Most investors gauge success or failure of their portfolio appraised against conventional equity benchmarks. Historically, I have also reported returns and compared those returns against the conventional benchmarks. In 2020, The DJIA returned 6.9%, the S%P 500 grew by 16.1% and the NASDAQ returned 42.8%. However, those benchmarks are no longer representative in isolation.
In 2020 I wrote about the hurdle of investment price inflation, based upon growth in M2 US money supply. Having reported on it, there is no longer a reason to exclude it, so I will be, going forward, indicating the impact of this deflator on my investment results in periodic reviews. In 2020, as M2 grew by 25.2%, one’s investment return needed to grow by a minimum of 25.2% just to break even, ex-M2. If one failed to earn that minimum amount, one did not maintain equity investment purchasing power.
Based upon that 2020 M2 increase, an index investment in either DJIA or the S&P 500 failed to grow ones’ equity wealth, ex M2 inflation. Only the NASDAQ outperformed M2 growth for 2020 based upon the yardstick, outperforming the M2 by 17.6%.
The Gnostic Large Cap blog model portfolio returned 44.5% in 2020, an increase of roughly 19.3% above M2 growth. For parts of the year, the portfolio lagged. Q4, driven by an outsized equity gain in PayPal, among others, turned the tables and the portfolio share value advanced from $400.37 US per share to $471.98 US, or 17.88%, in the final quarter of the year.
The top performing equity in the account for 2020 was an investment held for several years, but only mentioned twice on the public blog, that is deliberate on my part. Adyen NV (ADYYF-$2275.01), a European based global payment processor, was one of the very first “direct-listing” equities issued in the current wave and was added mid-2018. Direct listings differ from IPOs by virtue of the fact that capital is not required for the business, and therefore no investment firm is responsible for an underwriting. The initial purposes of a direct listing is to provide liquidity for employees that seek to sell some holdings, acquire more from existing holders and to provide a readily comparable value for salary packages which include share options incentives, vesting or deferred profit participations, as a portion of salary.
Investment banks HATE the concept of the direct listing, would prefer that it die a quick death rather than catch on and therefore they dissuade investors from gathering information on direct listings. The hope of investment banks is that by failing to offer positive investment cues, or any cues for that matter, on direct listings, short-cut oriented equity buyers will not grasp the benefits of the new model and the concept will fail.
Their efforts to scuttle an interesting model, a model that removes allocations from the “most favored clients” might work. Investors, in general, misunderstand the practice of fact finding. Most consider due diligence to be a quick internet search to see how many bullish research reports on company X are available and, failing that, some glance through social media sites such as Seeking Alpha (even the name depicts inefficiency and a lack of success, I’d personally be more interested in a board with a juicy declarative name like “HERE is the Alpha!”) to find “yay-sayers” if they are interested, or alternatively, “nay-sayers” should they have no wish to invest and seek to anchor their predetermined rejection. None of these activities have anything to do with actual due diligence, they represent bias support searches.
For direct listings, no underwriting fees are earned; there is neither investment analysts assigned to provide rosy coverage nor are there baksheesh payments handed out to pliant media in order to produce a favorable plug and cue up a buzz. Direct listings are by no means a secret and they are not hidden treasures; they DO represent an area where intrepid investors are legitimately expected to roll up their shirtsleeves and conduct real research; external validation is not readily supplied.
Shares of Adyen ended 2019 with a value of $741.80 US per share and ended 2020 priced at $2,275.01 US per share. Business wins were numerous and the trend towards a cashless society has taken hold faster in northern Europe, particularly the Baltics, than it has in most parts of North America. The use of cash in Sweden has diminished to almost unreportable rates with Adyen, among others, representing the primary beneficiaries. Adyen only recently hit the radar when favorable pumps on Square started being posted on social media with titles like ‘is Square the next Adyen?”, and then a bunch of investors started asking themselves, “Who is Adyen?”
Another respectable performance was turned in by PayPal Holdings (PYPL-NYSE) Inc which ended 2019 valued at $108.83 US per share and closed out 2020 valued at $234.20 US per share. Losers on the year were shares of Grupo Aeroportuario Del Sureste (ASR-NYSE) which started out 2020 valued at $191.09 and ended at $164.93, down 13.7% and Grupo Aeroportuario del Pacifico (PAC-NYSE) which started 2020 priced at $120.95 and ended 2020 priced at $111.29 US per share, for a loss of 8%.
2021 looks intriguing. On the one hand, the pandemic is by no means over. Ire is percolating among individuals on stalled rollout of vaccines to the real world, while media, celebrities, government officials, congressional interns, musicians and professional athletes already seem to be ready for the second injection of mRNA covid-19 vaccines. The issues of how a world that has leveraged itself up by 25%, strictly for consumption instead of capital investment, will respond once claw backs in the form of taxation commence. There is immaterial risk of winding down the rampant money supply growth rates, but deceleration of the increase should be forthcoming at some point in 2021.
When individuals globally are polled on what they miss most due to the covid-19 pandemic, what is indicated as being most missed are hugs and close human contact with family, friends and elder parents. The second most missed activity, by polling, is NOT the watching of sporting events, attending of concerts or purchasing new Nike shoes, it is going on holiday vacations and international travel. Hugs are fast to deliver and free on the offer, they can be restored immediately after successful mass inoculation. Vacations and international travel are far from free and require lead times; that secular trend almost snapped in 2020, but with 25% more money sloshing around the planet, and the public being blissfully unaware that the growth rate of their 401k came about by devaluation of the money that they already had and were simply sent out more of it in the form of direct payments, there could be a real ramp up in international travel going into 2022.
Given my world-weary take on human nature, the 2021 scenario ex-inoculation will go as follows: breath a sigh of relief, hightail it to the nursing home where mom hasn’t seen a family member in almost a year, give her a hug, hold her hand for half an hour, exit the nursing home and Uber directly to LAX for the first flight to USVI for a couple of weeks, because mom is only mildly dehydrated and we were quite stern with the attendant of the day (she understood what we told her, right?); mom will be just fine now and certainly will last until we get back, and in any event she’s pretty independent and we don’t want to smother her, but that St. Thomas hotel deal is siiiiick and won’t last. The overwater bungalows, at that price? And they said there was no upside to the pandemic. We will Skype with mom daily from the ocean club to make sure the electrolytes have been administered, she will love the view.
The talk of an immediate uptick in travel seems premature. The US will be largely fully vaccinated before most of the rest of the world, which means that Americans will be sending international surfing videos out on Instagram when most countries will still be in lockdown. The inability of much of the world to travel when the US will be free to resume normal vacations will create MORE pent up demand; that might be a real big thing in the latter half of 2021 and all through 2022.
This is all predicated on the hope that the Chinese government will tell their agents to stand down and NOT remove vaccine vials from American and European freezers, leading to spoilage and potential harm to those being inoculated, all in the nationalist objective of recreating the South Korean influenza vaccination debacle that occurred in the fall of 2020, for a western audience.