As always, this is not investment advice! Please do your own due diligence and take your own financial situation into account. Everyone has a different financial situation, which means different tolerances for risk and ability to take risk. What is appropriate for me may not be appropriate for you.
In the blink of an eye, the year is almost over as we head into the final stretch.
Time really flies in the Age of Corona…can you believe that the COVID-19 virus was discovered almost 2 years ago? And when all is said and done, the world may ultimately spend 4 years in a mode of acute / constant crisis, almost as long as WW1 and WW2?
People I know still talk about “returning to normal”, but it will be interesting to see what that even means.
Not because humanity will never be able to overcome (and adapt) to the virus, especially now that we have vaccines and potentially decently effective treatments even if we catch it.
But because 4 years is a long time. And habits change. Habits are hard to break over short periods of time, but habits can and do break when forced to adjust over a longer period of time. And when they break, new habits form. And these new habits will be hard to break / reversed without sustained effort.
People are learning new habits that are very different from the habits prior to the Age of Corona.
And the Age of Corona has been a fertile period for myth-making, which I will loosely define as periods of history where people reassess their philosophies and mental frameworks and invent new myths to make sense of the world they live in.
Like war. Like chaos and struggle. Like death.
The stories and myths people invent to explain why we are where we are scientifically, technologically, economically, culturally, politically, geopolitically will inform decisions and perceptions for decades to come.
People talk about “returning to normal”, but I’m more interested in paying attention to how we’ve all permanently changed.
At a micro level and macro level.
Everyone is already tuned in to the debate on WFH (work from home) / hybrid work, but there’s going to be more.
Because the world we live in is non-linear.
Seemingly small changes can compound over time and result in very big changes.
(For a mathematical example, consider the difference between a portfolio that compounds at 8% vs 10% over a 30 year period…2% difference doesn’t look like a lot, but compounding it over a 30 year period leads to unfathomable differences…8% compounded over 30 years leads to 10x return, but 10% compounded over 30 years leads to 17x return. The next time someone tells you 2% is inconsequential, you should think twice. That 2% difference is not 2% different after 30 years…it’s almost 2 times different. That means almost 2x more money and more whatever you want.)
Because these changes will build on itself over time. It will affect what assets people find valuable. It will affect what things people consider good (or bad).
Even something that seems inconsequential as 2% inflation vs 3% inflation can lead to dramatically different places over a 30 year period.
We are in a Chaotic Era, an era of change. What we should be paying attention to is not when we can go “back to normal”, but where we are already heading.
Turning to the Paper Portfolio – the Paper Portfolio did well, returning 11.71% during the month of October vs 7.02% for the SPY. This brings YTD returns to 22.78% vs 24.05% for the SPY. Since inception the Paper Portfolio has returned 179.7% (and 204.5% excluding the cash drag from the initial 6 month ramp).
During the last few months, the Paper Portfolio shifted towards a more conservative stance due to rising uncertainty around areas like fiscal and monetary outlook, global macro, and supply chain disruptions. This conservatism has been moderately helpful as it has reduced our exposure to names that have recently been impacted such as Apple. The marginally higher cash position also allows us to take advantage of the recent market volatility around these themes.
However, the conservatism was not a main driver of the story in October. The Paper Portfolio was primarily driven by company specific developments, some good and some bad.
Starting with the good:
Cloudflare returned an incredible 72.9% in October. After announcing plans to launch an edge storage offering known as R2 (and thereby making clear Cloudflare’s ambition to potentially disrupt AWS), the stock went on an incredible run, likely also fueled by significant amounts of short covering. Cloudflare’s P/S multiple is now extremely rich and materially above most of high-growth software. Only Snowflake sports a P/S similar to Cloudflare. While I continue to think Cloudflare has immense long-term potential, investor optimism has clearly risen to extremes. I will not complain, but it is still likely a good opportunity to take some capital back near-term.
Unity and Nvidia returned 19.9% and 23.4%, respectively. While there are multiple different drivers for these two stocks, one common (and key) driver over the past month has been all this talk about the Metaverse, especially with Facebook’s reorganization into the Meta company. Unity benefits because the Metaverse is often associated with VR / AR and games. And Unity is the primary game engine powering all of that. Roblox is another name often associated with the Metaverse, but Roblox’s footprint in VR / AR is minimal, and all of its games are locked in its own walled garden ecosystem, whereas Unity powers games across all ecosystems including for games on Oculus. Nvidia is also benefitting because whether it is games or VR or AR or AI…all of that leads to Nvidia’s GPUs and cash register.
Zillow returned 17.6%. The news flow around Zillow has been quite bad, to be honest. Zillow is pausing their ibuying because they may have been too aggressive in bidding for houses. But despite the bad news, the stock is up probably because the stock has been sliding for a while. And now that the bad news is all out in the open, investors may be betting that things can’t get any worse.
AMD returned 16.8%. AMD reported strong results. The results further contrasted with Intel’s disastrous results. It’s becoming increasingly clear that Intel is in deep trouble in the coming years and has a lot of work to do to catch up to TSMC in manufacturing process. This means AMD (which outsources manufacturing to TSMC) will have a process advantage for at least a few years and will be vacuuming market share very quickly.
Fastly returned 25.2%. Probably a bit of short covering ahead of results.
ETHE returned 49.8% as ETH prices reached all-time highs. Most of everything that people are interested in in cryptoland is built on top of the Ethereum blockchain.
On the bad side:
Pinterest declined 12.4%. At one point, the stock was on its way to a very healthy return after rumors of a PayPal acquisition spread. However, PayPal eventually denied the rumor, which negatively impacted Pinterest. In addition, the denial came after Snap’s negative earnings surprise (Snap’s 4th quarter revenue guidance was far below expectations because of greater than anticipated impact from Apple’s privacy changes and supply chain disruptions impacting advertising demand), which raised concerns that Pinterest may also be in trouble (and potentially trying to sell itself to resolve its problems). It also did not help to see Pinterest’s co-founder announce that he is leaving the company (to join Jony Ive’s design firm). We’ll have to see what Pinterest says when they report results in a few days.
Moderna declined 10.3%. At the beginning of October, Merck revealed Phase 3 results for their covid pill. During the Phase 3 trial, the pill reduced hospitalizations by ~50% with even higher probability of preventing death. This led to significant debate about whether demand for COVID-19 vaccines would decline. While this is a possibility, people should still get their vaccines because preventing COVID-19 should be more preferable than getting the virus and possibly going to hospital, even if the pill showed high probability of preventing death. In addition, Moderna was impacted by negative news flow around mRNA vaccines potentially causing heart inflammation in a small number of young adults.
Mercadolibre declined 11.8%. Brazil (and Latin America) is currently in an odd place, economically. Brazil’s macro situation is worsening, and the President of Brazil is currently caught in a lot of controversy after trying to push through fiscal stimulus that could damage the country’s long-term debt sustainability trajectory. These macro concerns come at a time when the company is also lapping tough comps. Investors are also likely concerned about rising competition as Shopee and Amazon get more aggressive in the region. On the payment side, Stone’s recent troubles with credit have also raised concerns about MercadoPago’s lending operations.
Overall, the Paper Portfolio performed well for the month, driven mostly by company-specific developments.
In our last rebalancing, we raised cash to 4.25%. For this month’s rebalancing, I have further trimmed some positions. These trims bring total cash to 6.00%. But, I also find the recent selloff in Snap to be an interesting entry point. As a result, the Paper Portfolio will initiate a 3% position in Snap. While most people that don’t use Snap might still view Snap as just a disappearing video-messaging company, Snap has evolved into a much wider media ecosystem (with Stories, a TikTok competitor called Spotlight, and Mini apps…mostly games) with a very interesting wedge into AR. Snap has the widest and most attractive set of AR filters that should become increasingly valuable as the Metaverse starts to take shape. Even before the Metaverse rolls around, AR filters are becoming very useful tools for advertisers and brands to drive product sales.
Alright, that’s all folks.
Disclosures: I own shares in NET, SE, PINS, MRNA, SDGR, U, OKTA, PLAN, UBER, AYX. I have no intention to transact in any shares mentioned in the next 48 hours.