Volatility & Portfolio Construction

Nearly two years to the day from the March 2020 lows, we find ourselves in another brutal market environment (amazingly, the S&P 500 is still ~85% higher than the March 2020 bottom). In short order, Mr. Market has changed his mind on the long-term prospects for many COVID winners; companies like Peloton, Shopify, Airbnb, Carvana, Netflix, and Roku, to name a few, have been taken to the woodshed. For investors with outsized exposure to a certain bucket of investments - young, innovative companies with strong growth but unclear steady state economics - this period has provided an important lesson on the role of portfolio construction (diversification) in the investment process. In addition, for investors who formed their philosophy during a period where the market rarely presented much (sustained) worry, this recent downturn has provided a costly, albeit necessary, education on what is required to truly earn an equity risk premium over the long run.

At a high level, my thoughts on the current market environment won’t surprise you: I remain focused on the long-term. For the kind of companies I aspire to own - an attractive underlying business with high-quality management and a strong balance sheet - these trying times can actually be a net positive. For example, it opens the door to opportunities that are typically unavailable when there’s tranquility in the air. (While it reflected company specific issues, Microsoft’s proposed acquisition of Activision Blizzard is a good example.) On a relative basis, I expect the companies I own to strengthen their competitive position during periods when uncertainty and risk aversion paralyzes weaker competitors (those who are dependent upon “the kindness of strangers”).

That’s a long way of saying that I remain comfortable with the collection of businesses I currently own, in addition to my ~100% structural allocation to equities (for more on this topic, please revisit “Mo' Money, Mo' Problems”). It would be nice to have dry powder, but that's always the case when stocks get cheaper. Owning great businesses at good prices is sufficient for me.

But in the short-term, my portfolio has incurred its fair share of pain; notably, that pressure has not been evenly distributed across the portfolio.

Here are the year to date returns through Wednesday for my holdings.