Quarterly Letter Q2, 2022 — The Beginning, Luck, Cash, Grit, and Maneuver.

Why?

I thought I’d start writing these quarterly letters because it seems like a very good idea to be able to look back and see how and what I was thinking. A record, of sorts, to help foster growth of mind.

This is important because investing is a mental game.

One of the best lessons that I’ve learned so far is that after-action review of a mission is one of the best opportunities to learn and that’s what our main goal is here. We are in the business of updating our thinking by looking back, so we can make better decisions moving forward.

I am thoroughly convinced that prioritizing learning leads to long-term portfolio outperformance. This is not to be confused with mental masturbation, as is the norm in investing circles. It is my hope that all quarterly letters will be plainly written, contain meaningful lessons learned, and interesting observations.

Portfolio Transfer from TDA to IBKR

My official start in investing my own money began right at the start of the pandemic with TD Ameritrade. While I love them, Interactive Brokers offered better reporting as you’ll see below.

I opened my account with them on 4/18/22 and have been slowly buying companies. This has been highly advantageous during the economic downturn.

While this is technically outperformance, it should be discounted to 100% luck. It could have easily been the opposite: slowly buying companies while the stock market soars to new record highs, which would have obliterated relative returns, but ensured safety via dollar cost averaging.

It’s worth repeating: this quarters’ outperformance is mostly luck with a little bit of wisdom. Dollar cost averaging instead of lump-sum investing saved the portfolio quite a bit.

Quarter Performance

Here is the performance since 4/18/22:

Performance Since Inception

You’ll notice that inception performance matches the quarter performance. I’m simply posting this here as a formality, so you know what to expect next quarter.

Risk Analysis

Here you can see Sharpe and Sortino ratios, along with some other fun data. I intend to keep posting these quarterly.

Why I Chose Benchmarks

I used to laugh at investors who would try to beat the market, thinking it was unbeatable.

Those days are gone.

A popular question among investors “Would you rather outperform the S&P 500 by 5% every year or make a return of 8% every year?”

This question gets at values of an investor. Do they value absolute or relative performance? I think if we value absolute performance, and practice wise investing, relative performance will take care of itself.

The purpose of benchmarks is a lagging indicator to see whether our investing discipline works or not. Just as combat is the ultimate auditor in effectiveness of fighting forces, relative performance vs a benchmark is the ultimate auditor of effectiveness in investing.

I could be wrong, but this seems like an obvious road forward.

PS

• Huge thank you to Jim, Alex, Simon, Christopher, Lily, David, Kai, Kyle, Michael, Casey, Greg, and McKyla for your support. I am beside myself that such amazing humans, who I’ve never met, gave time and effort to help make this a reality.

• If you want to sign up to see what I’m buying and selling, become a member here.

• I started writing a short semi-daily email. Most of it is not investment related. You can check it out here.

Market Observations

Even though the first half of 2022 saw quite a large market downturn, I am still convinced that we are overvalued. We still have lots of companies out there toting ridiculous valuations without being profitable, and grifters all over the place.

“The market may never be fairly valued again” is an argument that doesn’t look at history. It’s akin to “This time is different.”

Spoiler alert: this time is not different. As of today, 7/21/2022, people are getting giddy because the S&P 500 is on an uptick. Keep in mind that we were recently at December 2020 levels, which is not insignificant, but definitely not a total meltdown.

Anyone touting “the end is near” is either ignorant or trying to sell you something. Sure, we may see significant drawdowns from here, but who knows. I don’t know, and neither do any professionals.

Pay attention and see who manages money and predicts macro economic events. They are few and far between.

Notice how many of these investors are fundamental, while only a couple are macro investors. This chart should blow your mind. These are decades, and outperformance of the S&P 500.

There’s plenty of room in the fundamentals to do very well.

Not Rocket Science

The main takeaway here is that these are regular people. None of them have special powers. Most of them have most or all of these qualities in common:

• Insatiable learning -> Intelligence

• Ability and courage to stand alone

• Patient

• Self-motivated

• Self-directed

• Focused

• Risk taker

• Combines discipline, curiosity, and synthesis

• Emphasis on what works

These traits are accessible and free to those who choose to grow them. We both know, however, that the vast majority choose the easy road instead.

Deliberate Focus and Information Maneuver

One of the other things I see is a company being very popular in investing circles, especially on Twitter, without warranting such focus.

A great example of this is Twitter and Elon Musk. “Maybe I can make a buck on this” is a common thought.

This is a game of betting on a ruling, instead of investing in fundamentals. Does it warrant your focus and attention? Probably not.

This is another reason I subscribe to so few newsletters: information is best sought out via hunting, not waiting/ambushing. This realization came to me during my reading of MCDP-1: Warfighting. (Members can read the summary here).

The best information is sought after the spark is ignited by chance.

This means combining luck of information crossing our paths, then hunting for more along the same string.

Grit

Starting this venture was very fun, scary, and exciting. Continuing it takes a lot of grit.

When people think of grit, they might think of misery or unwillingness. Trudging forward.

When I think of grit I think of the smallest pebble of information that helps me get better at all of this. Much like fractions of a percent in compounding, it all adds up. It sounds overly simplistic, but it’s not easy. I think that’s where a lot of alpha lies. It’s in the easy to understand but hard to implement pile.

So that is what I will keep doing.

I’m still obsessed, still making progress, and loving every second of it. If you don’t hear from me for a few weeks, it’s because I’m learning or building. Ask my wife how many days I take off per month and she’ll proudly answer “none”. It is not just discipline that keeps me here, but love of the game. After only one year I can honestly say that I am a completely different human than when I started.

My previous life in the fitness industry had very little growth of mind or spirit. Here, in the investing, growth cannot happen fast enough, or deliberate enough. More books, more conversations, and more learning are always welcome. They are foundational.

Until next time

I have a lot of big things in the works, all of which support the main focus of investing. Stay tuned.

And thank you to those who have trusted me with your attention. Thank you to the members for being awesome. This wouldn’t be possible without you.

If you see anything that doesn’t make sense, or have a question, let me know.