Business & Money
I’ve gotten quite a few notes from people in recent months asking what I am buying and selling during this crazy time. So here it is.
My portfolio is up 12% on the year. That feels strange to say given we’re in the midst of both a health epidemic and a large shock to the real economy. I used the word “real” in that sentence to distinguish between the actual economy and the stock market. While the Nasdaq is positive for the year and the S&P is only off 12%, the real economy has seen jobless claims spike to 30 million and tons of companies have seen their revenues cut 80-100% overnight. And all the while 250,000 people have died globally, with 80,000 of those in the US.
This disparity between the real economy and the stock market doesn’t make sense to me; it doesn’t feel right. There is a narrative that low interest rates and money printing yields higher asset prices, and I imagine there is some truth to that. Nonetheless, I still feel uneasy.
At the end of the day, I find investing to be more about psychology and emotion, than it is about intelligence or financial analysis. As such, I needed to do something to ensure that I could keep my emotions in check and fight off the cognitive dissonance.
I decided to sell 20% of every position. I chose to do it across the board to embrace my own ignorance. I have no idea what will happen in the future, so I didn’t want to pretend I knew what stocks to hold and which to sell. So I sold a bit of everything. My hunch is that there will be better opportunities to put that capital to work in the not too distant future. Perhaps that plays out, and perhaps it does not, but there are worse things in the world than having more cash on the sidelines, especially if it helps me sleep better at night and keep the emotions at bay.
So that covers the selling side of things.
Of course, massive selloffs are also a great time to buy. It’s not every day that your favorite companies go on sale for 25-40% off. So in mid-late March when the panic felt palpable, I was busy putting capital to work in one of the largest themes in my portfolio: e-commerce. E-commerce has been a steadily growing trend over the last 20 years and the current moment serves to accelerate the trend. As such, Amazon at $1,729 a share felt too good to pass up. Same for Shopify at $326 and MercadoLibre at $509.
Finally, I’ll end by calling attention to a stupid mistake. I decided to buy shares in Carnival Cruise Lines when they hit $27. I promptly sold them a few weeks later at $17 for a quick 40% loss. Ouch!
But it was a good lesson, and an important one. Sometimes things sell off because of fear and panic. And other times things sell off due to a fundamental impairment to the business. I put a bunch of money into Shopify when it fell from $535 to $326 because nothing changed about the underlying business. If anything, the proposition of e-commerce only got stronger. By contrast, Carnival stock fell 85% due to a fundamental impairment. Revenue likely fell by that same amount, and there’s no way to tell how long that impairment will last.
Lucky for me, my good decisions during this period have more than compensated for the bad, at least for now.
Human Progress
Following that same thread, progress and improvement are all about learning from one’s mistakes. And even better than learning from your own is learning from the mistakes of others to avoid making those same mistakes in the first place.
Sticking with the theme of markets, I figured I’d touch on the things I’ve seen during my short stint of investing and what I’ve learned from each. 4 periods stand out to me.
The first that I was old enough to understand was the financial crisis of 2007. From that I learned to be allergic to debt. Nothing kills a business like too much debt.
The next was the run-up in the crypto markets during 2017. I had done some reading about euphoric periods in the past, but reading is altogether different than experiencing the real thing.
I made my first Bitcoin purchase toward the end of 2015 at $330. At the beginning of 2017, the price sat around $900. By June when things had tripled to $2,700, I started to feel uneasy. It didn’t feel right that something would appreciate that much that fast. So at that point I made a rule for myself: I would sell half the position any time it doubled. My logic was simple. If things doubled again, I would sell half, which would lock-in significant gains from where I started. At that point, I would be playing with house money. I wanted to participate in the upside, while removing the downside. So I sold half when things hit $5K, and half of that at $10K, and another half at $20K.
I’m not sure the “selling half” strategy is the right thing for everyone, but I think the underlying principle is sound. If things feel like they are starting to get frothy, it’s not a terrible idea to decide on a strategy in advance, so that you can remove the emotion from the process as things progress.
The next one came at the tail end of 2018 when markets quickly gave up 20% in 3 months. I learned 2 things.
First, it was during this time that I first heard the phrase “markets take the stairs up, but the elevator down.” It’s so true!
Second, when you decide to put capital to work during these periods, you can make a bunch of small bets, or a few high conviction bets. The latter feels more appropriate for me.
Finally, we come to today. I think things are a bit early to draw any conclusions, but there is one thing I’ll say. I have no idea what comes next. And from what I can tell, no one else does either.
Philosophy
It’s super hard to admit that you have no idea what’s going to happen. We humans are narrative machines; everything has to make sense. Everything must be reduced to cause and effect.
I once had a mentor who gave me a great piece of advice.
Every day, write down a prediction. After a while, review your notes to see how often you were right or wrong.
It’s likely to be a humbling experience.
My Latest Discovery
Overnight oats are delicious, nutritious, and super easy to make!
(ok, Hana makes them, but I swear she said they’re easy to make 😂)