Revisiting A Trade

A look at the work that goes into owning individual stocks.

Today I wanted to revisit a trade that I made back in early August when when I sold Square (SQ). My rationale as follows;

...I bought late last year around $40. An eight month hold is very short for me, I have quite a holdings for clients that go back to 2004/2005. Clients have owned Mastercard (MA) for many years and I perceive a lot of overlap there. Both stocks are featured in the ETFMG Prime Mobile Payments ETF (IPAY). I've also been concerned that we are close to the equity market cycle ending and I am convinced that whenever the bear starts, Square will get pummeled which is a comment about the stock, not the company. Mark Yusko is fond of Tweeting that risk happens fast and I believe SQ is vulnerable to that idea. I would much rather regret selling it to early than regret holding on too long if risk does end up happening quickly in the name.

On the Seeking Alpha version of the post a reader commented with an explanation of why SQ is different than MA and that I would regret selling it. I sold a little above $70 it of course rocketed higher. I was glad for the gain but holding on longer would have resulted in a larger gain. A portfolio is a series of decisions, some will be right and some will be wrong.

The concern I had about MA and SQ behaving similarly in the face of a decline has been unfolding this week exactly as I thought it could albeit my being a couple of months early. Square and MA are in the same general space with Square being the more volatile of the two and assuming Square is the real deal (I believe it is) then I would expect it to go up more on the way up and down more on the way down. That won't always be the case but it is a fairly reliable observation. Another example would be client holding Nike (NKE) versus UnderArmor (UA). For a good long time UA was the smaller, growthier outperformer while Nike continued to do well more than often than not even if it lagged UA. More recently UA has been a very poor performer. I am not saying I think SQ will rollover like UA did, I don't think it will, but it is likely to be more volatile than MA for a while still, maybe a long while.

If you are going to use individual stocks you need to understand these types of top down attributes in addition to understanding the fundamental story of the stock. Square could have all the promise in the world but its volatility potential makes it a difficult long term hold for many investors. Can you handle a 50% decline in a stock on its way ultimately to a 200% gain? That's a rhetorical question and not a projection of what Square will do, I have no idea what it will do.

This is a matter of doing more work and it is ok to not want to do this kind of work but owning growthier individual names becomes harder if you don't because you can end up getting blindsided more frequently.

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