Housekeeping
Like always, it goes without saying that what I write in these posts is not financial advice. Also, the opinions here are solely my own and they don’t represent the views of any company I might be affiliated with at the time of writing.
I also encourage to do your own research on every potential investment. I’m comfortable with my portfolio, but none of my holdings are investment recommendations.
Portfolio
Allocation
I aim to hold around 15-20% of the portfolio in broad equity ETFs. In practice what this means is that whenever the combined value of the two ETFs falls below 15% of the total portfolio I make additional purchases to bring it back up. I’ve made no additional ETF purchases in 2023 so far. I lowered the target allocation from 25% to 15%-20% because I believe the former was a bit too high considering my age (25). I still aim for this allocation to gradually grow as I get older.
The top 5 individual holdings continue to represent almost 40% of the portfolio, but there have been some minor changes. Alibaba is now the top holding at ~10% due to its recent price appreciation and a new purchase of Hong Kong shares at ~HKD87 earlier in the quarter. Nintendo is now out of the top 5, even though I also added to the position, as I’ve added a bit more aggressively to Brookfield. I added a bit to Berkshire Hathaway too. Have not touched the Constellation Software or Meta Platforms positions.
Cash is up to 16%, but I regularly add money to the account, so this is more a reflection of my slowness in finding new opportunities than a stance regarding the market. I want to be fully invested, but I’m not in a rush.
Sells
I sold two positions during Q1 23, for very different reasons.
Intel Corporation (INTC) - I initially bought Intel stock back in mid-2020. The stock had run down close to 30% from its June 2020 levels and 35% from its pre-Covid highs. Buying then was a narrow decision, based mostly on valuation and, in my opinion, overblown fears about the company’s future being so bleak. Then in early 2021, Pat Gelsinger was appointed CEO, which I saw as a strong positive for the company. His plan for the company made sense, and they were focused in the right issues. So I made a couple additional purchases in 2021. Execution has been mediocre, if even. Something that really bothered me was the management team’s refusal to cut the dividend to fund internal investments. The reason was clear, in my opinion: cutting the dividend would lead to a sharp short-term drop in the stock price. Unfortunately, they were short-sighted and did not see how this would put the company in an improved financial position to move forward with their strategy. Don’t even get me started about their timing on the Mobileye IPO. The straw that broke the camel’s back was the decision they made in late January to significantly reduce employee compensation. I can’t even describe how dumb it is to destroy employee morale precisely when you need your employees at the top of their game. They ended up having to cut the dividend anyway.
I sold the entire position on Feb 1st. My big mistake was thinking that Intel’s poor business performance during 2022 was related more to issues with the semiconductor market than bad management. Turnarounds are hard. I knew this on paper. I guess I had to experience it. The total loss after including dividends was ~35%. Earlier this year I analyzed TSMC, which I believe is an actual high-quality business in the semiconductor market, along with others such as Texas Instruments or ASML. I have no position in any of these for now.
Pershing Square Holdings (PSH) - Selling PSH was a tough decision because I think it will continue performing well. They have trounced the S&P over the past 5 years, and even outperformed in 2022 thanks to their timely interest rate swaption hedge. The equity portfolio is high quality, they opportunistically hedge against adverse market movements, and the stock trades at a discount to NAV of around 30%, which is much higher than the typical discount for a closed-end fund.
The largest issue is that owning the stock stresses me out. Bill Ackman is a divisive character, and he is vocal with his opinions, both on Twitter and in other media. I think Bill is a fantastic investor, especially since he decided to stay away from public short positions. But the problem is that whenever he voices his opinion on issues like Ukraine, FTX, regional banks, or birds, to name just a few, I can never be sure whether he’s doing it because he has a position. Perhaps it might sound a bit ridiculous, but owning PSH and following Bill Ackman disturbs my “emotional garden”. This is an interesting concept mentioned by Guy Spier in one of his latest interviews with William Green. So interesting I decided to add it as an item on my investment checklist. I basically ask myself the question: “Will owning this investment negatively affect my life due to stress or dissonance with my values?” With PSH, I can’t be at peace wondering whether Bill has a position when he posts about a topic. Perhaps I would be at ease if I could know the size and structure of every position. But I can’t, so I’m not. PSH has actually been one of my best performing investments so far, so it was particularly tough to sell.
Buys
I added two new positions so far in 2023. I also bought one new position in December of 2022, after the last portfolio update. When I make an investment I do so with a horizon of decades. I don’t try to anticipate short-term stock movements based on broader market movements, interest rate hikes or cuts, or geopolitical developments.
Brookfield Corporation (BN) - Owner and operator of high-quality cash flow generating businesses and real assets, the crown jewel being the asset management business. Capable management, operating good assets, with a stock trading at a relatively cheap valuation.
Moncler SpA (MONC) - I made a bad error of omission in not buying Moncler stock in 2022 when it traded down to 20x earnings. I corrected that a few weeks ago, at a higher valuation, but one which I still consider cheap for the quality of the business. I think Moncler will be able to grow at a rapid pace, with high operating margins and returns on capital, and a conservative financial position. It is also owned and controlled by Remo Ruffini, who has taken it from the brink of bankruptcy to a top luxury operation.
Markel Corporation (MKL) - I recently did a write-up for Markel, which you can read here. In summary, Markel’s business is a fantastic mix of a disciplined insurance operation and a top investment operation, managed by honest and capable management, trading at a more-than-reasonable valuation.
Charlie Munger, Alibaba & China
In this year’s Daily Journal shareholders’ meeting, Charlie Munger answered a question on Alibaba and said this👇🏽
“I regard Alibaba as one of the worst mistakes I ever made. In thinking about Alibaba, I got charmed with the idea of their position on the Chinese Internet. I didn't stop to realize they're still a God damn retailer. It's going to be a competitive business, the Internet. It's not going to be a cakewalk for everybody.” - Charlie Munger
The statement above led to a lot of heated discussion. Many people framed it as if he was admitting that investing in China was a mistake, which is far from the truth. Clearly, Charlie thinks he wrongly assessed the company’s competitive position, but he remains bullish on China👇🏽
“You can buy better, stronger companies at a cheaper valuation in China than in the United States.” - Charlie Munger
He vehemently disagrees with the idea that China is “un-investable”. Many people (mostly Americans who have a cartoon-like idea of life in China) have completely eliminated China from their investable universe, which is fair if it makes them feel more comfortable with their portfolios. To me, it screams opportunity.
I do have to say, again, that Charlie buying was never an influential factor in my purchase. I bought before he did. I don’t think Alibaba is “just a God damn retailer”. Just like Amazon, for example, is not just a God damn retailer. Different business models, I know, but this notion that a retailer can’t be a fantastic business is a bit perplexing to me. In any case, I also think Alibaba’s position within the Chinese internet ecosystem is extremely strong, with limited scope for foreign competition to come in.
Another piece of news that recently made the headlines is the company’s decision to separate into 6 distinct business units, each with its own management team and board of directors.
I’m neutral on this. On the one-hand I do think it will be good for investors to be able to selectively own their preferred business(es) within the Alibaba group. It will also help some of the units raise capital without affecting the shareholders of the other units. On the other hand, I’m not a big believer in these corporate restructurings aimed at “unlocking shareholder value”. It’s unclear to me whether there will be much change in practice regarding how these business units are managed.
Investing in Banks
The biggest topic of the last few weeks has been the crisis that resulted in the failures of three banks (SVB, Signature Bank, and Silvergate) in the US, as well as Credit Suisse in Switzerland.
I have generally refrained from considering banks as part of my investable universe. Mostly, this was related to my limited capacity on analyzing banks. As the past few weeks have reminded us, it can be a gut-wrenching sector to invest in. Terry Smith wrote a short article highlighting all of the reasons why he doesn’t invest in banks. In one sentence, he doesn’t invest in banks precisely because he knows in detail how they operate.
Banks require excessive amounts of leverage to generate a decent ROE, the assets on their balance sheet can be opaque and tough to value, regulators can effectively shut down payments to shareholders during rough times (as they did during the pandemic), and movements in interest rates and the broader economy can cause havoc in the business (i.e., their cyclical). If that’s not enough, sometimes banks will fail simply because they lose their depositors’ trust. Credit Suisse had capital and liquidity ratios well in excess of regulatory minimums, but they lost the confidence of the public. First Republic Bank was often regarded as an excellent bank in terms of its operations, client service, and financial performance. Didn’t matter. It still got killed by a loss of confidence.
The extensive list of bank failures in history should serve as a warning for anyone even considering investing in a bank. However, with that in mind, and in relation with what I said above, whenever a country or industry gets labelled as “un-investable” it peaks my interest.