I manage money for myself, several family members, and one friend, and find it helpful to reflect on results every quarter – i.e. each three months – to check in on how we’re doing. I thought it would be useful to share those reflections here as real-world examples of how I’m applying the principles espoused on A Short Investing Guide. Nothing in here is investment advice, and please check the disclaimer vis a vis performance. But I hope you find this useful/interesting. This was originally written on April 3rd, 2023; I’m publishing it as it was with minor stylistic edits, without the benefit of hindsight.
Market review – a lot of noise, but steady performance
Markets are rarely boring. This decade so far has borne that out. In the first quarter of 2023, following the worst year in the U.S. stock market since the financial crisis – and that on the heels of the best three year stretch in the U.S. stock market since the dot com craze (and all of this amidst a once in a century pandemic):
- Markets started the year rebounding from last year’s selling, with lower-quality company stocks doing especially well in a ‘dash for trash’ rally.
- Inflation, a big reason for last year’s sell-off, stayed above 4.5-6%, depending on which measure you use, well above the Federal Reserve’s target of 2%. This has required the Fed to raise and maintain higher interest rates than we have seen since before the financial crisis.
- ChatGPT became a big thing, to the point that the wider market and popular culture became aware that useful consumer facing artificial intelligence is here, which also triggered a new speculative boom in “AI-related” stocks, echoing hype cycles in crypto, meme stocks, the metaverse, cannabis, or a number of other fields.
- Banks collapsed in California, New York, and Switzerland.
- Lots of people rushed to make 2008 comparisons, or disavow 2008 comparisons, or forecast other types of doom.
And, for all that, the S&P 500 ended up 7%, the Nasdaq up 16.8%, and the small-cap indices I benchmark our performance against, the Russell 2000 and the S&P 600, up 2.3% and 2.1% respectively. Those are, in and out of context, solid numbers.
People who closely follow the market on Twitter, watching CNBC, or in any other way that will allow them to hear what other investors or analysts or “experts” think will be aware of these things, and that everyone had an opinion on them. Just like everyone had an opinion on inflation, or on the Russia-Ukraine War, or on the pandemic and the reopening and so on. In our day and age, it gets hard not to stand aside on not only the big issues of our time but all the issues of our time, and it’s even harder to limit how much you hear about these things from others.
These things do and do not matter for the market.
They do matter because they are sometimes signs of a bigger problem – the market dived in mid February 2020, 3-4 weeks before lockdowns reached the wider world – and because they sometimes offer buying opportunities when a bigger problem doesn’t manifest.
They don’t matter because markets fluctuate, in J.P. Morgan’s famous phrase, and too much energy trying to explain fluctuations will distract people who are trying to grow their money for the years and decades ahead which, to make a judgment, should be most people who have money to invest.
I don’t know where the economy is headed, or where the market is headed. Any opinions I have are lightly held. I apply my opinion on the edge of my analysis, to make sure I’m worrying about the right things and being conservative; nothing beyond that. For most people, it shouldn’t matter at all – the smartest plan is to set up a basic index portfolio, continue to add to it in some sort of automatic or unemotional way as savings build up, and not worry about the specifics of price or market environment.
In our case, we had a strong first quarter – 19.6% returns – based mostly on decisions made a long time ago, and then updated with analysis throughout the years. Some of that then turned into luck, or positive momentum in the market.
The hard thing about the market is that you never quite know whether you “deserved” your success. The easy thing is that all you have to worry about is the price you bought at and the price you sell; which is why a lot of these fluctuations don’t matter, as long as one understands correctly what they are investing in.
Our Q1 performance
| Q1 2023 | 2022 | 2021 | 2020 | |
| U.S. portfolios | 19.6% | -10.7% | 19.1% | 11.1% |
| S&P 600 | 2.1% | -17.4% | 25.3% | 9.6% |
| Russell 2000 | 2.3% | -21.6% | 13.7% | 18.4% |
| S&P 500 | 7.0% | -19.4% | 26.9% | 16.3% |
| Nasdaq | 16.8% | -33.1% | 21.4% | 43.6% |
| European Portfolios | 10.7% | -15.3% | 4.5% | 16.4% |
| Euro Stoxx 50 | 13.7% | -11.7% | 21.0% | 3.5% |
| DAX | 12.2% | -12.3% | 15.8% | -6.3% |
In Q1, we did 28% more selling than buying, or 86% more selling than buying once you take out purchases of short-term treasuries or bonds ETFs (SGOV, BIL, JPST) and market negative ETFs (RWM, PSQ) to hedge. So it was a cautious quarter, despite the success. I opened one big new position, dabbled in a few special situations, and trimmed some winners.
Disclaimer: I calculate performance myself, manually, so it may be prone to error. The different accounts deposit or withdraw money over the course of a quarter – I account for that by adding/subtracting that money to the starting amount at the beginning of the period. This means withdrawals intensify performance and deposits dampen it. Past performance of course is no promise of future results.
Top winners (performance as % of starting portfolio level for quarter):
| Axcelis (ACLS) | 6.2% |
| Grupo Aeroportuario del Centro Norte (OMAB) | 2.7% |
| Kimball International (KBAL) | 2.4% |
| Arlo Technologies (ARLO) | 1.5% |
| Grupo Aeroportuario del Pacifico (PAC) | 1.2% |
| Spotify (SPOT) | 1.2% |
| Apple Inc. (AAPL) | 1.1% |
| Booking Holdings (BKNG) | 1.1% |
Top losers (performance as % of starting portfolio level for quarter):
| F&G Annuities & Life Inc. (FG) | -0.3% |
| Dropbox (DBX) | -0.2% |
| Honeywell International (HON) | -0.2% |
| AerCap (AER) | -0.1% |
| LICT Corp (LICT) | -0.1% |
Winners/losers notes
Axcelis has been our biggest position for a long time. It was a cyclical semiconductor capital equipment provider – ion machines that help chip makers make chips more efficiently – whose business swayed every three years. It has become a business that has grown three straight years, setting new revenue records, and expects to grow for at least the next 2-3 years. The electric vehicle/electronification of the car is the key driver. This steadier growth makes the company more valuable. In the last six months, the market has decided to believe that value, taking the stock up over 100%. A big reason we’ve had two great quarters. Luck or skill? I don’t know, but we sold about 15% of our position to take advantage of the profit and manage the size of the position (it is 11% of our total portfolio, and 23% of one person’s portfolio).
Grupo Aeroportuario del Centro Norte (OMAB) and Grupo Aeroportuario del Pacifico (PAC) are companies that run airports in Mexico, in the north and Pacific. They have risen 82% and 57% respectively in the past 6 months. The reason is just that the market has decided to invest in these more for whatever reason, and then that momentum perpetuates itself; but two explanations are that more companies will move factories from China to northern Mexico (benefiting OMAB), and that people are still traveling like crazy post pandemic, boosting both companies but especially PAC which is more geared towards tourists.
Kimball Hospitality was a long-time position – I first bought as part of a special situation spin-off opportunity in 2014 – and had been a big loser since the onset of the pandemic. It made an acquisition that wasn’t doing great, and also the return to the office has been murky. But, I thought it remained undervalued, and so did HNI Corp, which agreed to buy it. We didn’t end up with a huge win over the long-term, but it was a nice pick-me-up for this quarter.
Arlo is something we’ve owned for a couple years. It had a good earnings report and the management team was loud about it and the market responded positively. Arlo has done what it meant to do – sell security cameras for a little more than they make them, but then sell a subscription to watch video for up to 7 days, which is a better business model. But the stock has fluctuated based on what the market is focused on, whether it’s growth (when the company rose to over $10/share) or profits (when it sank to the mid $3s. Arlo has enough money to make it until it is profitable while still growing fast, and it could be an interesting acquisition target eventually.
Spotify is the one company that we made a recent decision in and got rewarded quickly. This is semi-ironic: Spotify is an interesting investment based on what it can eventually do to achieve meaningful profitability as a leader in audio; it doesn’t burn cash now, but it doesn’t make a lot of money either. This is only semi-ironic because I bought partly on the instinct that the market got too negative about it last year, and the sentiment has turned around fast. I don’t know whether that will stick, and have sold some shares; I’m also not sure how big a pie Spotify is ultimately playing for, as it’s basically reconstituting the music business and the radio business (and sure, the audiobook business). If they show more signs of getting into ticket sales or other natural businesses based on their leadership, I would be more excited to stick with them.
There isn’t much of interest to comment on among the losers beyond FG, which I cover below. Dropbox is chugging along; maybe growing slower than expected, but at the valuation and with its share buyback program, that’s fine. Honeywell is a small position for us, opened during the pandemic as a “I know this company will be fine in the long run” play, and we’ll probably sell it soon. Aercap got caught up in the financial sector worries, and I vacillate between ‘this is benefiting from tailwinds in travel and in airlines cleaning up their balance sheet’ and ‘this is too risky, as seen in the write-off they took for their Russian airplanes’. Also between ‘sell at book value around $65’ and ‘buy at $50 or lower’. LICT is a tiny telecommunications company, and a small (1.5%) position for us.
Special situations / quick trades
I find it helpful to make smaller investments/trades both to burn energy so I can focus on bigger positions, and for special situations specifically as a way to make money no matter what the market does. Special situations have a specific market event that will cause the stock to move higher (or lower), independent of what’s happening in the broader market. Merger arbitrage or pre-deal speculation – where reports are a deal is coming but it’s not a done deal – are the main types of special situations I invest in.
It’s not easy to do this well since so many smarter people are playing the same game. I lost some money on Black Knight, a mortgage software provider that agreed to a deal with Intercontinental Exchange. There was always a high risk the FTC would sue them to stop the deal. When reporting made it clear that they would, I sold shares; we lost money for this quarter but not overall in this position.
I bought shares of Oak Street Health when it became clear a deal would be announced the next day. We made a trivial gain there.
We have a 1% position in National Instruments Corporation. This was one of our bigger buys during the bank crisis. Emerson pursued them for 6 months and then went public with a bid for $53/share. So, National Instruments is undertaking a ‘strategic review’ process, i.e. looking for other bidders. There don’t appear to be anti-trust concerns, so the downside is $53 and waiting for a little bit. Reports are there are two other bidders in the second round of bidding with Emerson. I would be surprised if it goes for only $53. Our average price is $50.78, and I may add more.
For small trades, I made a little bit of money on Zoom and we are slightly up on a small position in Mosaic, a fertilizer company. Both ideas came from my podcast co-host, Akram’s Razor.
New additions
Our biggest addition (4% of our portfolio at the price we paid) was F&G Annuities & Life, an insurance provider. Specifically, it sells annuities and similar products. The idea came from Thomas Lott, one of my favorite investors and a writer on Seeking Alpha. The quick summary: Fidelity National Financial bought F&G for $2.7B in equity value in a deal announced right before the pandemic. They spun out 15% of their position in F&G in December 2022. F&G was trading at about $2.6B market capitalization when I started buying at $20.5/share. F&G has grown their assets under management, assets, and earnings meaningfully since the 2020 deal, so even before getting into any near-term analysis, that is a weird disconnect. Add in that interest rates are higher and that the stock was really cheap at that price, and it felt like a good fit. I started buying on March 6th.
F&G was also among our biggest losers for the quarter until recovering in the last week of March. Why? Because it’s a small financial company, and investors sold off most of those companies after the Silicon Valley Bank collapse. Except F&G’s liabilities are insurance products. You can’t withdraw money out of an insurance product the way you can a bank. Instead, three things happened as FG sold to as low as 15.66:
- The company rushed to approve and announce a $25M share buyback plan. Not very much given the size of the company and that the plan is for three years. But, it’s at least a sign that not all is bad.
- Unisys, a small IT company, awarded a nearly $265M annuity contract to F&G, a nice example of growing assets under management.
- F&G’s CEO, Christopher Blunt, bought $460K worth of shares, growing his stake in the company by 7%. Not huge, but also a meaningful chunk (his base salary is $800K, and his total compensation in 2021 was $6.7M – again, he can afford it, but better he’s buying than not).
We got to what I’d call a full starting position at an average price of $19.16. I don’t have a sophisticated argument beyond what Tom laid out in the article above, but high $20s share price as a target and a 4.2% dividend at our average cost seems like a reasonable return, and I don’t think the financial wildness will crush its business.
In the European portfolio I manage, I bought shares in Villeroy & Boch. This is a German ceramics company whose dishware sells around the world, including Costco. We knew it from our time living in Luxembourg and visited their Mettlach (the dish set we bought is mostly languishing in our cupboards, a separate story). The company also sells bathroom installations, toilets and such. Shares were trading for less than 10x earnings, the company plans to pay a big dividend this year, and it has a clean balance sheet. It expects to maintain its earnings and grow its revenue this year. It also has a small upside kicker if it is able to convert a chateau it owns in Luxembourg city, which could lead to 20M Euros in income this year, vs. their total income of 71.5M last year.
Disclosure: I own shares in every company mentioned here except Unisys, Zoom, Oak Street Health, Black Knight, and Intercontinental Exchange.