Originally published December 13, 2021
Market Observations
What a wild month it has been. The portfolio started to catch up in all the downward volatility only to fall even further behind when the market ran back up. Some of you also noticed that when the market went up, it did not bring everyone along for the ride. It happens often enough when certain big components of the index drive the market up single-handedly, which is fine if you have a market ETF, but if you don’t own those particular stocks you are out of luck for your own performance.
The Canadian and international indexes have lagged against the US indexes. The tech sector was once again the number one performer. It’s particularly frustrating for anyone like me who has decided to be defensive. The cost of being different is mounting and there is an argument for adjusting back, at least a little bit, to a more market-like portfolio. It is what it is. For the moment I am moving slowly towards a more index-like portfolio. I will likely continue to make a few moves in the new year. Nothing dramatic, but definitely some adjustments.
Risks of Growth Stocks
Some of you got caught in the Docusign (DOCU) fall last week. Docusign, which is the company that leads the pack in providing software solutions for electronic signatures, provided a slightly lowered guidance to their future expectation of revenue. The stock then dropped 40% in one day… ouch. I bring this up to point out that the small investor needs to keep an eye out for positions they hold that may have become risky over time, or maybe were always risky but they did not realize it. Often a position will go up in value very quickly in an exuberant market, beyond its intrinsic value. This is ultimately what everyone wants, but if the story of the company changes, so does the value… quickly.
Don’t get me wrong, you need some exposure to growth stocks that are based on hopes and dreams, but not too much. These companies are easily identified, since the usual way of measuring them is more difficult as they often have no earnings or their pe ratios are over 35, sometimes in the 100s. How do you value something that makes no earnings? Well, you end up trying to value them in other ways like revenue growth, price per sale, or free cash flow. These are not straightforward approaches to value a stock so there is much more room to get it all wrong. Amazon and tesla are good examples, historically very little earnings were made but huge growth created large companies. What are they worth? They make no money. They just grow, so they are worth something for sure, so the market supply and demand will ultimately determine their value, and it can be volatile.
Review Your Portfolio for Weaknesses
So what am I trying to say? A portfolio should be reviewed for weaknesses from time to time. Warren Buffet’s rule number one is to not lose money, followed by rule number two which is to go back to rule number one! It comes down to avoiding big mistakes. Is your portfolio solid? Or are you holding too many Tesla or Docusign companies? There are other ways to murder money as well. These include holding too few sectors (not being diversified), holding too much cash, holding too much fixed income, like bonds, or too many income stocks like REITs that are interest rate sensitive. As I said earlier, I have no issue with holding a stock like DOCU or Tesla, but it has to be part of the more speculative portion of the portfolio, which should comprise no more than 5% for most people. If things go bad, it’s not the end of the world. I know someone whose wealth is almost entirely based on Bitcoin. He has been lucky, but luck can run out quickly.
My Portfolio Weakness
Where is my weakness? I believe I have become too defensive which has caused some serious underperformance. I simply do not think at this point that being so defensive is going to be worth it in the long run. I think the strategy to be defensive is sound, but I think I perhaps took it too far without realizing it. At the same time, I do not want to swing too far the other way and expose myself to the risks that I have been trying to avoid in the first place.
In the future, I will likely continue to increase my tech and coms positions, so stay tuned.
Calculate Your Annual Performance
Finally do not forget that it’s year-end. Take note of your dec31 portfolio value to determine annual performance this year and to create the starting point for next year. If you don’t do this annually, it’s like driving without gps, or headlights, etc…
Happy investing.
Marc’s Monthly Moves
I have sold BABA as a tax-selling move. I will likely buy it back in 30 days. I have purchased Google to increase my communication sector, which is underrepresented. Google is a giant monopoly, high quality, and still growing.
| Buy | Sell |
| Google (GOOG) | Alibaba (BABA) |
Marc’s Portfolio YTD Performance
- Portfolio return 17% (Including currency losses/gains)
- Portfolio return 17% (without currency losses/gains)
- SP 500 return 25.45%
- TSX return 19.83%
The portfolio underperformed against the SP500 by -8.45 points.
Money with Marc 