Paul Vs The Market

In my July 2020 quarterly recap, I had written: “This might be the best investing quarter that I will ever have.”

Well, the first quarter of 2022 is likely the worse investing quarter than I have had (and hopefully ever will have).

On the heels of a tough 2021 which initially saw my portfolio soar to incredible all time highs (only to eventually give all of it and more back), the first quarter of this year was absolutely brutal. At one point my portfolio was down 50% for the quarter alone and I was getting close to having my total returns since inception start to lose to the market after being up over 170 percentage points around a year earlier. Here’s the visual representation:

As you can see, my portfolio recovered a bit before the end of the quarter, but it’s still been quite the fall from grace.

I know I’m going to sound like a broken record, but my confidence in my investing style and my ability to beat the market remains unshaken. I have been investing for nearly 20 years and lived through many bear markets and recessions and have seen long term results despite short term setbacks.

At the same time, I strongly believe that it is important to always be learning and growing and getting better and it would be the height of arrogance to look at the chart above and conclude that there is nothing to be learned from such a change in fortunes.

The obvious question to ask is: Why couldn’t I have seen the last year plus of under-performance coming for my portfolio? Many of the stocks in my portfolio had appreciated tremendously over the past few years, often times far outpacing the actual growth of the underlying companies (even though that growth was often also very impressive). Valuations had gotten absolutely insane and it was clear that COVID had pulled a lot of growth forward for many companies. Even if remote work was here to stay, there was no way Zoom was going to keep growing like it had in 2020. At the same time, it was clear that a combination of stimulus checks, easy access to low and no fee trading, and abundant free time by people who might otherwise be gambling on sports or actually be working had caused some pretty crazy activity in the stock market (Gamestop, anybody?).

Simply put, stocks don’t always go up, and they most certainly don’t just keep doubling and tripling year after year. I knew there was bound to be choppiness in my portfolio in the near future. Did I know it would be this extreme? No. Did I know it would happen this fast or all at once? No. Most importantly: Did I have any idea when this pullback was going to happen? Absolutely not.

One of the clearest lessons I have learned in the many years I have been investing is that I simply have no ability to time the market and any attempt to do so is only likely to hurt my returns. When I first started out investing I passed on Google (GOOG) because I thought it had run up too much and was too expensive and wanted to wait for it to get cheaper. That caused me to miss out on a 20 bagger plus. I sold Netflix (NFLX) way too early because I thought it had run up too much too fast and wanted to lock in some gains before there was a pullback. That ended up being a $1 million+ mistake. I’m still making the same mistake even now as I have sold shares of Tesla (TSLA) six times over the past year and a half and only one of those sales was for a price higher than it sits at now (most were significantly lower).

In retrospect, do I wish I had sold a bunch of my high-fliers which have dropped 50, 60, 70 percent and more over the past few months to a year? Of course. However, I also realize that there was no way to tell exactly when those drops were going to occur. Many of my biggest winners, the same stocks that have been cut in half, have looked incredibly overpriced for months or even years. If I were to sell whenever I suspected an investment was overvalued and due for a big pullback, I would’ve sold most of these big winners way too early and missed out on big gains… and I still might not have accurately pegged the best time to sell.

So as unbelievable as it may sound, I don’t necessarily think the right takeaway from the past few months is: “Try to time the market better”. I’ve been investing for long enough to know that I just don’t have the ability to reliably do that and any attempts to try is likely to just make my returns worse. I didn’t see the beginning of the great recession coming, and there were multiple times I thought it was ending and we had bottomed and I was wrong most of those times. Likewise with this first quarter of 2022. On at least three different occasions I thought the bottom might be in and I’ve been proven wrong each time so far.

But there must be something I feel like I can learn from this pretty dramatic pullback. Yes, I believe there is. While the market, and my portfolio, were soaring to new highs, I’m pretty sure I started to relax my standards in terms of what companies to invest in. Instead of staying close to the ~20 positions that I wanted to keep my portfolio to, it started getting closer to 30. I started to invest more in companies that I knew less about or ones which seemed to have more red flags (or at least yellow flags). I had more new investments based more on “somebody else likes it” rather than “I have developed my own conviction in this company based on my own research”.

And while plenty of my high conviction investments are down an incredible amount from their recent highs, those lower conviction picks were often down even more. What is doubly damning is that, because I had lower conviction in them, I’ve sold those positions so they won’t even have a chance to recover. Why is that important? Because many of those previously mentioned high conviction picks, while down over the short term, are still beating the market over the long term. Would that have happened with these lower conviction picks? Maybe, but I likely won’t be around to find out.

I’ve been trying to remedy this over the past few months by trimming those lower conviction positions in order to add to high conviction ones. The big question is: will I be able to stick to this when the market turns around? Time will tell, but maybe it would be helpful if I printed up this quarterly recap to keep on my desk the next time I am justifying adding a 29th position to the Freedom Portfolio.

As is the custom, here’s the damage from last quarter:

Ticker	Quarterly Change
TMDX	32%
CRWD	14%
SWAV	8%
NVCR	3%
NU	-6%
AXON	-10%
TSLA	-10%
MELI	-11%
DIS	-13%
DMTK	-16%
SQ	-17%
TTD	-23%
TDOC	-24%
CELH	-27%
FVRR	-31%
SNOW	-31%
NNOX	-32%
ZM	-36%
ETSY	-41%
ROKU	-46%
SE	-46%
SHOP	-50%
RDFN	-54%
FUBO	-59%

Typically at this point, I would discuss some of the best and worst performers of the previous quarter. However, in line with the point above, I thought I would do something a little different and discuss what freedom portfolio positions I am considering trimming or liquidating to further focus the portfolio.

Reevaluation list:

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Nanox Vision (NNOX): Nanox has always been one of the higher risk companies in my portfolio, so I’m not as concerned about the precipitous drop in stock price. What concerns me is that the company has seemingly struggled to execute. FDA clearance keeps getting pushed back and the company has consistently failed to meet goals that they have set for themselves. The founder is no longer the CEO (which admittedly could be a good thing considering the previously mentioned struggles). There are enough red flags that it’s worth wondering if the upside of Nanox is worth the risk at this point.

Zoom Video (ZM): Zoom has been a painful position for me. I resisted buying for the longest time because I couldn’t see how Zoom could succeed in a world where deep-pocketed tech companies like Microsoft (MSFT) and Alphabet (GOOG) already offered established video chatting for free. Even if they were better, how long would it take for the smart engineers at these big tech companies to bring their offerings up to snuff? Since I was a little late to the party, I missed a lot of the run-up in stock price. By the time I finally relented and decided that they did have some sort of moat which protected them to some extent from the obvious competition and there was still unclaimed opportunity in things like remote work, remote board games hangouts, etc, COVID related lock-downs were wrapping up and people were ready to unleash their pent-up desire to get out of the house.

How much of the remote work trend will stick around? Will people still be willing to take remote classes or do frequent video calls with family and friends? Will Zoom be able to capture any of the opportunities that I thought they would? The future looks a lot cloudier now and I am once again starting to doubt their moat.

Disney (DIS): This hurts to admit. Disney is my longest held position and is much older than the Freedom Portfolio. I first bought shares in 2013 and the position has doubled for me, which sounds really nice until you realize that the S&P is up close to 160% since then, making Disney a significant under-performer over that time. When I bought shares of Disney, I did so because I thought they had an absolutely unmatched catalog of content (Pixar, Marvel, Lucasfillm, ESPN, etc) and were one of the few players that I thought had a great chance to launch a streaming service to challenge Netflix worldwide. That thesis has largely played out, with that content bringing home major money at the box office and helping to drive Disney+ to be a major success.

And yet despite all of that, Disney stock has not been impressive. At the same time, the future of Disney is looking murkier. Legendary CEO Bob Iger has stepped down as chairman and CEO. Disney+ growth is beginning to slow down. And new CEO Bob Chapek has gotten Disney embroiled in a political controversy with Florida Governor Ron DeSantis. I mentioned before when I talked about my reasons for selling Twitter (TWTR) that I hate it when companies get involved in politics. Having an almost universally beloved brand like Disney wading into politics strikes me as supremely bad idea that will serve as a distraction and ultimately leave a large section of their customer base unhappy. Right now, Disney seems to have less upside than any other time in the past 9 years while having a lot more risk. It might be time to reevaluate my longest held position.

Changes in the Portfolio

Just one round of portfolio changes in the recent quarter. I think we might be seeing a little more than that in the coming months.

• January 2022 portfolio changes

The Freedom Portfolio – April 2022

Here is where the Freedom Portfolio stands now. Need a reminder of what these terms mean? Check out: Defining my Terms.

Ticker	Company Name	Allocation
TSLA	Tesla	Babylon 5
MELI	MercadoLibre	Babylon 5
SHOP	Shopify	Babylon 5
SE	Sea Limited	Enterprise
TTD	The Trade Desk	Enterprise
NVCR	NovoCure	Enterprise
SQ	Square	Serenity
ETSY	Etsy	Serenity
RDFN	Redfin	Serenity
TDOC	Teladoc	Serenity
SWAV	Shockwave Medical	Serenity
FVRR	Fiverr	Serenity
SNOW	Snowflake	Serenity
DIS	Walt Disney	Serenity
ROKU	Roku	Serenity
AXON	Axon Enterprises	Serenity
ZM	Zoom Video	Serenity
FUBO	FuboTV	Millennium Falcon
CELH	Celsius Holdings	Millennium Falcon
NNOX	Nano-X	Millennium Falcon
NU	Nubank	Millennium Falcon

That’s the recap of the Freedom Portfolio for the first quarter of 2022. Here’s hoping the next quarter is a better one. It can’t be much worse. Thanks, as always, for following along.