I already posted 2 interim portfolio updates in March. Here are the links to those:
What we are seeing unfolding has never happened in modern times. We are seeing a pandemic that is literally shutting world travel and much of the world economy. As a human, it’s a little scary because we are in uncertain times. As a human, I am taking very serious precautions about my health and the health of others. For the most part, I stay in my apartment in San Francisco (after 2 weeks of holing up with my girlfriend in a nearby suburb). I have a large supply of surgical masks, rubber gloves, and bleach. I order everything for delivery and clean all deliveries with bleach. I don’t go outside when there are many people around but I have been managing a walk in the early afternoons.
As far as investing goes, I am not behaving in the extremely cautious manner that I do for health. I am actively analyzing information, vetting that information, scanning for upside opportunities, looking for tax minimization moves, all while ensuring that I don’t expose myself to financial disaster by being overly aggressive. I see this time as a rare opportunity to make a lot of extra returns, but it also requires risk management. I have lived through 1999/2000 and 2008 with stock portfolios in each of those periods. But back then, while I had stock portfolios, I was a relative novice. My skills have grown tremendously in large part due to Saul’s Investing Discussion board and the collective experiences that have been shared by Saul and others. I have also learned a lot simply by playing this game for the last 5 years. I really like games, and for me investing is like a game. Starting in mid-February the game got a lot more interesting. So I have my war room in my apartment, and I spend a lot of time reading, thinking, and analyzing. For me, it is definitely not a boring thing to be “locked up” at home.
My trading activity and portfolio adjustments went into overdrive in March. I am trying to position myself well for the rebound that I know will come. When I say I know, I mean that I see this as a very high probability likelihood (not an absolute certainty). The biggest uncertainty is the timing of how long the global shutdown will last. It could be as short as 30 more days or perhaps as long as 6 months….anything outside of this range seems remote to me (IMO). I’ll comment more on this at the end.
PORTFOLIO COMPOSITION
| Ticker | Ideal Target | 3/31/20 | 3/13/20 | 3/6/20 | 1/31/20 | Notes |
|---|---|---|---|---|---|---|
| AYX | 30% | 38.3% | 40.8% | 36.7% | 34.6% | temporary add |
| CRWD | 20% | 9.1% | 1.0% | 13.0% | 15.4% | added its of 2022 LEAPs |
| OKTA | 15% | 14.4% | 12.9% | 8.6% | 8.4% | added |
| DDOG | 12% | 11.8% | 8.3% | 5.0% | 3.6% | added |
| ZM | 7% | 7.3% | 5.6% | 6.8% | 5.5% | sold a bunch and day traded |
| PAYC | 5% | 5.3% | 7.4% | — | — | New position |
| TTD | 4% | 4.3% | 4.6% | 4.5% | 6.1% | |
| SMAR | 4% | 3.5% | 3.6% | 3.2% | 4.2% | trimmed |
| ROKU | 3% | 2.7% | 3.6% | 3.5% | 1.2% | trimmed |
| GH | 1% | 1.2% | 1.3% | 1.1% | 3.4% | |
| MDB | 0% | — | 4.4% | 10.0% | 10.5% | sold all after earnings |
| Cash | 5% | 8.1% | 11.8% | 9.7% | 7.3% | increased due to share price declines |
Portfolio changes since 3/31/2020
- Sold all my remaining shares in MDB the day after the Q4 earnings release. My reasons for selling were pretty much identical to stocknovice’s (see his March portfolio update). I’ll add that the drop in all stocks made this decision easier from a tax perspective because I got to sell at a lower price but a similar relative price (into what I was redeploying the funds).
- Sold the temporary shares of AYX that I bought in the second week of March. The allocation was over 40% and I needed to drop it down. But I added back a lot of temporary shares today which I will explain in more depth later.
- Bought more OKTA, DDOG, and CRWD (a lot of CRWD but mostly in the form of 2022 call options)
- Sold more ZM after a nice runup.
- Trimmed a little SMAR.
- Sold 1/3 of my remaining ROKU.
- Bought an 11% position in PAYC for the cashflow and discount, but reconsidered my allocation as too excessive given the high concentration of SMB customers (potential risk that PAYC’s customers go out of business).
- I’ve also done a fair amount of horse trading usually using ZM, AYX, and OKTA since I noticed a pattern: wide swings in opposite directions with ZM going up big on market down days and down big on market up days, and AYX and OKTA going with the market. I don’t normally do this, but these are times when such opportunities can present themselves. Seeing 8% swings in AYX and OKTA were not too uncommon while ZM was usually swinging in the opposite direction; there was even one day where ZM swung 20% in a few hours!
If you look at the table above, you will see that my current allocations are pretty much in line with my ideal target allocations. The three exceptions are AYX, CRWD, and cash. I’ll explain why they are different below:
AYX
Today, I invested an additional 3.5% of my cash into AYX while simultaneously selling covered calls against these extra shares and writing an equal number of puts (covered short straddle). The cash I deployed in AYX is for my taxes which is now not due until July 15th. The cash now earns only 0.7% interest in my money market account. The premiums from selling these options (which expire in 17 days) will yield me 16% in 17 days assuming the price of AYX stays at or above $95, yet this trade is still profitable as long as AYX is above $80 on April 17. AYX won’t report earnings until the very end of April or the very beginning of May. The trade seems like a great risk-reward scenario to me. I also have some additional AYX shares that I will unload when I see favorable relative stock pricing to another one of my positions. I expect to have my AYX allocation down to the low to mid $30s before Q1 earnings release.
CRWD
My CRWD position is 9.1% while my ideal target allocation is 20%. This is because most of my CRWD position is in the form of 2022 $50 and $60 call options. If I consider the number of shares that I control (i.e. if I count the options as shares and use the full value as if they were shares rather than options), my position size would be about 21%. So I’m right where I want to be. However, I would be willing to add more particularly if the stock dips down again.
Cash
As mentioned above, I bought AYX with cash to earning more interest. I plan on using a similar strategy sequentially until my taxes as due in July. I understand it adds some risk, but I deem the reward worth the risk.
Now I’d like to explain more of the thinking behind my allocations. We’ve now heard from OKTA, CRWD, COUP, PAYC (stock buyback), DOCU, SMAR, and other SaaS companies in their quarterly earnings calls and press releases. After hearing from them (note they reported when it became clear the pandemic was going to be really bad and disruptive) and thinking about this and what’s happening, my view has coalesced. SaaS businesses are generally holding up well. In fact, some companies are seeing no effect from the pandemic (OKTA said so in late February) while other companies (ZM and CRWD) are actually benefiting (business fundamental-wise and adoption acceleration-wise) from this WFH environment (they said so in early March). This became especially clear to me after the CRWD call on March 5th. So which companies are benefiting? The indispensable SaaS companies, in my mind, are CRWD, OKTA, and probably DDOG. I added significantly to all three in March. I just don’t see customers cutting their services and I see adoption increasing due to the WFH. Yet they are dominating and growing great without the pandemic also. ZM is probably benefiting the most, but ZM’s stock has already doubled this year. If we see a quick resolution to the crisis then ZM will have gained a lot of new business but a lot of people will sell their ZM shares so the ZM shares will be vulnerable to a big stock pullback (IMO). But for now, ZM remains a great hedge against another big market drop….and ZM would probably go up as long as this WFH drags on. Regarding AYX, I’m not sure how the growth will be affected by the disruptions created by the pandemic. It’s not really clear to me. Growth might slow for a little while. I’m not adding to AYX other than for trading. But my position size was already about 35% so despite the great price, I don’t want to add allocation other than for short term gain. So these are my core 5 positions with CRWD, OKTA, and DDOG being what I call heads I win, tails I also win stocks where heads equals the pandemic getting resolved quickly and tails equals the pandemic dragging on for longer. Together these 5 stocks comprise more than 80% of my portfolio. I have considered putting my entire portfolio into these 5 (selling PAYC, TTD, SMAR, ROKU, and GH) but I haven’t done this. I like the upside of the other 5 stocks for when the overall market rallies so I’ve kept them for now.
PORTFOLIO RETURNS
Wow, what a ride. Here are the monthly portfolio returns compared to the S&P500 total return index (^SP500(TR)) which includes dividends:
| DATE | GR Portfolio (YTD) | S&P500 Total Return (YTD) | Delta |
|---|---|---|---|
| Jan | +25.7% | 0.0% | 25.8% |
| Feb | +27.7% | -8.3% | 35.9% |
| Mar | -2.9% | -19.6% | 16.7% |
Well, considering that the market is down almost 20% and considering that I use some leverage, I am very pleased to be down less than 3% YTD. My portfolio has been swinging back and forth from positive to negative the past few days.
Below are the past portfolio peaks and troughs, the percentage drops from peak to trough and the duration it took to fall to the trough:
| Peak | Trough | %Drop | Peak to trough (days) |
|---|---|---|---|
| 9/4/18 | 12/24/18 | 37.4% | 111 |
| 7/26/19 | 10/22/19 | 37.4% | 88 |
| 2/18/20 | 3/16/20 | 45.2% | 27 |
You will notice how swift the most recent drop was. It was deeper and swifter than the 2018 and 2019 37% drops. Have we hit a bottom? If so that day was March 16th for my portfolio. I don’t know the answer, but I would guess that we have hit the bottom. We’ll see…
Below is the weekly tracking of my portfolio YTD return:
| Date | YTD Return | Notes |
|---|---|---|
| 07/26/19 | 100.0% | Last portfolio all-time high (ATH) |
| 08/02/19 | 85.6% | |
| 08/09/19 | 87.3% | |
| 08/16/19 | 81.4% | |
| 08/23/19 | 78.5% | |
| 08/30/19 | 83.3% | |
| 09/06/19 | 73.3% | |
| 09/13/19 | 46.3% | |
| 09/20/19 | 52.8% | |
| 09/27/19 | 37.6% | |
| 10/04/19 | 47.5% | |
| 10/11/19 | 49.0% | |
| 10/18/19 | 30.2% | Trough on 10/22/19 at +24.8% YTD |
| 10/25/19 | 34.2% | |
| 11/01/19 | 35.2% | |
| 11/08/19 | 30.0% | |
| 11/15/19 | 40.4% | |
| 11/22/19 | 49.0% | |
| 11/29/19 | 58.7% | |
| 12/06/19 | 45.9% | |
| 12/13/19 | 37.2% | |
| 12/20/19 | 42.1% | |
| 12/27/19 | 44.0% | |
| 01/03/20 | 4.5% | New year (YTD percentage reset) |
| 01/10/20 | 14.8% | |
| 01/17/20 | 19.6% | |
| 01/24/20 | 22.1% | |
| 01/31/20 | 25.7% | |
| 02/07/20 | 28.1% | |
| 02/14/20 | 39.8% | Almost reattained ATH at +40.7% YTD on 2/18/20 |
| 02/21/20 | 29.1% | |
| 02/28/20 | 27.7% | |
| 03/06/20 | 21.9% | |
| 03/13/20 | -4.8% | |
| 03/20/20 | -6.8% | Trough on 3/16/20 at -22.8% YTD |
| 03/27/20 | -2.4% |
FINAL THOUGHTS
These can be scary times for investors. When there is uncertainty there is fear, and when there is fear there is opportunity, particularly when there is forced selling going on. I think we probably hit the bottom about 2 weeks ago. I would love another big drop so I can take advantage. There was more uncertainty 2 weeks ago. There was more uncertainty about the pandemic, but I think the bigger uncertainty involved whether the financial banks and governments would quickly and strongly mobilize to avert a humpty dumpty situation (i.e. businesses failing and laying off millions).
Governments and central banks did respond to the call and they responded BIG. The US alone is providing $10T of stimulus with more probably coming if need be. The world’s financial system cannot survive a shutdown without help because so many businesses and so many people live paycheck to paycheck. The world’s governments really had no choice to not offer the stimulus because not doing do would have ended our financial system as we know it….at least for a long time. We now have what seems like a 3-month lifeline. The pandemic will fade in time; whether it will be weeks or months, I do not know, but it will fade and people will return to their old ways of living (mostly). If the hydroxychloroquine treatment works then we could see a faster return to normalcy because the effects of the world’s shutdown will be worse than the medical harm caused by reopening commerce. If there is no treatment then WFH could be here for a while. I believe that I’ve positioned my portfolio to thrive in either case. I also believe that I have some nice upside built in via some leverage and some options. I’d welcome another crack at those prices from 2 weeks ago for I see the chance of a prolonged economic depression as a VERY remote possibility now.
I hope that everyone is staying safe and entertained during these unusual and stressful times.