Lettera fine 2022

Pubblicato come post su eToro il 04 Aprile 2023

”Risk comes from not knowing what you’re doing”

(Warren Buffett)

Dear etorians, friends and copiers,

The above quote by Warren E. Buffett, one of the most successful investors of all time, emphasizes the importance of knowledge and research in investing. It is always our duty to make well informed investment decisions that mitigate risks while providing reasonable returns. Despite our best efforts, sometimes things don't work out as planned and we experience a setback.

We thank you. We thank you for choosing to trust us and especially to trust history and statistics. Perhaps you are familiar with a concept we wrote about also in previous letters and posts: more money is made in the waiting than in the acting. With great displeasure but without regrets we acknowledge the negative performance of this year 2022.

Our portfolio had a compounded annual growth rate (CAGR) of 5.4% in the previous 3 years. Theoretically it means doubling your initial amount every 13 years. As usual we value our performance against the notorious S&P500 index (see the table above).

[CAGR (Compound Annual Growth Return) is the geometric progression ratio that provides a constant rate of return over the time period according to the classic finance textbooks. “Constant” here is the key word because CAGR neglects the concept of volatility of periodic returns that can render arithmetic mean irrelevant.]

2022 in (quick) review

Unfortunately 2022 marked the beginning of yet another humanitarian crisis: the Russian invasion of Ukraine. We deeply sympathize with all the people and families suffering right now because of this nonsense conflict. During the year COVID-19 faded in intensity and importance (even though we are still in a pandemic, technically).

The markets experienced a setback. Probability you’ve heard about the recession of 2022 in global markets and several were the reasons:

• War between Russia and Ukraine. When Russia announced the “special military operation” the whole world trembled. The attack by Russia was condemned internationally with many countries imposing sanctions on Russian trade. The energy crisis that emerged spurred a deep downturn in financial markets. The war is nowhere close to ending.

• The SARS-CoV-2 pandemic is not over yet, likely due to an unequal global distribution of vaccines.

• Global central banks maintained the permissive monetary policy to ignite growth started with the COVID-19 pandemic. However, the attack on Ukraine by Russia caused commodity prices to rise, leading to increasing prices for food along with other products and services. The obvious result was global inflation, with food and energy prices surging across the US, Europe and Asia.

Meditations

Intimacy scares us. Sitting back and reflecting on past decisions is not an easy task. As you may have experienced yourself it is a time when the willingness to be sincere collides with the fear of pleading guilty. The fear of being judged, even by oneself, can be the dominant force that prevents us from learning from our mistakes. Self-improvement is a never-ending journey, and the willingness to confront our own faults is a vital aspect of personal growth. At times, it can be uncomfortable to be intimate with oneself, but it is a necessary step towards achieving success.

Investing is not about being right all the time; it's about learning from when we are wrong and preventing pride to blind us.

By maintaining a solid cash position, investors can have the resources necessary to weather downturns in the market. However, we think there is no one-size-fits-all when it comes to portfolio allocation and sometimes it may be necessary to make adjustments in response to changing market conditions. We recognized the potential for a downturn but failed to take action. This immobilism resulted in missed opportunities for acquisitions and potentially greater losses. It is crucial to cut losses early. We applied this learned lesson in early 2023 through a balanced portfolio restructuring. It is our duty to constantly monitor the market and make informed decisions to protect and grow our investments. We’ll catch up on this next year.

Indeed looking back one year it would have been wiser to reduce active positions and increase cash reserves. A lot of individual stocks in our portfolio suffered a downturn during this year. Notably the energy sector did extremely well (+52%), we played that only indirectly through $BRK.B ‘s Berkshire Energy (BHE) (and indexes of course).

What’s next?

Looking ahead we can imagine inflation having some more run up before settling with perhaps a really moderate downslope. It will mean declining prices mostly for cash-burning companies but also for the general market and hence a plausible buying opportunity. We will keep a solid part of the portfolio (10%) in cash and cash equivalents (i.e. short-term US Treasuries) for this reason and also because the almost 5% yield is attractive.

Overall, it's essential to remain vigilant and not let emotions dictate investment decisions. By remaining disciplined and maintaining a diversified portfolio while keeping a watchful eye on other economic factors (e.g. inflation) we can position ourselves for long-term success.

Stay well.

Until next year,

peterlavi - Pietro Lavisci