Quarterly Letter: Q2, 2023

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Q2 2023

Performance

Another banger of a quarter. The portfolio is up 11.5% this quarter alone vs the S&P 500 8.74%.

We are now at 21.96% since inception vs 3.43% for the S&P 500.

Here’s a full breakdown:

It’s not odd to beat the market so soon but it’s entirely too soon to tell whether it’s skill or luck. A 10 year out-performance can be entirely attributed to luck and marketed as skill. This is extremely common in the investing industry.

It’s also important to note that this rate of performance cannot likely continue without poor quarters and poor years. I expect underperformance at some point. Althought this is not ideal, the reality is that we can focus on what we can control. We can control the process, not the outcome. Control research, portfolio management, and how we think about businesses. We cannot control the market.

The focus on owning great businesses at reasonable prices is going to underperform at some point, and that’s ok. The score takes care of itself.

As always, here is our performance since inception first and quarterly performance second.

Heavy on the telecomm I know.


Investment Strategy and Philosophy

Most people in the investing world think that returns matter more than anything. This is not true.

If you can’t sleep at night, your health fails, wife and kids leave, and life falls apart, were the returns worth it? I can say for certain that no, they are not worth it. This is why my strategy focuses on deep understanding of the business, buy a slice of it, and wait a very long time.

For me, investing is a means to an end for freedom, not a means to an end for money. In fact, I want the absolute minimum needed to maximize freedom. Combining that with a lifestyle of work that feels like play (investing), and we have a winning strategy. Simple, but not easy.

It’s always a good idea to get ideas out so they can be tested by dialogue before the market tests them by destroying the portfolio.

A long time ago I posted my investing philosophy in the website. You can read it here: Investing Philosophy. It’s a terrible first draft, and it’s something that needs to be updated. In this draft I list a few things:

  1. Absolute Returns
  2. Risk Control
  3. Consistency
  4. Market Inefficiency
  5. Infinite Time Horizon
  6. Micro Only
  7. All In

They aren’t terrible, but they aren’t great or fleshed out very well.

I aim to update this list on an ongoing basis through the quarterly letters. It’s silly to put something in stone as a relative beginner and then not touch it. It assumes I’m experienced and top notch, which I’m not. My only superpower is assuming I’m either missing something or just plain wrong.

It would be the biggest of red flags for anyone to say “I’m right, and I’m not changing my mind.”

One of the main things I didn’t list was the kinds of businesses I’m looking for. I’m looking for quality, but that has so many facets that there’s many books out there on the subject.

Some things off the top of my head about quality:

  1. Revenue growth through meaningful products and services
  2. Obsessed customers
  3. High margins
  4. High returns on invested capital
  5. Market leader
  6. Widening moat
  7. Top notch management

Point #1 can be an entire library in itself. I’m not going to go into it here, but I will say that I’m looking for businesses that are growing because they are solving a problem or empowering people. Microsoft and Costco come to mind here.


Turnover

I spoke with a family friend who thinks she has zero interest in investing. I asked her if she’d like to invest in (what I believe are) great businesses.

“No, I don’t have time to trade all day.”

This is the common response that I get: “I don’t have time”

The thing is, I don’t think we’ve made a purchase, sell, or rebalance in 6 months. Not one.

I think if people took time to think or dig a little deeper, they’d realize that they have time to invest. I’m not asking a lot here, just a few hours a year. That’s one movie. How many hours of TV do most people watch?

Turns out it’s quite a lot:

What a poor excuse to not pay attention to your investments, the very thing that can help future generations live a better life.


Outlook

There’s a lot of talk about how the market is overvalued. I don’t see it, but I see what they mean. Here’s a history of the P/E for the S&P 500:

The thing is, we could play the “what if” game all day. The fact is we don’t know if markets will go up or down in the next year. We can only buy quality businesses at reasonable prices and let the score take care of itself.

One of the themes that I see being much bigger than most realize is the AI revolution. I think it’ll be big enough to be classified in the same league as electricity, the internet, and the printing press. It’ll revolutionize education, health care, play, creation, and business models. It’ll destroy older jobs to make way for newer and better ones.

I think some of the best opportunities are in big tech, as new technologies are rolled up into existing businesses.


Conclusion

What an amazing game to play. I’m so grateful to be able to do this alongside so many wonderful people. On to the next quarter!

~ Mike

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