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August 2020 Performance Review

September 8, 2020

The bubble forming in fast-growing tech stocks — notably the handful of tech near-monopolies increasingly driving the entire stock market's returns — started to burst in September, but for August it was smooth sailing for the trillion dollar-ish market cap crew. Most stocks are still below the pre-pandemic all-time highs, but some are way, way up, driving the indexes to new highs. Interest rates crept up, hurting bonds and foreign markets benefiting from a weakening U.S. dollar.

Our Conservative portfolio gained 2.60%, and our Aggressive portfolio gained 2.71%. Benchmark Vanguard funds for August 2020 were as follows: Vanguard 500 Index Fund (VFINX), up 7.18%; Vanguard Total Bond Market Index Fund (VBMFX), down 1.02%; Vanguard Developed Markets Index Fund (VTMGX), up 5.07%; Vanguard Emerging Markets Stock Index (VEIEX), up 2.26%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.72%.

With basically no larger cap tech stocks except for iShares Edge Quality Factor (QUAL) up 6.86% last month, our returns were supported by foreign stocks, which in general had a decent month largely thanks to a weak U.S. dollar. Inflation-adjusted TIPs bond funds did well relative to the bond market as inflation expectations picked up. If this keeps up, we may have to move to Utility stocks as a big expectation for inflation can lead to problems in the next crash and falling inflation expectations. iShares Edge Quality Factor  (QUAL) is on the short list to get sold here.

Much as they did in the late 1990s, larger cap growth stocks are dominating the market. Unlike the 1990s, other areas like value stocks and bonds are no real bargain. The S&P 500 was up 7.19% with dividends last month. This gain beat basically 100+ global fund categories except for Japan, U.S. large cap growth, and U.S. technology stocks, and consumer cyclical stocks. Of course, large cap growth and tech stocks are what is driving the S&P 500, so this is just more of the same.

The tech action is even pushing up funds you wouldn't expect to see on the tops for the month — like Convertible bond funds, enjoying a 28% one-year return. These funds often own lots of Tesla convertible bonds, which are basically trading like the stock, now that the stock price is well above the conversion price on the bond. Tesla stock recently did a 1-for-5 stock split and was worth about as much as all the other auto stocks combined — not bad for less than a 1% global market share of sales. One head scratcher among many is why the other auto stocks haven't tanked — if Tesla is the future, are we just going to be selling more high margin cars in the future such that the old car companies can keep their market caps? Somebody is going to lose big time.

While parallels can be drawn to early 2000 (which ended very badly for tech stock investors and the S&P 500 in general), there are several important differences:

  1.  Interest rates are just above 1%, not over 5%. It is not hard to finance this debt cost with earnings from a company if you did a company buyout with debt — or just took out a 30-year mortgage and used the cash to buy stocks.
  2. The earnings are largely real. Tesla and some others aside, the bulk of the big tech companies are big earners on today's eyeballs. They don't even need to grow users or come up with a revenue model.
  3. The margins are monopoly grade. Companies like Apple and Google can take a third of all money going to apps. A few weeks after a Congressional shakedown, both Apple and Google kicked off a game maker for billing consumers directly and not cutting in the two phone operating system giants for their usual cut . Amazon is not far off from having a piece of most online sales. Facebook is selling ads off everybody's social media content and not cutting in content creators.
  4. There may not be competition for many moons because possible competitors will get bought out or crushed. Google couldn't beat YouTube, so they bought it. Facebook bought Instagram. Somebody is probably going to buy TikTok.
  5. The Covid pandemic is creating a tech dystopia where we all live in our houses and live off the internet. This has been building slowly since the 1990s and accelerated with smart phones, but this could be the last breath of the bricks-and-mortar economy. Sad!


It is a golden era of tech, but this is not a 'this time it's different' point to rationalize trillion dollar market caps. The boom can still collapse just out of fear in investors who recently bought in with leverage, but also longer term because there is only so much profit a handful of companies can squeeze out of the economy before global governments start turning up the heat. This regulatory shakedown could take many forms, but higher taxes to help pay for the trillions in Covid economic support on top of already lofty government debt piles seems probable.

Stock Funds1mo %
[Benchmark] Vanguard 500 Index (VFINX)7.18%
FTSE Germany (FLGR)7.04%
iShares Edge Quality Factor (QUAL)6.86%
Franklin FTSE China (FLCH)6.46%
Homestead Value Fund (HOVLX)6.37%
Franklin FTSE South Korea (FLKR)5.61%
Vanguard FTSE Developed Markets (VEA)5.17%
[Benchmark] Vanguard Tax-Managed Intl. Adm. (VTMGX)5.07%
Vanguard Small-Cap ETF (VBR)4.63%
Vanguard FTSE Europe (VGK)4.31%
Vanguard Value ETF (VTV)4.18%
iShares MSCI BRIC Index (BKF)4.18%
VanEck Vectors Pharmaceutical (PPH)2.40%
[Benchmark] Vanguard Emerging Mkts (VEIEX)2.26%
Vanguard Energy (VDE)-0.62%
Direxion Gold Miners Bear 3X (JDST)-6.67%
Proshares Ultrashort QQQ (SQQQ)-28.21%
Bond Funds1mo %
Vanguard ST Inflation Protected (VTIP)1.11%
Schwab US TIPS (SCHP)0.91%
iSHARES JP Morgan Em Bond (LEMB)-0.07%
[Benchmark] Vanguard Total Bond Index (VBMFX)-1.02%