Well, this has been the best start to a year portfolio-wise that I have ever had. The Australian dollar has been weakening a little, and a few developments in my portfolio companies have happily gone my way. We rejoice knowing that pride goeth before destruction.
Last year was an outstanding year for quality growth. The Magnificent 7 (or perhaps Superb 6 now) did extraordinarily well. This was on the back of a varying degree of fiscal and operational discipline, and a resumption of acceptable growth rates across these businesses. A sub-grouping of names like V/MA/VRSK/FICO/MCO/SPGI also resumed their winning ways. In some cases historic growth rates resumed, and in other cases there has been increasing focus on returns and offloading subpar acquisitions. Generally speaking all of this has been a good thing, not just for investors, but for the economy as a whole.
As a general rule I have been casting the net wider - and discarding rubbish. The US markets remain fully priced, although with good reason. The more unruly emerging markets also remain comparatively cheap, although also with good reason. The Chinese example remains somewhat instructive. Despite all the good things happening in the Orient with respect to growth and capital allocation, a simple unavoidable truth remains: terminal value problems trump all other considerations. This is not very well understood, especially by those who have been infected with the ‘value with any context’ crowd. A system that undermines individual property rights begins a cycle of economic regression. This has been clearly demonstrable in places like South Africa. This also isn’t to say you can’t make money in these markets, it’s just to say that if you don’t have to, why would you?
The most common cause of death for a mainland Chinese billionaire is not health related. This is not an investable environment - and I have learnt that the hard way. Those who parrot the phrase ‘China is more capitalist than the West’ have fallen into the trap of conflating capitalism with other related, but different terms. Capitalism does not mean innovation or competition - capitalism is simply the accumulation of capital. This is the terrible little secret that makes the USA great, former Commonwealth countries OK, and Europe (outside of the Nordics) meh.
Coincidentally, although I’m hoping this isn’t a surprise for anyone reading, capitalism is also what makes a winning company! That is the earning, reinvestment, and eventual accumulation of capital for shareholders. Einhorn’s latest letter perfectly summarised this notion:
We have become even more disciplined about price and emphasise investments where we get paid by the issuer, as opposed to investments where we rely on other investors to revalue the security.
I started my investing journey on the somewhat faulty assumption that ‘cheap’ stocks should ‘mean revert’. This is just an overly simplistic approach to investing. What constitutes ‘cheap’ and what constitutes ‘the mean’ are dynamic, not static concepts. I was humbled recently, but merely by the fact of how lucky I was to sell a stock before it went onto collapse:
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