Lessons from 2023

Apologies for the delay in this month’s blog but I have had an absolutely jam packed December. January should clear up a bit and I’ve got quite a few exciting ideas I’m currently researching. Last year around this time I did a post detailing some key lessons I had learnt in my time investing up to then. I’m all about self improvement so I figured why not do it again and look at how the last year has shaped my investing process. Many of this year’s lessons will be more specific as my investing has improved from the year before. Whereas 2022 was a year of poor portfolio management hindering my returns, this year (apart from January) I’m actually quite proud of how I managed my portfolio. My returns were underwhelming however, with an especially poor last couple of months and much of this comes down to poor individual stock selection as opposed to portfolio wide issues. With this in mind, let’s get into my lessons from 2023.

Separating brand from business

This is an idea that’s very fresh in my mind due to my recent disaster with Doc Martens $DOCS.L. The thesis was very simple: Docs are a fantastic brand with strong tailwinds and reasonable growth trading at a very reasonable valuation. If I had looked a bit closer I would have noticed slowing revenue with high capex due to an aggressive, risky expansion into DTC stores and poor supply chain management. Margins were in visible decline in a business that was heavily exposed to slowing consumer spending. The fact is that my valuation was done at a cyclical top and while the brand was doing fantastically, the business underneath was deteriorating. I had thought about these concerns, but had swept them under the rug and focused on the brand and valuation when in reality they didn’t matter in the short term.

Timing the market

This one’s fairly simple. I’ve had a few times in the past few years when I’ve either been able to make successful directional trades at market extremes, or wanted to and seen it would have worked out. While I never thought that I was able to consistently time the market, I did have the perception that at market extremes I had some level of edge. Now I do still believe that it makes sense to adjust my portfolio based on how I see the market. If the market is frothy, sell some of my winners and add some short exposure and vice versa. However, this is very different from making significant, directional bets on the market which I did a few times throughout 2023 (sometimes with options). A market that is irrationally cheap can get irrationally cheaper and vice versa, and it’s in markets like that where investors make the biggest mistakes. As tempting as it might be to make short term directional trades like that I’m not sure I have any real edge and I should stick to my strategy which I believe will work over the long term.

Short sizing

I came into January and into December with “large” short exposure. Both of those trades I got dead wrong as January saw the largest short squeeze since January 2021 and the past week has seen another face ripping rally. In January I got smashed, meanwhile the recent rally I actually ended up slightly up for the week. This comes down to strong portfolio management minimising how much I can lose from a mistake. I realised as the year went on that in general my short exposure was way too large.I went from 1% large shorts and .1% regular shorts to now .1% large shorts and .01% regular shorts except in very rare exceptions. I came into the year trying to get some sort of alpha with sizable short positions. That’s not how any of the best short sellers operate and I should just be using them as a hedge and focusing on my long book (with the exception of specific short opportunities).

Fish where no one else is fishing

This is a classic cliche that I already knew and tried to follow coming into 2023, however it’s taken on a brand new meaning. I often see people say that their edge is turning over rocks where no one else is looking, and then they’ll pitch some $150m US or Aussie small cap stock. The fact is that while there is alpha to be found in these spaces, there are no longer the kind of no brainers that Buffett was famous for finding in his youth. There are countless podcasts, newsletters and twitter accounts dedicated to scraping through Australian small caps, US microcaps and OTC stocks, or European mid caps. As a retail shareholder, I believe that my edge is found by going deeper, going where most successful investors aren’t even looking because there’s too much junk and even if they found something they couldn’t even build out a position. My best and most interesting ideas this year have been found by pure grunt work. Every morning I scan through the ASX, Hong Kong and SGX announcements to see if one pops out. Trawling through screeners for shitty, microcap, cheap book value stocks one by one to see if any are interesting (How I found 10% positions Cardno). Focusing on stocks under $100m in non-US and Aussie markets, where there are far fewer eyes. There’s not really a shortcut for this, the best opportunities exist because no one can find them. Luckily I enjoy the process, and it has yielded some fantastic ideas so far.

Keep it simple stupid

This may seem antithetical to what I just said regarding finding obscure, hidden situations, but I’ve had a real focus recently on keeping my investing simple. Now this doesn’t mean avoiding situations like Cardno, an obscure microcap liquidation trading at a significant discount. There are two situations I think exemplify this best. The first is my short of Lifestyle Communities. While I truly believe in the short, at its core the bet is a bet against housing. I believe the Australian housing market to be a bubble, however like any macro related topic, it is complicated. Additionally, the accounting and operations of the business are opaque and hard to model. There are a lot of unknowns and I’m forced to take a larger position than I would like (because of higher minimum ASX trading fees compared to US). While I believe in the thesis, there are just simpler, more reliable ways for me to make money. Similarly I did a writeup on Luvu brands earlier this year, a business that I absolutely love. While I love the business, it’s not a business that’s easy to predict. With significant exposure to the consumer, coming off tough comps and no clear capital allocation strategy there’s a lot of ways for the thesis to go wrong. Compared to the other names in my portfolio which all trade at very reasonable multiples on fairly stable cash flows there is a clear distinction in risk and complexity that I just don’t need. I want to focus on theses with easy to understand variables and a clear path forward.

Growth is often at a reasonable price for a reason

This year marked a noticeable style shift for me from traditional value to many more GARP’y names as many decent businesses seemed to go on sale throughout the year. While I do believe GARP names to be a solid hunting ground for ideas, I think it’s important to realise that they’re usually reasonably priced for a reason. I want to compare two GARP companies that I invested in this year that released poor results in $INMD, which I sold and  $MTCH which I actually bought more of. On one hand, Inmode is a company that’s fairly far outside my circle of competence with a limited moat and no clear capital allocation policy. Match on the other hand is probably one of the companies furthest inside my circle of competence, has a huge moat and a very clear capital allocation policy. This was essential, as when $MTCH released the result that the market didn’t like I was able to confidently take a differentiated view to the market, along with having confidence in the company’s capital allocation, which I couldn’t possibly do for $INMD. Additionally, while there is a reasonable chance Match doesn’t work out, downside is limited by their rock solid moat which makes their earnings very defensible. This is essential for preventing the classic GARP killer of earnings deterioration mixed with multiple compression. A 12 PE stock is only a 30% drop in earnings from becoming a 17 PE stock. A growth narrative falling apart as earnings drop is a recipe for disaster, and something that was very unlikely to happen to Match due to their moat. All in all, when a growthy company looks cheap, I need to ask myself: a. Why it’s so cheap, b. Whether I’m really in a position to be able to assess the opportunity and c. What’s the downside if I’m wrong?

I hope you’ve enjoyed this update and I hope you’ve enjoyed the last year of my ramblings. It’s legitimately incredible how quickly the Substack has grown and I am shocked at how many people think I’ve got something of value to say. While my performance this year hasn’t been as strong as I had hoped I do feel like my investing is coming on leaps and bounds and I feel that there’s been a noticeable improvement in my ideas and analysis. I hope that I have added some value to your year and I will continue to keep putting my ideas out into the world in 2024.