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.
I’m currently on holiday (at a nice warm beach) and I assume you were / are / will be, too, so I’ll keep this short (and because there really isn’t much to say anyway!).
November was volatile much like most of 2021 so far. The underlying tectonic shifts that are underway technologically, economically, socially, culturally, politically, and geopolitically continue without pause. These are not the things causing volatility, in my opinion. These shifts are secular and enduring. As sure as the sun rises.
What is causing volatility is the rapidly oscillating perception of how fast changes will happen or whether change will be delayed or undone.
One moment the market thinks the world is secularly changed, and then another moment the market is back to assuming “reopening and return to normal” for whatever “normal” even means.
November was mostly a ping-pong between these extremes as investors weighed all of the following:
1/ New Coronavirus variant Omicron – Pandemic repeat / continuation or no big deal?
2/ Rising and sustained inflation – Still transitory and due to supply chain stress or something deeper?
3/ Monetary tightening – Taper is coming…will rates go higher faster and more furious than expected due to rising inflation? Or are we still “business as normal” in an era of low rates even if rates begin to rise?
4/ Politics and Geopolitics – Was Trump a fluke? Politics and geopolitics continue to look pretty shaky even under Biden…
I don’t think we have to be too cute with any of this…I don’t know what the world will look like in the next 6 months or the next 12 months for that matter, but the next 3 / 5 / 10 years continue to look pretty clear.
We are in a Chaotic era, an era of change. The secular shifts that began years ago are not stopping now. We can either ride the change or deny it at our own peril.
The best positioned companies are those that can learn and adjust quickly. The best positioned companies are those that can innovate and invent. And that’s what we seek to invest in through the Paper Portfolio.
Unfortunately, there’s been a lot of excess in the capital markets, including many investors that have been either careless about what they pay (e.g. I like NET, but I definitely liked it a lot more at ~$20 when it was added in December 2019…and much less at $200 even though the thesis for us has not changed at all) or not particularly informed about what they own (e.g. I’ve seen too many investors claim X is the “Shopify of…” or “Square of…”; the chance that any of them are Shopify or Square of anything is pretty close to 0).
Many of the stocks in the Paper Portfolio have such investors, and unfortunately we’re traversing down the same roads with these travelers at the moment. Many of these fair-weather friends of ours are likely suffering immense drawdowns, which is leading to cross-contagion. The Paper Portfolio has made a few mistakes this year (e.g. Zillow) so we’re not free of guilt ourselves, but I hope to keep that list short.
In the meantime, I think if we more or less keep up with the S&P500, I think we have done okay.
Turning to the Paper Portfolio, the Paper Portfolio was on track to outpace the S&P500 both for the month and YTD until the past two weeks. Similar to the last few months, the Paper Portfolio approached the S&P500 intra-month, temporarily exceeds it, but then gives back the gains as various unexpected headlines lead to elevated volatility. Nevertheless, we are not too far away from the S&P500 (and can change on a dime given the elevated volatility of the portfolio). For the month, the Paper Portfolio declined 7.17% vs -0.8% for the SPY. This brings YTD performance to 13.97% for the Paper Portfolio vs 23.05% for the SPY.
There were significant declines across many names, but most of the declines were mostly related to market volatility rather than company specific issues.
The few stocks that faced company specific issues were:
1/ SDGR – Schrodinger declined 28.22% in November. SDGR reported weak results at the beginning of the month with a relatively high guidance range for Q4 despite the quarter almost being over. This raises concerns that there might be underlying business issues that are not well understood by the market.
2/ Z – Zillow declined 47.6%. Zillow announced disappointing results and indicated they will completely pull out of the ibuying segment (where a user can sell their house directly to Zillow). ibuying is a fast growing segment that could have become a large opportunity for Zillow. Pulling out of this segment raises questions of what’s next and whether Zillow is now potentially at risk of disruption if other ibuying players succeed. This is a bit of an unfortunate mistake, but I can live with it. We have probably burned 2% of performance in total during the duration of this holding.
On the positive side:
1/ NVDA + U + AMD – Nvidia returned 27.8%. U returned 13.9%. AMD returned 31.7%. All three are likely benefiting from the continued halo of being associated with the Metaverse (by enabling it through core technology).
Not much else to call out.
For the December Update, I am trimming the outperformers, while maintaining month-end weights for most underperformers.
We will add a 3% position in KIND (Nextdoor). Nextdoor currently is flying under the radar with limited excitement from retail and professional investors. There are currently no sell side coverage of the name. All of this bodes well if the business continues to execute as I anticipate. Nextdoor has a highly differentiated social graph based on real-world proven identities tied to your neighborhood. This position of trust is very hard to replicate. Although it is not “exciting” to many investors likely because of its seemingly niche appeal, the financial opportunity ahead here will be nothing close to niche. While Nextdoor will not be able to rival peer social networks in terms of users or engagement, Nextdoor has the potential to do better advertising than Facebook can at a local level. Every social network can only dream of gathering real-world, proven data on you (to serve you advertising). Nextdoor is the single social network that already knows most households at a local, real-world level. And more importantly, the vast majority of advertising online is local / small-business advertising. Google and Facebook have to gather a lot of potentially creepy data on you because it needs it in order to know what local advertising is relevant for you. Nextdoor already knows who you are at a local level. It doesn’t need all that creepy data to do local advertising in a targeted and relevant way. Nextdoor is simply much better positioned to serve the local advertising market than Facebook is. Nextdoor seems like an asymmetrically good bet at $4 billion market cap. If the company executes well, I anticipate Nextdoor could become a $40 billion+ market cap in the next 5-10 years.
Alright, that’s all folks. Let’s see what December brings.
Disclosures: I own shares in NET, SE, PINS, MRNA, SDGR, U, OKTA, PLAN, UBER, AYX, and KIND. I have no intention to transact in any shares mentioned in the next 48 hours.
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