I seldom document my trades in details but this year’s execution has so far been nearly impeccable. My trades tends to be more chaotic in the past, but this year my thought is clearer. I can explain the rationale behind each trade as I perform fewer and fewer trades in recent years which I wouldn’t be able to do otherwise. I want to write down the logic behind each trade so that I may refer to it later.
The value of this trading log is that I don’t single out any individual technique such as buy point, sell point, stock picking, market observation or risk management, but I’ll discuss portfolio management as a whole, and how different pieces play well together. Financial gurus can always single out a stock and choose its optimal buy and sell points in hindsight, but that’s not practical.
The general market was down significantly since mid February. Many high-risk stocks such as tech stocks, medium small stocks and momentum stocks went down 30%-50%. Normally, when a correction occurs, it’s the perfect time to observe which stocks and sectors hold up strongly which probably will be the next leading stocks when uptrend resumes. Next leading stocks always pop up. If you keep observing the market, you can always get yourself prepared for the next stocks.
At the beginning of 2021, I only hold two stocks: Square (SQ) and Cloudflare (NET). My first trade hadn’t been performed until the end of May when I sold all SQ and switched to BioNTech (BNTX) and added to NET. At the end of August, I sold all BNTX and switched to Tesla (TSLA). That’s it!
Here summarized my trades for this year:
At the beginning: SQ, NET
End of May: sell SQ → buy BNTX, buy NET
End of August: sell BNTX → buy TSLA
Now: TSLA, NET
As you can see, I sticked to my strategy of performing very few trades, concentrating to a few conviction stocks, and executing swiftly when necessary.
The following charts visualize the trades. Take a look and I’ll explain the logic of individual trades.
On selling SQ
I sold SQ not at the top in February, but sold at the lower half of the consolidation range. The lesson was that you don’t have to catch the top. Even if I sold SQ at a price that didn’t seem to be the best, but if you look back, the price of SQ has been stagnant and underperforming since then. So, selling an underperforming stocks was always a great decision.
I sold SQ for the exact reason: it has been underperforming the general market and some of the stocks (e.g. vaccine stocks) that hold up well. I always observe individual stocks and sectors that are outperforming. Although I don’t trade most of the time, I’ve prepared what my next move is, and I can switch to outperforming stocks immediately when necessary.
SQ has been one of the favorite stocks of ARK invest / Cathie Wood believers. That’s what they would say: You shouldn’t be so short-sighted and we look at the next 5 years. The business and numbers of SQ are alright. Innovation is doing extremely well. We’re going to the moon!
Unfortunately, the market doesn’t work this way. If the price underperforms consistently, there must be something wrong. Most of the time the market is correct and I’m wrong. Always respect the market!
The price of SQ has been losing steam. Besides this most important factor, another reason to sell was that it became harder to decipher its financial reports which was not a good thing for us as an individual investor. The revenue was severely inflated by Bitcoin “revenue”, it became harder to understand the organic growth of the core business. To make it worse, Jack Dorsey, the CEO of Square seemed to go all-in on Bitcoin which worried me a lot as a cryptocurrency doubter.
On adding to NET
NET regained its momentum pretty quickly at the end of May. Adding to it was a no-brainer. I didn’t even look at the purchase price when I added. I thought any price in the consolidation range was a reasonable price. There is no need to pick a precise buy point. Trend is much more important.
NET has always been critisized for its high valuation. But if it keeps going up, you shouldn’t try to go against the market.
On buying BNTX
Vaccine stocks (i.e. MRNA, BNTX) outperformed the market during the first half of 2021. BNTX was mildly dragged down and consolidate in May due to market correction. But it had been double since the correction began in February. So, its momentum was extremely strong. I had high confidence that it would rocket when the correction was over.
The pattern of BNTX reminded me of Livongo (LVGO) of last year. Both going up crazy and stalling a bit only when the market correction dragged them down. I harvested 100% profit within a month in LVGO which was later bought out by Teledoc (TDOC). It was a very successful trade.
I almost immediately attracted to the setup of BNTX. Again, I didn’t care much about the exact buy point. Any price during consolidation was reasonable.
It was easy to monitor the business of BNTX, at least I knew what it was on business side though I didn’t know mRNA vaccines on technology side. I knew that I won’t hold BNTX for long term so I almost ignored the operating numbers of the company because the market always looks forward but not backward. Zoom (ZM) was a good example of similar plays in 2020. The price of ZM topped when the operating numbers were still rising as the market knew that flocking to Zoom meetings only gave a one-off revenue boost.
On selling BNTX
BNTX had been moving sideways in June and I had waited almost a month before it took off in July. It sky-rocketed and was doubled in a month! It went exactly like what I had thought; the exact copy of LVGO in 2020.
In the first few days of August, the price of BNTX seemed to run in a climax way, being up 30%+ in a few days, including two 15%+ days, after reporting a blow-out earnings. I was ready to take profit.
After reaching the top on 10th Aug and collapsing 30% in a few days. I waited to see if it can rebounded quickly like what it did in May. If it did and consolidate, I would probably sit through the consolidation.
It turned out that it didn’t rebound strongly. The general market kept moving up and people (not market) had a strong expectation of booster shots which would further boost its earnings. But when more news of booster shots came out, the stock kept moving downward. That was a strong sell signal! The stock price didn’t react positively to the positive news!
I sold all BNTX right after its weak rebound. The first loss is your best loss. Surely I should’ve sold it earlier during its climax run but I missed it. But a 70% profit in 3 months was definitely a great achievement. I would rather take the profit than wait and hope for it regaining the top which was very unlikely for a downtrend stock.
On buying TSLA
I always had a handful of stocks that I wanted to buy. So, when I sold BNTX, the only problem was that which stock I should choose. I always don’t want to sit in cash. I would rather go all-in on index fund or big tech stocks than holding cash.
I considered switching to big tech stocks to lock in the profit of this year. This was exactly what I did last year when I exited LVGO and switched to SQ. This was a relatively safe play when compared to LVGO. Alphabet (GOOGL) was one of my potential picks which had been outperforming and was a big cap.
But after I watched some FSD (full self-driving) videos and Tesla’s AI day, I’ve made up my mind. TSLA would be a much better choice, for its potential. I didn’t regard TSLA as a long-term investment in the past because I didn’t think selling electric cars was a good business financially. But now I realize that Tesla is actually a robotics and AI company, a software-first company which I favor better. I can envision that Tesla will keep selling much more robots (whether they are in the form of electric cars or Tesla bots) with intelligent software installed (FSD or AI).
It’s like the “Apple model”. What makes Apple unbeatable is its software though its major sales come from iPhone. What makes Tesla unbeatable (highly likely) is its AI capability though its major revenue comes from selling electric cars. FSD is what makes a Tesla car looks cool.
Looking at the stock charts of TSLA, it had been consolidating since February after last year’s massive run. The performance of TSLA was actually flat this year, underperforming. But it started to pick up steam after July and outperform, coinciding with the buzz of FSD beta.
I like buying stocks during consolidation. I can buy it at any time during the time and don’t have to be rush. Again, I didn’t care much about the exact price I bought TSLA. It looked reasonable anyway. Surely there is overhead supply of its previous top (~$900), but I can wait. I can sit through the consolidation while it keeps outperforming the general market. Let’s see if it will turn out to be a good trade.