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Humanizing Tech

"Personal Hedge Fund, Q3 2016 Update" in Humanizing Tech

The Base Code: Performance & New Investment Opportunity

I. Overview

At the start of 2016, I restarted my focus in a number of areas after taking a break for a few years. One of these was playing the old game of investing. I decided to make my entire journey 100% open source so others could follow along with me or use it as a guide to create their own Personal Hedge Fund and create their own financial independence.

We named it The Base Code.

If you’d like you can read all of The Base Code’s articles, or if you’re looking for quarterly performance updates, here are the direct links:

II. Prior Investment Strategy

As I’ve mentioned previously, I backed into an investment strategy after building up from basic principles that I thought would produce the best returns. The acronymn was BOSAH, which sounds funny but actually does stand for something: Buy On Sale And Hold.

It’s based loosely on some of the fundamental strategies that Berkshire Hathaway and Warren Buffett use:

  1. Don’t use technical analysis to day trade. You’ll never be as fast as the big boys and they’ll beat you on timing even if you have better algorithms.
  2. Use a fundamental approach where you find good companies run by good management producing good products.

I added one small piece to this which is the “on sale” aspect. Namely, wait until a good company trades at a discount due to market inefficiencies (T-Mobile). Something like some bad short term news that came out or unrealistic sales targets that Wall Street hopes for but don’t really tell the whole story (Apple). Or, some major market trend that will greatly impact the business of said company (NVIDIA).

Employing that strategy allowed me to make a 2x return over the market benchmark (S&P 500).

But during Q3, I ended up doing something unexpected that required me to update this strategy. This is an important point. You don’t have to hold precisely to your strategy when you get new information or a gut feel that something needs to change. You have a brain. You make decisions. Trust that little nagging voice in the back of your head and give it a shot.

III. A New Investment Approach

Taking my own advice, I did three major things that I never expected to do at the start of the year:

  1. I sold all the minority positions that held a lot of my diversification.
  2. I sold major stakes that were underperforming.
  3. I invested in an alternative asset class.

Here’s why. Divesting my minority positions in stakes like Sprint (which doubled in price over my holding period) and in more major stakes like Tesla meant I free up necessary cash to invest in something else with better upside. The other benefit is that I no longer have to spread my focus over a large number of areas with commodities like Oil, Water, Cobalt and even small positions in Nike, Under Armor, Akamai, etc.

The other benefit to selling the dogs, of course, is that it’s coming up on the end of the tax year and by realizing losses, you can reduce your taxable income. If you sell the winners, you realize a gain and have to pay Uncle Sam on that gain. If you held them less than a year then you pay ordinary income at the same rate as your normal paycheck. If you hold them longer than a year then you pay capital gains, likely 10% to 15% cheaper.

So, after selling all of these securities, I was left with only the best equities that I believe will continue to appreciate in value. They are:

  • 42% Apple: consumer hardware (smart phones and tablets, computers, wearables)
  • 35% NVIDIA: computer chips (GPUs for artificial intelligence, virtual reality, self-driving cars, and gaming)
  • 13% Amazon: shopping (buy anything you want and get it delivered to your door in a day)
  • 10% Facebook: social network (1.7 billion monthly active humans can’t be wrong)

With only those 4 companies, I’ve tackled almost the entire macro themes of our modern technological age. From an access device, to a communication channel, to the machine that powers the machine, to our penchant for buying stuff, unless the entire world comes to a screeching halt, I can’t see these companies not doing well over the next decade. Which means they’re still undervalued.

Below is proof of my holdings and my performance compared to other groups on Openfolio. As you can see, I’m doing +400% better than the market benchmark year-to-date in 2016, the S&P 500 (+28% compared to +7%, respectively).

In terms of Alpha, my personal hedge fund has generated +21% (28% return for my fund minus 7% for the market). To put that into perspective, if I owned my own “real” Hedge Fund, people would be beating down my door to do 4x better than the market, especially when a savings account is lucky to get you 1% return.

Interestingly, most people don’t realize that by holding all their money in cash (checking or savings), they’re losing -3% per year due to inflation. Over the course of your entire lifetime, that amounts to a whole lotta cheddar.

So, if I was to update my investment strategy acronymn, BOSAH, how would it change?

We’re not Holding forever. We’re selling the laggards and underperformers for tax planning and to reinvest those funds into someting that will give us a better return than letting it sit in something we may not believe in any longer.

BOS (Buy On Sale) is still relevant. It’s the second half that’s tricky. Reinvest Under-Performers? I think that’s simple and accurate.

BOSRUP: Buy On Sale, Reinvest Under-Performers

It’s a mechanic that makes you continue to monitor your investments. Just like the tech industry constantly tries to reinvent and disrupt itself, we should take the same approach with our investment strategy.

IV. Investing In A New Asset Class

When it comes to the new “Reinvest” part, where do we look for a better asset with better returns? What did I do with the capital that I took out of public US equities and commodities? It’s no secret that I’m a fan of startups and have been working on them nearly my entire adult career. And as any good product person staying up to date on their industry, you see early indicators of when things are getting hot.

That’s how and why I invested in NVIDIA. Because I knew artificial intelligence was going to eat all of software and that the two things machine learning needed to work was:

  1. Training data. Lots and lots of training data to get to five 9s of accuracy.
  2. Processing power. Specifically, GPUs to handle the massive parallel processing of all this data to develop an accurate prediction model that would be used by every social network (face detection), media company (video streaming and VR rendering), and enterprise (big data analysis) in the world.

And as we look at the most valuable use cases of bleeding edge AI, one that’s now getting a lot of press is that of self-driving cars. NVIDIA has developed special chips and a platform to help process all of the sensory information (cameras, LIDAR). They even went so far as building their own self-driving car.

Then you see Cruise get acquired by GM for $1 billion after 3 years of work and OTTO acquired by Uber for $680M after 5 months of work and you start to see very real investment returns. You see Udacity open-sourcing a self-driving car for anyone who wants to build one and understand that the battleground has been set for the race to 2021’s fully autonomous Level 5 self-driving car.

So, is there a way for someone to participate in this when there’s not really a good public company who’s stock you can just go out and buy? There is, but it’s not easy.

You have to go find a self-driving car startup. And it has to be one that’s taking a wholesale different approach to the problem because everyone using the same approach is going to be disrupted by Udacity.

But you understand that the biggest and hardest problem has yet to be solved. And that’s the wayfinding capability. Enter a destination and get there without issue and without human intervention, regardless of weather or anything unexpected that might happen along the way (e.g., a bicyclist or child runs out in front of you).

So you find the people working on it, you invest, and you help. Then you make sure that they get into the Udacity self-driving car nanodegree so you get the knowledge of how every other competitor in the world is approaching the problem. You take that off-the-shelf before anyone else, and you continue to focus on the part that it doesn’t solve.

Looking at the same problem through a different lens. That’s how you create investment Alpha.

— Sean

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What is an Artificial Connectome?

Personal Hedge Fund, Q3 2016 Update was originally published in Humanizing Tech on Medium, where people are continuing the conversation by highlighting and responding to this story.

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from Stories by Sean Everett on Medium http://ift.tt/2cThwk7