The Hunt for Dislocations

Hunting Dislocations

This year I was definitely more of a “trader” than normal. I don’t think any actual Wall St Trader would look at my portfolio turnover as such but for me this was quite an active period. As readers from the past will know, I ideally like to buy businesses at both a Relative valuation discount and Absolute valuation discount (tough to find both now as of October 1st). Absolute is your standard “discount to intrinsic value”. Relative valuation is way easier to calculate. Why does Pepsi trade at a discount to Coke? You can easily identify that the P/E multiple is lower. However, it’s hard to identify the reason why this persists. 

When I’m hunting for dislocations, I make sure to understand the numbers and the business performance, but then start to focus a lot on what is causing the dislocation and can I have a variant perception that has a catalyst for change. This is much more of a softer approach than a rigorous model determining the intrinsic value. It is also more of a “trading” posture than an “investing” posture.

Example #1

Fans of indexing say that with all the investors and analysts following large caps stocks, there’s no way to outperform the market. Exhibit A for why this is wrong is below.

There may be no company out there more studied and followed than Google. And yet, since this tweet the stock is up 26% and at the highs was up 44%.

What caused this opportunity was the Twitter echo chamber. Perplexity was raising rounds quickly, rumors were swirling of Open AI launching a search killer, questions were being raised around Google’s search moat, and within all of this Google launched Gemini with horrible results causing them to withdraw the model. All In Podcast, BG2, and every podcast and analyst was saying Google is behind on AI and search was under attack. 

My variant perception was that Google still had some of the best talent, search was far from being disrupted, and the echo chamber had permeated way too far from a few loud voices. The catalyst for change would be Google showing more of what they have accomplished historically in AI and correcting the mistakes of Gemini. Timing was the hard part, would they correct in weeks, a month, a year? My perception of the quality of the business said this was a massive dislocation in one of the most liquid and well followed stocks out there. I put 100% of my (very small at the time) account in GOOGL Jan 120 2026 Calls (more on LEAPS later). A month later I sold for a 50% gain…4 months later those LEAPS were up 200%+. Selling too early hurts!

Example #2

Frankly being 100% long GOOGL was a bit much for me. Although I believed I had a wide margin of safety, it’s still psychologically a lot of risk to deal with. I needed to better manage my position sizing to allow me to sleep at night. Additionally, I finally had some funds unlocked along with the GOOGL proceeds to have a more meaningful PA which started on 6/6/24.

As luck would have it, just a few weeks later in June we had the Salesforce crash. Longer time SaaS investors will remember 2016 when a similar event happened. Salesforce reported a large slowdown in growth and the enterprise software market tanked as well. Quality companies were trading for what I considered longer term bargains.

I chose to have a max concentration of 20% for top ideas and then balance out the rest of the portfolio with cash and smaller positions. My TEAM position was expressed through Jan 120 2026 Calls (sensing a trend yet?). BRZE and the small cap vertical market SaaS company both have too small market caps for a liquid, long term option market to exist so both of those were expressed through common equity.

My variant perception was that the “SaaS is dead crowd” was once again becoming too loud a voice. Quality businesses were trading at both absolute and relative discounts. The market had correlated to 1 on SaaS assets with the once every 4 years Salesforce flash crash and when that happens, inevitably babies get thrown out with the bathwater.

I thought this would be a portfolio I would hold for a while as I had found attractive entry valuations for companies with durable growth ahead. Well, this market moves fast. In one month my Atlassian options were up 40%, Braze was up 23%, and my small cap SaaS position was…flat (now up 9% and still much more to go). 

I was fortunate to have a conversation with Dennis Hong of Shawspring Partners at this time. Dennis is someone who is always open to offering feedback, helping test an idea, and provide mentorship. This is one of those times I really appreciated his common sense. Dennis told me not to look a gift horse in the mouth and take some off the table. Shortly thereafter Atlassian hit new lows for the year before rebounding back to where I originally purchased. Contrary to my Google lesson (not holding long enough), this was a great example of taking risk off the table.

End State - Barbell Portfolio

Nothing in the market stands out as meaningfully undervalued or dislocated right now (even in many small caps). The portfolio is much more diversified as a result since I don’t have conviction in any one idea to concentrate.

Several of these positions are “forever” holds. I’ll talk about Serial Acquirers more in a future letter but you can see how those make up the majority of the portfolio. They are the middle of my barbell portfolio strategy, balanced quality compounders that I hope go down in price so I can buy more. On either side of the barbell I add some risk such as higher beta tech positions, special situations, or small caps.

For the quarter, my account is up 7.9% compared to S&P 500 at 5.4% and the Nasdaq at 2.8%. Inception was only 1 month before but you can find that table at the bottom of this letter. 

Why LEAPS

Throughout the moves I’ve made this year, a consistent theme has been the use of LEAPS (Long-Term Equity Anticipation Securities). Joel Greenblatt describes them better than me so please read his description below. 

Monthly Performance Table