Much like the general market, the Paper Portfolio had a volatile September.
However, the Paper Portfolio proved to be much more resilient than the market overall. The Paper Portfolio was approximately flat during September, returning -0.34%. In contrast, the S&P500 returned -3.74%. This brings year-to-date performance up to 72.04% for the Paper Portfolio and 5.58% for the S&P500.
The resilience of the portfolio is further highlighted when you consider its performance against the Nasdaq 100, which returned -5.64%. Given that our portfolio is significantly overweight technology, the strong performance with respect to the technology-heavy Nasdaq 100 should be taken as a strong vote of confidence that we own truly some of the highest quality companies among a crowded field of growth and momentum names. In an upmarket, all growth stocks do well, but the true test are the ones that can perform well through both up and down periods.
In addition, our shift to a defensive positioning last month turned out to be extremely timely.
The excesses that were starting to build up led to a frothy top in early September before unwinding both quickly and violently. While the excess seems to have unwound to a meaningful extent, Capital Flywheels continues to think a defensive posture makes sense, especially as we head towards November elections. October will likely be a highly unpredictable month both domestically and internationally. So much of our domestic situation and international geopolitical situation are now intertwined. And one thing that Capital Flywheels has learned over time is that the more things you have to take into consideration, the more ways in which things can go wrong.
When we turned defensive last month, Capital Flywheels warned that it may become a drag on performance. While that did not turn out to be true for September, things could have easily played out very differently. Therefore, continuing to maintain a defensive posture could very well turn out to be a drag in the next 30 days. However, given that the Paper Portfolio has already outperformed so much, we can afford to be defensive, especially in the face of immeasurable uncertainty. What ultimately matters is the long game, not any single month or quarter or even year. And Capital Flywheels intends to win.
From an individual stock perspective, many of the most well held names declined significantly. This includes Facebook (-10.7%) and Apple (-10.3%). Other software and technology names also came under pressure such as Mercadolibre (-7.4%), Alteryx (-6.0%), and Wix (-13.5%).
Illumina declined 13.5% but that is mostly due to the announced acquisition of a company called Grail. Many investors and analysts have called the deal into question. Grail is currently developing a liquid biopsy test (e.g. blood-based test) that can detect more than 50 different types of cancers. This is a big deal if successful. Unfortunately, Grail’s product is not commercialized, yet. In addition, it transforms Illumina’s business model from that of a tool provider for downstream players to now potentially directly competing with the customers they serve. The situation has become a bit more complicated, but Capital Flywheels is okay seeing where this goes.
Offsetting the downward pull of the names above, a couple of holdings performed very well. Pinterest increased 12.8%. Uber increased 8.5%. Cloudflare increased 7.3%. And Adyen increased 8.3%. What matters is that our largest positions were all incredibly resilient. All top 5 holdings were positive on the month.
As part of the rebalancing, the weights of PINS and SQ will go up marginally, but a larger number of holdings will see some small reductions. The Paper Portfolio will also completely sell out of Atlassian. Atlassian was added during the February Update. The stock has increased 23.7% over the 8 month holding period. While I continue to like Atlassian, its valuation is quite rich and unlikely to deliver returns disproportionately higher than the rest of the portfolio as a whole over the next 30 days. The flexibility of added cash would likely be more valuable. If the political and geopolitical environment looks more manageable in 30 days, we can easily add the position back.
Let’s see what October brings.
Disclosures: I own shares in SE, PINS, SQ, UBER, FB, SHOP, NET, AYX, MTCH, PLAN, and TEAM. I may transact in shares mentioned in the next 48 hours.