Q2 2024 Portfolio Update
Portfolio Changes, Q2 2024:
Popular Posts, Q2 2024:
Celsius: The Rise Of A Billion Dollar Brand
Chuck Akre and the 2007-2008 Financial Crisis
In what has been a generally favorable environment for the TSOH portfolio, with a 1H 2024 gain of roughly 20% (full results below), it also feels like we have moved another step closer to a crossroads. Recent portfolio changes tell the story: Mr. Market continues to ask more demanding questions to certain holdings (in the form of higher stock prices), with two prominent examples being Microsoft and Netflix. As a long-term investor who desires to truly own a select group of high-quality businesses, my typical response is to leave Mr. Market to fluctuate between his short-term bouts of optimism and pessimism as he sees fit, particularly on relatively inconsequential stock price changes (10% - 20% in either direction). As an important aside, I’d argue this is a prerequisite for being a long-term owner of common stocks (to the extent that’s something one aspires to). If you can’t resist the urge to react every time that a stock climbs or falls by 10% - 20%, you are going to find it very difficult to own a business for a long period of time, and particularly in size.
With that said, there’s a point where these moves are no longer insignificant. Whereas a 10% or 20% climb for a stock is relatively inconsequential, all else equal, in the context of forecasting 10-year expected returns (and “all else equal” is a very important qualifier there), we can’t say the same when we start talking about 50% or 100% moves to the upside. If that outcome for a given stock coincides with the availability of other investment opportunities - with the caveat, as always, that those ideas will only be considered for inclusion in the portfolio if they pass the first filter - I’m likely to take action.
That is what I have done of late, and it is what I am likely to keep doing if recent developments within the portfolio are repeated as we look ahead.
With that said, I will continue to resist an approach that puts the cart before the horse, i.e. one that steadily pushes the portfolio towards a collection of lower quality businesses over time as a result of being overly focused on near term (headline) valuations. But even if we narrow our focus to the top decile of publicly traded companies (based on our assessment of business quality), you can imagine a scenario where one chooses to accept some degradation on the first filter if we swap out a top ~1% business at ~20x forward EPS for a top ~10% business at ~15x forward EPS. If presented with this situation, is that compromise sensible / justified? How about if those numbers are ~25x and ~10x, respectively? In theory, there’s a “right” answer to that question. In practice, I’d say that it’s the responsibility of each investor to determine how much weight they place on the different variables, along with how they think about the role of individual positions in a portfolio. (Obviously, that cannot be taken to absurd extremes, and it still assumes sensible analysis in broadly thinking about what different valuation multiples imply / require over time.)
This is a question that you’ve watched me try to answer over the past 3+ years, as well as something I’ve written about on occasion (most recently in ”Valuation and Long-Term Investing”). Looking forward, while specific actions will be subject to whatever Mr. Market presents us, I will continue to make those decisions with clear focus on my north star. As always, should the need for further changes arise, they will be disclosed to subscribers beforehand.
Here’s the current TSOH portfolio: