Q4 2022 Portfolio Update

The TSOH Investment Research Service launched on April 5th, 2021, and with it came a mixture of excitement and uncertainty. Prior to the launch, I had been sharing my work publicly online for about ten years - but this marked a meaningful next step in my relationship with readers. I was asking for a more significant commitment of their time and money, which I did not (and do not) take lightly. In a few months, TSOH will celebrate its second anniversary. None of this would have been possible without the support of subscribers over the past two years; for that, I’m incredibly grateful.

In addition, I want to give a special shoutout to Francisco Olivera, who provides feedback on the vast majority of TSOH posts before they’re sent to subscribers. He has helped me to improve as an investor and as a writer; more importantly, he’s a great person and someone I’m happy to call a good friend. If you don’t know Francisco, you should follow him on Twitter.

Before diving into the year end review, two quick updates.

First, I’ve historically delayed the Monday post to Tuesday when the market was closed. That’s changing: from now on, Monday’s post will be released as scheduled whether the market is open or not. (As a reminder, the publication schedule for TSOH is every Monday and every other Thursday.)

Second, a quick update on the business side of TSOH: the service ended 2022 with more than 550 paid subscribers, an increase of roughly 40% from year end 2021. I’m sharing this information because I think it’s important for current and prospective subscribers to have clarity on the roadmap for the service: I can state with a high degree of confidence that this will be my sole professional endeavor for many years to come. Again, a big thank you to all of the TSOH subscribers who have made this venture possible.

With that, let’s get started on the 2022 Portfolio Review.

The short summary is that this was a difficult year, for the markets generally and my portfolio specifically (the S&P 500 declined by nearly 20% in 2022, its worst result since 2008). The typical response - and not necessarily the wrong one - from long-term investors like myself is to shrug this off as part of the game; we have to live with short-term volatility (the price paid for outsized expected returns over the long run), but it’s not reflective of material change in the underlying value / opportunity for the businesses that we own. Just be patient and the business value will ultimately be reflected in the stock price.

The problem is that the facts can change.

To pick a prominent example from the portfolio, Charter is experiencing significant pressure in their broadband business relative to historic expectations. Whether that’s temporary or structural will be determined over time – but in the short-term, it’s fair to question whether the underlying assumptions for the thesis were less certain than previously assumed. The market’s negative response to that development strikes me as logical.

The same can be said for Netflix and Disney; the investments are predicated on a long-term path to scale and profitability (FCF) in DTC. While less obvious to me than at Charter, I can appreciate why market participants may be less certain about that future than they used to be (particularly if the regulatory environment will not allow for further industry consolidation).

Meta is slightly different, but it fits a similar story line. There’s an open question whether current headwinds in the company’s ad business are more reflective of competitive factors or broader macro pressures. I’ve laid out my argument for the latter, but I can still appreciate why others harbor concerns about the former. (And that’s before considering the situation at FRL.)

Long story short, I think the business and investment environment in 2022 can be succinctly summarized by the famous Yogi Berra quote: “In theory, there is no difference between theory and practice. In practice, there is.”

In theory, you want to own – and buy more of – great businesses when their stock prices fall. In practice, the art of determining what will continue to be a great business is a difficult task, particularly in an environment like the one that we faced in 2022 (tough YoY comparisons, macro pressures, etc.).

When you zoom out and look at a stock price chart over 20 or 30 years, it’s easy to overlook the significant and sustained business pressures that were undoubtedly faced in the interim (for example, see the post about National Indemnity, which lived through 10+ years of persistent headwinds during the late 1980’s and 1990’s). As a long-term investor, my task is parse out what is temporary and able to be overcome, as opposed to developments that could fundamentally threaten the prospects of the business. Again, that is a difficult task, particularly in a period like the one we’ve seen over the past few years.

My takeaway is that I need to be even more selective.

I need to do a better job of mentally preparing for periods of heightened uncertainty. In the good times, I need to be really honest with myself: Is this a business and a management team that I truly want to partner with for the next 10+ years? Or will my confidence be shaken if this industry experiences some significant short-term pain? In the case of a company like Netflix, I can confidently say that it passes the test; for some other names in the portfolio, the answer is less certain than it ideally should be. (Naturally, that confidence has not been shaken to such an extent that it currently demands a change.)

The balance is finding a handful of one-of-a-kind, great businesses, while also being cognizant of position sizing. Honestly, I’m not sure I have the level of confidence, nor the demonstrated ability, to be more concentrated than how I run the book today (Berkshire Hathaway and Microsoft are among a very small group that, in my mind, are deserving of a 15%+ weighting).

One clear mistake I made as of late was the initial position sizing on Spotify; despite the significant stock price decline, I think the jury is still out on the investment (as I wrote in June, the Investor Day event focused on a number of key questions that are critical to the long-term thesis.) That said, I should’ve sized it with the understanding that even an optimistic scenario would likely be one where the story played out over 3-5 years (at least). In hindsight, it was simply too large given the uncertainty inherent in the bet. The lesson, as I see it, is to be less aggressive out of the gates in a situation like this (unproven long-term economics); even if the results are proven out over time, there will likely be periodic opportunities to add to the position.

Here's a portfolio breakdown as of year-end 2022: