2023-05-16 09:42:08 ET
Summary
- Currently, my portfolio is beating the S&P by about 7% since I began tracking.
- In this period, I pursued a new strategy focused on volatility.
- My most notable stock to date is Super Micro Computer, and I intend to trim Lowe's to buy some US Bancorp.
Portfolio and Transactions Update
Beginning this year, I started tracking my personal portfolio in a series of articles. For January and February , I gave insights into my strategy and the thought process behind my decisions. I'm writing another update for the past several weeks with the decisions I made and the general allocation of my portfolio. That said, let's jump into the update.
Portfolio Tracker (Authors Creation)
First off, March had a few tumultuous days that led to 5% or more drops in TQQQ and UPRO, which triggers a small purchase for me. The dollar-cost averaging strategy is working for now as these are 2 of my 3 top performers. Given the nature of these funds, they can easily lose the gains I've enjoyed so far but with my strategy, I'll be able to accumulate positions over time and should earn a handsome reward.
The most notable transaction has Super Micro Computer ( SMCI ). This is not a company I've covered (yet) but will be initiating coverage soon. SMCI is a computer hardware company specializing in full-rack solutions. They have had an impressive run in 2022 but I'm confident in the position the business and industry are in, so I expect the growth to continue.
'Volatility Cluster' Options Trading
In the spirit of transparency, I'll note an options strategy that yielded a 12% return for me thus far. The guiding principle of this strategy is 'Volatility clusters' as defined by Benoit Mandelbrot in his book The (Mis)Behavior of Markets. Essentially, this states that high volatility in the market tends to cluster. This is not particularly consistent with positive or negative days, but the fact that a big positive or negative day tends to be followed by another big positive or negative day. All of my options were short-term straddles (buying calls and puts on ( UVXY ) at the same time with the same expiry, essentially betting for a big swing in either direction). UVXY is a 3x leveraged fund tracking the VIX. According to Mandelbrot, if day 1 is highly volatile, day 2 is more likely than normal to be equally volatile in either direction. So, a +5% swing in UVXY, makes either a + or -5% swing the next day more likely.
In this light, if UVXY swung + or - 5% on any given day, I would also buy the contrarian option, namely if there was a +5% swing I would buy a Put, and if there was a -5% swing I would buy a Call. All puts and calls were as close to 'in the money' as I could buy. The total notional value of the contracts I bought was $583 and I ended with a $70 profit or 12% return for the month. To be clear, this was experimental and highly speculative. I do not recommend this strategy. This was 'play money' and mostly paper trades, so I was not worried about my notional value dropping to $0. This is not recommended with any cash that one cannot afford to lose and under no circumstance would I recommend using margin funds for trades like this.
I was confident in this strategy given the extreme uncertainty we saw throughout March with the banking sector troubles. I knew the market would be sensitive to either positive or negative news, which was correct. Once the market had calmed, I stopped this strategy. I do not currently have any open options positions.
Shifting Preferences
Warren Buffett often says that if he were to return to the beginnings of his investment career with a much smaller portfolio, he would be looking feverishly for wonderful businesses among small-cap stocks. To date, I've looking mostly at large-cap stocks with modest return expectations. I did this to get money working for me in reputable companies so that I could begin growing money over time as I shift my focus. Now, this strategy is shifting toward smaller companies with much higher potential.
My first investment with this renewed strategy was my SMCI purchases. This company is well-positioned in one of the hottest industries yet trades at a very attractive multiple. SMCI is akin to an infrastructure company in the big tech space. All tech businesses need high-power, reliable computing solutions, which SMCI simplifies by offering full-rack solutions and is quick to market with new innovations. They coordinate release schedules with major chip companies like AMD ( AMD ) and Nvidia ( NVDA ), and have a seasoned internal manufacturing team that allows them to consistently be first to market with computers that incorporate the newest technology. SMCI is not dependent on just one company for innovation, rather is dependent on continued innovation in the semiconductor space, which I expect to continue at a rapid pace.
My interest in the semiconductor space has led me to read about a variety of innovations in the semiconductor space, and what I believe to be the most promising are Gallium Nitride ("GaN") and Silicon Carbide ("SiC") chips. A range of companies provide products in this space and it's a rapidly evolving landscape. Smaller companies like Navitas ( NVTS ) and Power Integrations ( POWI ) could be long-term compounders, while established players like Texas Instruments ( TXN ) and ON Semiconductor ( ON ) offer safer and more reliable options. This corner of the vast semiconductor ecosystem will be the focus of much of my efforts as I seek to find the best all-around opportunity and I look forward to discussing this more in the future.
Looking Forward, Better Opportunities
Lastly, I have planned some changes to my portfolio. I will be shifting some money from Lowe's ( LOW ) into U.S. Bancorp ( USB ). Although Lowe's is a great long-term dividend growth play, USB offers a better current yield and I have a much higher expectation of total return for USB over time. I will be buying in periodic intervals over the next month or so to build a position.
The regional bank woes will not last forever, and strong regional banks have not been shaken fundamentally by this turmoil. Although the flight risk of deposits is still the pervasive issue in the banking sector, USB is a well-run institution with great valuation. USB is one of the largest banks that isn't tagged as a GSIB (Globally Systemically Important Bank), so it isn't subject to the same regulatory or capital requirements as other larger institutions.
The decision of which bank to buy was between M&T Bank ( MTB ) and US Bank. The reason I've opted for USB here is that MTB has a much larger book of loans in commercial real estate ("CRE"), which is a space I do not feel confident in right now. About 1/3 of MTB's 2022 loan book was in CRE, while USB has less than 10% in CRE. For this reason alone, I'm much more comfortable with USB and feel this will deliver great returns over the medium term.
For further details see:
Volatility Clusters, The Next Best Semiconductors, And Regional Banks - Portfolio Update