Quarterly Letter: Q1, 2023 (Members Only)

Prefer PDF? Click Here.


Another solid quarter. While Walsh Investment Strategy pulls ahead of the market, I consolidated a few things, namely benchmarks. In the name of simplicity and efficiency I am no longer benchmarking against the total market (VT) or the NASDAQ (QQQ).

If I could pick one benchmark, it would be the S&P 500. That will be the only benchmark moving forward.

Here are the visual results from the quarter:

Here are the results since inception:

Here is the risk analysis between Walsh Investment Strategy and the benchmark:

You can see how much higher my Sharpe and Sortino ratios are. That’s ok. These high ratios are necessary for long term outperfomance.

From Investopedia:
“The Sharpe ratio and the Sortino ratio are both risk-adjusted evaluations of return on investment. The Sharpe ratio indicates how well an equity investment is performing compared to a risk-free investment, taking into consideration the additional risk level involved with holding the equity investment. The Sortino ratio is a variation of the Sharpe ratio that only factors in downside risk.”

The remainder of the letter is intended for members of the website only.

Portfolio

Here’s how the portfolio fared:

Meta platforms stole the show with a 76% return and 6.5% contribution to the portfolio alone. Intel, Microsoft, and Roblox also contributed nicely.

Here’s where this leaves us as of the end of the quarter:

I’m not a fan of having 13% of the portfolio in Meta after the recent performance. This performance had nothing to do with the business and everything to do with how people viewed the business. It was an interesting time to buy the company when it seemed like the whole world hated Meta and Zuckerberg. I had a hunch that the world would not quit using Meta Platforms apps overnight, so it was obvious that it was undervalued.

However, there is a fair bit of luck involved in this. Meta could still dissolve into a has-been company, but I doubt it. I may trim the position somewhat.

As always, I will email all members the day before I make any portfolio moves.

Sector Performance

Let’s look at sector performance:

In good times, telecom, and consumer cyclicals tend to outperform while financials and utilities underperform. The thing is, it’s common to try to time the market or time the market cycles “We’re beginning a recession. So I will buy Financials and Utilities” are par for the course. This is silly thinking. I have a short thesis on each of the above companies where I think the risk-to-reward favors the long-term investor.

Meta just happened to be a much faster turnaround than I was expecting.

It’s important to notice some things, and then leave them alone. Sector performance is one of those things. Which brings us to strategy.

Strategy

Our strategy remains the same: grow our money by investing in skewed risk/reward ratio of companies that are misunderstood in their pricing. While quality business are always welcome, their sometimes lofty valuations are not. The best company in the world is not worth a P/E ratio of 100, nor is the worst company in the world worth 0.1 P/B. There must be a middle somewhere. That middle is misunderstanding.

Let’s look at Roblox as an example.

Roblox is still misunderstood. They are a platform that has its own coding language, where anyone can 1) show up, 2) start making video games, and 3) charge other people to play them.

This seems trivial, but the video game industry is large, and growing. I still believe that the video game industry will be one of the largest in the future, and will splinter into many other categories, much as the technology category has splintered.

Not to get too into the weeds, but this is a great example: the Call of Duty franchise has been in trouble for some time now. Players have been disappointed with the evolution of the series, so developers on Roblox created a first-person-shooter that resembles Call of Duty, but they built it in-line with gamer preferences.

It’s this closeness to the customer that will set Roblox apart in the long term, leading to more users and more robust revenue streams in the future than what is expected. A misunderstanding.

Of course, nobody is without their blind spots, me included. I could be totally wrong about Roblox or any of the other companies in the portfolio present and future.

When I lose and a company I invest in falls short, it will be a learning experience. Comparing wins and losses, losses teach us the most. Wins pay us the most. The name of the game is to win as much as possible in the long run, so it makes sense then to leverage the inevitable losses and learn from them.

It should be noted that only learning from personal experience is costly and not ideal. Learning from the greats, history, and the losses of others is essential in becoming a good investor.

Learning

Sometimes when we start out on a path, we climb up almost to the top of our mountain only to realize that we took the wrong path. If we want to get to the top of the right mountain, we need to go all the way back down and pick a different path.

That’s what I did in this last quarter. When I started writing about stocks, I had a grand idea that I would leverage my experience outside the investing industry and map this experience directly into investing.

It worked for a while, and pretty good. However, if we are to make significant progress together, a fundamental understanding of common practices is essential. The way I was operating would be like a restaurant owner showing up to a warzone and saying, “I have experience that I think would be useful here” and jumping into the fight without any training. Sure, a restauranteur could get lucky a few times in a row, but they will eventually get killed and probably get others killed too. Not ideal!

That is why I have invested heavily into my own education to learn the fundamentals of investing common practices. Things like modeling, how equity research firms work, and communication best practices.

Conclusion

We outperformed this quarter, which is great, but it does not guarantee any future results. The opposite is true. A fruitful beginning can play tricks on the mind and imbue overconfidence early in the game. Being aware of this is crucial for every investor.

I will continue to invest in my education so that I can better serve you, the members. I appreciate all of you who have stuck with the adolescent phase of starting the website. As we close 1 year of active portfolio management, I still consider everything we do as brand new.

I look forward to the next quarter and the years to come. As things get pricey out there, it’s important to remember that cool heads prevail.

~ Michael

Disclaimer: The information provided on this website is for general informational purposes only and should not be considered investment advice. Please read our full disclaimer for more information. You can access it by clicking HERE.

Responses

Subscribe

Get smarter
Invest wisely
Never miss a thing

You have Successfully Subscribed!

Shares