Last week I reduced my position in Tesla from 8% to 6% of my portfolio, and I bought an initial 1% position in Fastly.
I thought it might be worth sharing my thinking on these trades, to pull together a number of the strategies Albert and I have discussed in previous articles, and to show how I use the Telescope Investing approach personally to inform my own investment decisions.
Background – using cash to manage risk & create opportunities
Around May 2020 I began to increase the level of cash in my portfolio, driven by a sense that the valuations of many of the companies I’m holding were getting rather ahead of themselves.
I initially built the cash position by selling some of the poorer performing stocks in my portfolio, plus those that I’d personally lost some of my belief in (or honestly had simply lost interest in and no longer felt inclined to track). It’s important to undertake a semi-regular review of the companies you’re holding to ensure that the investment thesis still stacks up, so when the company’s mission no longer excites you, it’s a little harder to summon the energy to do justice to this.
Weeding-out the trash only got me so far, so it was my desire to also reduce a couple of bigger positions, bringing them back in-line with the overall portfolio and increasing my diversification a little.
Although it’s recommended to “let your winners run” to build substantial long-term gains, this must be balanced with a modicum of risk management. I’ve therefore generally tried to keep any single company below 25% of my total portfolio value (and honestly even this number is way too high – I’ll only get anywhere near this exposed to a single company if I have absolute conviction in them).
One such company in my portfolio is Shopify. Although I believe in their mission very strongly, even at today’s all-time high valuation, if I’d let this run unchecked over the past four years it would have grown to dominate my portfolio. Sure, in retrospect I would have made far greater returns if I’d simply done nothing, but this would have come with a level of risk that I couldn’t countenance personally, so it’s with some reluctance that I’ve had to trim Shopify back three times in the past twelve months.
I’m no longer adding new money to my portfolio, so a key benefit of maintaining a healthy cash reserve is that when I spot a new investment opportunity that I’m interested in, I’m able to take advantage and purchase a stake without having to sell something first.
Overall, the whole market still feels rather rich, so, for now, I’ve taken a personal decision to maintain a 20% cash position, which I feel is sufficient to mitigate some of the emotions that might be stirred if the market does face a serious correction in the future. This is a higher level of cash than I’ve ever held previously, and I recognise that if valuations continue to increase over the coming few years I will have reduced my own gains, but right now 20% feels like the right number personally to help me sleep at night, and to give me a sense of satisfaction rather than dread if we do find ourselves in a sustained bear market once again.
Planning to buy Fastly
I never act hastily when I’m managing my own portfolio. I keep an investment diary to help me record my thinking when I do trade, and generally any planned action sits on my ‘investment to-do list’ for at least a week so I can kick the idea around and socialise it with people whose opinion I value.
I added Fastly to my watchlist on 17th July 2020. It initially came up in conversation when two friends asked Albert and I for advice on how they might build-out their own investment portfolios. We put together a model portfolio – what we would likely buy ourselves if we were starting from scratch on that day.
It’s likely a good subject for a future article, but overall the model portfolio is up 23% (vs 6% for the S&P500) – and within that group of companies, Fastly is a top-three performer, showing 49% gains in two and a half months.
I do my best to avoid ‘price anchoring’ – the feeling that you’ve missed out on a trade (sale or purchase) because the valuation has moved against you over some intervening period. It’s tough to avoid buyers remorse or FOMO if you do miss the best time to buy or sell, but without a time-machine to-hand, the only logical thing an investor can do is to assess whether the trade still makes sense today. That was the case when I re-looked at Fastly last week having undertaken some additional due diligence using the Telescope lenses, so I was happy to pull the trigger.
Sizing the trade
If I want to add a new stock to my portfolio I’ll generally build the position gradually, using the concept of ‘buying in thirds‘ as a form of dollar-cost averaging, to reduce short-term volatility and price movements.
A starter position for me is usually between 1 and 2% of my overall portfolio value on the day of the trade. If I feel I already have a good handle on a company I’ll generally trend a little higher in that range, and if I just want to get some skin-in-the-game to motivate further research, I’ll generally trend a little lower.
I feel like I have a good handle on Fastly, but at the same time I get a sense that its current valuation is a little rich, perhaps driven by overly buoyant market sentiment towards SaaS companies during the Coronaconomy. For this reason, I decided to just invest 1% of my portfolio, with the intention of adding to the position over the next couple of months if I still like the company. I’ve therefore kept this on my to-do list so I don’t forget about it in the future.
Planning to sell Tesla
Prior to last week, I had 8% of my portfolio invested in Tesla. I’ve done incredibly well from my Tesla holding (purchased in Oct 2013, Jan 2014, and Nov 2016 – I was buying in thirds even back then), but unlike Shopify, my decision to reduce this last week was because of the company’s fundamentals, rather than because I feel it’s over-grown within my portfolio.
I don’t envisage a day when I’ll not be a shareholder of Tesla (or for that matter any publicly available company led by Elon Musk), but with a market capitalisation of $400B, there’s simply a smaller opportunity for multiples of growth over the coming few years. I have a number of companies in my portfolio where I do anticipate 5x and 10x growth, so my investment dollars just feel like they’ll be better-utilised elsewhere.
You might ask why I don’t sell my entire Tesla holding if this is my sentiment towards them. It’s difficult to give a very straight answer to this, but I feel like it’s primarily my strong belief in the company’s mission (“to accelerate the world’s transition to sustainable energy”) and a personal desire to support this with my investment decisions. I like to be proud of the companies I’m invested in, and so fully exiting my Tesla position just feels like it runs counter to this desire.
Per the article linked above, I consider a ‘full position’ as being 6%, and so this feels like an appropriate space for Tesla to occupy in my portfolio. Until they grow into their valuation over the next few years as the vision of ‘battery day’ is realised, it’s my intention to broadly keep Tesla below the 6% level in terms of my personal holdings.
Conclusion
So to wrap up this short article, this is the type of thinking I put into all of my trades. To quote from our recent podcast on avoiding emotional investing decisions, I might look at my portfolio often, but I’ll rarely touch it – and it’s this tendency towards inaction that’s really helped my portfolio achieve market-beating returns over the last twenty years.
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