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My BIG portfolio reveal!

Hi Everyone 👋,

Happy Monday. Apologies for the 1 day late newsletter. One of my family members got COVID and I had to get tested. They are doing much better now and my test came back NEGATIVE. Thank the lord!

Welcome to the +1,445 NEW subscribers who have joined this week. If you’re reading this but haven’t subscribed, join our community of smart, fun & edgy investors 👇

There’s a timeless truth that hedge funds blow-up for the same 3 REASONS:

  1. Concentrated Positions

  2. Leverage

  3. Complex Derivatives

But the REAL reason is GREED!

Greed makes people believe they can outsmart the market and it blinds them to the real level of risk they are taking on.

Basically, it comes down to putting your “hand in the cookie jar” one too many times.

And in the last three months it’s happened TWICE. Two BIG funds have blown up:

1.     Melvin Capital (Jan 2021) 👉 Lost $4.5B in 1 month. Entire financial system came ‘dangerously close’ to failure during GameStop mania.

2.     Archegos (April 2021) 👉 Lost $100B in days. Story is unfolding. Banks are taking billion dollar hits.

The problem with these blow-ups is they set off a domino effect across the entire financial system causing major collateral damage.

Let’s use an extreme example. The global hedge fund industry manages +$4 Trillion.

Add 10-to-1 leverage (I am being conservative, sometimes way more leverage is used) and were now talking — $40 Trillion exposure of a $100 Trillion global stock market.

That’s a scary number!

So, if professional money managers with fancy designations and year of experience can fall prey to the same basic human emotions we all have — how can we protect ourselves?

This week, I am going to explain to you how I build my portfolio with guardrails.

Because we can’t control what the stock market does BUT we can control how we invest in it!

You are probably thinking “BORING, I want to invest in multi-baggers that will 5x, 10x and even 20x.”

Good news is, the best portfolios are built with both STEAK aka boring & lower-risk stocks and SIZZLE — fun & risky stocks!

This week, let’s BUILD AN AWESOME PORTFOLIO in <5 mins:

  1. 80/20 Rule 👉 Winning Formula

  2. Sectors & Geographies 👉 Game of Inches

  3. Positions 👉 Size! Size! Size!

  4. Let’s have FUN 👉 Small Caps, Deals, Derivatives & Leverage

Let’s get started!

1. 80/20 Rule 👉 Winning Formula

I would trust this guy with my money — at least 80% of it.

The biggest risk this guys ever taken is letting his grass grow an inch too long.

But he knows the truth.

A truth the financial industry doesn’t want you to know because they are too busy selling you YOLO options which typically expire worthless.

Here’s the TRUTH:

“Investing is simple. It's the financial industry that works hard to make it complex!” -Robert Rolih

Making money in the stock market comes down to ‘time in the market not timing the market.’ Start investing as early in your life as you can, make consistent contributions BUT mostly leave your portfolio ALONE.

To achieve this you will need to learn to control your emotions. Because otherwise you will fall prey to over-thinking which leads to over-managing and over-trading etc.

To mitigate against these behavioural tendencies, I have found the perfect investment portfolio blend to be 80/20. I invest:

  • 80% of my money in large-cap, low-risk stocks.

  • 20% of my money in small-cap/micro-cap, deals & other high risk strategies.

Why does 80/20 work?

Because the BORING portfolio I mostly leave alone. Which gives the companies I’ve invested in a chance to grow their revenue, earnings, pay me consistent dividends and hopefully appreciate in value.

'Rome wasn’t built in a day’ and neither was Amazon or Apple.

You need to let time and compounding work for you.

“I will tell you how to become rich. Make your coffee at home and invest $5 a day in the stock market. At 8% annual return you will have +$1MM in 50 years.” - Genevieve Roch-Decter

Now, here comes the magic, I take most of my energy and re-focus it on my 20% FUN portfolio. Because investing in high risk stocks and deals takes A LOT of attention and time if you’re going to be great at it.

It took me a decade, a lot of bad investments to develop my rhythm, edge and deal flow network. And I still make tons of mistakes!

For the FUN portfolio, the reason the weighting is 20% is it’s small enough that I won’t wipe myself out if I hit a BAD streak and all my small cap investments go to zero.

Yet it’s also a big enough allocation that if I hit a WINNING streak of multi-baggers it could add meaningful return to my portfolio.

Let’s use an extreme example to drive the point home:

Imagine you have a $1MM portfolio, $800k invested in the BORING portfolio and the other $200k invested in the FUN portfolio. The FUN portfolio is 20 equal weighted investments, 10 go to ZERO (you lose $100k) BUT the other 10 appreciate 10x. Your FUN portfolio is now worth $1MM and your TOTAL portfolio is now worth $1.86MM (assuming a 8% return on your BORING portfolio).

Point is, you can simultaneously have BIG losses while having BIG gains that more than offset them.

This week I was ecstatic to go on FOX NEWS and wave my 80/20 flag:

FOX: “What percent of your portfolio should be in something like a Starbucks?”

ME: “I’ve always used the 80/20 rule”

I used the example of Starbucks (it was their 50th anniversary) to illustrate a BORING stock with UNBORING returns.

Since going public in 1992, the stock is up +330x (more if you include dividends) and they simply “make coffee a little bit better than everyone else”.

I also got to talk about Bitcoin which is flirting with new all-time highs. It’s a key holding for me in the FUN portfolio!

GRITTY TIP: If your grandmother knows the company it goes in the BORING portfolio. If your 12 year-old nephew tells you about a “Hot Stock” it goes in the FUN portfolio.

Now, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel on how he diversifies his portfolio?

A DOCTOR’S DIAGNOSIS

Hopefully Dr. Patel is reading this newsletter. He clearly needs a 80/20 lesson or he might end up owning the carcass of bankrupt movie theatres.

2. Sectors & Geographies 👉 Game of Inches

My father taught me from a very young age to always have a VIEW about the world. He is an economist by training and is a huge big picture thinker. So for me investing always starts with TOP DOWN.

I read and think a lot about the economy, growth, interest rates, commodity prices & innovation.

I then ask myself ‘where do I think the economy AND the stock market are going to go over the next 12-18 months? and I make sector allocations based on that.

To me it feels like that scene in Any Given Sunday with Al Pacino’s great ‘Game of Inches’ speech:

You find out that life is just a game of inches.
So is football.
Because in either game
life or football
the margin for error is so small.
I mean
one half step too late or to early
you don't quite make it.
One half second too slow or too fast
and you don't quite catch it.
The inches we need are everywhere around us.
They are in ever break of the game
every minute, every second.

Okay so I am trying to make it entertaining here because as you’ll see below my OVER/UNDER allocations to sectors is extremely underwhelming.

I am NOT making big calls here.

It’s all at the margin.

You’ll also notice that I have a big exposure to Canada with a 32% weighting to the TSX. That’s because I live in Canada, I’ve grown up with this stock exchange, I feel more comfortable with it. But, also it’s an extremely commodity and material weighted-index (~40%). Since I believe we are in an inflationary environment I am happy having exposure to it. Year-to-date, the TSX is outperforming the S&P 500 for only the 2nd time in 10 years.

I revisit the weightings and rationals quarterly and make small adjustments.

GRITTY TIP: If you don’t want to bother picking large cap stocks for your 80% BORING portfolio you could buy a low-cost ETF instead.

3. Positions 👉 Size! Size! Size!

It was eye opening when I used to manage money professionally. We dealt with some of the wealthiest families in Canada, truly the top 1%.

And although they were extremely bright and sophisticated, they often would come in with messed up investment portfolios. For example, I often saw accounts with overly concentrated positions of +20% in one company and/or zero diversification across sectors.

Typical story: a wealthy business owner who had made all his/her money in one industry and was too afraid to venture outside of it in their investments.

This is too risky. Because if you are overly concentrated and it goes the wrong way on you:

For example, if that 20% position goes down 50% you need to make 100% just to get back to even.

Like the famous Wall Street saying goes “Elevator Up, Escalator Down.”

This is why you’ve got to spread your risk across:

  1. Large Cap/Small Cap (80/20)

  2. Geographies

  3. Sectors

  4. Position Sizes !!

Without busting out the CFA curriculum here, I am going to explain to you the TWO biggest risks to your portfolio:

  1. Systematic Risk: Risk related to the overall stock market. You CANNOT diversify away.

  2. Non-Systematic Risk: Risk related to individual companies or industries. You CAN diversify away.

As you can see here, the more positions you have the more you reduce Non-Systematic Risk.

The optimal number of positions is somewhere between 25-40. There is a lot of debate around this and I am not going to get into it here.

Because of my 20% exposure to high-risk small-caps, I have more positions than the average investor. I run my portfolio with 15-20 large caps and +20 small-caps.

GRITTY TIP: Is your portfolio going to bounce around like a snapping turtle or sail according to the motions of the ocean (the S&P 500)? To find out how volatile your portfolio is you can calculate your portfolio’s BETA. Get the beta of each stock in your portfolio, multiply each by its weight in your portfolio and sum it up. A reading over 1 means more volatile and a reading under 1 means less volatile than the stock market (ie. S&P 500).

See below, my portfolio beta is 1.12. I can expect my portfolio (on average) to go UP more on UP days BUT go DOWN more on DOWN days.

Why is my portfolio more volatile?

Because I have allocated 20% to FUN, HIGH RISK SMALL CAPS!

4. Let’s have FUN 👉 Small Caps, Deals, Derivatives & Leverage

Now, we get to the FUN part, investing in SUPER RISKY yet SUPER FUN companies, deals & strategies.

Of course, we all want to find the next Apple, Shopify & Tesla.

“All Great Companies Started as Small Companies. Find them.” - Ian Cassel

The good news is, there’s a lot of opportunity. Of all the public companies in North America, nearly 50% of them are microcaps with under $300MM market cap (~11k companies).

Bad news is, the failure rate of microcaps is extremely high. I am not sure that it’s quite as high as the start-up failure rate of 9 out of 10 — but it’s definitely HIGH.

To reduce my risk even further, I have a mix of:

1) Small-Caps: $5B to $300MM market cap with the potential to grow 30-50% a year

2) Micro-Caps & Private Deals: $300MM market cap, complete lottery tickets with high risk of complete failure and private deals that carry illiquidity risk.

Finding winners for me comes down to:

  • THEMES: Look for BIG NEW markets with BIG upside (Crypto, Cannabis, Fintech, eSports etc)

  • DEAL FLOW: Look for deals within the network I have built up over the last 15 years.

  • SCALABILITY: Look for a business that can scale revenue significantly faster than costs.

  • PEOPLE: Look for people who are extremely obsessed with their business & mission.

The idea is to discover a stock or a trend before the large institutional investors do. They have restrictions on market cap sizes. Most won’t invest under $1B let alone under $300MM. They also typically wait for research coverage.

For example, the largest public cannabis company in the world Canopy Growth (then called Tweed) went public in 2014 with a market cap of around $90MM. I was managing money professionally then and we were invested in Tweed. At the time it went public recreational cannabis wasn’t legal yet. It would take 4 years before a major bank initiated coverage on the sector. Today, Cannabis is a +$122B market cap sector (as measured by the top 100 public cannabis companies) and Canopy is worth $16B. Both the theme and the stock are multibagger stars.

A more recent example, is Enthusiast Gaming (EGLX-T). It is one of my best performing microcap investments over the last few years. I invested in their go-public financing back in Oct. 2018 (when they were a client of my previous company, one of the co-founders is my advisor now). They were one of the FIRST esports companies to go public in North America. They had a $40MM market cap when they went public. Today, it’s on the cusp of hitting $1B market cap and listing on NASDAQ. They’ve grown their revenues +7x while their operating expenses have only grown 2x. The company culture is one of OBSESSION. Built by gamers for gamers. Literally the most enthusiast bunch!

In terms of other high-risk strategies like derivatives, day trading, leverage, these are not things I really believe in.

Most options strategies don’t make people money (they do sell a lot of courses though ; )

Day trading:

“You can have a hot hand for a hot minute, but just like Vegas the House always wins.”

Side note: I do believe in trading around core positions. Like trimming a position that gets too big or being opportunistic and adding to your position if a company has a random bad quarter.

Leverage: Leverage doesn’t change odds. It simply magnifies outcomes. I have never really used it and think it’s too dangerous.

By far, I believe the best ROI on your time and brain cells is to leverage your knowledge base and network.

GRITTY TIP: Learn to say NO! At the start of your small-cap investing career you will make MANY mistakes and lose money. You can’t escape this and in fact must embrace it. Over time, you will refine your investing instincts. This is when you have to learn to say NO to deals and investments. Still do your research but don’t put money in every opportunity you are excited about. Over time, you’ll get better at avoiding duds which makes a huge difference over the long run.

How is Grit Playing It?

Now, for my BIG portfolio reveal!

Breakdown:

  • 42 Positions

  • 78% large cap, 22% small cap

  • Approx: 60% US, 40% CAN

  • 4-10% Cash/Deals

This is only one of my portfolios. I also have RRSP, TFSA & other accounts. I own many of the same positions there, too.

If you’ve been reading my previous newsletters you will be familiar with some of these positions and the rational of why I own them. If not, please go back and read!

What I am not disclosing here is the private companies, pre-rto, pre-ipos I am invested in. I have a strong deal flow network. Because I have been in finance for the last 15 years, I have built relationships with CEOs, executives, investment bankers, investment advisors, hedge fund mangers, private equity/VC investors, promoters etc.

Needless to say, I SEE and have ACCESS to a lot of deals.

Most I don’t invest in.

Sometimes I miss crazy multi-baggers and I kick myself.

But here’s the thing, I have never SHARED this deal flow with anyone before.

And I think it’s finally time that I do.

So, I will soon be launching a PAID subscription of this newsletter (this current version will REMAIN FREE) that not only reveal my portfolio holdings once a month (with BUYS & SELLS) but also my DEAL FLOW.

  • Deals I am buying

  • Deals I am not buying

  • Deals I am neutral on

  • Deals I haven’t had time to fully diligence but still think worth sharing

I am super excited about launching this product.

It’s time to Democratize Investing Knowledge BUT also Democratize Investment Access.

In the U.S, FinTech companies like SoFi are about to launch a version of it with IPO access. I think this is wonderful but I also think by the time most IPOs happen the ‘easy money’ has been made.

If you want to really play ‘RISK’ you have to go smaller cap.

Oh and fantastic news we hit a BIG milestone of +20k subscribers in just 4 months.

Thank you everyone who is with us on this mission !

Until next time. Always Yours. Incessantly Chasing ROI,

-Genevieve Roch-Decter, CFA

P.S VISA & PayPal announced enabling transactions with crypto this week. Combined, they have +100MM merchants worldwide — not a big deal ; )


What else we Grittin’ On?

COINBASE. IPO April 14th. Read our valuation analysis here!

JOBS. Jobs report blows past expectations as payrolls boom by 916,000 in March. Re-open the economy!

TESLA. Posts record deliveries of cars in Q1. Stock running out of steam?

Stock Market Bubble? Maybe not…


Disclaimer: All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading does involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk of any trading you choose to undertake. You are solely responsible for making your own investment decisions. Owners of this newsletter, its representatives, its principals, its moderators, and its members, are NOT registered as securities broker-dealers or investment advisors either with the U.S. Securities and Exchange Commission or with any securities regulatory authority. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. Reading and using this newsletter or using our content on the web/server, you are indicating your consent and agreement to our disclaimer.