An Open Book:
As noted in my article last week, I believe full transparency is essential for building trust. For this reason I am sharing my stock portfolio and trades made over the past three years to ensure readers understand where I am positioned before I start writing on individual topics. Sadly most investment commentary, especially on places like CNBC and X, are largely tainted by the maxim of where you stand on an investment is based on where you sit (e.g. subtly encouraging others to buy a stock the speaker has an interest in). I aim not to do that, but still feel it’s important to make this audience aware of where my money sits so you can judge for yourself. What I will try to do here is to help you understand my logic in the decisions made and inform on the potential decisions to be made going forward so that you might glean some knowledge from my successes and failures.
Past Trades and Current Portfolio:
Success Metrics:
Up until now I have had a corporate job that allowed me to drive cash into my stock portfolio through both salary and stock allowances. Going forward I will only be utilising the roughly $350,000 stock + $50,000 cash currently owned. While this is just the practicality of my personal situation, it will also allow for easier tracking of success metrics. My fundamental success metric is whether or not my portfolio can outperform the market average, both YoY (year over year) and cumulatively. In general if you just stick money into an index fund, the expectation should be that over many years the average return will be approximately 10% / year. If I cannot beat that average, then I’m just wasting my time by taking a more activist approach.
Looking Inward:
My own portfolio contains only a handful of stocks, which as I’ve highlighted reflects my belief that diversification would defeat the purpose of entrepreneurial investing. I intend to keep my portfolio at 5-10 stocks; mostly because I have a hard time following more than that closely enough to validate my decision to own them (and determine when to sell them). It should also be noted that many other stocks are being followed closely and will be considered as potential buy targets, so the total amount of stocks to be watching grows quickly and can easily become unwieldy. I often look at funds like ARK Innovation ETF as what to avoid becoming. They hold 35-55 stocks from every “high-growth” sector imaginable, no matter how ludicrous. Their bet is on all “high-growth” stocks/sectors, whereas I would rather bet in a more focused way only on a few stocks that I believe have the best chance of succeeding.
Finding the Seams:
When Meta announced its Q3 earnings last year, it was mayhem. The stock plummeted 19% and nearly every story was about how it was in terminal decline. It’s helpful to go back and read through what commentators were saying at the time, for instance in this CNBC article. That week I put $50,000 into the stock because what almost everyone was saying about the company didn’t line up with what I believed. That is where opportunities lie - when the market is doing something you don’t agree with.
Market Belief vs Counter Belief:
As a stock I’m watching reaches 52-week lows I will often look at the conventional market belief about the stock and draw a plausible counter narrative to base potential action on. If I keep going back to my counters as something I truly believe in, then I’ll look for a particularly down day in the stock market to put money in. One of the reasons writing about investing is so appealing to me is so that I can go back and look at my mindset at a certain time I made a decision (and with hindsight learn from it). For META I recall there were several reasons to go in when the market was saying get out.
Mr. Market: The company was in decline. Meta’s total platform user growth had stagnated for the first time ever. Market cap was nearing ~$200B.
Counter → Just the core businesses of FB/Insta/Whatsapp were worth more than $200B if they sold them off. Sentiment was irrationally negative and Metaverse spending had created negative equity.Mr. Market: Tiktok was taking share and was the future of social media.
Counter → Mounting geopolitical pressures and state governments were trying to ban Tiktok. I still believe Tiktok will be banned or forced to sell as tensions rise.Mr. Market: Meta no longer knew how to innovate.
Counter → Meta was exceptional at copying the good ideas of others, and while owning the largest social platforms, even if they couldn’t innovate anymore they could still win by copying, acquiring, and fast-following.Mr. Market: Apple had undercut their business and ad spend would drop off.
Counter → Meta has so much data and a direct relationship with their users; they will figure out how to monetise it.Mr. Market: Zuckerberg had lost his mind and was going to burn every cent of the company’s cash to achieve his Metaverse dreams.
Counter → I had begun to believe in the Metaverse as a future disruptive platform (3-5 years out), and decided Meta was the best play for it. Matthew Ball’s “The Metaverse” book and Kashmir Hill’s article and Hard Fork podcast had a big influence. Additionally, from multiple interviews I listened to it was clear Zuckerberg cares deeply about his reputation and legacy - so he was going to self-correct when an extreme was reached.
One Year Later…
Purchased on 11/1/2022, the stock is up ~230%, and most of my counter assumptions were correct. But I’d estimate my assumptions account for only ~80% of the rise in the share price, and other unexpected but positive externalities account for the remaining ~150% rise (persistent high interest rates shifting money from debt fueled growth stocks to large tech and the LLM driven AI boom). So to a great extent luck was involved, but I still consider a significant part of the stock’s rise as a validation of my beliefs.
Looking for the Exit?
After such a meteoric rise, and with the stock consisting of a high percentage of my overall portfolio, it would be rational to shift some money out of META. In the next two months I do not plan to do so. Firstly for tax reasons to avoid the addition 5% that comes with higher income (next year I won’t have a corporate salary/severance, so tax burden will be the normal 15%), but also there are too many positives that have driven the stock up in the past year that are still unaccounted for in the share price. The stock was at $378 in 2021, yet AI was not being utilised in the way it is today nor was it advancing at such a breakneck pace as top technology companies race to be first in the newest AI models and products (I consider META a leader in AI). In addition, 2 of my 5 counter assumptions for META have not come to fruition (Tiktok ban and Metaverse scaling), so for multiple reasons there is still some room to rise further. When excessive exuberance begins to be the feeling around the stock, and it’s nearing all-time highs ~$350, I will take another look at whether or not it’s time to sell.
Driven by a New Culture:
My takeaways from Meta’s Q3 earnings last week is that the company is now driven by a culture of efficiency (just look at the above financial highlights) and execution. Zuckerberg talks about execution in almost every interview he does now. Threads was built in a matter of months by a small team, then approved by executives and launched at a clever time. Even though it’s not making much revenue yet, it’s emblematic of a cultural shift within the company. Coming from Intel, which is a company that struggled mightily executing on anything other than its core business, I take disproportionate note of the importance of something seemingly as insignificant as the build and launch of Threads at Meta. When Meta already has enormous network effects from their existing platforms, the most important factor for their social media business success will be how they execute on copying and one-upping the features of competition (also see Reels). Everything else is just gravy and still not completely priced in (Ray-Ban Smart glasses, Metaverse, and future AI products like avatars / chat bots).
A Note of Thanks:
Before closing this week’s article I want to say thank you to those who have already subscribed to my Substack and read the first two articles, and even more so for those who have sent messages of encouragement as I take a new direction in my career. If you enjoy the writing here, please leave a comment or share with a friend. Hearing from readers means more than I can express in words. Thanks for being a part of this new adventure.
I'm sure you've read the studies that show 92% of investors, over the long-term, can't beat the market index. Larry Swedroe wrote in his book: "It’s bad and it’s getting worse. Every year, S&P Dow Jones Indices does a study on active versus passive management. Last year, they found that after 10 years, 85% of large-cap funds under-performed the S&P 500, and after 15 years, nearly 92 percent are trailing the index." and Mike Piper, maybe the best tax strategy guy out there, noted: "Highly regarded economists have shown that a portfolio of randomly chosen stocks can perform as well as a carefully assembled one."
Just curious, why do you think you can beat the market? And why are you picking Meta and NET, all the popular names? why not focus on small cap, where history shows the greatest opportunity to "possibly" beat the S&P? You show 1 year of data. Can you expand to include your last 10 years of stock picking? It's a fascinating study in human nature. Maybe it's that most men like to "tinker" and fix things...and that translates into stock picking and marketing timing. Despite what all the research shows, we still feel that need to tinker. I understand, I went through this too. It took some time and painful experiences until I read JL Collins and found the path to VTSAX. Not to disrespect what you're doing, it's really to learn.