A little over two years ago, I wrote about three Chinese companies that I was very bullish on. At the time, talk of FANG stocks and BAT stocks were all the rage, so I cheekily dubbed my three companies “the JIB”. Here are how those baskets of stocks have performed since I wrote that article (numbers from December 3rd):
The JIB (up an average of 110%)
JD.com (JD): Up 292%
Baozun (BZUN): Up 22%
iQiyi (IQ): Up 17%
FAANG (up an average of 98%)
Facebook (FB): Up 99%
Apple (AAPL): Up 152%
Amazon (AMZN): Up 95%
Netflix (NFLX): Up 69%
Alphabet (GOOG): Up 76%
BAT (up an average of 64%)
Alibaba (BABA): Up 87%
Baidu (BIDU): Down 20%
Tencent (TCEHY): Up 127%
Not too bad, if I can be permitted to toot my own horn for a moment. I did end up selling my position in iQiyi earlier in the year, though, so my own personal return on the JIB is slightly different than what is laid out above. Still, I’m fairly proud of how the JIB has managed to hold up against the much more highly touted FANG and BAT stocks.
But as you may have noticed, the gains for the JIB were a bit uneven, with both Baozun and iQiyi returning less than 25% while JD.com did the heavy lifting with a nearly 300% return. As mentioned before, I sold iQiyi earlier in the year when it looked like their competition was getting to them and I think it has become time to say goodbye to Baozun as well. The hope with Baozun was that it could be the “Shopify of China” and benefit from riding the same trends that Shopify has. For whatever reason (trade war, bad execution, etc) that just hasn’t quite come to pass. Growth has been okay, but nothing near what other ecommerce companies have seen during COVID, and recently I’ve found myself wanting more and more to redeploy those funds into a new idea.
That new idea is Fiverr (FVRR), and I now have a new Millennium Falcon level position in it. I’ve used the service in the past to find an artist to illustrate my book, Penny Invests, and was pretty impressed by the wide variety of services provided. I believe they are well positioned to ride the trend of entrepreneurship, the gig economy, remote work, and people looking for side hustles.
A few other tiny shifts to the portfolio to report (none of these changes affect what size of a position they are):
Sold a small bit of Tesla (TSLA) – I’m still a huge believer in the company, but the valuation is getting a little ridiculous even for me and even with the addition to the S&P coming up, I feel like this stock has a lot of optimism baked in already. I wanted to take a tiny bit off the table to bolster a few other positions, such as:
Buying a bit more of Zoom (ZM) – Zoom has nearly doubled since I originally bought it earlier in the year, but it is also down almost 30% from recent highs from a few months ago. I’m beginning to see the optionality still ahead of Zoom even after the pandemic is over and the recent pullback seems like a bit of an overreaction to vaccine news. I think Zoom survives just find in a post-pandemic world and still has room to thrive and flourish.
Buying a bit more of Crowdstrike (CRWD) – Crowdstrike recently had a pretty impressive earnings report and it reminded me that I wanted to add a little bit more to my position. Sometimes it is as simple as that.
Buying a bit more of Nano-X (NNOX) – Nano-X recently did a live virtual demonstration of their technology and while I didn’t quite think it was the same slam dunk as many did, I was suitably impressed and think the chances of it being an outright fraud are lower than before. It felt like a safe time to add a bit to my position.
In fact, I’ll bet they’re a bigger deal than you realize.
It’s always tricky comparing the size of different industries, but at this point it feels pretty safe saying that the video game industry is bigger than the movie and music industries combined, and the gap is projected to only increase in the coming years. Major esports events already draw more viewers than the Super Bowl. Read Dead Redemption 2 had a bigger opening weekend of sales than Avengers: Infinity War (although that record was later smashed by Avengers: Endgame). Netflix (NFLX) considers Fortnite to be a bigger competitor than HBO and Activision Blizzard (ATVI) spent more money to acquire the maker of Candy Crush than Disney (DIS) spent to acquire the Star Wars franchise.
So yeah, video games are kinda a big deal.
I’ve loved video games for as long as I can remember. I had an Atari 2600 as a kid, and then later an NES which got an incredible amount of use. In college, the most popular pastime when hanging out with friends was playing the Nintendo 64 and since then it’s been the Xbox 360 and Xbox One. It’s not been just consoles, either. I got hooked on computer games like Warcraft 2, Alpha Centauri, X-Com, Knights of the Old Republic, and many more.
While I don’t play video games nearly as much as an adult now that I have a job and a family, I do still count it as one of my favorite hobbies. I have very fond memories of saving Clementine, surviving a suicide mission, and saving Earth from an alien invasion. I’m thrilled to see video games grow in acceptance and no longer be considered a niche activity that are only done by geeks (something that I proudly consider myself).
However, while the industry would appear to be healthy when looking at things like revenue growth and the increasing popularity of esports, there are some dark clouds hovering over it that has had me concerned about the future of the industry and if it can survive.
Many articles have been written about how incredibly difficult it can be working in the video games industry and how commonplace burnout can be. The increased cost of developing games has led to a push to find new ways to monetize them, such as through lootboxes, downloadable content, micro-transactions, and others. It has gotten to the point where some decry that it feels like incomplete games are being sold, with new maps and functionality added later (for an additional cost).
Additionally, those higher production costs make creating non-sequel / original / new IP games an even riskier proposition than before. And if the game doesn’t easily lend itself to becoming a franchise (like Call of Duty or Madden), then it puts additional pressure on that single game to perform. Bioshock Infinite was an amazing game that I wish there were more of, but it didn’t seem to sell enough copies to offset the high production costs. So despite getting critical acclaim and being by all accounts a hit, the developer had to shut down. Yes, there was some well received DLC, but despite the name, the game didn’t lend itself to new versions coming out every year.
Those same high production costs lead to another problem: Loads of filler content will be added to games so that publishers can claim hundreds of hours of playtime in order to justify the price of the game.
Filler content has become a bigger issue for me in recent years, although it’s hard to tell if that’s just because I’m more sensitive to it due to valuing my free time more, or if it’s because changes in the gaming industry have made it a bigger issue. Either way, I’m not the only one to notice. I don’t agree with everything from this Kotaku article, but I do agree with the idea behind the headline of wishing that more games respected my time, especially these days now that I have so little of it. I prefer concentrated content versus dilution. I love the Dragon Age and Mass Effect games, but it feels like each subsequent iteration gets filled with more and more meaningless fetch quests. In many ways, I respect and enjoy games like Firewatch that have a specific story to tell and wastes no time telling it.
So there are some dark clouds over this otherwise very promising industry. What’s the solution? Could the industry be ripe for disruption?
It certainly seems like it.
Google Stadia launched just this week, largely to negativereviews. For those who don’t know, Stadia is Google’s (GOOG) cloud gaming service which effectively does away with expensive gaming consoles in favor of doing the processing in the cloud and streaming the resulting video back to you. While the technology behind it is neat, and I’m amazed how far internet speeds have come in my lifetime, it also struck me as a solution in search of a problem. Full priced games and monthly subscription cost didn’t seem to offer much savings over buying a console, and performance is generally worse. In fact, given how eagerly Google has been shutting down various services lately, there is also a very real risk of buying a game and not being able to play it if/when they shut the service down. In fact, if I was a betting man, I would take the under on the service still existing 3 years from now.
But that’s just one of many disruptive efforts underway.
Not too long ago, Apple (AAPL) launched their new Apple Arcade service. Google has its own gaming subscription, as does Microsoft (MSFT) with their game pass. Even publishers like EA (EA) are getting into the subscription game with EA Access. In the case of the latter two, those efforts are trying to capitalize on the shift from purchasing physical media from a third party to buying (or renting) digital copies straight from the source. One only has to look at the five year chart of Gamestop (GME), which has lost nearly 90% of its value during that time, to see how powerful that trend has been. But the shift from physical copies to digital copies is part of an even larger shift away from the idea of owning games and instead subscribing to a gaming service.
In other words: the Netflix model.
Netflix helped to accelerate the shift away from movies being something physical that you bought and owned (a DVD or Blu-ray disc) to something more ethereal that people pay a fee to access and once they stop they no longer can watch it. Video games are already part of the way there. Xbox Live Games with Gold kick-started the idea that you pay a monthly fee for a service which will give you access to certain games for free each month. Now, Game Pass seems like the final culmination in Microsoft’s attempt to move to a Netflix model.
So what changes? I honestly think the shift to a subscription model could be good for the industry and for gamers. Businesses often prefer subscription revenue because it turns something that is “lumpy” (ie, the business gets a ton of money when it releases a new game, or movie, or piece of software but makes little to no money between releases) into something that is more consistent and reliable.
For a game developer, getting revenue based on subscriptions instead of big releases might help smooth out a few issues. Maybe it makes it easier for more developers to have the patience of Blizzard and release their games “when it’s done” instead of rushing an unfinished product out the door. Or maybe there’s less of a need to keep going back to “crunch time” to get that new release out to keep the lights on. Perhaps there is less pressure to artificially create a type of subscription revenue by having loot boxes or other in-game purchases. In fact, maybe the subscription services themselves at some point ban (or heavily discourage) in-game purchases outright in an attempt to garner goodwill from the gaming community.
Perhaps more importantly, I wonder if this could help encourage companies to take a chance on games that have passionate, but smaller, target audiences instead of always going for as broad a market as possible. Right now, in order for a game to be a financial success it has to appeal to a broad enough group of people to sell enough copies. But what if there was a way to measure the depth of people’s interest in addition to the breadth?
Imagine a game that appeals to a small, but very passionate fan-base. Perhaps if the game was sold through traditional channels, it would sell 1 million copies, which isn’t quite enough to recoup costs and turn a profit. However, imagine those fans are so passionate that they would sign up for a subscription service just to play that game. It’s not unreasonable at all to think that a company like Microsoft might pay the developer more than a million copies would’ve netted them in order to have exclusive rights to that game and acquire those million subscribers. We’ve seen something similar happen with Netflix where they have revitalized things like comedy specials and brought back cult hits (but not ratings darlings) like Arrested Development. Not every Netflix show has to appeal to everybody, as long as for each subscriber they have a handful of shows that really appeal to them.
Done right, this new era of subscription video game services has the chance to really unleash a bunch of niche games catered to more specific audiences with creative new game-play and original IP. Or, it could all go wrong and lead us to a new hellish gaming dystopia. The truth will no doubt be somewhere in between, but I choose to believe it will lean more towards the former. Time will tell.
It wasn’t too long ago that Twitter (TWTR) was one of my Freedom Portfolio holdings that I thought had the most upside and was most excited about. In fact, it was just a little over 6 months ago where one of my recklessly bold predictions was that Twitter would get to half the market cap of Facebook (FB). My thinking was that the impact of Twitter didn’t match its market cap and that Twitter as a platform was far more useful and important than Facebook or Instagram. I frankly still think that is true. So why is the headline of this piece “Selling Twitter” and not “Doubling Down on Twitter”?
There are two main reasons.
Decreased Ambitions
Part of the reason my enthusiasm for Twitter had been waning for a bit is because they no longer seem to focused on growth and instead seem focused on monetizing the audience they already have. The company seems to be getting increasingly profitable, which is good, and I wouldn’t be shocked if this was a market beater going forward, but there doesn’t seem to be any grand ambitions at Twitter anymore, and they seem content with the user base and core functionality that they have now. There’s nothing necessarily wrong with that, but it’s not the reason why I saw potential in the company. There don’t seem to be any more grand experiments like buying the rights to Thursday Night Football. Instead of being focused on adding more users, they seem more focused on purging ones that they already have. Which brings me to my larger concern…
At War With Itself
Twitter has gotten increasingly involved in the messy area of policing the content on their platform. While that’s likely a good thing in terms of cracking down on toxic and abusive behavior, it does put them in an extremely difficult spot of picking and choosing which speech is acceptable and which isn’t. I think the degree to which Twitter is now deciding which content is acceptable on its platform and which isn’t is opening up a Pandora’s Box that they’ll find incredibly difficult to close. Once you’ve banned a controversial figure, how do you justify letting them back on your platform?
But the real difficult question is: Where do you draw the line? Everybody’s line is different, and now social media companies are trying to draw a single definitive one for everybody. There is no way this ends well and is bound to end up ultimately angering everybody.
For example: Just yesterday YouTube, which is owned by Alphabet (GOOG), managed to get itself in a bunch of trouble over how it handled a conservative comedian named Steven Crowder who a Vox journalist named Carlos Maza has accused of harassing him. I desperately don’t want to delve into politics and therefore don’t want to weigh in on the merits of the charge, but what is important is how the way that YouTube handled things managed to anger both sides. In a 24 hour period, they at first they refused to do anything, since Crowder’s videos didn’t appear to violate any of their terms of service. However, they pretty quickly seemed to bow to the Heckler’s Veto and half-reversed course and temporarily de-monetized his channel. Liberals are incensed that YouTube didn’t go further and ban him altogether, while conservatives are angry that he was punished at all and are calling for leftist comedians who direct vile language at conservatives to be treated similarly. Now, things like “VoxAdpocalypse” are trending across social media.
This is the inevitable future of content regulation on social media that I am worried about. It’s an incredibly easy slippery slope to slide down. If somebody like Crowder should be de-monetized (or eventually banned), then what about people like Sarah Jeong, who had some controversy over anti-white jokes? What about the non-PC jokes of Family Guy and South Park?
Social media companies like Facebook and Twitter live and die based on content and engagement. Some of these recent moves to regulate content is putting these companies on a path to be at war with the content and engagement that they need to survive. That’s not a good place to be, and it is why I, with some reluctance, am no longer a Twitter investor.
Two Freedom Portfolio holdings made news last night and this morning: Twitter (TWTR) and Tesla (TSLA). Here are some quick thoughts on each:
Twitter
Twitter released their Q1 earnings this morning, and the market seems to like what it has seen, as the stock is up around 10% as of the time of this writing. I can understand why, and overall it was a pretty decent report, but I found myself a little disappointed. Why? Because the focus seems to be more on making money rather than user growth. Obviously making money is huge and the ultimate goal of every company, but part of my investment thesis for Twitter was the opportunity to grow its user base. I looked at the hundreds of millions of users that Twitter had compared to the billions that Facebook (FB) had and wondered why Twitter couldn’t get there too. I personally find Twitter to be so much more useful and irreplaceable than Facebook or Instagram. Apparently billions of people disagree with me.
Twitter has moved the goal posts yet again. It’s no longer about Monthly Active Users (MAUs) or Daily Active Users (DAUs), it’s about Monetizable Daily Active Users (mDAUs). Is it a better metric? It could be, but it definitely shows where the focus of the company is right now. There is no incentive to grow the user base unless that user can be monetized. There’s nothing necessarily wrong with that, but it does seem to be a shift in thinking that Twitter is no longer a growth company doing everything it can to grab market share, but instead is working towards becoming a more mature (and profitable) company. It could still be a good investment going forward, but I think it deserves a re-evaluation by me to see if I still want to keep it in the Freedom Portfolio.
One more concern:
We are taking an even more proactive approach to reducing abuse on Twitter and its effects in 2019. Improvements in Q1 emphasized proactive detection of rule violations and physical, or off-platform, safety — including making it easier to report Tweets that share personal information, helping us remove 2.5 times more of this content since launch.
A lot was made in the shareholder letter of how much content that Twitter was taking down in order to help foster a healthier discourse. I’m all for higher quality content and against abusive messaging, but I really hope Twitter is keeping a close eye on whether or not they are removing the right content and not just more content. We’re told that 2.5 times more content is being removed and we’re supposed to trust that that is a good thing. It very well could be, but if incentives aren’t aligned properly and the main metric of success is removing more content and not just the right content, then that’s not a good thing and is one more example of growth being de-emphasized.
And by “right content”, I’m not making any allusions to political content or any judgement on any bias against conservatives that many people think that Twitter has. I will note, however, that I believe that the major social media companies underestimated the quagmire they were stepping into when they decide to more heavily police their content. Twitter and Facebook are private companies who can enforce whatever standards they want and aren’t bound by things like the First Amendment, but once they decided to take a stand on things like fake news and harassment and hate speech, they entered a very murky and uncertain area. One person’s hate speech is another person’s freedom of speech, and almost every decision is bound to anger one side or another. It’s telling that both sides of the political aisle seem to have the social media companies in their sights now. It’s not a good position to be in, and I consider it to be a major liability for Twitter going forward.
Tesla
Tesla held an Autonomy Investor Day yesterday where they released more information about Tesla’s pretty ambitious plans for a self-driving taxi fleet within a year. Part of my long term investment thesis for Tesla was the hope that they could take the lead in self-driving cars due to the amazing amount of data collected from their auto-pilot functionality. In essence, I saw Tesla as running a mass market beta test to iron out the flaws in their system. I thought that could give them the ability to catch up with competitors like Alphabet’s (GOOG) Waymo which might be ahead.
None of that thinking has changed after last night. The biggest news coming out of that event seems to be that Elon Musk has claimed that this could all happen as soon as next year. That seems wildly optimistic, and something that isn’t news is that Elon Musk tends to be wildly optimistic. The market seems similarly unimpressed, as Tesla is down a bit as of this writing. It’s been a bit of a trend in 2019, as Tesla is down around 16% year to date.
I’m generally a fan of Elon Musk, and I’m a fan (and shareholder) of Tesla. However, I worry sometimes that Musk (and by extension Tesla) are too concerned about “burning the shorts” and focused on short term share price instead of the long term health of the company. Pretty much everybody knows Tesla won’t have fully automated robo-taxis in a year, so why throw out that goal? At this point, I really do think it would be in the best interests of Musk and Tesla for Musk to step down as Chief Executive Officer and instead become something like a Chief Evangelical Officer. That way Tesla can have a less controversial leader who can set more realistic goals and make the right decisions for the company both long and short term while still benefiting from the aura and optimism of Elon Musk.
Plus, it would give Musk more time to spend on SpaceX… or maybe even get some sleep.
Recently, while talking about anchoring, I mentioned the government attempt to break up Microsoft (MSFT) back in 2001 and how it looks silly now in retrospect to think that bundling Internet Explorer with Windows would give the company too dominant of a monopoly.
Well, breaking up “big tech” is back in the news these days thanks to democratic presidential candidate Elizabeth Warren’s proposal entitled “Here’s how we can break up Big Tech“. She is by far not the only candidate to have proposed breaking up larger tech companies or increasing regulations on them.
The US government isn’t the only regulator to worry about. In recent years, the EU has levied a few pretty hefty fines against Alphabet (GOOG) and Apple (AAPL) and rumor has it they have their eyes on Amazon (AMZN) and Facebook (FB) as well. Additionally, India has begun putting in place regulations which effectively handicapped foreign companies like Amazon from doing business in the country.
This isn’t a political blog, so there’s no need for me to go into my thoughts on how wise these actions are. However, government regulation and threats to break up companies is a very clear factor to consider when investing as it can quickly change the narrative around an investing thesis. I mentioned previously that for the most part I tend to avoid investing in some of the larger companies (Amazon being the glaring exception) and this is among the many reasons why. Success attracts attention from the government and that attention is rarely favorable.
One of the “Cons” mentioned when I wrote about “Why Amazon is my Largest Holding” was “government intervention” and this is precisely the reason why. If two years from now we have a President Warren and there is real talk about lawsuits to split Amazon Web Services off from Amazon or to ban them from running advertising then that is a very large blow to the growth story for the company.
It’s far too early to anticipate what will happen in an election so far away, but the situation does bear monitoring. I’m still confidently holding my Babylon 5 level position in Amazon, but for the first time in a long time I can see a scenario where I might want to trim that position a few years down the line.
How to prevent anchoring from sinking your portfolio
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:
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?
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!
I wanted to do something a little unusual and talk about a company that isn’t in the Freedom Portfolio. The Trade Desk (TTD) is a company that I first heard about around a year ago while working at The Motley Fool. I knew some people there were pretty interested in the company at the time, but I personally couldn’t quite understand what competitive advantage they had so I never purchased any shares. As you can see below, that turned out to be a mistake.
The Trade Desk in green versus the S&P 500 in blue
The Trade Desk has nearly quadrupled over the past year, which is obviously an incredible run. It has also had a number of days where the stock price has jumped double digit percentages. Each time that’s happened, I’ve kicked myself for not having bought shares the last time it had a big jump.
It’s incredibly easy to have FOMO, fear of missing out, when investing in individual companies. In investing, unlike with Pokémon, you can’t catch ’em all. The Trade Desk isn’t at all the only big winner that I’ve missed out on, and it will by no means be the last. This may seem obvious, but I think it’s important to remember. Warren Buffett didn’t invest in Alphabet (GOOG) or Amazon (AMZN). Peter Lynch missed out on Starbucks (SBUX) and Netflix (NFLX). Some of the greatest investors of our time missed out on some of the best investments of our time.
Individual investors don’t have to be perfect. They don’t even have to be close to perfect. I try not to obsess over the ones that got away or, worse yet, chase after investments that are outside of my comfort zone. I missed out on The Trade Desk, and maybe I’ll never have an investment have such stunning performance over such a short period of time. That doesn’t deter me at all, and I hope it doesn’t deter you. I don’t believe I have to be perfect to beat the market… just better than average.
It’s hard to think of any other way of describing the start to the Freedom Portfolio. It’s also hard to think of a better way of describing the performance of the stock market over the past month. As of the time of this writing, the all-time high for the S&P 500 was September 20th, 2018. That was about a week and a half before the official start of me tracking the performance of the Freedom Portfolio. I couldn’t have picked a worse starting time if I tried.
The S&P 500 opened at 2926.29 on October 1st and closed at 2506.85 on December 31st. That’s a return of -14.3% over the quarter, which is a pretty extreme downturn. During that same time, the Freedom Portfolio is down 22%, which is obviously even worse. Here is a breakdown of the performance by position:
Ticker
October 2018
January 2019
Percent Change
TSLA
305.77
332.8
8.84%
TWTR
28.51
28.74
0.81%
TCEHY
41.04
39.47
-3.83%
OAK
41.54
39.75
-4.31%
DIS
117.28
109.65
-6.51%
KSHB
5.965
5.37
-9.97%
MKL
1195.79
1038.05
-13.19%
GOOG
1199.89
1035.61
-13.69%
MELI
343.84
292.85
-14.83%
AABA
68.54
57.94
-15.47%
ISRG
575.15
478.92
-16.73%
SHOP
166.44
138.45
-16.82%
BLX
21.02
17.3
-17.70%
ILMN
369.15
299.93
-18.75%
JD
26.03
20.93
-19.59%
RDFN
18.56
14.4
-22.41%
AMZN
2021.99
1501.97
-25.72%
AX
34.89
25.18
-27.83%
NFLX
375.85
267.66
-28.79%
BIDU
230.81
158.6
-31.29%
NVTA
16.75
11.06
-33.97%
NVCR
52.94
33.48
-36.76%
BZUN
49.3
29.21
-40.75%
TDOC
86.78
49.57
-42.88%
SQ
100.8
56.09
-44.36%
ATVI
84.18
46.57
-44.68%
IQ
27
14.87
-44.93%
NVDA
284.16
133.5
-53.02%
I would be lying if I said that I wasn’t disappointed to be starting off this way. Obviously I would have preferred to have been up versus the market, but at the same time I am absolutely not worried at all. I have a 20+ year investing time horizon in front of me before retirement. Measuring the Freedom Portfolio’s performance after one quarter would be like judging an NBA game after 30 seconds of play or a baseball team two games into the season.
In fact, not only am I not worried, but a part of me is glad to use this opportunity as a teaching opportunity. While it has been hard to tell for the past 10 years, the stock market is risky. It doesn’t always go up. Sometimes it goes down, and sometimes it goes down a lot and goes down fast. Taking on that risk doesn’t just mean getting higher returns, it also means accepting the fact that sometimes you will get negative returns, and that can be painful. Nobody likes to see their money disappear into thin air, no matter how much they accept that it’s the trade-off for higher returns.
Measuring the Freedom Portfolio’s performance after one quarter would be like judging an NBA game after 30 seconds of play or a baseball team two games into the season.
Okay, so losing money might be expected, but how does that excuse the Freedom Portfolio not only losing money but also losing to the market? Doesn’t this prove I would’ve been better off with index funds? Not at all. I believe that the same reason why stocks outperform other investments over the long term (risk vs reward) is the same reason the Freedom Portfolio will ultimately outperform the market. Yes, stocks under-perform during down periods, but they over-perform during up periods, and thankfully those up periods outnumber the down ones. I believe the case will be the same with the Freedom Portfolio. When the market is down, the Freedom Portfolio will do even worse, but my hope and expectation is that when the market is up, the Freedom Portfolio will do better, and over the long run those up periods will more than make up for the down ones.
In fact, I even predicted this a few months ago:
Furthermore, I entirely suspect that in a down year, I would see my individual companies drop more than the market by virtue of the type of companies I tend to favor. I fully expect that there will be years where I lose to the market, sometimes badly. The hope is that over the long term, those years are more than made up for by the up years.
So while this start is certainly disappointing, I can’t say it’s entirely surprising. We were in the midst of the longest bull market in US history, and while I still don’t believe in trying to time the market, it does seem safe to say that we were overdue for a downturn. My confidence is completely unshaken and it won’t be shaken even if there is another quarter or two where the Freedom Portfolio under-performs. Risk goes both ways, and times like these are the price we pay for out-performance in the good times.
Notable performers
Worst performers
nVidia (NVDA): Remember the cryptocurrency craze around 12 months ago when everybody was trying to work “blockchain” into their business model and people were losing their mind over things like bitcoin and ethereum and ripple? Well, prices eventually fell back down to Earth and not too many people are talking about cryptocurrencies anymore. So it probably wouldn’t have been great to have invested in a company that was in any way related to cryptocurrency, huh? Well, unfortunately, nVidia got caught up in the cryptocurrency craze. How? Because it turns out that the GPUs that they are so good at making are great to use for “mining” cryptocurrencies. So while the craze was building, their product was flying off the shelves faster than they could restock them. Once prices crashed and it no longer was profitable to mine for cryptocurrencies (and yes, I realize I’ve used that word a lot and I am looking forward to not having to type it again for a while), demand dried up in a hurry, which caused a giant inventory headache for nVidia as they now had a bunch of GPUs that they couldn’t sell. That’s why their market cap has been cut in half (and then some) over just this past quarter.
I actually got pretty lucky with nVidia in that I had sold roughly half of my position earlier in 2018 (before the formation of the Freedom Portfolio) because I was concerned about what the collapse in cryptocurrency prices would do for demand for their chips. Even I didn’t see a 50%+ drop happening, though (otherwise I would’ve sold my entire position). I still think nVidia is a compelling company, though, and they very clearly still have a lot of growth opportunities ahead of them in that have nothing to do with cryptocurrencies. I’m not necessarily interested in buying here, as I want to see evidence that they’re working through their inventory problem first, but it’ll be on my watch-list for potentially adding to later in 2019.
Square (SQ): One thing that I think the world needs more of is for people to be willing to say, “I don’t know” instead of wildly speculating on things. I’ll go ahead and start: I don’t know why Square is down so much in the past few months other than to point out this interesting fact: Despite being down 44% in the part quarter alone, Square is still up roughly 50% for the year. The best explanation that I can come up with is that the stock had gone up too much and gotten too detached from the business fundamentals, and so when a downturn came it also got hit the hardest. As near as I can tell there are no meaningful changes to the underlying business, so I’m excited to see what Square does when the market turns around again.
iQiyi (IQ): Another one where it is a little hard to separate changes to the business from general market craziness going on around it. iQiyi has had quite a year. It started off with a disappointing IPO where it ended up down around 13% when most IPOs end up with a strong first day. Within the next three months, though, it would go on to nearly triple from its lows. Since then, it’s been a long, slow decline basically back to where it was shortly after the IPO. I suspect the craziness with the US/China trade war and general unease over the health of the Chinese economy might be having a stronger effect on iQiyi’s stock price than any fundamental changes in the business. This is another one where I am excited to see where it goes when things calm down some.
Amazon (AMZN): This might be a surprising pick for being mentioned among the worst performers. Why pick on Amazon (down 25%) when there are bigger losers like Activision Blizzard (ATVI) or Teladoc (TDOC)? Simple: Because as the only Babylon 5 level position in the Freedom Portfolio, Amazon has an outsized impact on my performance. Amazon alone accounted for 20% of the losses of the Freedom Portfolio this past quarter, or more than twice the amount that nVidia accounted for. I hate to sound like a broken (ignorant) record, but I’m a bit at a loss as to why Amazon lost a quarter of its value over the past few months (other than some strange sense of literal symmetry of losing a quarter over a quarter). If it wasn’t already such a large position in the Freedom Portfolio, I would absolutely be looking at adding more. As it is, I’m looking forward to Amazon leading the charge when market conditions do improve.
Best performers
Tesla (TSLA): What a wild ride for Tesla the past few months have been. While they did have an awesome third quarter where they were surprisingly profitable, Tesla’s relatively good performance over the past quarter is honestly more due to lucky short term timing. At the start of the quarter Tesla was suffering from a lot of negativity around Elon Musk’s notorious “Funding Secured” tweet and potential SEC actions as a result. While the stock has been all over the place, at the end of the year it ultimately ended up virtually unchanged from where it was at the beginning.
Also, while I am still a big believer in Tesla over the long term, I worry that 2019 could be a tough year for them. Federal tax incentives to buy electronic vehicles get reduced in 2019 and Tesla made a big push to pull forward as much demand as possible before the end of 2018. They no longer have a massive backlog of demand to fulfill and international expansion could be complicated by the trade war. I wouldn’t be surprised to see a short term struggle for Tesla in 2019 similar to what nVidia went through in terms of dealing with the cryptocurrency bubble.
Twitter (TWTR): Just barely squeaking in with a positive return, 2018 was a weird year for Twitter. Halfway through the year everything seemed to be going great and sentiment finally seemed to be turning around. Then, Twitter seemed to get unfairly lumped in with Facebook and seemed to get punished in unison. I’m still pretty bullish on Twitter’s future, although I am starting to worry about the daunting task in front of them in terms of balancing free speech while also curbing harassment and making twitter a less toxic environment. I know it’s an incredibly difficult task, but management seems to have made some missteps so far which makes certain groups of people feel like they are being censored and that Twitter is taking sides. It’s a potential stumbling block to keep an eye out for.
Disney (DIS): Disney’s 6% loss might not look all that great, even in comparison to the S&P 500, but I think Disney is set up for a big 2019. Much of the past year has been spent preparing for a big transition to video streaming and also dealing with the acquisition of Fox. While there is still work to be done, I’m hopeful we’ll start seeing the fruits of some of those labors in the coming quarters. I’m expecting some big things from Disney in 2019.
Changes in the portfolio
I consider myself a long term, buy-and-hold investor, but that doesn’t mean I’ll never make any changes to the Freedom Portfolio. This quarter had more turnover than I expected due to a lot higher volatility than I expected. In the future, I hope to have fewer buys and sells to report on.
Sells
Alphabet (GOOG) – Sold entire position: There have been a lot of negative headlines around Google the past year or so. It started with James Damore’s memo and the resulting controversy over if Google has a problem with diversity, both ideological and otherwise. Then there has been a lot of scrutiny (both internal and external) about the secretive Dragonfly project and how Google might be considering trying to re-enter the Chinese market with a censored search engine. Google elusiveness over addressing whether or not it was planning to re-enter China along with their strange decision to de-emphasize their “Don’t be Evil” motto certainly did little to allay fears. Next came accusations that Google hasn’t always handled accusations of sexual misconduct in the best way. All of this happened with the backdrop of co-founder Larry Page’s strange absence.
None of these issues alone would’ve been hugely concerning, but taken together it’s certainly worrisome. Perhaps even worse, though, has been the response to them. I like to invest in companies which I believe have strong management, and I’ve been underwhelmed by Sundar Pichai’s handling of most of these incidents.
Lastly, and perhaps most importantly, is that I just don’t know if Google is quite the revolutionary disruptor that it once was. They’re playing catch-up in the fields of cloud computing and home voice assistants. Google Glass was a giant flop and nothing earth shattering has seem to come of any of their moonshots yet. Considering its head start, YouTube feels like it should be a bigger player along with Netflix and Hulu and Amazon Prime. Waymo might still be a game-changer, but it seems like rivals like Tesla and Uber are quickly catching up.
Oaktree Capital (OAK) – Sold entire position: This one should have a bit of an asterisk next to it. Why? Because while I did sell all of my shares of Oaktree Capital in the Freedom Portfolio, I ended up buying some outside of the Freedom Portfolio as part of my emergency fund. You might recall me writing about emergency funds a few weeks ago. The resulting discussion got me to thinking about the idea of mixing some stocks into my emergency fund and Oaktree’s dividend yield of around 7% made it look like an enticing stock to experiment with. So while Oaktree is out of the Freedom Portfolio, I do still hold some shares.
Twitter (TWTR) – Sold small part of position: The sell was motivated by the fact that there were other things I wanted to buy and I had no cash available. Twitter was chosen for two reasons: (1) It had held up better than most during the recent volatility and (2) the concerns listed above about the balancing act between free speech and reducing harassment. My confidence in Twitter took a tiny hit the past few months and this seemed like a good way of representing that.
Tencent Holdings (TCEHY) – Sold some: Like Oaktree, this one should also come with an asterisk. Why? Because while I sold half of my Tencent holdings in the past quarter, I did it basically to keep my exposure to Tencent even while I bought…
Buys
Naspers (NPSNY) – Started a position: this. The following description of my trades gets a little into the weeds, so if you want the TLDR explanation, just know that this isn’t an indictment of Tencent at all and my exposure to Tencent should ultimately stay roughly the same.
The longer story is that Naspers is a South African company that has made a number of investments in various internet and media companies. Back in 2001 it made what is considered to be one of the most successful venture capital deals of all time by investing $32 million in Tencent, which was then a startup. That investment has now ballooned to be worth over $100 billion. Currently, Naspers owns about 31% of Tencent stock. Interestingly, even though Naspers owns more than simply their stake in Tencent, their own market cap is around $85 billion which is significantly less than just their Tencent stake alone.
This isn’t a completely crazy situation (another Freedom Portfolio holding: Altaba, trades at a similar discount to its stake in Alibaba) and there are some good reasons why that discount exists that involve factoring in taxes that might need to be paid if and when the companies liquidate their positions. There is certainly no guarantee at all that the gap between Naspers’ market cap and the value of their Tencent holdings will ever narrow. However, I liked the idea of taking a small chance on Naspers both to see if the gap does narrow, and to see if any of their other investments takes off in a similar fashion. They caught lightning in a bottle once with Tencent. Maybe they can do it again?
2u (TWOU) – Started a position: I’ve long believed that we’re in some sort of bubble in terms of higher education costs and I’ve been wondering if there is a way to profit from the inevitable bursting of the bubble. I’m still looking, but in the meantime, I’ve had my eye on companies trying to disrupt the education market. 2u is a company that had been on my radar for a bit now, but it popped back up when I heard it mentioned on a recent episode of the Rule Breaker Investing podcast. I was amazed to see how far it had fallen (even before the recent market drop) without any clear reason why, so I decided to dip my toe in and start a small position.
Uxin (UXIN) – Started a small position: I believe I first heard about this recent Chinese IPO on the Motley Fool’s Market Foolery podcast. I don’t want to go too deep into Uxin right now, so let me leave you with 2 important things to know about it: (1) It is the leading online used car platform in China and (2) it has been as low as under $3 a share and as high as over $8 a share in the past month alone. I bought my position two weeks ago and it is already down over 40%. This is an incredibly volatile stock right now and not for the faint of heart.
Square (SQ) – Added to my position: As I mentioned earlier, I can’t figure out any good reason why Square has plummeted so much during this downturn. I’m still a big believer in the long term prospects of the business and saw an opportunity to add some shares on sale so I took the opportunity.
iQiyi (IQ) – Added to my position: Pretty much cut and paste from above. I like the cut of iQiyi’s jib, and it’s inexplicable to me how this could’ve been run up to $45 and is now a third of that.
Teladoc (TDOC) – Added to my position: Teladoc was down over 40% this quarter, and unlike some positions down that big, there was a compelling reason why: their CFO resigned after some misconduct allegations. While it’s obviously not ideal and not a good look, I do think the business fundamentals remain unchanged and so I added some to my position.
THE FREEDOM PORTFOLIO – JANUARY 2019
So how does the Freedom Portfolio look now? Not too dissimilar, although there is a new Enterprise level position (hello Disney!). Need a reminder of what these terms mean? Check out: Defining my Terms.
Ticker
Company Name
Allocation
Performance*
vs S&P*
AMZN
Amazon
Babylon 5
300.84%
246.14%
NFLX
Netflix
Enterprise
443.28%
396.47%
SHOP
Shopify
Enterprise
209.96%
195.14%
DIS
Walt Disney
Enterprise
77.15%
-1.50%
TSLA
Tesla Motors
Serenity
53.76%
30.03%
MELI
MercadoLibre
Serenity
119.80%
92.46%
SQ
Square
Serenity
-11.62%
-3.23%
AX
Axos Financial
Serenity
148.98%
80.17%
ILMN
Illumina
Serenity
121.39%
96.05%
ATVI
Activision Blizzard
Serenity
21.39%
-5.95%
RDFN
Redfin
Serenity
-25.05%
-15.71%
TWTR
Twitter
Serenity
26.99%
-3.12%
JD
JD.com
Serenity
-21.44%
-8.01%
ISRG
Intuitive Surgical
Serenity
-11.55%
1.18%
AABA
Altaba
Serenity
-14.09%
-0.29%
IQ
iQiyi
Serenity
-29.97%
-22.34%
MKL
Markel
Serenity
-11.32%
2.49%
TWOU
2U
Serenity
-0.54%
7.62%
BIDU
Baidu
M. Falcon
-27.16%
-13.36%
TDOC
Teladoc
M. Falcon
-7.06%
-0.91%
NVDA
Nvidia
M. Falcon
35.87%
25.77%
BZUN
Baozun
M. Falcon
-39.24%
-25.82%
NPSNY
Naspers
M. Falcon
-1.26%
-2.91%
BLX
Bladex
M. Falcon
-33.72%
-27.60%
NVTA
Invitae
M. Falcon
-33.87%
-20.27%
KSHB
KushCo
M. Falcon
27.86%
39.41%
NVCR
NovoCure
M. Falcon
-25.64%
-12.61%
UXIN
Uxin
M. Falcon
-43.29%
-41.81%
TCEHY
Tencent
M. Falcon
-2.21%
12.11%
*: Approximations. As of 1/1/2019
That’s all for now. Looking forward to checking back in a few months down the line. Thanks for following me on this journey.
The year is coming to an end. For many people that means it’s time to come up with new year’s resolutions. Some might be thinking of tax loss harvesting, using up the remainder of their FSA balance, or maxing out an IRA contribution. Those are all very noble endeavors. I’m looking forward to (and simultaneously dreading) the first quarterly check-in for the Freedom Portfolio. One other thing I am looking forward to? Starting the first annual Paul vs the Market Fantasy Investing season.
What is fantasy investing?
I have some friends who are interested in investing. Some are hardcore advocates of low-fee passive index funds who don’t believe that people can beat the market by investing in individual companies. Others are a little more open to the idea and have dipped their toes into some individual stocks. Still others are me, who has half their retirement funds in individual stocks and created a whole website based on the premise that he can beat the market.
Regardless of where we stand on individual stocks, we all occasionally talk about various aspects of investing, from what percentage of our income we try to save to Roth vs Traditional IRAs to what individual companies we’re invested in.
I enjoy investing. I enjoy games. I’ve played a bunch of “fantasy” sports games like fantasy football, basketball, baseball. I’ve even played more esoteric games like fantasy movie league. I had always thought that investing lends itself well to a fantasy game. The numbers are already there in abundance. The scoring is straightforward and translates well to real life. Most importantly of all? The studying and skills developed playing a fantasy investing game might actually be extremely useful in real life.
So around two years ago, I came up with the idea of a game to play with my friends. At the time, I called it the “stock market challenge”, but the basic idea was to make a “fantasy” version of investing where people draft stocks and see how they perform over the course of a year. So far we’ve only had one contest finish, while two more are in progress. I’ve really enjoyed it so far, and one of the best parts about it is how little time it takes. Because the focus is on long-term investing versus day-trading, there are no daily or even weekly line-ups to set. You basically draft your portfolio of stocks in the beginning and don’t have to do anything else (in fact, you really can’t do anything else) until the contest ends a year later.
Rules and Scoring
The rules are simple. Each player picks 5 tickers that they think will outperform the market over the next year. Each ticker must be different and each is weighted equally. There is no need to stress over how many shares to buy of each company.
Scoring is based on the combined return of the 5 positions in a player’s portfolio. What does that mean? Assume the example portfolio below:
Company
Return
Stock A
+30%
Stock B
+5%
Stock C
-20%
Stock D
-10%
Stock E
+15%
Then the score for this portfolio simply involves adding the returns together. In this case: 30+5-20-10+15 = 20. Dividends can be counted separately and added in if necessary, although none of the games I’ve played so far have been close enough to where dividends made a difference.
Other than that, there really aren’t any additional rules. The spirit of the game is to not pick penny stocks, leveraged ETFs, or different classes of the same stock (ie, GOOG and GOOGL), but there are no specific rules against it. When buyouts occur, the position is typically closed at the buyout price. We’ve been fortunate to not have to deal with any splits yet. Among my friends so far it’s been competitive, but also cooperative. We’re trying to win while also discover what other companies our friends are bullish on and why. The hope, at least for me, is that we’re all winners no matter what the final score is because we all become better investors.
The hope, at least for me, is that we’re all winners no matter what the final score is because we all become better investors.
As mentioned above, the competitions generally run for a year, although I enjoy checking in occasionally past the end date to see how things are going and to see if I am catching up to the winner.
This year’s contest
Previous competitions have been small affairs between a handful of friends and I, but I’m interested in formalizing it and opening it up a bit for the new year. For the 2019 season, I want to track things on the PvtM site, with quarterly check-ins on how people are performing. The competition will run from January 1st, 2019 to December 31st, 2019. Because the market is closed on New Year’s day, the first day of scoring will be January 2nd and the starting price for each ticker will be set by the price at market open on that day. The final price will be set at market close on December 31st.
Interested in playing? Great! Please fill out the form below. All entries must be received before January 1st. You don’t have to use your real name, any alias or unique identifier will do. If your stock isn’t traded on the major US exchanges, please provide additional information so I can find it and make sure I have the right one. As mentioned above, the spirit of the game isn’t to pick penny stocks or leveraged funds, so please keep that in mind. Lastly, please place something in the comments field to indicate to me that you are a real human being and not spam, especially if you’re going to be using an alias that I do not recognize. If you think there’s any chance I will mistake your entry for spam, you could include an email address there for me to double check on. Also, the plan is to make each portfolio (along with the stocks chosen) public once the contest starts, so if for whatever reason you don’t want it public, please let me know in the comments section. Entries are due in by midnight on December 31st so I can set things up on January 1st. Thanks! I’m excited about this and hope we get more entries than my “find the marijuana references” competition.
*UPDATE* Apparently the form wasn’t working properly, so please either use the comments section below to list your tickers or email your submissions to: paulvsthemarket@gmail.com. If you previously submitted, please submit again. Sorry for the inconvenience.
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,
CONNNNNNNNNNS!!!!!!
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.
