It seems like just yesterday we rang in 2024, yet here we are, halfway through the year already. As planned, with July upon me, I'd like to take a moment to reflect on my portfolio's performance, share some insights about my investment journey, and discuss my strategies for the future.
Current Portfolio and Performance
At the end of Q1, I mentioned acquiring positions in three companies: Amazon, Tesla, and Palantir. These were gradually added to my existing portfolio, and the results in Q2 have been quite favorable.
The graph above illustrates the performance of my portfolio compared to major market indices since January 1, 2020. My stock account has achieved a cumulative return of 180.04%, outperforming both the NASDAQ100 and S&P500 over the same period.
However, on a year-to-date basis, my return of 13.07% lags behind the NASDAQ 100's 16.98% and the S&P500's 14.48%. While my Q1 return of 3.78% significantly trailed the NASDAQ 100's 8.49% and the S&P500's 10.16%, I've managed to narrow the gap somewhat over the past three months.
This underperformance in Q1 can be attributed to a relatively high allocation to long-term bonds and cash, coupled with lackluster bond performance. Anticipating improved profitability for AI companies, I graudally added to my positions in Q2 as their valuations entered my target range. This increased exposure to AI stocks has significantly boosted my overall portfolio performance.
The table above details my portfolio holdings as of June 30th. The main changes since Q1 include partial sales of Alphabet stock and the long-term bond TLT when their prices rose, as well as the planned additions of Amazon, Tesla, and Palantir, each up to 10% of the portfolio. NextEra Energy was sold entirely upon reaching my target price, as it was not intended as a long-term holding.
Tesla, Palantir, and Amazon have all experienced substantial price appreciation, increasing their respective weights within the portfolio. In terms of asset allocation, cash accounts for approximately 2.6%, long-term bonds 11.6%, and equities a significant 85.8%. This deviates somewhat from my initial target allocation of 65% equities, 15% long-term bonds, and 20% cash, which I'll elaborate on shortly.
Understanding the Essence of Capitalism: The Difficulty of Precise Valuation and Timing
Before delving into my investment strategy for the second half of the year, I'd like to discuss the fundamental nature of capitalism. Accurately valuing a company and timing the market through qualitative research and numerical analysis is incredibly challenging. Even the most comprehensive valuation method, the Discounted Cash Flow (DCF) model, relies on numerous assumptions about revenue, operating margins, effective tax rates, reinvestment rates, cost of capital, and perpetual growth rates. Perfectly predicting all these variables is impossible for anyone.
Furthermore, utilizing DCF for stock investing assumes that the stock price will converge with the DCF result over the long term. However, the exact timing of this convergence is unknown. Even with a perfectly calculated DCF result, stocks of companies with attractive economic moats may trade at a premium. If a company's economic moat is strong enough to deter competition, the DCF-calculated fair value will inevitably rise over time, potentially making the stock unattainable.
Short-term stock price movements are highly volatile and influenced by the supply and demand dynamics of various market participants. Each participant has different motivations and objectives, making it impossible to accurately predict price movements.
Passionate investors dedicate time to studying investments, analyzing financial statements, monitoring economic trends, and calculating investment timing. However, most fail to achieve satisfactory returns. While studying investments is essential, it's crucial to have the right mindset before embarking on this journey.
In capitalism, the amount of money in circulation continuously increases.
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| Source: FRED |
The graph above illustrates the M2 money supply data provided by the Federal Reserve. As of May 2024, the M2 reached $20.963 trillion, nearly doubling from $11.3179 trillion in May 2014. This trend of roughly doubling M2 every decade has been consistent in previous data.
This data signifies a decline in the value of money. While M2 may not be a perfectly precise measure of monetary value, it encompasses cash in circulation, demand deposits, other checkable deposits (M1), savings deposits, small time deposits, and money market mutual fund accounts. Consequently, M2 exhibits a strong correlation with various indicators like consumer spending, inflation, and economic growth, providing a comprehensive reflection of the economy's money supply.
While the past trend doesn't guarantee a doubling of M2 in the next decade, the principles of capitalism suggest a high probability of continued monetary expansion. I believe it's crucial for long-term investors to understand this underlying context when allocating their assets.
Sustainable Great Businesses and Delegating Investments
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Warren Buffett of Berkshire Hathaway advocates for investing in exceptional businesses at reasonable prices, rather than mediocre companies at bargain prices. He believes that sustainable great businesses will naturally generate excellent returns for investors.
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."
Acquiring companies with a dominant competitive edge, or economic moat, at a fair price and holding them for the long term allows the principles of capitalism to work their magic, turning these investments into money-making machines.
"We have people running the businesses, and the main thing is not to destroy or damage the spirit they have."
While many investors try to predict industry trends and company earnings to time the market, Charlie Munger suggests a different approach. Instead of playing this game, he recommends finding businesses with economic moats and management teams capable of delivering high ROIC and ROE to shareholders over the long term. Trusting the management to navigate through both good and bad times can lead to sustainable returns for investors.
These companies, acting as money-making machines, continuously generate revenue from the expanding money supply and return it to shareholders, creating a compounding effect.
In essence, the strategy is to identify companies with exceptional competitive advantages, led by management teams capable of delivering sustainable shareholder returns. If these companies are trading at a fair price, investing in them and holding for the long term can lead to compounded returns for investors.
Returning to my investment strategy for the second half of 2024 and beyond, my current holdings of 5% or more include Alphabet Class A, Tesla, Palantir, Amazon, TLT, EPR, and Meta. I plan to fully divest from EPR this year, as I intend to focus my dividend investments on SCHD and DGRW ETFs.
I continue to analyze Alphabet, Tesla, Palantir, Amazon, and Meta, and still consider them to have sufficient economic moats. I'm closely monitoring their management teams' ability to maintain high shareholder returns over the long term and will continue to hold these positions unless my views change. Of course, I may adjust my holdings based on portfolio management considerations or excessive price movements.
My overall strategy remains focused on identifying companies with economic moats in growing sectors, valuing them appropriately, and acquiring positions when they trade within my target price range.
Currently, my portfolio's cash allocation is relatively low. However, I have plans to continuously generate additional cash flow, which should increase my cash position over time.
That concludes my thoughts for today. I'll provide another update on my portfolio and investment outlook at the end of Q3.
Thank you for reading.
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