In 2022, my portfolio returned 5.78% and the S&P 500 index returned -18.11%.
Cash holdings averaged 46% for the year.
Personal Performance vs. S&P 500 Index (with dividends reinvested)
Year Personal S&P 500
-------------------------------------------------------------
2018 30.36 (4.38)
2019 11.59 31.49
2020 17.15 18.40
2021 21.15 28.71
2022 5.78 (18.11)
-------------------------------------------------------------
Compounded Annual Gain 2018 - 2022 16.91% 9.43%
Results were far better than I expected going into the year, but my thoughts about general market conditions haven’t materially changed. The S&P 500 still appears overvalued relative to history; despite this year’s heady decline, valuations are still on par with the peak of the dotcom bubble.
It continues to be challenging to find attractively priced companies with sufficient margins of safety. Many individual securities seem reasonably priced only if you assume record high operating margins going forward. While not impossible, given the unusual conditions of the past few years, and the weight of the historical record, this doesn’t seem like a great bet.
I’ve been investing “full-time” for the past 5-years now, so at the risk of some self-indulgence, perhaps some introspection is in order.
I feel pretty comfortable about my valuation process, which I would describe as 1) discounted cash flows utilizing a combination of 2) base rates and 3) subjective business judgement. I owe a great debt of gratitude to Aswath Damodaran for making his valuation classes freely available online and Michael Mauboussin for his paper on base rates. I’ve also benefited greatly from John Hussman’s perspectives and data on broader market valuations relative to history.
The biggest challenges have been more psychological and emotional in nature: What is the maximum position size I can have and still sleep well at night? What is my natural bias (bearishness) and how do I adjust for that? How do I resist the fear of missing out during periods of speculative excesses? How do I know when to sell a quality company that may be quantitatively overvalued, and how do I even measure the range of uncertainty around any valuation? I’ve learned that it’s impossible to fully emulate the great investors because everyone’s psychological temperament is different. It is more important to come up with an original strategy that you can actually stick to.
One thing I’d like to do better at is to have less portfolio turnover, both for tax reasons and because it’s hard to constantly find and replenish investment ideas. I’d like to think that the high portfolio turnover over the past few years has just been due to marginal opportunities combined with high volatility. Most of the companies I’ve owned have been extremely cheap but average, or even below-average, businesses that I have been disinclined to hold once they approach fair value. More recently, some higher quality companies have been trading for more reasonable prices, which should result in less turnover.
It is still unclear to me how much of investing is due to skill versus luck, my own track record included. Fundamentally, investing is about prediction. I think the impact of “unknown unknowns” (COVID, Ukraine, energy shocks, etc) on outcomes likely outweighs anything that can be reasonably inferred under most circumstances. People are quick to credit their own skill for success and external, “uncontrollable” factors for failure, but randomness seems like the dominant factor in both cases.
In business, most successful entrepreneurs I’ve met aren’t any smarter or savvier than average, but just happened to be in the right place at the right time. Cathie Wood had the right style (speculative growth stocks) during the right time (greatest speculative asset bubble in history), but her brief success appears to be due more to luck than genius. Just as there are very few successful serial-entrepreneurs, there are likely very few investors who genuinely possess skill, which can only be ascertained throughout a variety of market cycles over the course of decades.
At the end of the day, I’m just trying to accurately value companies, buy them when valuations are cheap, and sell them when valuations are high. If I can spread these bets out across an acceptable number of companies (maybe 12-15), then the overall results over the long term should be favorable, even with some inevitable individual misses. This strategy seems so simple and self-evident that it almost doesn’t seem worth stating, but it’s remarkable how hard it is to stick to, particularly during long periods of time when little seems cheap.
It is also remarkable how much investment media tend to obscure and complicate things. Instead of discounted cash flows, you have made up multiples based on invented metrics (Community Adjusted EBITDA, most non-GAAP metrics). Instead of selling when something is grossly overvalued, you have people claiming that you should #neversell. Despite a well-documented history of bubbles and manias, you have people who claim there is no price too high for a quality company, and that “this time is different.” This isn’t meant as a victory lap, but more just to emphasize how difficult it is to stick to the basics when there is so much noise and distraction.
Current Positions
Undisclosed US Small Cap (<$500MM market cap)
BKNG
GOOGL
AMZN
EBAY
USB
S61.SI (SBS Transit)
0752.HK (Pico Far East)
1977.HK (Analogue Holdings)
5122.JP (Okamoto Industries)
Cash (48%)
2022 Performance Review
Another excellent year Eric! Congrats. I think this market, having returned to more historic interest rate reality, should continue to solidly favor your investment style - even more so than in the past. I'd bet you continue to outperform. Look forward to future updates - I read them with great interest.
One question - do you have other investments besides these public market investments? Have they over or underperformed your public investments? If you feel so inclined, I'd be curious to know your "overall" performance including % of other investments you may have (private co's, debt, other types of investments, etc.) I track all on one ss and include those in my overall yearly performance. For example, I'm at 63% public equities, 18% real estate and debt investments (not including house), 19% private investments (based on most recent marks). Overall, over the period you report I'm ahead of the S&P even with some lower than market debt dragging returns, but not as high as your performance :)