Q4 2023 - Seeking Winners Quarterly Letter
January 1, 2024
“Understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things.” - Charlie Munger
Hello and Happy New Year!
2023 was a year to remember travelling and living in five different countries this year including Italy, Germany, South Africa, USA and Canada. As I write this letter its a great reminder for me of how lucky I am to be able to manage this portfolio while travelling and it’s something I really enjoy and hope to continue for years to come. Travel plans for 2024 are already shaping up with Japan and Sweden being the next two destinations planned for exploration and hopefully learning more about the capital markets there as well.
The Fund’s fourth quarter 2023 performance was 12.76% compared to the S&P 500 Total Return of 11.69%. Performance for the 12 months ending December 31, 2023 was 43.99% compared to the S&P 500 Total return of 26.29%. I ended the year with a total of 10 positions, which is the same as the previous quarter. In the quarter there was not much activity outside of three buy transactions where I added to my position in Lumine Group (this stock basically doubled since the spin-off from Constellation Software) in October and December and added a small amount to my Topicus position. I believe both of these companies have the most upside in my portfolio based on the future cash from operations they will generate for the price paid today. Near the end of the letter I will list out the full portfolio holdings.
2023 was a record year for me personally for returns in a single year. Although I am pleased with the 2023 return of the portfolio, I am of course not expecting anywhere near this continued outperformance vs the S&P 500. I believe the Nasdaq 100 index performance of 2023 is unsustainable over a long-time period and the portfolio’s underperformance to the Nasdaq 100 in 2023 was simply due to not owning the market darling Nvidia. Although 2023 was a great year for equities, it was a year of increased uncertainty and stress for investors. During times like those, investors time horizons shrink significantly. The bulk of the index’s returns were generated by what is now called ‘The Magnificent Seven’, Tesla, Apple, Nvidia, Amazon, Alphabet, Meta and Microsoft. Part of the reason these are up so much in 2023 is due to investors focus shifting to the here and now, profitability and cash-flow generation take center stage. All of these companies are highly profitable, have strong balance sheets with low debt, high returns on invested capital and typically use recessions to their advantage to strengthen their market positions, while other smaller competitors struggle. Investors know this and in my opinion some of the inflows into these companies was due to their perceived safety. Other inflows into these companies is simply from investors blindly buying the index, which I’ll touch on more below.
I’m currently invested in a small number of what I believe to be extraordinary businesses that are run by talented managers who continue to wisely reinvest free cash flow. Although quite a bit happened in 2023, nothing has caused me to reconsider either my investment approach or the type of businesses I wish to own. I will continue to concentrate capital in what I consider to be durably advantaged businesses with exceptional management and long runways for reinvestment. As I enter 2024 I continue to be completely agnostic about near term market direction and 100% optimistic in the long-term prospects for the portfolio companies.