Trading Diary – 17 December 2019

This week we’ve sold our position in Redbubble. Again, we have not redeployed the capital released into the market. We now have effectively four spaces open in the portfolio for new investments. We’ll reinvest this capital into new positions as we observe leading stocks moving out of trading ranges and into new uptrends. 

Sell

Redbubble Limited (RBL)

We sold our position in Redbubble at a 47% loss. Our risk management processes were ineffective in this situation as they are most effective in conditions of gradual reversal in the trend from up to down. Trend reversals usually take place over weeks or months. In this situation, it took place in one session of trading. Therefore, we were unable to avoid the bulk of the drawdown.

The reason for this, as with most things operating in a complex system, is hard to pin down. When we opened the position in November, we were under the impression that there was a good chance that the stock was positioning itself to enter a new uptrend. The business appeared to be back on track and gaining traction with key strategic initiatives. 

However, the latest market update issued on Thursday brought into question most of these assumptions. Competition is increasing, and growth is unquestionably slowing in the core Redbubble business. As a result, the stock sold down significantly, giving up most of its gains for the year. 

Future growth trajectory

It’s unclear at this point whether the company’s growth profile is permanently slowing or even reversing or whether the growth profile is just volatile. The industry in which the company operates is very competitive. More competitive than the market realised. Competitors in the area will continually try to gain short term ascendancy by one-upping each other through deals and marketing. The hyper-competitiveness will result in lower margins and a volatile business, which is what we’ve seen in this latest update. 

Moving on

In this situation, we take our cuts and move to the sidelines. This trade is the most significant loss we’ve experienced this year and is substantially higher than the average loss for our strategy. 

One key takeaway from this experience is that in future, we’ll be less inclined to enter a position that has gapped up in price substantially in recent history. A stock that can gap up on positive new information is one that can equally gap down on negative news. We prefer smooth trends, where information slowly disseminates through the market, driving the price momentum.