Q4 2023 Portfolio Update

Following a nearly 20% decline for the S&P 500 in 2022, its worst annual performance since 2008, the index rose 24% in 2023. Rather than ramble on about the folly of trying to predict these short-term price swings, this quote from a yearend 2022 New York Times article does a great job of succinctly demonstrating the recent track record for Wall Street’s market predictions:

“A year ago, bank analysts responsible for projecting where stocks would end 2022 were somewhat optimistic… Even the most pessimistic prediction at that time thought that the S&P 500 would finish the year 10% higher than where it actually will. Now, the most optimistic strategist doesn’t expect the S&P 500 to even make up that lost ground in 2023, while most expect the market to end roughly at where it’s starting, after a dip early in the year.”

With the benefit of hindsight, the most pessimistic strategist wasn’t pessimistic enough in 2022, and the most optimistic strategist wasn’t optimistic enough in 2023 - an impressively bad overall result for the group. (As an aside, I personally prefer the term “soothsayer”, defined as “a person who predicts the future by magical, intuitive, or more rational means”. On the range from magical to more rational means, I’ll leave it to you to determine what the strategists’ stock market predictions are likely to be based upon.)

This won’t surprise you, but I don’t believe that market timing needs to have any bearing on the conduct of a long-term investor; said differently, the above is solely for entertainment purposes (at least it’s good for a laugh). Thankfully, it’s all unnecessary. Market timing introduces noise and additional decisions to the otherwise adequate outcome likely to be achieved over time with a much simpler answer: a structural allocation, periodically rebalanced and revisited to ensure it’s aligned with one’s ability and willingness to bear risk (to be clear, rebalancing and the periodic reassessment of one’s ability / willingness to bear risk are separate). A structural allocation may not have the apparent sophistication of an approach that involves dancing in and out of stocks based on macro factors, valuation metrics (CAPE / Shiller P/E), technical signals, etc., but it’s much less prone to large unforced errors.

Simply put, this game is already difficult enough when you narrow your focus to the task of finding great businesses to own over the long run. You’ll likely be better off if you leave the soothsayers to their fun while you stay focused on the task at hand. (As I’ve discussed previously, my target allocation is ~100% equities; it’s unlikely to change from that level for the next decade.)

Judging Performance

As shown below, the TSOH portfolio did well in 2023 (+35%); after a difficult 2022, particularly in the first half of the year, it’s pleasant to report more favorable results. That said, the three-year figures show that there’s still room for improvement (as a reminder, the TSOH Investment Research service launched in April 2021). Despite a solid headline outcome, this year also presented some difficult decisions for me, most notably as it related to Comcast / Liberty Broadband. It’s always disappointing to throw in the towel on a long-term investment that hasn’t worked as expected. That said, the industry is changing and the original investment thesis was no longer valid. As a result, I decided to sell; we’ll see how that decision looks in due time.

I view the Spotify decision / outcome somewhat differently. Simply put, I’ve been surprised by the sweeping changes announced in recent months. (From “Retain Optionality”: “Their ability to generate meaningful profits and FCF will largely come down to cost efficiency… The evidence we’ve seen to date should lead one to conclude that this isn’t a skill set that comes naturally to Spotify’s management team; that has to change in the years ahead.”) As always, I’m open to revisiting the investment if the facts warrant doing so.

As we think about historic returns, specifically as it relates to judging the soundness of one’s investment philosophy and decision-making, it brings up one of the interesting realities of this game. For active investors, there’s a clear delineation between success and failure: you are either beating the market or not. If you want to know whether you’re a “good” investor, you can get a black or white answer at any time from your account statements. (There’s no comparable measure to judge a “good” doctor, plumber, etc.)

In practice, I think it’s less clear how to effectively use that data, particularly in the earlier stages of one’s investment career. Specifically, when should you turn on the scoreboard? Personally, I bought my first stock in 2007 – but I also knew very little at that time, so that doesn’t seem like a particularly useful starting point. How about in 2011, when I graduated from college and had an outsized Microsoft position? (With the asterisk that I also had very limited savings; if I had ~20% of my portfolio in Microsoft at that time, that would’ve been in no way comparable to an established investor who had ~20% of their portfolio in Microsoft.) I don’t think there’s a clear answer, other than to note that the starting point selected would greatly influences the output (the other clear answer is that the scoreboard has to be turned on eventually). In trying to intelligently spot the “good” investor, I would not feel particularly confident on the predictive power of either of these starting points.

I think the most sensible takeaway, particularly if you’ve only been an active investor for the past five or ten years, is to recognize the reality of the above, while also recognizing that the outcome of each passing year isn’t irrelevant to the answer (you can’t hand wave about the scoreboard indefinitely).

As a young investor, I had no reason to (justifiably) expect that near term success was a likely outcome. As Charlie Munger once put it, “I don’t think one can become a great investor very rapidly, any more than you could become a great bone tumor pathologist very rapidly.” It has taken me many years of hard work and accumulated experience to even get this far, by inching forward one day at a time - and even then, I surely still have plenty left to learn. Importantly, along the way, I’ve also established a clearer view on the type of investor I’m trying to be. It only took 15 or so years, but I’m confident that a firm foundation has been laid for the decades ahead. Hopefully it will result in a reasonable shot at attractive long-term results.

Here’s the current TSOH portfolio, along with the updated returns. (As a reminder, the portfolio accounts for every dollar of my investable assets.)