TWTR – Paul Vs The Market

The Freedom Portfolio – April 2020

March 31, 2020 paul.essen Comments 2 comments

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

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

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

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

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

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

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

So basically, treat the numbers below as very tentative.

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

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

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

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

Notable Performers

Best Performers

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

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

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

Worst Performers

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

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

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

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

Changes in the Portfolio

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

Sells

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

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

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

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

Buys

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

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

Watchlist

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

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

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

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

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

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

The Freedom Portfolio – April 2020

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

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

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

5 CEOs I admire

February 20, 2020 paul.essen Comments 0 Comment

President’s Day was this past Monday and so this seemed like as good a time as any to make a brief list of some of the CEOs of companies in the Freedom Portfolio that I most admire. Why? I’ve long thought that we as a society spend too much time and energy admiring (or possibly hating) the President and oftentimes give them far too much credit for things like the economy and the stock market and even larger things like our standard of living. On the flip side, I think we don’t spend nearly enough time appreciating the entrepreneurs and business leaders who take risks and are constantly driving innovation forward.

Who has done more to improve the life of the average American? President Obama? Or Steve Jobs, without whom you might not have a tiny portable device that serves as a camera, GPS, handheld gaming system, phone, and also provides access to the entirety of humanity’s knowledge at your fingertips? President Bush? Or Jeff Bezos, who helped drive down prices, changed 2 day (and now 1 day) shipping from a luxury to something expected, and turned voice assistants from something out of Star Trek into reality? Who will do more to save the planet? President Trump? Or Elon Musk?

An argument can be made for both sides, but I personally skew a little more towards the CEOs. With that being said, here are five CEOs from companies in the Freedom Portfolio that stand out to me (alphabetical by last name):

The Five

Jeff Bezos: Founder and CEO of Amazon (AMZN) – Notwithstanding some questionable moves in his personal life, it’s hard to find a more impressive entrepreneur and innovator alive today than Jeff Bezos. He turned a tiny online seller of books into a $1 trillion company that now sells almost anything (and allows others to sell almost anything) and can deliver it all in just a few days. Oh, and they’re also the leader in cloud computing and the third largest online digital ad platform in the US. I love his “Day 1” philosophy and how he seems to be determined to never stop trying new things no matter how large Amazon gets. Truly an incredible leader.

Reed Hastings: Founder and CEO of Netflix (NFLX) – It takes a lot of guts and foresight to start a business as crazy sounding as sending DVDs through the mail and allowing people to keep them as long as they want (or on the flip side, churn through as many as they want). If that is where the story stopped, it would be impressive enough, but not only did Reed Hastings start a company which has revolutionized how we consume media, but he has also reinvented it multiple times in the process.

The first reinvention was having the guts to pivot the DVD-by-mail business into online streaming before it was obvious that it was the future. The second was having the foresight to start investing in original content so that the company wasn’t so reliant on content producers. The third is having the grand vision to not just be content with the US market, but to try to become the leader internationally as well.

Bonus points for being humble enough to be able to admit when you were wrong and to reverse course (*cough*qwikster*cough*).

Bob Iger: CEO of Disney (DIS) – I wish I had a clever pun to make involving Iger and King Midas, but it really feels like everything he touches turns to gold. Just look at the acquisitions made under his watch:

Pixar
Marvel
LucasFilm
21st Century Fox

That’s an incredible amount of content that has achieved huge box office success, critical acclaim, or oftentimes both. While the jury is still out on the last one, I’m very excited about the future potential of Hotstar and there’s little doubt that acquisition helped strengthen the appeal of Disney+ and Hulu. And that brings us to what might best define Iger’s legacy at Disney: the bold entry into streaming with Disney+, Hulu, and ESPN+. Like I mentioned with Reed Hastings previously: it takes a lot of guts to move into streaming. While the creation of Disney+ didn’t require as much foresight since the path had already been charted with Netflix, it probably did take even more guts to disrupt an even more established company and move away from what had been a pretty lucrative arrangement. I think it’s clearly the right move, although only time will tell.

Glenn Kelman: CEO of Redfin (RDFN) – Earnings calls can sometimes be dull affairs, so it’s refreshing to hear a CEO drop phrases such as “It’s on like Donkey Kong”. Those are the kinds of small gems you often get from the self-described “goofy” CEO of Redfin. From the few interviews I’ve read, he also seems like a genuinely humble, honest, and down-to-earth guy. In a world where many CEOs are often described as abrasive or hard to work with or even jerks, that’s a nice change of pace.

But all that would be unimportant if he couldn’t also walk the walk. Luckily, I’ve also been impressed by how visionary and focused on the customer Glenn Kelman has been as CEO of Redfin. They’ve gone from simply a low fee brokerage paired with a well designed website to attempting to fundamentally disrupt the real estate market with things like Redfin Now, Redfin Direct, Redfin Mortgage, Redfin Concierge Service, and much more. There are so many different ways for Redfin to win and grow moving forward and I’m excited to see how it all plays out.

Tobias “Tobi” Lütke: Founder and CEO of Shopify (SHOP) – Obviously, the fact that his company has grown 10 fold while I have been a shareholder endears me to Tobi Lütke more than a little bit. I love his vision as CEO of Shopify of “arming the rebels” against the Empire that is Amazon (despite also being an Amazon shareholder) and also love the bold initiative of creating a fulfillment center network to compete with Amazon.

The admiration goes beyond that, though. Lütke is accessible in a way that many other CEOs of his stature aren’t. He is active on Twitter and has on more than on occasion even live-streamed himself playing Starcraft on Twitch. He even offered an internship to a professional Starcraft player based on their gaming achievements alone. As somebody who still plays Starcraft despite its waning popularity, I can’t help but love that. But even beyond that, he seems to have a pretty healthy idea of work/life balance and that 80 hour work weeks aren’t necessary for success. In a world where it seems like we sometimes over-deify those who put in long hours, it’s nice to see an example of the other side.

Honorable Mention

Elon Musk: CEO of Tesla (TSLA) – Musk is obviously an incredible entrepreneur and innovator and as Tesla shareholder I am extreme grateful for what he has managed to do. However, even I have to admit that his behavior sometimes leaves a lot to desire and flirts with the lines of legality and ethics. That’s why I couldn’t quite put him on this list.

Jack Dorsey: Found and CEO of Square (SQ) and Twitter (TWTR) – Look at that title. Not only did Dorsey help start two incredibly successful companies in Twitter and Square, but he’s currently serving as CEO of both. That’s very impressive. So why didn’t he make the list? For starters, he has a bunch of odd behaviors that I have trouble relating to, like only eating one meal a day (or fasting entirely on weekends) and taking ice baths. Some have even taken to calling them disorders. But the larger issue is that I still have a little doubt regarding his abilities as CEO. Twitter still lags badly behind Facebook in most metrics despite being a highly relevant platform and Square has seemingly floundered a bit since high regarded CFO Sarah Friar left. Maybe both companies would be better off without a part-time CEO?

The Freedom Portfolio – January 2020

January 15, 2020 paul.essen Comments 6 comments

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

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

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

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

Notable Performers

Best Performers

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

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

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

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

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

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

Worst Performers

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

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

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

Changes in the Portfolio

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

Sells

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

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

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

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

Buys

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

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

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

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

Watchlist

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

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

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

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

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

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

The Freedom Portfolio – January 2020

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

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

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

Recklessly Bold Predictions for 2020

December 20, 2019 paul.essen Comments 1 comment

One year ago, I made a set of bold predictions for what 2019 would bring. With the year winding down, I thought it would be fun to check in to see how I did and maybe make a few predictions for 2020 as well. First up, how did my 2019 predictions go?

Note: Some of these numbers were pulled a few days ago and thus might be slightly out of date by the time this post is published.

2019 Predictions

The race to $1 trillion – again

The Prediction: That Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) would all return to a $1 trillion market cap, and in that order.

Reality:

Microsoft returned to the club in April and currently sits around a market cap of $1.2 trillion
Apple returned in September and currently sits around a market cap of $1.3 trillion
Amazon hasn’t yet returned to the club and currently sits at a market cap of slightly under $900 billion

Have to take a loss here, although I do think I was impressively close. I ended up being very wrong about Amazon (not only were they not the first to return to an over $1 trillion market cap, they were the only one not to return at all), but at least Microsoft and Apple came roaring back to smash the $1 trillion barrier. I’m still (obviously) a big believer in Amazon, though, and am looking forward to them not only crossing $1 trillion next year, but also passing up Microsoft and Apple in the process.

Tesla doubles

The Prediction: Tesla (TSLA) will hit a market cap of $100 billion in 2019.

Reality: Another swing and a miss. The profits that were promised didn’t show up and Tesla was actually down big for most of 2019 (sitting closer to a $30 billion market cap) before a recent recovery which has put it up slightly for the year and at a market cap of $76 billion. Tesla is currently sitting at an all-time high, though (and hit the $420 “funding secured” level), so maybe I can get a tiny bit of partial credit? There’s still a few days left in the year for them to surge another 31% or so, right? Regardless of if they hit the $100 billion market cap, I’m still optimistic regarding Tesla’s outlook going forward. Hopefully increased international sales will help to boost their profitability in 2020 and finally push that market cap north of $100 billion.

Twitter gains on Facebook

The Prediction: Twitter (TWTR) gets to half of Facebook’s (FB) market cap.

Reality: My boldest prediction gets the biggest miss. Twitter has had a pretty up-and-down year while Facebook has had a pretty strong one. The end result is that Twitter is sitting at a market cap of $25 billion while Facebook is at a market cap of around $590 billion. That puts Twitter at around 4% of Facebook’s market cap, which is… uh… slightly short of the 50% I predicted.

Loyal readers will know that I ended up selling my Twitter position around the middle of 2019 because I had lost faith in the company for a few reasons. I still am amazed at the discrepancy in market caps between Twitter and Facebook considering the level of impact that each seems to have in our society, but maybe that’s just the way that things are going to be between those two businesses for the foreseeable future.

2020 Predictions

So not a great record in 2019, even accounting for the fact that they were “bold” predictions. Let’s see if I can do better in the coming year. Since next year is 2020 and my bold predictions are supposed to be at least a little fun and silly, I thought it could be interesting to have my picks for next year be based around the number “20”. As usual, I think the odds are against most of these predictions because they’re supposed to be things that are unlikely to happen, but also maybe are things I think are more likely than others might expect. Like with last year, I will be ordering them in what I consider to be decreasing order of likeliness.

Disney and Netflix both gain 20%+

A 20% gain might not seem like a super bold prediction, but I’m making it a parlay and predicting that both Netflix (NFLX) and Disney (DIS) reach that mark in 2020. Many people see streaming as a zero sum game where the success of something like Disney+ means that it has to come at the expense of Netflix. I’m not so sure that’s the case, and think that a rising tide can lift multiple streaming service boats. Disney+ and Netflix serve different demographics and being signed up for both is still cheaper than an old traditional cable package.

Netflix and Disney have had a pretty different 2019 in terms of performance. Disney is up over 30% for the year after a record smashing box office and the incredibly well-received launch of Disney+. Can they keep the momentum going into 2020? I believe they can and that Disney+ will continue to outperform expectations (which is why I predict a 20%+ gain), but there certainly are some dark clouds as well. The biggest is that there is practically no way Disney’s 2020 box office can come close to matching 2019’s. Consider that in 2020 Disney will have:

No Avengers movie
No Star Wars movie
New IP like Onward and Soul versus sequels to popular films like Frozen 2 and Toy Story 4
Live action Mulan versus remakes of Lion King and Aladdin
A potential let down for Marvel movies after the big conclusion in Endgame and with unproven IP like The Eternals

I think the market will be willing to overlook an understandable step back in 2020’s box office and will instead focus on the growth that Disney is seeing in their streaming services, but I wouldn’t at all be surprised to see at least one article written in 2020 wondering aloud if Disney has lost its magic after a drop in their box office receipts.

Meanwhile, Netflix has had a much rockier 2019 which has seen it basically flat for the year, although it is sneakily up around 30% over the past 3 months. A combination of some big subscriber target misses, slowing growth domestically, and deep-pocketed competitors (Disney+, Apple TV Plus, etc) entering the market all weighed heavily on Netflix’s stock price. I believe stories of their demise have been greatly exaggerated. International growth remains strong, and Netflix still has a clear lead in almost every market they are in. And while I have little doubt Netflix has come close to a saturation point in the US, I believe they remain in a strong position which will allow them to keep customer defections to a minimum. Netflix has managed to remain must see TV with a series of much talked about and/or well regarded recent releases, such as:

Marriage Story
The Irishman
6 Underground
Always be my Maybe

Yes, they will no longer be the only (significant) game in town, but they’re still very much a leader in an industry which I think will continue to grow.

Square will add $20 to its share price

Square (SQ) has had a rough go of it lately. Since September of last year, Square has lost about a third of its value and sits at around $65 a share as of this writing. I’m a bit flummoxed as to why Square has continued to flounder despite putting up some great growth rates (and while seeing Shopify soar in 2019). So my second bold prediction is that in 2020 Square will add $20 to its share price (a roughly 30% gain) and will get close to returning to its all time highs.

Redfin will add $20 to its share price

Now we’re talking. Redfin (RDFN) is currently sitting at around $21 a share, so a $20 increase would effectively mean the stock doubles in 2020. Redfin the stock has been treading water for years despite putting up some pretty impressive growth and taking market share in a market where things move pretty slowly. I’m going to boldly predict that 2020 is the year that investors finally realize the gains that Redfin has made and the stock responds accordingly.

Bonus Prediction #1: Bitcoin to $20k

My predictions this year felt a little tamer than last year’s, so I wanted to throw out a few more bonus ones just for run. This one is not necessarily investing related, since I personally view cryptocurrencies as pure speculation, but I admit to being intrigued by bitcoin (full disclosure: I do own a tiny amount).

In 2017, bitcoin neared an exchange rate of $20k per bitcoin before collapsing. After a bit of a rebound, bitcoin is now worth around $7k. I boldly predict that bitcoin stages a bit of a comeback in 2020 and returns to the $20k level from a few years ago.

Bonus Prediction #2: Somebody will buy Nintendo

Gaming has been a pretty hot sector for awhile now, and some deep pocketed tech giants (Apple, Alphabet, Amazon, etc) are starting to show an interest in getting involved. My second (and last) bold call is that some company acquires Nintendo (NTDOY). It would be a pricey acquisition, but it would also instantly give the acquirer a ton of invaluable intellectual property that is globally recognized. Expanding that IP into mobile games and other platforms like Xbox or Steam could be incredibly valuable.

Your Bold Predictions

So those are my bold predictions for 2020. What are yours? Let me know in the comments and we can track them together! Regardless of what happens in 2020, I want to wish you a very prosperous and happy new year. Thanks for reading!

The Freedom Portfolio – October 2019

October 11, 2019 paul.essen Comments 4 comments

It’s the one year anniversary of Paul vs the Market and the Freedom Portfolio! I just wish it could’ve coincided with a better performing quarter. The third quarter of 2019 was brutal, and saw the Freedom Portfolio essentially give back all of the gains from the 2nd quarter. The Freedom Portfolio was down 10.5% for the quarter, compared to the S&P being up around 1.7%. I’m still up versus the market year-to-date 22.9% to 20.5%, but am now back to losing to the market since inception (October of 2018) -4.1% to 3.9%.

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

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

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

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

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

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

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

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

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

Notable Performers

Best Performers

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

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

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

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

Worst Performers

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

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

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

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

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

Changes in the Portfolio

Sells

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

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

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

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

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

Buys

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

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

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

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

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

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

Other

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

The Freedom Portfolio – October 2019

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

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

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

The Freedom Portfolio – July 2019

June 30, 2019 paul.essen Comments 5 comments

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

Here are the numbers from last quarter:

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

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

Notable Performers

Best Performers

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

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

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

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

Worst Performers

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

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

Changes in the Portfolio

Sells

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

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

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

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

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

Buys

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

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

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

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

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

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

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

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

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

The Freedom Portfolio – July 2019

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

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

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

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

Selling Twitter

June 6, 2019 paul.essen Comments 1 comment

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.

Twitter and Tesla Make News

April 23, 2019 paul.essen Comments 0 Comment

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.
Twitter Q1 2019 Letter to Shareholders

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.

The Freedom Portfolio – April 2019

April 4, 2019 paul.essen Comments 5 comments

Now that’s more like it.

You may (or may not) remember that the first ever performance check-in for the Freedom Portfolio was all about explaining why the Freedom Portfolio was under-performing the market and why I wasn’t worried. Here is what I said 3 months ago:

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.
The Freedom Portfolio January 2019 by Paul Essen, January 1st, 2019

Well, the S&P 500 was up 14% this past quarter. The Freedom Portfolio? It was up 25%. Since inception (October 1st, 2018), the Freedom Portfolio is down 2% compared to the S&P 500 being down 3%.

In other words, the Freedom Portfolio has won the Q1 2019 battle and is currently winning the war.

Here is a breakdown of performance by position:

Ticker	January 2019	April 2019	Percent Change
STNE	18.29	41.11	124.77%
NVTA	10.76	23.42	117.66%
MELI	285.61	507.73	77.77%
IQ	14.56	23.92	64.29%
SHOP	134	206.62	54.19%
JD	20.31	30.15	48.45%
NVCR	32.5	48.17	48.22%
BZUN	28.23	41.54	47.15%
TWOU	48.45	70.85	46.23%
RDFN	14.01	20.27	44.68%
SQ	54.1	74.92	38.48%
NFLX	259.28	356.56	37.52%
AABA	56.78	74.12	30.54%
CRSP	27.84	35.72	28.30%
SPOT	111.66	138.8	24.31%
AMZN	1465.2	1780.75	21.54%
ISRG	469.5	570.58	21.53%
NPSNY	38.335	46.43	21.12%
TWTR	28.26	32.88	16.35%
TDOC	48.19	55.6	15.38%
EDIT	22.03	24.45	10.99%
KSHB	5.47	5.94	8.59%
ILMN	294.71	310.69	5.42%
DIS	108.1	111.03	2.71%
ATVI	45.25	45.53	0.62%
MKL	1021.88	996.24	-2.51%
TSLA	306.1	279.86	-8.57%
UXIN	4.79	3.79	-20.88%

Needless to say, I’m thrilled. I was confident that the Freedom Portfolio would make a comeback, but I certainly didn’t expect it to happen over just one quarter. A 25% gain in a single quarter is pretty ridiculous, even coming off a big drop. However, it’s worth noting that despite the big quarter, the portfolio is still down from where it started. Also, everything I said previously about short time periods is still absolutely true. A half a year is an incredibly short amount of time when it comes to investing, and with signs that the US economy might be slowing down, I wouldn’t at all be surprised to see another bear market where the Freedom Portfolio under-performs soon. I’m definitely not planning any parades yet.

Notable performers

Worst Performers

Note: A position doesn’t have to lose value in order to be a “worst performer”. All it takes to qualify is to under-perform the market. With the S&P 500 up over 14% this past quarter, that’s a high bar that a lot of positions are going to fall short of.

Disney (DIS): Disney is a perfect example of this. Normally a return of 2.7% in a quarter would be pretty respectable, but it falls well short of the performance of the S&P. We’re coming up on 4 years of basically flat performance for the Walt Disney company, which is definitely frustrating, but I’m still holding onto my shares. With the Fox acquisition finally closing, all of the pieces should finally be in place for over-performance over the next few years. This year alone should see an incredible box office performance (Avengers: Endgame, Star Wars: Episode IX), the opening of the new Star Wars theme park, and the launch of Disney+. Should be a fun ride.

Activision Blizzard (ATVI): Basically flat over the quarter, but that’s a pretty major disappointment after the pummeling it took in Q4 of 2018. Many other positions in the Freedom Portfolio rebounded but Activision has not. The company remains on my watch list for potentially selling, as there has been a lot of negative news around the company recently that has wiped out some of the investing thesis behind it.

Tesla (TSLA): After being the best performer in the 4th quarter of 2018, Tesla was down 8.5% for this quarter. I’m honestly a little surprised it has been as relatively stable as it has been considering the controversy swirling around CEO Elon Musk. The stock is down around 5% since the inception of the Freedom Portfolio. While I am still a believer in the company long term, I did sell about 30% of my position early in the quarter for reasons I will lay out further below.

Uxin (UXIN): Uxin was the biggest under-performer on a percentage basis, but the impact on the Freedom Portfolio was relatively minor because it is such a small position. It was a very volatile stock when I purchased it and I anticipated that it would continue to be volatile in the near future. Not at all worried right now and not at all thinking of selling. Uxin has a pretty long leash and I want to see how the company performs when there there isn’t the threat of a slowdown in China going on.

Best Performers

StoneCo (STNE): This is for clarification more than anything else. While StoneCo is up huge the past quarter, I didn’t actually start a position until very recently and after the big gains. In fact, my position is slightly down from where I bought in right now.

MercadoLibre (MELI): The MercadoLibre gain, on the other hand, is very much legitimate. While it started off the quarter as one of the larger Serentiy level holdings, I obviously wish it had been a lot bigger. I thought that even after the huge pop after earnings, which is why I bought after those big gains. I don’t regret it at all, either, as even those later purchases are up a fair amount. In fact, while the earnings jump and adding to my position helped move MercadoLibre from a Serenity level position to an Enterprise level one, the performance since then is threatening to move it into a Babylon 5 level position. Mercado Libre’s gains over the quarter accounts for 15% of the Freedom Portfolio’s gains. That’s how on fire the company has been.

JD.com (JD), iQiyi (IQ), Baozun (BZUN): The JIB had an awesome quarter, up 48.5%, 64.3%, and 47.2% respectively. If the JIB was counted as a single company, it would be a Babylon 5 level holding in the Freedom Portfolio and their gains would’ve accounted for 16% of the gains in the Freedom Portfolio. Positive movement in the trade war between the US and China seems to have outweighed concerns over China’s economy potentially slowing. Regardless, I’m still a big fan of every one of these.

Netflix (NFLX): Another large position and another big gain for the quarter. The 37.5% increase for this Enterprise level position was enough to account for 12% of the Freedom Portfolio’s gains. There wasn’t a lot of news with Netflix over the quarter, although I have seen a lot of people concerned that Netflix could struggle with the entry of some well-funded competition in Apple (AAPL) and Disney (DIS). I believe Disney will have a very strong product, but I’m not worried about either offering hurting Netflix much. I believe there is room for multiple winners in the streaming video space and I am confident that Netflix will be one of those winners.

Shopify (SHOP): Much like Netflix before it, Shopify was an Enterprise level holding which also crushed it this quarter. Its gains accounted for 14% of the Freedom Portfolio’s gains. Not much else to add except that they continue to execute excellently and riding the eCommerce wave.

Changes in the Portfolio

This past quarter saw a lot more turnover in the Freedom Portfolio than usual and I wouldn’t expect to see nearly as many transactions for the rest of the year.

A few weeks ago, during my post on anchoring, I laid out some of the recent buys and sells that I undertook this past quarter. Here’s a quick recap of them:

Sells: Axos Financial (AX), nVidia (NVDA), Bladex (BLX), Baidu (BIDU), Tencent Holdings (TCEHY)
Buys: Baozun (BZUN), CRISPR Therapeutics (CRSP), Editas Medicine (EDIT), MercadoLibre (MELI), Teladoc (TDOC), Naspers (NPSNY), Spotify (SPOT)

Sells

Tesla (TSLA): As mentioned above, I sold around 30% of my position in Tesla earlier in the year. Part of it was locking in some gains that I wanted to deploy elsewhere, but part of it was out of some concern over the short term prospects for the company. Specifically, I was concerned that the late year push for Model 3 sales and the reduction of the federal tax credit for buyers meant that Tesla might’ve pulled forward a lot of demand. In other words, people who might normally have bought a Model 3 in Q1 of 2019 instead rushed to get the purchase in before the end of 2018. If that was the case, it would’ve meant disappointing Q1 numbers. We’ll find out in about a month when Tesla reports earnings.

Buys

StoneCo (STNE): I had my eye on this company before they had an amazing earnings report in mid-March which caused the stock to soar. At the time, I knew it was a digital payments company in Brazil that counted Berkshire Hathaway as an investor, and anybody who has read what I had to say about MercadoLibre knows I am intrigued by the payments space in South America. Unfortunately, I hesitated pulling the trigger. I finally decided to dip my toe in with a small position after the big jump on earnings. I’m looking forward to digging into the company more over the coming quarters and possibly adding to my position if I like what I see.

Kushco (KSHB): Speaking of adding to positions if I like what I see… Kushco Holdings was one of my smallest holdings on account that it was a pretty small company in a very speculative industry (cannabis). For that reason, I decided to start with a very small position. Having liked what I’ve seen of the company since then, I wanted to add a little to my position.

Spin-Offs

Multichoice Group Limited (MCHOY): I’m guessing you haven’t heard of this company. Neither had I until it magically showed up in my portfolio. It turns out that Naspers (NPSNY), my preferred way to indirectly invest in Tencent (TCEHY), had spun off one of its many other holdings as a way to try to unlock value for shareholders. I’ve decided to hold onto it for now until I can do more research into the company, but I’ll likely end up selling this tiny position in the next month or so.

The Freedom Portfolio – April 2019

So here’s the new Freedom Portfolio! Click here for last quarter’s review. A few positions are gone, with the largest being Axos Financial (a longtime holding that I was sad to sell) and there are a few new faces. At the top, Disney (DIS) dropped back down to a Serenity level holding while MercadoLibre jumped up to an Enterprise level holding.

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

Ticker	Company Name	Allocation
AMZN	Amazon	Babylon 5
NFLX	Netflix	Enterprise
SHOP	Shopify	Enterprise
MELI	MercadoLibre	Enterprise
DIS	Walt Disney	Serenity
TSLA	Tesla Motors	Serenity
TDOC	Teladoc	Serenity
SQ	Square	Serenity
BZUN	Baozun	Serenity
ILMN	Illumina	Serenity
ATVI	Activision Blizzard	Serenity
RDFN	Redfin	Serenity
TWTR	Twitter	Serenity
JD	JD.com	Serenity
ISRG	Intuitive Surgical	Serenity
AABA	Altaba	Serenity
IQ	iQiyi	Serenity
TWOU	2U	Serenity
NPSNY	Naspers	Serenity
MKL	Markel	M. Falcon
SPOT	Spotify	M. Falcon
EDIT	Editas Medicine	M. Falcon
CRSP	CRISPR Therapeutics	M. Falcon
STNE	Stoneco	M. Falcon
NVTA	Invitae	M. Falcon
KSHB	KushCo	M. Falcon
NVCR	NovoCure	M. Falcon
UXIN	Uxin	M. Falcon
MCHOY	Multichoice Group	M. Falcon

Thanks for reading! This was a lot more fun to write than last quarter, although we’re still only two steps in on a journey that I expect to last for well over 100. There’s still plenty of time.

Twitter’s Impact Doesn’t Match Its Market Cap

February 8, 2019 paul.essen Comments 0 Comment

Twitter (TWTR) is a Serenity level holding in the Freedom Portfolio. They released fourth quarter earnings Thursday morning and the market’s reaction is a great example of why I prefer buying and holding for the long term and not worrying about short term fluctuations. Like Amazon (AMZN) recently, Twitter reported what looked to be a great quarter which beat expectations, yet dropped the next day for reasons I don’t fully understand.

Here are some of the important numbers:

Earnings per Share: 31 cents versus 25 cents expected
Revenue: $909 million versus $868 million expected
Monthly Active Users: 321 million versus 321 million expected

So despite meeting or exceeding expectations across the board, Twitter was down close to double digit percentages afterwards. There was some speculation that it could be a reaction to a projected increase in spending or possibly disappointment in the daily active user numbers that they released. The reasons for a short term drop are relatively unimportant to me as long as the long term growth story remains intact, although one of my bold predictions is certainly off to a bad start.

Which brings me to the title of this article and something that has been baffling me for a long time. As of this writing, Facebook (FB) has a market cap of roughly $480 billion while Twitter’s market cap is around $23 billion, making Facebook around 20 times the size of Twitter. While there are any number of good reasons why Facebook is so much larger than Twitter (number of active users and revenue/profitability being the main ones), the difference still seems insane to me considering the impact that both companies seem to have on our society.

It doesn’t seem like a single day goes by where news either is being made or broken by Twitter. Either it’s policy being announced by the President or athletes are sniping at the media (or each other) or controversy erupting over a sitcom star’s tweets or a former New York Time’s editor’s alleged plagiarism. Just last night, I learned of the bombshell blackmail allegations between Jeff Bezos and the National Enquirer through Twitter.

I’ve written a post about developments with the National Enquirer and its parent company, AMI. You can find it here: https://t.co/G1ykJAPPwy
— Jeff Bezos (@JeffBezos) February 7, 2019

I find Twitter absolutely invaluable for keeping up with breaking news and getting real time reporting and reaction and also simply reading up on the opinions of people who I respect. Wondering why the star running back isn’t on the field? Twitter often has the answer before the sideline reporters on TV. Interested in a diverse array of responses to the State of the Union address? I can check Twitter while watching and get hundreds of different takes without having to wait until the end to get a few (mostly identical) takes on TV. Interested in some instant feedback on a company’s earnings or opinions on a just announced merger? FinTwit is invaluable. I learn about breaking news on Twitter now far more often than I do in any other media, and possibly even all other media combined. I would easily give up Facebook and all of their properties before I would give up Twitter.

And that’s why it’s mind-boggling to me that Twitter has thus far been unable to take this amazingly impactful platform and transform it into a better and more profitable business. I can’t think of very many other companies that has a bigger discrepancy between how important they are and their market cap.

I’ve owned shares of Twitter for a few years now, and as you can tell from the chart below, it’s been quite a ride. The low point was probably in 2016 immediately after Twitter essentially announced that they couldn’t find somebody interested in buying the company. Part of me was relieved, because I thought Twitter had a lot of potential as a stand-alone company, but mostly I was shocked that so many other companies had taken a look and decided that they weren’t interested in what I thought was an incredibly powerful platform at what appeared to be a discount price.

Twitter in green and the S&P 500 in blue

In addition (and perhaps related) to management’s seeming inability to capitalize on the power of the platform to improve the business, I’ve also been worried about the lack of innovation with regards to Twitter lately. Besides a bump in character limit and cracking down harder on what they perceive as harassment and toxic behavior, how has Twitter improved lately? Despite widespread desire for it, there’s still no “edit” button. In fact, the one rumor coming out of Twitter is that instead of adding functionality, they’re considering removing some in the form of getting rid of “likes”. Not exactly earth-shattering disruption there.

Artist rendition of the Stark difference in innovation between Twitter and Square

The difference is even more stark when you compare the innovation at Twitter with the innovation going on at the other company that Jack Dorsey (CEO of Twitter) is the CEO at: Square (SQ). While Twitter has been essentially treading water, Square has released their new Square Terminal, their Square Cash app which allows bitcoin trading, and been working towards a banking license. That’s a breakneck pace for any company, and makes Twitter look especially bad. It makes me worry that all of Jack Dorsey’s passion and creative energy is directed at Square, with Twitter being an after thought. Maybe it’s time to consider if this CEO-of-two-companies thing isn’t a good long term solution and to look for somebody who can give Twitter the full attention it deserves?

It’s not like it should be hard to come up with interesting ideas to pursue. A few years ago Twitter seemed prime to jump into the arena of video streaming live events when it bought the rights to Thursday Night Football. It made sense to me, as Twitter oftentimes can greatly enhance the experience of live events as it provides additional commentary on what’s going on. The experiment seemed well received, but Twitter lost the rights the next year and hasn’t seemed keen to make any major pushes since then. I understand that viewing rights to the major professional sports can be pricey, but why not make a big push towards eSports where the market is more fragmented and in its earlier stages?

Similarly, I think that one of the more under-reported stories in the past year or so is the growing acceptance and growing legality of sports gambling. This also seems like a big potential opportunity for a real time communication platform like Twitter. Wouldn’t it be cool to be watching Yankees / Red Sox and be able to make a bet in the middle of the 6th inning on whether or not Chris Sale will pitch into the 8th inning? Or bet on if Klay Thompson will hit a 3 pointer in the 3rd quarter? Twitter has the capability of instantaneously connecting millions of people who might be watching the same event. Think of the possibilities with peer-to-peer prediction markets. Dealing with payments could be a challenge, but why not work together with a payment processor like Square? I hear their CEOs are close…

These are just two ideas, but there’s undoubtedly dozens if not hundreds more. It seems like now, more than ever, there’s an appetite for people communicate online about shared experiences. Twitter has done a good job of feeding that appetite so far, but there’s a lot more work to be done. I hope they’re up for it.

P.A.U.L. Score

Protected: 5

When I wrote about The P.A.U.L. System, Twitter was the example I used of a company that had a strong moat because of network effects, so it makes sense that it would excel here. Obviously no moat is completely unassailable, and Twitter could still get disrupted, but starting an entirely new social network from scratch is hard to do. Twitter has a number of wildly popular personalities active on the service that span all different sorts of interests. There’s something for anybody. Music lovers have Taylor Swift and Lady Gaga and Justin Bieber and Rihanna. Sports fans have Ronaldo and Lebron James. Donald Trump has basically turned Twitter into his own quasi-spokesperson and there are plenty of politicians on all sides that can be followed. It’s hard to envision something easily rising up to replace Twitter.

Alternatives: 3

This is an incredibly tough one to measure and really gets at the heart of why I am torn on Twitter as an investment. As I mentioned above, Twitter seems like it has so much potential and so many opportunities to branch into all sorts of different things. At the same time, it’s fairly indisputable that they’ve failed to realize much of that potential so far. For that reason, I can’t go any higher than a 3, and even that is hard to make a case for.

Understandable: 4

Once you understand that Twitter’s customers aren’t necessarily the people who use it, but the advertisers who want to market to those people, then Twitter is pretty simple to understand. They want a large user base who uses the service a lot so they can sell those eyeballs to advertisers to make money. It’s also helpful if they can get data on their users to help advertisers more accurately target their advertising. Follow the aforementioned Taylor Swift? Then you might be interested in knowing when her new album is out. This is why it makes sense that Twitter has been transitioning from monthly active users (MAUs) to daily active users (DAUs) to monetizable daily active users (mDAUs). Each change has moved them one step closer to accurately identifying how they’re doing in terms of growing an audience that they can make money off of.

Long Runway: 3

This is an area where I have reduced my expectations for Twitter some recently. Previously I looked at the number of users that Facebook had and figured that if they could get billions of users for multiple apps (Facebook, Instagram, Facebook Messenger), then clearly Twitter should be able to reach a billion users at a minimum as well.

Frankly, Twitter’s recent growth numbers don’t support that theory anymore. Maybe the platform is too complicated, or people are scared off by the reports of toxic users, or maybe people just don’t want a social network geared more towards interacting with strangers than with friends. For whatever reason, it now looks like Twitter will probably never grow to the same size as Facebook. I still think there’s a lot more room to grow, but the ceiling might be a little lower than I might’ve thought before.

Total Score: 15

An okay score, but I think one that adequately measures how torn I am about Twitter as an investment. So much potential, but so little of it realized yet. I’m still a believer, but I desperately want to see some signs of innovation or improvement out of them soon. I’m also keeping a close eye on how they deal with the careful balance between preventing abuse and harassment without trampling free speech. If they continue to struggle in these two areas, it could be a warning sign.