2023 Portfolio analysis: Up 86% and how that can improve
My investment portfolio was up 85.8% in 2023, a fantastic step in the direction of my investment goals. But there's still a lot of room for improvement. When it comes to analyzing performance, it's important to separate process from outcomes. Howard Marks writes in one of his memos 'You Bet!':
The best and most lasting thing I took away from Grayson's book - and the first thing I remember learning in college - was the observation that you can't tell the quality of a decision from the outcome.
In that spirit, I've analyzed my investment positions, the thought process for holding them and the trades I made in an effort to avoid “resulting” (judging an action by its result and not by the process). To separate the outcome of an outstanding year for my portfolio from the quality of my investment process. Here's a full review of my portfolio, what went well, what didn't and how I'm looking to improve performance in 2024 and beyond.
Portfolio performance
The 85.8% rise in portfolio was driven by two components:
35.3% rise in my equity investments
247% rise in my crypto investments
I started 2023 with an equity/crypto portfolio breakdown of 76% and 24% respectively and ended the year with 55.4% in equities and 44.6% in crypto. My crypto investments had a stellar year and outperformed Bitcoin's 156% and Ethereum's 92% rise. While my equity portfolio handily outperformed the S&P 500's 24%, it handily underperformed the QQQ's 54%. The S&P 500 is a great benchmark for many portfolio's but not mine. Due to my equity positions being higher risk and more technology focused, the QQQ is a better comparable.
In this retrospective I'll focus on the equity portion of my investment portfolio.
Bottom line up front
The most important takeaways from 2023:
Don't sell winners as long as the investment thesis still holds. To outperform, I must adhere to Howard Marks' lessons in 'Fewer losers or more winners?'. Decrease the size of losers, let winners compound and outperform. Spotify carried my 2023 portfolio performance.
Decrease risk by analyzing risky companies in portfolio (based on business, management, sector etc) and implement: larger gaps when scaling in to a company. Add a position size limitation.
Put proper processes in place for buys, sells and trades that fit the trade and investment check list.
Narrow down and focus. It's very hard to outperform the index. Sell positions that I’m not really confident and don’t have long track record of outperforming the QQQ and buy the QQQ. Focus on companies I have conviction in that can outperform significantly.
Breaking down my portfolio
Let's explore these lessons following my portfolio moves throughout 2023. On 1/1/2023 this is what my portfolio looked like.
My 2023 portfolio shows my investment approach, which I developed during 2021 and 2022. It's not balanced but focused on a few high conviction bets where I see overlooked value. I've mentioned the risks of this strategy; big contrarian bets can fail, but if correct, they greatly boost performance. This was evident in 2023.
My three largest positions are exactly such bets, and all played out very differently. On Spotify it was very right. On Curiosity Stream I was very wrong.
The rest of my position can be split into three. Ross Stores, Starbucks and Logitech were core positions, the rest is a smattering of tech positions and a few 'learning positions' - companies that I want to learn more about, and therefore put skin in the game.
Spotify
Spotify had a great 2023, meeting or exceeding all its targets: growing both free users and premium subscribers as well as increasing gross margins. In May 2022, the company changed their reporting style, breaking out different business segments more granularly, which has helped investors see the improvement in margin growth, especially in the much maligned music segment.
Spotify was up 138% in 2023.
What I got right in 2021 and 2022 was my analysis, in-depth research, and ability to "buy the crash" that Spotify went through during those two years.
In 2023 what I got right, was holding.
I didn't hold everything, I sold some, but I held onto the vast majority of my position, and so despite selling, Spotify ended the year a 10 % larger portion of my portfolio. While holding might sound easy, holding onto gains can be just as hard as buying into crashes. Especially when those gains become a vast part of one’s portfolio, as Spotify has become of mine, at its height, even crossing 40%. That is a very large amount of concentrated risk that most people would not be comfortable with, especially considering Spotify's volatility. I took some profits throughout the year, but always kept it a very large position - my largest by a wide margin. This was what I got right.
In retrospect, all of the sales and trimming were a mistake.
Missing out on upside isn't what made them a mistake. They were a mistake because of a faulty process. I sold for emotional reasons - 2022’s nasty declines left scar tissue. I sold my Spotify shares not because I doubted the company, but due to fear from past market drops and a desire to secure profits. This emotional decision was a mistake, as Spotify's stock rose 138% in 2023, but my premature selling limited my portfolio's growth to 85%, costing me a 14% gain.
My main takeaway from 2023 is to let winners run. Spotify shows that letting successful investments grow is hard but can greatly benefit a portfolio. It's so uncommon to get the company right and in a timely, sizable position. When you do, it's important to maximize it.
It's worth reiterating the point to hold winners and let them compound over time. To quote yet another Howard Marks memo 'Something of Value' (italics are mine):
Here's how Andrew puts it today:
"It's important to understand the paramount importance of compounding, and how rare and special long-term compounders are. This is antithetical to the "it's up, so sell" mentality but, in my opinion, critical to long-term investment success...
In other words, if you have a compounding machine with the potential to do so for decades, you basically shouldn't think about selling it (unless, of course, your thesis becomes less probable). Compounding at high rates over an investment career is very hard, but doing it by finding something that doubles, then moving on to another thing that doubles, and so on and so on is, in my opinion, nearly impossible. It requires that you develop correct insights about a large number of investment situations over a long period of time. It also requires that you execute well on both the buy and the sell each time.
When you multiply together the probabilities of succeeding at a large number of challenging tasks, the probability of doing them all correctly becomes very low. It's much more feasible to have great insights about a small number of potentially huge winners, recognize how truly rare such insights and winners are, and not counteract them up by selling prematurely."
When will I sell? When my thesis of outperformance no longer holds true, which I'll write about in a separate article.
Curiosity Stream
Consequent to my biggest success is my biggest mistake. I started the year with 15% of my portfolio in Curiosity Stream and closed out my position following first quarter results. This was by far my biggest loss amounting to roughly 8% of my overall portfolio.
I initiated my position in Curiosity Stream in 2021 and in many ways it was similar to Spotify. A company I thought the market was undervaluing. It had a few things going for it that I thought presaged significant upside. Curiosity Stream is a streaming company for documentaries, nature and history. A Netflix for factual content. They claimed to have ~20m plus subscribers, a direct to customer business angle, cheap content production and the bulk of content investment behind them. That implied a dramatically improving cash flow profile. Put that together with the content wars that Disney, HBO, Paramount, Netflix etc were going through during 2020-2021, I thought this implied a great risk reward and floor price for the stock.
Curiosity Stream came public via a SPAC in 2021 and crashed along with every other tech and SPAC related stock during 2022. I was sure the market was getting this wrong and doubled down. And doubled down again, which is how I entered 2023 with a 15% position.
I was very wrong.
What made me confident?
I thought I understood Curiosity Stream business model: a D2C subscription play, where content costs were coming down, leading to a better margin and FCF profile. Similar to Spotify.
Credible management that predicted growing revenue. Credibility was given by management delivering on revenue projections throughout 2021 and early 2022 and being founded by John Hendricks, the founder of the Discovery Channel, who was still on the board. I thought his connections would also help pull a rabbit out of the hat should the company need financing or M&A.
Companies were acquiring streaming competitors and content libraries left and right during 2020-2021. With 20,000 titles that have a relatively long shelf life, I thought that Curiosity Stream would become an acquisition target if its price dropped too far.
All these factors made me confident that the company was undervalued and had significant upside. But I got my research wrong. Really wrong.
I didn't actually understand the business. I didn't read the fine print and notes in Curiosity Stream's 10-K which revealed a few huge problems, which I discovered after they had already surfaced:
Subscribers weren't really D2C subscribers, rather almost all of the reported 20+ million subscribers were viewers watching on some bundle. This dramatically over inflated the company's prospects. FCF collapsed as much of the revenue that came in wasn't through D2C, rather through bundled marketing deals, which I did not understand in advance.
Licensing revenue, which was a majority of the business were crap deals to boost revenue numbers pre SPAC. As part of the deals Curiosity Stream was obligated to spend all of this revenue on marketing, making these loss generating deals which looked great for revenue projections but shit deals financially.
An entire segment of reported income, Enterprise sales, turned out to be one client that didn't renew.
Management proved to be inept and duplicitous at best, complete liars at worst. But that's partly on me - I didn't do my diligence properly and was blinded by Curiosity Stream being founded by Hendricks. I took a heuristic shortcut (he was a good successful manager before, so this next venture of his will be as well).
Putting these two together led to some disastrous results for Curiosity Stream.
Revenue completely fell apart. Management had made their numbers by front loading revenue that was pure advertising and were completely inept at growing D2C subscribers, even with a $20 annual subscription price, by far the lowest in the industry.
Cash flow collapsed and the company was hemorrhaging cash, causing the market to doubt their viability.
All in all, Curiosity Stream dropped more than 70% throughout 2023. I sold my entire position after Q1 earnings that were reported in May.
What caused me to change my mind after doubling down throughout all of 2022? The fundamentals and doing better research. After giving management two quarters of grace on missing earnings and projections as well as not answering the key issues on conference calls, I went through the 2022 10-K with a fine toothed comb and discovered all of the problems above - which came home to roost during the second half of 2022 and early 2023.
I have three important takeaways from Curiosity Stream.
Do the homework. All of it. This is even more pertinent when a company is a micro cap, recently public, or unproven in any sense.
For high risk companies, with unproven characteristics, decrease the total position size and increase the size of price movements between scaling in.
Book the loss. It's never too late to sell. The best decision I made with Curiosity Stream was to sell the entire position following Q1 earnings. This helped me approach the company much more objectively as I followed Curiosity Stream's results throughout the year.
Hasbro
Hasbro had a relatively uneventful year price wise, but greatly disappointed on the business side. As my thesis has been harmed, I've cut the position in half. Hasbro is a well known toy maker, with games such as Monopoly, Play-doh, Nerf and licenses for Disney's greatest hits: Marvel and Star Wars. It's less well known for its real growth engine: Wizards of the Coast, the parent company of Magic the Gathering and Dungeons and Dragons. Both brands have been growing double digit for the past several years due to an incredibly loyal and growing fan base. My thesis for Hasbro lies in unlocking the incredibly IP that both Magic and D&D have: hundreds of characters and stories beloved by a large audience with dispensable income. Essentially, what Disney managed to do for Marvel, Hasbro could do for this IP, whether via movies, TV shows or digital gaming.
2023 mostly debunked the thesis. Despite new management, they've shown themselves unwilling or unable to unlock this value. it doesn't help that previous management saddled Hasbro with so much debt that has severely limited them. An underwhelming investor day in early 2023 showcased a company focused on reducing inventory overhang, operational efficiency and reducing debt. Essentially, all things relevant for a consumer products toymaker loaded with debt, not an IP powerhouse that excels at storytelling and is focused on unlocking this value.
Additionally throughout 2023 the company showed lacking judgement in several things related to MtG and D&D: saturating the market with new cards, sets and collections and an incredibly mismanaged roll out of D&D's new game license. While both didn't impact 2023 financial results, they showed a deep misunderstanding of their communities and burned future goodwill. These weren't the moves of a management team that understands the dragons hoard of valuable IP they're sitting on - which is only worthwhile as long as they have community goodwill.
Mitigating this were a few positive points. Baldurs Gate III was the most successful game of the year, as was Monopoly Go! Both licensed from Hasbro. Hasbro acquired DnD Beyond, and their desire to change D&D's open game license is due to their desire to finally have an end to end D&D digital gaming experience.
At the end of day, Hasbro is a company in a turnaround, and they'll probably execute on it over 2024 and 2025. It's not a sell at current prices with current dividend yield, but it's just not the focus I want to see from the company. Owning a slowly improving consumer products goods company wasn't my investment thesis and I lightened up on Hasbro throughout the year and plan on unloading most of my shares throughout 2024. Hasbro has shifted from a 'big bet' to a '12 month trade' (as a reminder trades are companies that I believe can outperform on a year timeline with a specific catalyst in mind).
I didn't lose money on Hasbro, but I definitely lost out on opportunity cost. My biggest takeaway here is that if a company is going to be a big bet, it needs to earn it and meet my investment check list: there needs to be a catalyst of some sort, a history of outperformance or something to merit the premium placed in my portfolio. Hasbro had none of these. Management had just changed, the company hadn't performed exceedingly well since Covid, nor did they have a track record of unlocking the value I believe they have. In short - they didn't merit a premium position and instead should have been in my "learning investments" criteria.
Cash
My fourth largest position was cash. Some believe that having a large cash position causes underperformance, and in a year where the QQQ was up ~50% that's probably true. However having a decent cash position lets me sleep better at night and is a form of anti-fragility in the portfolio - giving me dry powder in unforeseen market occurrences. 2023 was full of doom and gloom prognostications.
I ended 2023 with double the cash position (20%) as I took profits in Spotify and other tech companies.
Ross Stores, Starbucks, Logitech
It was good year overall for these positions with Ross stores up 20%, Logitech up 50% and Starbucks trailing by a mile and down 5%.
I entered 2023 with roughly 7% of my portfolio in each. Ross Stores and Starbucks have been long-term holds in my position, based on their secular growth stories and brand positions. Ross Stores is one of two unique, low-cost treasure-hunt retailers, still in the midst of its regional to national growth story. Starbucks is a one-of-a-kind global brand with years of store growth, location, and compounding ahead of it.
Despite forming a core part of my portfolio due to their longer term outperformance, both have gone through a series of lackluster years. Neither had bounced back fully from COVID and various macroeconomic headwinds, China and logistics cost inflation most notably. I trimmed both positions slightly throughout 2023 due to these headwinds with the intention of buying back on significant pullbacks that occur in both companies periodically.
Logitech proved to be more cyclical than I believed and I lightened up considerably during the first half, unfortunately missing out on a large portion of the second half rally. Despite this less than ideal result, the process was correct. My bull case assumption for Logitech outperforming on a multi year time horizon was based on gaming, video collaboration tools and the creator economy all outperforming. All three of these have proved to be either slower growth or more cyclical in nature. Despite having a lot of conviction in Logitech the company, I have less so in Logitech the stock's ability to outperform my benchmark and therefore trimmed it greatly, ending 2023 with it being just 1% of my portfolio.
Remaining positions
The rest of my portfolio entering 2023 was made up of a smattering of tech companies I like, none larger than a 5% position. I trimmed all of these positions throughout 2023 as they ran up.
I added to high growth, high quality SaaS plays that are long term compounders: Shopify, Snowflake and Monday. All have great management, secular tailwinds and are multi year holds for me (again, as long as the thesis holds true). All were underweight in my portfolio relative to my belief in them and so I've decided to buy them on the way up.
Innoviz, a Lidar supplier for the automotive market has become one of my new 'contrarian big bets' throughout 2023. I believe that over the next 3-5 years this company can grow by an order of magnitude. Together with the huge upside potential, there are many risks: product risk, capitalization risk, market timing risk, competition risk. Despite these risks, I believe that Innoviz is the best bet on the growing Lidar space, justifying the risk-return, and making this a classic 'contrarian big bet' for my portfolio. Over 2023 the company has performed well and the thesis (which I'll lay out in depth in a follow up article) is playing out. Over the year as the stock has slumped I've added significantly to this position.
Exited positions
I exited a few positions in 2023: Stitch Fix, Meta (Facebook), Curiosity Stream and Atlassian.
New positions and other large changes
Axon: an outstanding company that I've owned in the past and building a new position in once more. Axon is a unique supplier to law enforcement around the world with a powerful brand position and technology and business model moat. Due to this the company trades at a premium. I plan on building out this position patiently. Full write up on Axon to come.
Markforged and Desktop Metal are both 'learning positions'. In my search for a next big bet and technology trend 3D printing has come across my radar (yet again) and I'd like to see if this is a sector to keep an eye on.
Apple and Nike are both high quality companies that have sold off. They do this periodically and every time has been a buying opportunity. They are both in my '12 month trade' bucket.
Lastly, based on my learning this year, the QQQ is going to become a major part of my portfolio, replacing my spatter of tech companies with the index.
Main takeaways
2023 was an outstanding year for my portfolio. There are a few powerful lessons that I plan on implementing in 2024 and beyond to improve my performance going forward:
Hold onto outperforming companies and don’t sell. If a 'big bet' works out, hold on for dear life as long as the thesis is intact. Don't overthink. Don't overtrade. Spotify carried my 2023 portfolio.
Maintain a disciplined process. Make sure each company matches my investment check list, that risk management is in place, that I've done all of the homework thoroughly, set price targets for buying and selling. A disciplined process would have helped me avoid my biggest loss in Curiosity Stream and helped me buy back quality companies I trimmed.
Pay attention to emotions. I sold too much during 2023 due to emotional scarring from the declines in 2022. I also overbought at times from fear of missing out. Maintaining discipline and writing trade and investment processes will help mitigate this.
Further thoughts
All sells were 'bad': Logitech, Spotify, Google, Domino's, Microsoft, Ross Stores, Starbucks. All sells prevented me from capitalizing on upside. However, it’s hard to know if this was a good or bad decision. Outcome was a net loss: all stocks went up. But was the process correct? Tough to tell. 2022 impacted the decision to sell greatly. I was burnt from the down market and wanted to book gains and raise cash (which I did), but was this emotional scarring or actually a good call? Some sells were due to companies underperforming (LOGI, ROST, DPZ). SPOT was taking early profits (mistake which needs to be analyzed in my best trade of 2022-2023 and what I learned from it). MSFT and GOOGL were me lightening up on tech - which was a mistake, especially since I never bought back.
Lessons from selling:
Set “rebuy” targets for every trade around a core position.
Don’t sell out early on a main position.
Let winners compound if the thesis is true.
Sometimes the process will be right, and outcome will be wrong.
Don’t bet big on macro unless it’s really really confident or extreme.
Management is critical to companies. Need to make this a key part of research.
Have to watch for emotional scarring or simply over biasing on recent history.
Possible biases going into 2024: NOT trimming positions. Crypto, Spotify and QQQ rise and success all create a bias that trimming is bad.
FOMO is the anti patience. Some companies have underperformed (Hasbro, Innoviz) and patience is much harder when everything is at the races.
Few positions really beat the index. I should have a reason for holding each company.
Narrow down and focus. Sell positions that I’m not really confident and don’t have long track record of outperforming the QQQ and buy the QQQ.
Sowing the seeds for 2024-2025
I sowed the seeds of 2023 outperformance during 2022. How am I setting things up for 2024-2025?
Holding onto big bets that can outperform over the next 2-5 years: Spotify and Innoviz.
Avoiding portfolio performance sink holes: opportunity cost of Hasbro, risk management with Innoviz.
Narrowing focus. Closing most positions for the index and betting larger on companies I think can outperform over the next 2 years.
Seeding new future out performers.