Tmall, and Tencent’s (TCEHY) WeChat. There are a lot of major non-Chinese companies who are scrambling to get access to the Chinese market and its increasingly internet-connected and growing middle-class. Baozun is well position to profit from that trend.

Current Events

I’m pretty excited about the prospects of all of the JIB companies that I mentioned above, and all in the Freedom Portfolio, but I would be remiss if I didn’t mention what has been going on with them lately. Put simply: They’ve been getting hammered. Two of them are down double digit percentages and the third isn’t far behind. There are a bunch of possible reasons behind the drops:

General market volatility over the past month
Concerns about a slowing Chinese economy
Concerns over tariffs and the continuing trade war with the United States
Concerns over increasing Chinese government regulations

All are completely valid concerns and I don’t mean to dismiss them, but if you’re looking at holding these companies for the long term (3+ years), then none of those worry me too much. In fact, I’ve been looking at the recent drops in the JIB companies as a possible opportunity to add to my positions. Trade wars down last forever. Economic slowdowns don’t last forever. The opportunity in front of these companies in terms of a growing middle-class not only in China but elsewhere in Asia is real and is too big for me to ignore, though. I wouldn’t be surprised if the next year or two is tough for these companies (part of the reason why I am holding off on making any moves), but over the long term, I like their chances of being big winners.

In short, I like the cut of their jib.