First Quarter of 2018
In the first quarter of 2018, the portfolio declined 2.6% lowering our cumulative return to 60.6%. This period also signifies the five year anniversary of the fund's inception. At this marker, we largely outperformed the World Index Ex-US ETF [ACWX] benchmark (cumulative return of 32.7%) but underperformed the S&P 500 ETF [SPY] by 6.1% (cumulative return of 66.7%).
Many may view our performance as satisfactory given the average cash position held in the portfolio, however, the fund underperformed my expectations. My strategy looks to outperform both indexes in the long-term and provide double-digit annualized returns. Neither of these measures was met. While the investment philosophy behind the strategy is ironclad, I believe the strategy needs to undergo a few changes.
Our highest conviction investments outperformed the S&P 500 benchmark in spades, what lacked was a portfolio concentration large enough to outperform in the long-term. I would like to call it being gun-shy, green, or maybe too conservative as a portfolio manager. As discussed in prior letters, I will concentrate the portfolio in fewer investments which started in Q4 of 2017. The fund is going cap its holdings to ~15 positions with a larger concentration of capital given to these stocks.
In the past 5 years, US tech and growth companies dominated the narrative, most notably in the e-commerce sector and SAAS business lines. The ubiquitous FANG stocks (Facebook, Amazon, Netflix, Google) returned an avg 535% and contributed approximately 30% of the 66% total return in the S&P 500 since our portfolio’s inception. To the shame or the discipline of this strategy, we held no significant position in any FANG stocks or companies with similar attributes. Despite this, I’d like to say we did well without riding the hype and stayed disciplined investors.
Managing the portfolio provided many lessons, it proved to be as challenging and exciting as I expected it to be. This firm is now built on a strong foundation aided by 10,000+ hours of clinical investment work and more than twenty years of business experience. I would like to thank my clients for their continued trust and support.
Suspension of Disbelief
To enjoy a great novel, tv show, or movie, we allow ourselves to be fooled and suspend skepticism. For bulls to sleep peacefully in today’s high price environment, the equivalent suspension is required. It is a key ingredient to any well-fed mania. Fundamentals are replaced with projections and promises. Visceral thought replaces logic and investigation. The stocks which are currently en vogue are promoted tirelessly in the media and produces a dangerous sense of low risk. Our methodology and philosophy adhere to the nature of a businessman (or woman). Investing is a serious matter which requires large doses of disbelief and skepticism. Unfortunately, human psychology works against our better judgments. It takes as much discipline and courage to sell at high prices as it does to buy when prices are low.
Chief Investment Officer