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Partnership Performance, H1 2023
Zoetis is one of the highest quality and ‘unknown’ companies I’ve ever come across. The first part of my research will be a 20-30 minutes read and will cover Zoetis R&D model. I’ll be sending it to your email on Wednesday after the market closes, I believe you’ll love it.
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I never charged for this newsletter and will try to never do. This space is truly to learn and explore interesting ideas, not one in which I impose my views on companies or the market. Nevertheless, I think transparency is very much needed in finance. To that end, I’ll be updating you with our partnership/fund performance every semester. Otherwise, it could be seen as if I’m talking without having any skin in the game.
Even though we do not seek to strictly compete with indexes, we will provide their return alongside ours to have some sort of parameters to help guide expectations. Given the portfolio possesses a large component of technological companies, the Nasdaq’s return will also be included in the following table.
Note: 2022 returns are calculated beginning on the 25th of Jan.
The partnership’s inception was on the 25th of January of 2022. Since then, it has delivered a return of 10.53 %. In the same timeframe, the S&P 500 had a return of 1.8 % and the Nasdaq of 6.7%.
One year and a half is too short of a timeframe to draw any relevant conclusion regarding how well are we doing our job. The professional absolute minimum is generally three years, the theoretical minimum is around 5 years and, in my opinion, the philosophical and ideal would be 10 years.
Game of Thrones popularized the phrase, but memento mori is a Latin phrase that traces back to Ancient Rome. When emperors and, prior to that, consuls, won a battle or a war against renamed enemies, they were entitled on some occasions to organize a parade, called triumph. They sat on a big cart pulled by horses, with the whole army behind them, and marched throughout the city. All citizens attended.
A man that commands an army of 50k soldiers and that is acclaimed by hundreds of thousands of people is a very susceptible man to feeling godly. To avoid that, there usually was a person behind the commanding general that kept saying ‘memento mori’ to him, as long as the parade lasted. Remember that you will die. That should remind everyone of our human condition and we are logically humbled by such statement.
We were not stupid in 2022 and we are not geniuses in 2023. Returns this year have been ‘good’, I suppose, but that’s not something we try to attach to. We look at businesses and how their fundamentals evolve. The market does what the market does and I see no merit in having good returns in the short run, as there are big chances of it being purely luck and randomness.
For obvious reasons, I will not share how the optimal portfolio looks like, as I feel that’d be unprofessional and disrespectful to clients. I’m all in for ideas, knowledge, research and almost everything to be ‘free’, but there is a limit haha. Nonetheless, here’s how the portfolio looks as of today:
Positions, alongside allocations reveal which industries and companies we find more attractive moving forward. Additionally, position sizing illustrates not only the upside we see in businesses, but the potential downside as well. Diving into the portfolio’s fundamentals:
Businesses’ superiority can be partially detected by observing how much value is the company keeping from the value they create. The portfolio built, leaving aside cash, keeps 24.2 cents in benefits from every dollar in sales it generates. On the other hand, the S&P keeps 11.2 cents in profit for every dollar in revenue.
In parallel, analyzing how efficiently management allocates capital is vital. Good management teams are able to do more with less. Likewise, the returns the business is able to earn from investments can also help get a glance of its natural profitability. If the portfolio were a business, for every dollar invested in it, the company would generate 26.9 cents in operating income after taxes, while the S&P, 9.8 cents.
Note: The S&P 500 margins’ data is from Terry Smith’s last letter (except NPM) and ROIC from Forbes.
Expectations moving forward
I do not make market analysis nor market predictions and macroeconomics do not play any role in the partnership’s strategy. I find amazing to see how easily we can trick ourselves. It has gotten to a point where most people seem educated on how futile forecasting can be, and even clarify it themselves, but then they proceed to tell what they think the market will do.
It is great for them to have a market, but it is not my intention to trick you. I do not know what will happen and I believe that stating my view detracts value from you. The most likely thing is that I will be incorrect. Writing it, then, can do nothing but harm.
What I can say moving forward is out of common sense and arithmetic. The parthership’s YTD return is abnormal and impossible to sustain, no one should expect it. If we were to deliver 30% returns every six months, in 5 years that would be 13x. And in 10 years, 190x. It goes beyond saying that such performance is unrealistic.
Last article, we went in a somewhat profound manner over my investment philosophy. That is why I wanted to keep this article short, as usual. Anyway, hope you enjoyed the article and, if interested in chatting, you have my email below!
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