Trevor’s Portfolio: Confessions of a battered investor

Executive summary

  • October 2018 was a blood bath for global equities with the S&P 500 shedding more than US$1.9 trillion in value during the month, the worst rout since September 2011;
  • The S&P 500 was down 6.95%, giving up most gains for the year and ending the month up a mere 1.42% for the year
  • Trevor’s growth-oriented portfolio got a good-hiding, going down 21.5% in October along and virtually wiping most of the gains for the year. As of end of October, the portfolio was however up 4%

 October market rout: Running for the hills

There is a common adage on Wall Street: “Market pullbacks are healthy for long-term bull runs. They remove weak hands from the market and increase scepticism which stops exuberance from taking valuations to truly irrational places”. Well, October was that month and hell did it remove so many fragile hands.

The benchmark U.S. index, the S&P 500 crushed 6.95%, wiping out US$1.91 trillion off investors’ wealth. To give perspective, this was the worst monthly performance by the market since September 2011.

It all kicked off with the Federal Reserve Chairman, Jerome Powell, telling the market that the U.S. economy no longer need the policies that were put in place to pull it out of the last financial crisis. The Fed Chairman signalled that the Fed is going to aggressively raise interest rates and there have “a long way” to go before they get to neutral interest rate levels. Trump, as predictable, wasn’t happy, launching a scathing attack on the Fed and the market revised its forecast interpreting the statement to mean the Fed is going to raise U.S. interest rates to at least 3.5%, up from 2-2.25%, before taking a breather. Such a hike will be much steeper to what was initially anticipated.

Coupled with the general consensus that U.S. equity market was already in expensive territory, the market reacted violently sending shares sharply lower in October. Technology stocks, particularly four of the five FAANG stocks: Facebook, Amazon, Apple, Netflix and Google parent Alphabet — were among the hardest hit. Amazon shares dropped 20.2%, shedding over US$169 billion in market cap and in the process lost its trillion dollar valuation. Despite impressive Q3 numbers, Netflix was down 19.3% as investors got worried about the company’s increasingly reliance on debt, in a rising interest rate environment, to fund the expensive costs to develop content. Facebook and Alphabet both finished October down 7.7% and 9.7%, respectively.

Trevor’s portfolio performance

Growth stocks are very volatile and their high market beta means they are more volatile than the overall market. My tech heavy and growth- oriented portfolio bore the pain when the market tanked in October, going down 21.6% in one month!

The biggest losers were Stitch Fix, Square, Nvidia and iQiyi, which were down 34%, 26%, 25% and 21% respectively in the month. In addition to the broad market sell off, there were also company specific factors on play. Stitch Fix posted awful Q3 results with user growth remaining flat as the company experimented with pulling off TV advertising. Square’s share price had overrun reaching a P/S of 14x at its peak valuation and as for iQiyi, even though it managed to post an impressive growth in paid subscribers in Q3, the cost of developing content is still way ahead of the revenues from subscribers.

Security October 2018 returns
Vanguard VOO ETF -6.95%
Powershare QQQ ETF -8.6%
EMQQ ETF -5.0%
Unit trusts (TFSA)
Sygnia 4th Industrial Rev -8.75%
Individual stock picks
Square Inc -25.8%
Nvidia -25.0%
Stitch Fix -34.4%
Delivery Hero -16.1%
Spotify -17.2%
Infineon Technologies -11.8%
iQiyi -21.0%
XPO Logistics -11.7%
Overall portfolio -21.5%

October portfolio additions

As a long term investor, I took advantage of the strong market pull back to add exposure to two quality businesses I had been tracking for a while. I  initiated exposures to Tencent Holdings at HKD258/share and increased my exposure to XPO Logistics at US$86/share.

Tencent has had a torrid year triggered by increased Government intervention in its gaming business. The Community Party is cracking down on its addictive video games and have indicated that they will not approve any new games until the second half of 2019. Gaming has historically been the company’s cash cow so obviously the market got nervous, sending the share price down 40% from its peak earlier this year. My view for Tencent is very simple – the company is the Berkshire of the technology sector in China and its tentacles are spreading to other segments include payments, content streaming, e-commerce, Al and cloud computing. I am in no way worried about the company’s future prospects. I actually believe that Tencent will be the first Chinese firm to reach a trillion dollar valuation.

As for XPO Logistics, I love its dominant positions in the last mile logistics segment which is growing at more than 12% p.a. driven by increasing e-commerce volumes as well as its dominant position in the Less-Than-Truckload segment. You can read my full through on XPO here

Looking forward

After some careful consideration, I have decided to pull back a little from buying shares going forward. I am going to pivot my portfolio and start building up my cash position over the next 6 to 12 months. This is not an attempt to time the market but rather a strategic decision to stock up on dry powder to take advantage of a prolonged bear market which I believe is long overdue. To be clear, I am not putting a moratorium on buying shares but rather I will be strategic allocating more than 60% of new capital towards cash (and when I say cash, I mean US$).

In addition, I am also looking to diversify my portfolio away from technology stocks. There are a number of opportunities in the US$ 2 trillion payments sector, grocery retail space as well as fast moving consumer goods that I am currently analysing. I will share my thoughts on my blog.

Closing remarks

Well, October was bad and a lot of weak hands were surely from the market. I don’t believe that this was not a once time sell off but rather the beginning of a bear market. In an interview with CNBC last week, Ray Dalio – the famous hedge fund manager and co-founder of Bridgewater Associates –  spoke about how the U.S. market is now in the 7th innings and as the Fed raise rates and unwind quantitative easing policies, equities are definitely heading for choppy waters in the near term. In essence, the risk in the market are now heavily tilted towards the downside

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