2023 Performance Review

In 2023, my portfolio returned 21.76% and the S&P 500 index returned 26.29%.

Cash holdings averaged 72% 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) 
2023                                       21.76        26.29
--------------------------------------------------------------
Compounded Annual Gain 2018 - 2023         17.70%       12.07%

I think it makes sense to simply repeat what I wrote last year, with some minor changes highlighted:

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 [updated link]; despite this year’s heady decline rise, valuations are still on par with exceed 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.

Looking Back

Performance was far better than I had any right to expect given the extreme cash weighting of the portfolio. There were a few components to this performance:

• Small cap Japan picks did very well

• One of my largest positions (undisclosed US small cap) did very well

• Owned some tech stocks early in the year (BKNG, GOOGL, AMZN, EBAY)

• An opportunistic play on the Spirit Airlines merger (SAVE), with some very lucky timing

On the downside, my biggest losses over the past few years have been:

• Chinese / HK companies. I don’t know if I would have changed anything here, though. At the time, many high quality companies looked cheap even with the political risks and gloomy base rates of great power conflicts. However, these risks heightened to a level too uncomfortable for me personally after China failed to condemn Russia’s invasion of Ukraine, escalating tensions with the US.

• Companies I didn’t fully understand, like MRNA and USB.

On the latter point, although valuations looked cheap, I just didn’t have a strong enough “intrinsic” narrative, founded on a deep understanding of the businesses. When these weak internal narratives were challenged by external uncertainties, I ended up selling at inopportune times due to fear.

I think the lesson here is just to do more diligence before buying, and that a cheap price alone is not enough if I can’t pair it with a strong narrative. Aswath Damodaran, considered by many to be the modern dean of valuation, has written a great book on this exact topic.

Looking Forward

Speaking plainly, I don’t think I’ll be able to outperform the market long term with a material cash position, no matter how well my individual stock picks fare. However, I am also reluctant to invest in companies whose valuations I don’t understand, in a market that appears exceedingly overvalued by most reliable historical measures.

Again, I think it makes sense to simply repeat what I wrote a few weeks ago:

I am currently holding 80% in cash while I await a more favorable environment, and will try to focus on ideas outside of the S&P 500, outside of the US, and more inline with special situations and opportunities uncorrelated with the general market. Even if I can only find a handful of attractive opportunities per year, I believe that results should be satisfactory relative to the alternative.

More concretely, there still appear to be many opportunities in Japan, and I’ll likely increase my exposure there. A few places I’m looking for ideas:

• Japan Company Handbook - A monster 2,000+ page tome that has brief overviews of thousands of companies.

• Asian Century Stocks - Paid Substack that I’ve subscribed to for a few years that does a great job of surfacing small, lesser known names.

• Twitter - Lots of random accounts that focus on smaller Japanese companies, including AltayCap, YoyogiCapital and TeddyOkuyama. In general, I try not to pay attention to any third party valuations or stock pitches, but will just note the ticker and add it to a list of companies to research at a later time.

I like Japan because many of the companies are smaller with business models that are relatively easy to understand. Many of them are are also extremely cheap, but have a history of hoarding cash and investments, so the challenge is finding companies that are at an inflection point in capital allocation. I think a diversified basket of these types of companies is likely to do well over the coming years.

Wishing everyone a safe and prosperous 2024!