November 2021 Portfolio Review
Raising the quality bar and an appreciation of the value of conviction
Overview
The “kick in the nuts” I was expecting for October ended up arriving a month late. Most of my holdings got sold off heavily in the last week of November.
I’m conditioned to expect these episodes roughly every 6 months - there is always something to worry about. After the unusual returns of 2020, volatility in the other direction was always in the range of potential outcomes.
Investing in individual stocks can be simple or complex as you choose to make it, but it is not easy - having a plan aligned to your investing philosophy is vital.
Portfolio Changes since the end of October 2021
Sells
$API - This was a painful exit on a mismanaged position. I’ve spent time reflecting on my decision-making process here rather than the financial outcome, which I have to accept as the cost of market tuition.
Agora made a inappropriate parabolic move back in February 2021 that I felt was based on Clubhouse hype rather than business fundamentals. The valuation disconnect ($>10B on <$200M in NTM sales with China ADR risk ) did not match my long term conviction in the company’s durable competitive advantages. It should have been a sell on that basis, back in Feb, when I was close to a 3x on my original purchase price.
The conviction assessment was a qualitative rather than a quantitative issue, but I was able to answer it at the time
did this feel like Jeff Green & $TTD, Toby L & $SHOP, or Jeff Lawson & $TWLO level of conviction?
The answer was no.
What happened instead of a profitable short-medium term return was a loss of ~50% of my invested capital.
It was a foolish mistake to try to optimise my selling timing for the UK tax year in the first week of April. I was up against the £12.3K threshold of tax-free capital gains for the year in my taxable account as I worked towards paying off the loan, and decided to try to ride the position through to the next tax year in April 2021.
After the Feb spike and drop, I continued to hold $API stock for too long and price anchored, despite acknowledging that the near-medium term prospects for the business had deteriorated due to the changes in China’s ed-tech market. Lesson learned - my decision-making framework around selling stock requires a structured “level of conviction” assessment somewhere in the mix.
Agora remains an interesting company, and the last ER was a bit better than I had expected but it does not warrant a place among my best ideas for now. There are no extra points awarded for difficulty, so I dropped $API this month after dropping my other Chinese ADR, $BZUN last month.
My main concern with $BZUN (outside of the China ADR issues) was that the business was deteriorating before my eyes, and the most recent ER reinforces that perspective in the near term. I don’t mind revisiting both ideas in the future, at a higher price if needed.
Funds from $API have been reallocated to $DCBO - growing faster, similar market cap, no China ADR risk, better operating margin, more confidence in the leadership from the ER call.
$NVTA - I halved my position after the last ER. Not because the stock was down, but because I have struggled to justify the position allocation size vs alternatives.
I respect the long term ambition but just don’t have enough faith in the Invitae executive team to be capable of turning it into a business in the true meaning of the word.
As an asymmetric bet, it might work, but there is no need to over-allocate to speculation.
Buys
$SEMR - full position
$DCBO - 1/4 position while i dig deeper. The last ER results were solid, but i wonder whether the TAM and tailwinds are large enough for this to ever be anything other than a niche business…
$SE - starter position
$CLPT - tryout position. A fascinating (?speculative) idea for long term consideration. I’ve kept wanting to learn more, but medtech is not my traditional zone of investing competence. Having a little skin in will help me think through it a bit more clearly. I have minimal expectations regarding ROI at present, but the space is certainly interesting. Chances are high that I won’t add to this as a priority in the near term until I can understand it better and de-risk it to my satisfaction - that might be a tall order and may not be the best use of my time…
Current Portfolio Allocations
$TTD is holding up my portfolio after a stellar market reaction to strong earnings. A number of my holdings are -ve YTD, but I’m still currently in positive territory for the year (for now) despite paying off £16K of debt this year. I’ll take that, and the ridiculousness of my crypto holdings has softened the impact. I'm still not talking about crypto in detail because price action observation is not analysis.
Several investors I admire have had a far more successful year. I have been asking myself what I can learn from them to improve my process. There usually is something to learn, but it’s also important to acknowledge that not everyone can or wants to play the same games - I was unlikely to ever invest in $UPST as an example.
My focus for most of 2021 was on loan payoff rather than new ideas, but I do wonder if my quality bar threshold should have been raised earlier.
I may have spent too long holding onto ideas that have been more mediocre as opposed to great. I wonder if I need to be more decisive when my conviction doesn’t match my allocation - (looking at you $TDOC). I don’t expect a smooth annual CAGR but the penalty for holding onto businesses that are not your best ideas in a concentrated portfolio is pretty high. Trying too hard to be smart has probably kept me out of $DDOG and $NET this year, despite doing enough work on both of them. I’m trying to avoid “resulting” as getting the process right is the key thing, but I was pondering this recently after a thoughtful reader asked why I don’t own either.
Overall, I’m ok with how things have turned out this year so far - it continues to be a learning journey.
I will confess to feeling a bit burned out with work, markets and 2021 in general. I’ve found it hard to get into a flow state over the last few months. I’ve recently had lumbar disc problems that are not helping my mood - I need to do some focused physiotherapy and lose some weight to put myself back together physically as well.
I am looking forward to the Christmas period to reconnect with family and to get excited and optimistic again. We’re picking up a tree at the weekend, and the kids are getting excited about their upcoming nativity performance. There’s plenty to look forward to…
Just need to maintain perspective over it all.
Have a great December!
Watchlist
$AMPL, $CFLT, $IOT, $OLO, $DOCS, $MQ, $WEAV
It’s been a tough year for growth stocks that is for sure. Market beating returns in 2020 and reversion to the mean for many names. I am sure these stocks will bounce back. I wish you a speedy recovery my friend.