It’s only been 3 months since my last journal entry but it feels like 3 years. The Coronavirus has infected enough of the global population to be officially termed a pandemic and most of the world is on lockdown.
The markets have responded as you’d expect when the the demand side of the economy is effectively turned off. The S&P 500 ended Q1 down 20% YTD and 23% from all-time highs. During the week of March 9th the S&P 500 fell 20%+ over a four days stretch. It’s probably fair to say my generation, one that began investing post-2008 Great Financial Crisis, has its first war story.
I decided on “Find Your Beach” as the title of this entry because not only does Corona, the beer company, share a name with the catalyst of our current crisis but its commercials communicate a message that I have found to be important during this uncertain time. Finding your beach means finding your happy place, somewhere you can think clearly, without the fog that clouds your thoughts when the shit hits the fan.
I’m on my beach when I’m running and when I’m writing. Every day since the beginning of March I have gone on a mid-day run and upon returning, jotted down my thoughts. What follows are those thoughts, written and re-written over the last month as I have reacted to one of the most volatile periods of my investing life.
I’ll start with the good news. I’m well capitalized. Between my bi-weekly salary and sales commission, I was paid $115k pre-tax in Q1. It’s a big number, in fact, it’s the most I have received in a single quarter since I started in sales 6 years ago. It also says way more about how hot the SaaS space was than it does my capabilities as a salesperson.
But the world has changed. Despite recording our best quarter in company history my employer laid off 20% of our staff, mostly on the sales and marketing teams, and everyone who still has a job is taking a salary reduction. Mine was cut by 25%.
After maxing out my 401k and Roth IRA —$19,500 and $6,000 respectively (pre- pandemic, unfortunately)— I was left with $55k in post-tax income. Since my daily living expenses are covered by my regular salary (despite the 25% reduction), my sales commission and any excess income I generate is funneled into one of two buckets:
My Base
My Bets
My Base
There’s a famous story about a man who asked Charlie Munger for his advice on creating wealth at a Berkshire Hathaway Shareholder Meeting in the 1990s.
The man complained that his net worth wasn’t increasing as fast as he would like. When I read Munger’s response it instantly resonated:
The first $100,000 is a bitch, but you gotta do it—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.
My net worth hit the $100k mark around my 25th birthday in 2016. Again, I’m lucky to have landed a lucrative sales job at the right SaaS startup at the right time relatively early in my career. That good fortune, and my privilege, isn’t lost on me.
But still that first $100k was not easy. I was the first salesperson at my company operating with no playbook.
Going from $0 to $100k was in fact a bitch. There’s no way I’m going to put myself in a position where I have to do it all over again.
Successful investors know how to manage risk and one way I manage risk is by ensuring I’ll never permanently impair my net worth below $100k. Currently I have about ~$100k in low cost index funds and real estate despite the recent bear market.
Going forward I plan to send another 40¢ of every $1 I invest into a low cost index fund as a sacrifice to the efficient market gods.
In my last journal entry I explained why:
Here’s the truth. I am a 28 year-old self-taught amateur attempting to do the work of a professional investor. That isn’t a recipe for success. I’m effectively making a series of bets against more informed and more experienced people. I should expect to lose more of those bets than I win over time.
The logical conclusion? Buy low cost index funds instead of individual stocks.
My Base gives me the ability to make bets (and take the occasional big swing) from a position of strength... from a position of fuck you.
My Bets
This is the fun part. I wrote about Disney, Pinterest, and Match Group in my last entry but I sold all three positions in recent weeks. Here’s why:
Disney
Bob Iger stepping down as CEO was surprising but ultimately didn’t change my view that Disney is a durable franchise bigger than any one individual. In fact, I’m still quite bullish on the company despite the obvious near term challenges. The range of potential outcomes became too wide with not enough upside. I closed the position to concentrate my portfolio into a handful of “ride or die” investments with a more narrow range of outcomes or enough upside to warrant the uncertainty.
Pinterest, on the other hand, was an easy sell. I admit defeat here. The company might very well be undervalued but times of crisis have a way of making priorities extremely clear and I simply do not trust Pinterest management to be a steward of my capital over the next 3-5 years.
Match Group
I closed my position in Match Group, one that I had significantly added to in the early days of the Coronavirus sell-off. However this move was part of a simple trade (h/t to @JerryCap for the idea): swap my Match Group stock for IAC stock, recognize a tax loss early in the year and maintain exposure to the online dating market. Barry Dillar and the IAC management team are proven capital allocators and as @modestproposal noted recently, post-spin, IAC was available at a sub-$4B market cap with $2.4B in net cash during what looks like an opportune time to have dry powder to put to work.
Outside of IAC, I made two other additions to my portfolio:
Nextdoor
Nextdoor is my first investment in a private company that is not my employer. People (myself included) under-appreciate how long it takes to build a network like Nextdoor —one that has critical mass of merchants with real identity in local geographic areas. I have a friend, who is close to the company, to thank for helping me clarify this thesis.
As it was put to me:
[Nextdoor] is not one network, it's a constellation of networks that need to be bootstrapped individually.
With Twitter once you have some content, everyone can access that content and the snowball starts rolling —> global content liquidity.
With Nextdoor, if a community in San Diego, CA is very active/vibrant, that does nothing to affect the momentum of a community in Cleveland, OH. So that means a couple things:
The company has to take the long, slow road to bootstrapping each locale from scratch. There are no shortcuts or hacks. Neighbors aren’t in people’s contact books like your friends and family (so you can’t just juice growth on the back of Import Contacts, like Snap can). The fundamental challenge is to connect people that currently aren’t connected to each other.
Nextdoor has a network effect that will be extremely difficult to break at scale, especially considering the verification component. Look at how long Craigslist’s network has lasted even with a shitty product.
The challenge is monetizing effectively in the short term (to reduce dependence on raising money) while continuing to building liquidity in as many neighborhoods as possible around the world.
The other lens to view this investment is a blind bet on the jockey.
Sarah Friar was named CEO of Nextdoor at the end of 2018 after spending six years at Square. In the press, she was seen as Jack Dorsey’s right-hand woman but talking to employees who worked with her I get the sense the description doesn’t do Friar justice. In many ways she was the grown-up in the room who oversaw Square’s transition from fintech startup darling to established public company. Nextdoor is approaching its own pubescent phase and Friar is about the best you can hope for in an executive when balancing a proven track record with untapped upside potential.
SmartCentres
Finally we arrive at SmartCentres, a Canadian Retail REIT listed on the Toronto Stock Exchange. I would not have even considered an investment like this at the beginning of the year but as Munger said “there are two rules of fishing, No. 1 is to fish where the fish are and No. 2 is don’t forget about rule No. 1.”
The idea for SmartCentres came from @nachkari. He’s a self-described enigma but one of the most thoughtful business minds I’ve come across. His Twitter feed toggles between private and public so my advice is to smash that follow button next time he opens it up.
Anyway, the regurgitated, completely unoriginal thesis goes something like this:
Despite SmartCentres’ exposure to retail, particularly small businesses, most of its properties are priced on land value instead of income. Theoretically then, the impact caused by small business failure should be short-term because the land is entitled for large redevelopments.
The other attractive aspect of the investment is that Walmart is SmartCentres’ largest tenant, occupying 41% of gross leasable area and generating 25% of rental revenue. An additional 23% of rental revenue is generate from blue chip companies such Canadian Tire, Loblaws, Sobeys, and LCBO — all of which will survive, if not thrive, in these unprecedented times.
I’m not going to continue to bullshit my way through the SmartCentres pitch because this is admittedly outside my circle of competence. I’m coat-tailing a smart investor and using the experience to learn about a new asset class. If the investment turns to shit, this summary will serve as an excellent introduction for my post-mortem.
Zillow
And finally we come to my largest position. Zillow still makes up close to 50% of my portfolio and is undoubtedly a “swing for the fences” investment. I realize I have not published an updated thesis for the investment in over a year despite my incessant tweeting about the company. That’s the plan for a future journal entry.
Until then, I am thankful for my health, the health of my family and for all the great connections I have made through Twitter. My DMs are open so feel free to stop by and drop me a note.
When all this is behind us I’m always down to grab a coffee or a beer.