Obsession Capital 2020 Annual Letter

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Obsession Capital’s annual letter for the year ended December 31, 2020.

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Dear Partner:

Summary of Financial Performance

Despite the huge uptick in volatility in 2020 and the subsequent crash in prices of equities as well commodities, the S&P 500 ended the year with a handsome 18.40% annual return. We are happy to share that despite a volatile year, our fund’s annual return was 77.55%, beating the S&P 500 benchmark by 59.15%. Introduction The past year has been a challenging time for the global economy, but it also brought great opportunities for investors and our fund. The emergence of a new strain of the coronavirus, COVID-19, was first reported in late December 2019, and media coverage started widely in January 2020. However, a lot of countries responded and started to coordinate only in March of 2020.

Amid the initial chaos due to lack of government coordination and uncertainty regarding the severity and highly contagious of the virus, the market crashed. The situation was so dire that circuit breakers were triggered four times in March 2020. It was a catastrophic event, and even worse, little did we know that it would be so tragic and cause countless deaths, loss of jobs in almost every industry, and severely impact the modern way of life. Given the low savings rate among the majority of the population, it would not be an understatement to say that prudent people with ample savings were less impacted by the pandemic compared to the others. And those who benefited from the initial market crash were privileged to have access to liquidity at the right moment. Market participants witnessed an incredible transfer of wealth during the crisis. Nonetheless, it was a profound experience to see as events gradually unfolded.

As the equities markets in the U.S. were making new highs in the first quarter of 2020, I was analyzing the price levels meticulously. Consequently, I decided to shift gears from having optimum exposure from growth stocks to make more room for more defensive stocks, such as adding exposure to Microsoft and PayPal, in the asset allocation structure of the fund. Furthermore, I was aware of the new strain of the coronavirus as early as January, when it first reached the shores of a handful of nearby countries. It was expected that there would be a lag between events unfolding and the onset of governments’ responses due to the time it takes to reach consensus in societies.

Meanwhile, I was concerned that this lag in policy response would lead to poor coordination among various government agencies to mitigate the spread of the virus. Misleading information and the lack of proper directives from authorities caused chaos and panic across the financial markets that magnified the bearish pressure and induced volatility to increase considerably. Unsurprisingly, when the COVID-19 pandemic reached U.S. shores and a necessary survival mechanism was triggered among investors, causing the overall market to tank while boosting defensive stock prices.

Long before COVID-19 turned out to be a material risk for the economy and our way of life, we already recognized the importance of certain industries as crucial for the functioning of society at large and deemed irreplaceable. As a result, we had already expanded our exposure to such mission-critical industries that included cloud computing, digital payments, streaming services, and emerging driverless technology providers, among others, prior to the shelter-in-place directives came from regulatory authorities.

Business Performance Breakdown

Digital Payment Service Provider - PayPal

Despite numerous alternative digital payment and e-wallet providers, PayPal holds a “near” monopoly status in the industry. Because while other competitors may offer similar services, when it comes to sending money the most efficient and safest way possible, both domestically and internationally, PayPal is the only viable option. Also, by end of Q3’20, PayPal had over 361 million active users, an increase of 22% compared to 295 million in Q3’19. It is worth noting that during Q3’18 to Q3’19, PayPal’s active users went up by 16%. Such a large active user base enables the company to leverage a network effect that other competitors in the industry can only wish for.

The COVID-19 pandemic prompted people to comply with mandatory shelter-in-place policies around the world, and all travel was prohibited unless deemed necessary. As a result, PayPal’s quarterly revenue went down to $4.62 billion in Q1’20. However, the two rounds of Paycheck Protection Program stimulus last year have favored PayPal’s stock price and became an important catalyst to the growth of the company’s business that attracted new users, helped to reinforce customers’ loyalty, and increased average transaction volumes of active users.

Compared to other blue-chip companies, PayPal has more of a momentum stock undertone to its price action. This undertone was reinforced after PayPal announced its decision to open its network to cryptocurrency transactions in Q3’20, which caught some speculative investors’ eyes for the rise of bitcoin price. Consequently, in Q2’20 and Q3’20, PayPal’s revenue started to grow, and in Q3’20 the company posted a $5.46 billion quarterly revenue, representing an increase of 25% compared to $4.38 billion in Q3’19.

Cloud Computing and Gaming - Microsoft

The high drama involving Microsoft and Amazon regarding the JEDI project reward caused some stirs in early 2020 for the company. However, Microsoft offers a trifecta of amazing management, robust product line, and legacy service offerings. More importantly, the company has a track record of committing to innovations even during the most difficult times. Microsoft has also been one of the institutional investors’ go-to picks during volatile market periods.

For a company valued north of more than a trillion dollars, Microsoft showed tremendous resilience for its willingness to adapt and innovate by quickly launching its virtual conference software Microsoft Teams, which immediately gained popularity and significant market share in this niche. Microsoft also helps more reserved high-net-worth investors, who have high interests in gaming, get a piece of the market. It seemed to be a wise decision to me that Microsoft did not provide an ambitious earnings guidance while reporting news records of statistics, which was remarkable considering the uncertainty of personal computer and gaming consoles sales over the last three quarters.

As a result, despite the initial downturn in the global economy in 2020, Microsoft posted annual revenue of $143.02 billion, a 13.65% increase compared to $125.84 billion in 2019. The net income for 2020 came out at $44.28 billion, representing a 12.85% increase compared to $39.24 billion in 2019.

Given the strong performance over the last three quarters, I expect to see Microsoft remain a staple in the respective sector.

Streaming Service - Tencent Music & Disney

Tencent Music had a rough start in 2019, and its stock price never went much higher than its IPO price of $13 per share. Even without a market crash in 2020, the company’s stock would have struggled to make a breakthrough. However, streaming service providers became an overnight sensation across the board due to China’s quick shutdown and strict shelter-in-place policies. Tencent Music has delivered incredible growth for years, yet its stock always lacked the momentum to justify a higher valuation and a price breakout. Despite the uncertainty, Tencent Music continues to invest in its core business and work closely with record labels to develop strong partnerships, such as Universal Music Group. Going forward, an undervalued company like Tencent Music would be my favorite choice for the long term, which would provide investors with a strategic investment opportunity to participate in the growth of streaming service in the Chinese market.

Disney was one of the most negatively impacted companies due to the pandemic. While almost all of its theme parks closed to comply with the local guidelines, apparently investors still gave Disney the benefit of the doubt and hoped that the company’s aggressive adoption for its lucrative streaming service Disney+ could change the company’s business profile while diversifying its revenues from sudden shutdowns in the future. Disney+ certainly delivered impressive growth for the company and promptly became a formidable challenger in the streaming service industry.

Driverless Technology - Tesla

Our fund had an overweight rating in the second quarter of 2019, as it held a significant portion of Tesla in our portfolio. Unfortunately, due to some constraints of the fund’s investor profile, I decided to cut the driverless technology company out before entering 2020 in exchange for more defensive stocks. Such decisions of course provided more certainty and lower volatility for the investors. As you can imagine, volatility goes two ways: it can go down, but also go up, way up. Reducing exposure to Tesla was certainly a strategic move. However, in retrospect, there was definitely room for improvement when it came to taking a binary approach to individual stocks. I would say that I hope this mishap can serve as an invaluable lesson to remind myself in the future.

Biotechnology - Picks of Moderna and Catalent

Moderna’s success in developing a COVID-19 vaccine was no surprise. Moderna’s proposal to develop mRNA vaccines had already put the company on the trajectory of researching viable vaccine solutions. Factoring Moderna’s market cap and government funding to race all the potential vaccine developers toward producing the vaccine as soon as possible, these two factors contributed to Moderna’s upward price movement. The U.S. government’s funding cleared the path for Moderna and Pfizer to solve one of the most critical issues in the process of clinical trials. Although Moderna’s vaccine has been approved, the company’s stock price benefited from speculative bets long before the approval saw the light of day, since the beginning of the clinical trial. Also, we need to acknowledge that the current price has factored in a lot of future cash flows, and currently it is trading at a premium. Therefore, I have added Catalent to our portfolio in order to diversify the fund’s investments in response to potential vaccine demands.

Hedging - Safe-Haven Currencies

The demands for safe-haven currencies helped us develop a robust hedging plan to cope with sudden market crashes in 2020. However, when trading two currencies, both providing somehow a sanctuary for global investors, it would be tricky to find a distinct path for the short-term movement. Nevertheless, our fund still managed to make a decent profit by trading derivatives of safe-haven currency pairs.

Moving Forward

When the circuit breakers were triggering in March 2020, it was like a déjà vu moment for me. It made me relive the heights of the financial crisis in 2008. It reminded me that the dates on the calendar may have changed, but human behavior—the inherent psychological biases that drive market prices in the short-term— has changed very little over the past decade. As one of our fund’s strategies is to take advantage of uncertainty and psychological biases observed among investor behavior in the broader marketplace, we were able to leverage the unprecedented volatility in the equities market.

Moving forward in 2021, investors need to take note of the excess liquidity, which is chasing yields and causing volatility in various asset classes, including inflation hedge plays in commodities markets. It is astounding to observe that the market is both depressed and overheated at the same time due to the concentrated bets on the technology sector. A healthy dose of caution while navigating these overconcentrated sectors would not hurt. After all, as investors we should always prioritize assessing risks over chasing performance, as being aware of risks is an essential part of this business.

On that note, I credit the fund’s performance to the trust vested upon our strategies by our investors as well as to the shared values between the firm and our partners. Our commitment to investing in technology innovations that could redefine our way of life across multiple generations to come makes it easy to define our goals, the work easy, and the decision to choose which path to take rather clear.

I look forward to another year of prosperity while working closely with you and serving our shared values as a trusted business partner for years to come.

Communication - Twitter and Blog Posts

You probably have noticed that this letter appears to be a lot like some of the firm’s tweets and blog posts. That is great! We always want investors to have access to the most updated information or our thought process on certain investments and market climates to help you make sound investment decisions. On that note, we encourage you to check out our blog or follow us on Twitter for regular updates.

Last updated date: Mar. 2, 2021


Managing Partner

Joy Chen


This document is issued by Obsession Capital LLC (“Obsession Capital”) for informational purposes only. While Obsession Capital believes that the sources of the information are reliable, none of Obsession Capital, its members, managers, directors or any of their respective agents, affiliates, related bodies, officers, and employees give any guarantee, representation, warranty or undertaking, either expressly or implicitly, and accepts no liability for the accuracy, validity, timeliness, merchantability or completeness of any information or data (whether prepared by Obsession Capital or by any third party) contained in this document for any particular purpose or use or that the information or data will be free from error. Obsession Capital disclaims all liability to any person relying on the information contained in this document in respect of any loss or damage (including consequential loss or damage) however caused, which may be suffered or arise directly or indirectly in respect of such information.

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The performance results contained herein are unaudited. Past investment performance is not a guarantee or predictor of future investment performance. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible. Some high risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including a greater volatility and political, economic and currency risks and differences in accounting methods. Investment in securities, and return on such investments, may also rely in part on the continuation of certain macroeconomic trends, regulations and conditions, including but not limited to within the financial and banking industry. Trends and historical events do not imply, forecast or predict future events and, in any event, past performance is not necessarily indicative of future results. There can be no assurance that current market conditions or trends will continue and actual events and circumstances may vary significantly. Any change to the macroeconomic or systematic conditions, however minor, or the occurrence of unanticipated events or circumstances, may alter the outcome of an investment and/or the viability of a firm’s investment strategy.


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