Lettera fine 2023 - Annual Letter

"You don't have to be brilliant, only a little bit wiser than the other guys,

on average, for a long, long, time."

Charles T. Munger

Dear investors, and friends,

As a standard practice you’ll get to read this annual letter in which I try to condense what the year has been and more. In particular if you’re not new, you’ll know that it’s an opportunity to remark on the more abstract trait of the investing practice. Those, in my opinion, are the foundations upon which to build all the rest.

I’d like to acknowledge the trust and faith you conceded me. Even if from a rational perspective it was a simple call, it wasn’t easy to stay the course after a negative year.

Reportedly, missing the best days or months in a long string of returns, can significantly impact your returns. If you missed the market's 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an astonishing 83% in the recent 20-year period (1994-2023).

........................2020...........2021.........2022.........2023.........CAGR
S&P500...........16.26%......26.89%.....-19.44%....23.70%.....10.11%
peterlavi..........26.92%......26.12%.....-26.70%....27.26%.....10.54%

As routine, the annual performance of your capital and mine are presented here. The final column is in bold as it is a key metric, called CAGR.

By CAGR we mean Compound Annual Growth Return. It is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span].

The performance was very good as compared with the benchmark both on an annual basis and over the four-year period. I know that you already know it, but it is still worth recalling that even a slight difference in interest rate can translate into a substantial gain over a long investment horizon. The following example helps: take an initial capital of $10k invested over 20 years. On one hand compounded at 10.0% per year, on the other hand at 10.5%. At the end of the two decades even the small 0.5% premium resulted in a significant difference in the final amount ($6,387.35 more, $73,662 vs. $67,275). So, when investing for the long term, even a small increase in interest rate can be beneficial.

The Ever Flowing River of Time

The year 2023 was financially great but as always it took away some lives. On November 28, 2023 it was the time for Charles T. Munger (Charlie) to go. He enjoyed a magnificent life, fulfilled not only by great capital accumulation but also by giving. Wikipedia shortly described the late Charlie as a “businessman, investor, and philanthropist” . Indeed he was all three. Leaving the world at age 99, he managed to accumulate a lot. He gave a lot more, in my opinion. Accumulation comes in different forms, he was able to do it also in the noblest way. Culture. He spoke on plenty of occasions, but with very few words. Sharp and concise. Straight to the point and wise. He was a true philanthropist.

Having a diverse background - trained and starting the career as a lawyer - he turned to finance later in life, and brought some paradigm-shifting ideas. He is a mentor to me.

To achieve so much in life means having some important tailwind, too. In medicine there’s a concept in vogue in recent decades termed “active aging”. It encompasses a series of lifestyle behaviors among which training the mind. Remain curious and never stop learning new things. It all compounds.

2023: a Year of Conflict and Innovations

Year 2023 brought a lot in terms of news. Floods, wildfires, and other extreme natural events were monthly news, unfortunately. Covid-19 emergency was declared over by the World Health Organization (WHO) in May, a day before Britain celebrated the first coronation in 70 years. King Charles III is crowned in Westminster Abbey.

In the financial space a single event yielded two completely different outcomes. Rising interest rates in the U.S. - increased four times over the year - lead to a widely predictable and avoidable disaster. Silicon Valley Bank and Signature Bank, regional banks famous for tech startups and venture capital firms, failed after a run on deposits. The same catalyst, seen from a different perspective, led to a different outcome. Rising stock prices due to the anticipation of stopping the rising pattern, and expectation of rate cuts. Doomsayers were all over the place during mid-year. Nonetheless, Nvidia joined the $1 trillion club. The seventh U.S. company to reach this astronomical market valuation badge.

The artificial-intelligence (AI) boom was in full swing.

Of note: Twitter rebranding to X and the NBA team of Denver, the Nuggets, winning their first championship against the underdog Miami Heat.

The year ended on a tragic note. Citing the Wall Street Journal: Palestinian militants poured out of Gaza in a surprise assault, rampaging through villages and taking hostages. By Israel’s count, 1,400 people [were killed on that day], mostly civilians. Israel declared war on Hamas. President Biden would condemn Hamas’s attack as “an act of sheer evil.” I condemn all wars. Diplomacy can prevent or solve conflicts, and save lives.

Year 2024 will be much more political. More than 50 major elections are scheduled (e.g. U.S., Taiwan, India, Mexico, and Russia). Countries that contribute 80% of world market cap and 60% of global GDP will be voting.

Timeless Investing Principles

Even if winter is now over, try for a minute to imagine a snowball rolling downhill. It starts small, but with each rotation it gathers more snow, growing in size. The growth process starts small, then becomes bigger and bigger. It is exponential. This snowball effect is a clear visualization of what compound interest offers. By reinvesting our earnings on top of the initial investment, we harness the power of growth on growth. Does size matter? Long story short it does not. Starting small is superior to starting big if the other part of the equation is neglected. Time horizon is the second key. Even small contributions can snowball into substantial sums over extended periods. The longer your money stays invested, the more time it has to compound and generate significant returns.

That being said, choosing the right asset to buy and accumulate is challenging. You can make a good deal buying a pair of socks, as long as you’re paying the right amount. In the end it comes down to being able to make a sensible assessment of the value of the socks you are buying.

However, determining an asset’s true value can be an art form, not an exact science. While financial metrics play a crucial role, they don't capture the entire picture. Future potential, market sentiment, and even a dash of intuition all influence valuation. Analysis is better conducted with a 360° view, analyzing various factors. An investor should consider both the numbers and the narrative, employing a bit of artistry to arrive at a fair valuation.

Never forget these three concepts – compound interest, time horizon, and valuation – you can transform your savings into a powerful wealth-generating machine. The sooner we start, the longer our snowball has to roll, and the bigger it can become.

Going Forward

Investors should be ready to see returns flattening. No one can guarantee you to keep performing as in the past, as no day is equal to the previous one, not in life nor in the markets. Portfolio is constructed in such a way as to have protection in case something goes south without being noticed beforehand. We held a substantial amount of capital in cash equivalents (government bonds - or “I owe you” - of U.S. called “Treasury Bills”) ready to be deployed. The reason is twofold, (1) being ready to deploy the capital when an unforeseen opportunity materializes, (2) benefit from the attractive yield it’s now offered.

The focus remains on underappreciated single businesses. Research is performed continuously to try to find them. Nonetheless, no rush is felt. The reason is simple. A substantial amount of capital is my own capital, and you can be sure to have your capital being treated with maximum caution, and attention as I’m treating mine. They’re intertwined.

As per the detailed composition of the portfolio, you can access the full list of holdings directly and publicly. You’ll notice some tiny positions. These are companies which are worth our attention, but either not exhaustively researched yet, or at the right price.

Stay well, with an active mind, and body.

Until next year,

peterlavi - Pietro Lavisci

Disclaimer: The information provided on this website is for informational purposes only and is not intended to be a substitute for professional financial advice. The author is not a financial advisor and does not hold any relevant licenses or registrations. The author's opinions are based on their own research and experience, and should not be considered investment advice. Investors should always conduct their own research before making any investment decisions. Past performance is not a guarantee of future results. Investing in securities involves risk, and investors may lose money. The author is not liable for any losses or damages that may occur as a result of the information or opinions provided on this website.