Window Dressing
By: John Bonini
Tags: Investing, Airbnb, Mutual Funds, Zoom, Slack

Image Credit: Universal Pictures

From Investopedia:

“Window dressing is a strategy used by mutual fund and other portfolio managers near the year or quarter end to improve the appearance of a fund’s performance before presenting it to clients or shareholders. To window dress, the fund manager sells stocks with large losses and purchases high-flying stocks near the end of the quarter. These securities are then reported as part of the fund’s holdings.”

I don’t manage any fund.

Sometimes, at parties, people ask why.

I don’t care to answer this, so I just change the subject.

I don’t consider all funds to be evil or useless compared to the most standard index fund.

If people spend time and resources to “achieve alpha” (I hate hearing this), then fine. Godspeed!

If people succeed in trading or any other complex mathematical system that’s consistent or evolves with experience, then great. Congrats!

At a certain point, an individual (and independent) investor realizes that his or her monies do not, in any way, affect the global stock markets.

It may be disconcerting to arrive at the conclusion that one isn’t at the center of the universe and that the trillions of dollars changing hands every day are not waiting for person X to make a buy or sell order.

I care about taxes because, well, legally, I am spectacularly obligated to feel that way on one day of the year.

But when I buy a company’s stock, I do so with the expectation of a capital gain to someday be realized.

At the start of 2017, I expressed my optimism with Shopify ($SHOP), the Canadian commerce platform, on my public Twitter feed (@JohnBonini):

The value of Shopify’s stock in these last two-and-a-half years is up around 8x from, let’s say, $40 to, let’s say, $320.

I don’t plan on selling any shares, but I was (pleasantly) surprised to see such an outperformance.

Now, it’s time for regret:

Even though I was so optimistic about Zoom ($ZM) to the point that I’ve publicly written about it since the 16th of April, I still do not own any shares:

I expected the pop on its IPO date, but have myself to blame for being too set in my ways hoping to pay a specific price or expecting the overall market to care.

Today, on its direct listing date, I bought some shares of Slack ($WORK).

I can’t walk around any WeWork without seeing people chatting on their channels.

Buying Slack is not a makeup call for missing out on Zoom and now Slack’s current valuation of $20 billion is a good step up from $7 billion in 2018 and $5 billion in 2017.

Whenever Airbnb begins trading on an exchange, I hope to enjoy an IPO date in a brighter light:

“Even before it reaches the half-year point, 2019 will be remembered as a banner year for IPOs, with Lyft, Uber, Pinterest, and Beyond Meat already having gone public and more high-profile upstarts to follow, including The We Company (a.k.a. WeWork) and Slack. Also on deck for IPO: Airbnb, which has more listings than the total number of rooms of the top five hotel brands. Airbnb sales have tripled in the past three years and in 2018 surpassed the Hilton hotel chain’s sales. The lodging disruptor is not just taking market share from the incumbents by following its core strategy; it’s also making inroads into their business with the purchase of HotelTonight and its new partnership with a New York City real estate developer to create high-end apartment-style, hotel-like rental suites in Manhattan’s iconic Rockefeller Center. With Airbnb nipping at its heels, one leading hotel giant has responded in turn by encroaching on Airbnb’s terrain, launching a global luxury-home vacation rental platform, Homes & Villas by Marriott International. As Business Insider reports, this new program brings an intriguing aspect of the established hotel business into the home-sharing arena; consumers using Marriott’s platform will be able to earn and redeem points on the hotel brand’s Bonvoy customer loyalty plan.”

Expect to continue hearing Airbnb politically battling cities around the world.

Where it wins the turf battle, or at least negotiates cleverly, expect it to win big:

“[We] found that every 1 percent increase in the number of Airbnb properties decreased the average revenue per room by 0.02 percent. Although this impact seems small, consider Airbnb’s phenomenal year-over-year growth rate when measuring the company’s impact on hotel room revenues. Accordingly, every time Airbnb’s supply doubles — which is its average yearly pace since inception — hotel revenues fall 2 percent. While it’s hard to convert this into dollar amounts given the statistical nature of our analysis, we crunched the data on New York City and found that total potential hotel revenue lost to Airbnb may have totaled $365 million in 2016 alone.”

Also from Investopedia:

“For investors, window dressing provides another good reason to monitor your fund performance reports closely. Some fund managers might try to improve returns through window dressing, which means investors should be cautious of holdings that seem out of line with the fund’s overall strategy. The act of window dressing is under close watch by investment researchers and regulators with potentially forthcoming rules that could require more immediate and greater transparency of holdings at the end of a reporting period.

While window dressing overall can help a fund’s returns in the short term, longer-term effects on a portfolio are typically negative. Investors should pay close attention to holdings that appear outside of a fund’s strategy. While these holdings may show higher short-term performance, over the long run, these types of investments drag on the portfolio’s returns, and a portfolio manager cannot often hide poor performance for long. Investors will certainly identify these types of investments, and the result is often lower confidence in the fund manager and increased fund outflows.”

I’m late on Zoom, on-time with Slack, and early with Airbnb.

That’s how my window is currently dressed.