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.
What a start to the year.
The selloff that began in late November and accelerated in December…continued to accelerate throughout January. Although it initially affected just high multiple, high growth stocks, the selloff eventually ensnared even more reasonably valued parts of the market by mid January.
The trigger since November has mostly been a combination of very high inflation and a complete reversal in Fed tone. The Fed has gone from very accommodating to seemingly very unaccommodating in a span of 6 weeks.
And, unfortunately, high multiple stocks are the ones that are most sensitive to changes in interest rates and the cost of capital. This has been a very swift and painful period for the Paper Portfolio, but with the reset in valuation, a lot of the stocks are now becoming increasingly attractive.
For example, SNAP used to trade at 20x revenues and is now trading at 20x 2023 earnings after selling off >60%. 20x earnings isn’t exactly “cheap” yet, but it certainly sets up the stock nicely to become very cheap, very quickly unless the business materially decelerates from here.
Many once expensive stocks are increasingly like SNAP. But these businesses still need to deliver as expected (ideally better than expected). If we are to make money from here, we need to make sure to avoid situations where other investors not only paid a high multiple on expected earnings, but also overestimated future earnings. Peloton might be such a scenario, for example. I have no doubt that we will eventually discover that we have misjudged the future earnings power of some of these businesses, but ideally we keep those situations to a minimum.
The holes we dig ourselves into through high valuation alone are eventually escapable as long as we are in the right businesses. The holes we dig ourselves into through high valuations AND the wrong businesses are the graves we will eventually die in.
Good thing life expectancy is pretty high in this country. I have no plans to die anytime soon.
In any case, January was a challenging month. The Paper Portfolio returned -20.14% vs -5.27% for the S&P500. After two months of very sharp negative performance, the gap between the Paper Portfolio and the index since inception has narrowed dramatically. At the end of January, the Paper Portfolio is now up only 85.20% vs 57.71% for the S&P500. While the Paper Portfolio is still up meaningfully vs the index, the elevated volatility of the Paper Portfolio is probably not worth experiencing unless we are able to earn a commensurately better as well. We’ll have to see if we can widen the gap again in the coming months and years.
Not much to highlight in terms of individual stocks this month. Almost everything is down a bundle, but mostly due to market / macro factors rather than anything stock specific. There was only 1 stock that had positive returns (PLAN). PLAN never experienced the wild momentum on the way up, so that may have helped insulate it from the hangover as well.
We have a little bit of a cash cushion raised over the last two months. Given how much stocks have sold off and how valuations have changed, I think it makes sense to incrementally wade back in to the market.
Let’s see what February brings.
Disclosures: Of the stocks mentioned, I own shares in NET, SE, PINS, MRNA, U, OKTA, SDGR, KIND, UBER, PLAN, AYX. I have no intention to transact in any shares mentioned in the next 48 hours.