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.
March was an extremely volatile but interesting month.
Markets sold off violently in a way that was eerily similar to the market selloff two years ago.
In March of 2020, the world faced an uncertain future with a war underway against an unknown virus.
Now in March of 2022, the world once again faces an uncertain future with a regional war underway in Eastern Europe, a financial war underway around the world, and a possible new Cold War a few footsteps into our future.
In March of 2020, markets rebounded almost as quickly as it fell in a near V-shaped recovery.
Interestingly, now in March of 2022, markets also rebounded sharply in the last two weeks…possibly driven by hopes for a peaceful resolution.
Despite the eerily similar pattern, the situation couldn’t be more different.
Back in 2020, global governments took steps to support the economy. Now, global governments are taking steps to rapidly reduce support in order to manage spiraling inflation.
Back in 2020, despite knowing almost nothing about Covid (yet), there was no question that the world would be able to defeat the (viral) aggressor given enough time. Now, what does victory even mean in our highly uncertain, tinderbox geopolitical world? Does it mean a complete defeat of Russia? Or is it possible to simply forget the past month and go back to “normal”? You and I can go back to normal, but there are close to two hundred million people in Eastern Europe that no longer have a normal to go back to no matter what happens.
Back in 2020, I was very optimistic about our future.
Now all I can think about is the fact that we live in a Chaotic era, an era of Change.
And all the possible ways to Change are the Changes upon us.
Still, I’m the most wildly long-term optimistic person I know. I still am.
But I’m always a near-term realist, and our eyes need to be wide open.
The world is fragmenting in ways that might not be reparable. The world’s supply chains are fragmenting in ways that might not be reparable. The world’s technology and financial ecosystems are fragmenting in ways that might not be reparable…in the old way as we know it.
All of these things create volatility.
And if there’s an iron law to life, volatility always creates more volatility.
There are never permanent equilibriums in our world. With enough volatility, the world gets shaken and stirred just enough to potentially (but very rapidly) shift to new unforeseen equilibriums.
We are in one of those moments. Perhaps we return to the same equilibriums we all know and enjoy. Or perhaps not.
While we seem to have a taste for risk in the Paper Portfolio given our high valuation, tech skew, there is a season for risk, and there is a season for retreat. Unfortunately, we’re probably in the latter. It probably makes sense to take a more defensive stance near-term while our world undergoes transformation.
This does not necessarily mean sell all the high-valuation / tech / growth names and buy commodities.
I think it means prioritizing companies that have the most degrees of freedom, companies that can navigate the changing world no matter how it evolves. This means businesses with strong balance sheets (not necessarily positive margins or earnings…if the balance sheet allows, it would actually make sense to invest and take advantage of global disruption at this every moment). This means businesses with critical and irreplaceable capabilities, capabilities upon which the world is built…both now and in the future. This means businesses that can evolve quickly, not just the dominant businesses of today, but the dominant businesses of tomorrow.
Interestingly, I think tech remains one of the most fruitful areas for investments, but we have to be selective. Valuations have reset, but the magic of tech isn’t necessarily DISRUPTION or INNOVASHUN. The magic of tech over the last two decades is the ability to create immense value and exist in a space entirely separated from the challenges of the physical world. The physical world has a history of being an ugly and messy place (as we are seeing now). But Tech? Tech is magic. Tech exists in a place where things are exactly as you command it and conjure it through code. And in an uncertain and unpredictable world, the companies that can command their realms with certainty are probably worth a premium.
All change creates immense opportunities. But you have to be able to get to the other side. And I’m determined to get to the other side…
For the month of March, the Paper Portfolio experienced a highly volatile month to end up nearly flat. After declining double digits by mid-month, the Paper Portfolio rebounded sharply to end the month down 1.7%. The S&P500 continues to do better at +3.8% (certainly didn’t feel that way!). This brings YTD returns to -19.8% for the Paper Portfolio vs -4.6% for the S&P500.
Although most of the portfolio was down meaningfully, most of the moves were related to overall market weakness.
A couple of highlights:
Winners:
1/ NVDA – Nvidia returned 11.9% due to continued (quite incredible) strength in datacenter demand. Despite the phenomenal growth of Nvidia’s datacenter business, we still seem to be in the very early days of AI and accelerated computing adoption. Nvidia announced new products at GTC / Investor Day that continue to raise the bar.
2/ MRNA – Moderna returned 12.2%. While Moderna remains a battleground between investors willing to bet on the long-term potential of mRNA technology beyond Covid and investors concerned about declining Covid-related revenues, bulls are temporarily regaining the upper hand. Moderna continues to sign more Covid-related contracts than expected. In addition, the company provided an updated look into their pipeline at their recent Vaccines Day event.
3/ PLAN – Anaplan returned 37.3% after private equity firm Thoma Bravo announced an acquisition of the company.
Losers:
1/ SE – Sea declined 17.7%. Although there were likely several factors in play, a key driver of weakness was likely Sea’s earnings / guidance. The company is expecting the gaming segment to face significant headwinds as economies reopen. In addition, the company’s leading game, Free Fire, was recently banned in India. Given the uncertain regulatory environment, the company also decided to shut down their India e-commerce operations. Despite the negative developments in gaming, Sea still appears very attractive with continued strength in e-commerce and growing potential in fintech.
2/ OKTA – Okta declined 17.4%. Recently, Okta has been caught in a media firestorm due to a security breach back in January. The scope and implications of the breach did not become known until March with weak communication from the company. The long-term impact of this incident is hard to gauge at this point, but the damage is likely manageable.
3/ Z – Zillow declined 14.3%. Mortgage rates have gone up a lot recently. Mortgage applications are falling rapidly. In short, Zillow likely faces headwinds near-term.
In terms of rebalancing, the Paper Portfolio will make quite a number of changes. The Paper Portfolio will completely sell out of Anaplan (since it’s already trading near the acquisition price) and Shopify. Shopify has already been reduced to a fairly small position over the last 18 months, but the rising global pressure on supply chains and logistics is probably a negative headwind for Shopify’s merchant base. I like Shopify, though…maybe we’ll be reunited again in the future.
The Paper Portfolio will also significantly reduce the weight in Zillow. The rapid rise in mortgage rates will likely create volatility in the housing market in the next 6-12 months.
A few other names will have their weights nudged down, while others will have their weights nudged up.
Alright, that’s all folks. Let’s see what April brings.
Disclosures: Of the stocks mentioned, I own shares in NET, SE, PINS, U, OKTA, SDGR, KIND, MRNA, UBER, and AYX. I have no intention to transact in any shares mentioned in the next 48 hours.