26 January2025
In this 6th edition of HVG Investment notes, I want to share HVG 2024 Portfolio Review and two podcasts I enjoyed this week.
I. HVG 2024 Portfolio Review – Part 1
Performance
HVG portfolio returned +14.1% in 2024 (in USD terms, including dividends). Since 2000, the portfolio has gone up 77.3% or 15.4% on an annualised basis.
The results are mixed. On the one hand, solid double-digit returns are within my long-term objective of generating 10-20% annualised returns through the cycle. The extra focus on not losing money by having a substantial cash position and more defensive stocks almost ‘guarantees’ underperforming broader indices when markets are particularly strong. Besides, half of the HVG portfolio was invested in international stocks, which significantly lagged the S&P 500.
On the other hand, with a relatively small portfolio size and the rise of passive strategies, one can expect better opportunities for diligent private investors to generate stronger results.
Here are the details of individual stock performance in 2024.
On the other hand, with a relatively small portfolio size and the rise of passive strategies, one can expect better opportunities for diligent private investors to generate stronger results.
Here are the details of individual stock performance in 2024.
The difference between 18.2% and 14.1% in the table above comes mostly from negative FX changes as the performance of individual stocks is calculated in local currency, while total portfolio performance is reported in USD. Other factors include the impact from positions that were closed during 2024 and are not shown in the table.
From here, a usual value investor letter would talk about market excesses and numerous signs of bubbles, such as the proliferation of meme coins, market concentration, disappearing equity risk premium, and extreme weight of US stocks in global markets.
I will spare you the details as they are widely available. It is important to understand the macro context, but it is much more important to accept that long-term results from owning stocks come primarily from the underlying performance of individual companies in the portfolio. You can either add value by timely switching between different stocks and asset classes or by identifying exceptional companies and holding them tight as long as fundamentals remain strong.
From here, a usual value investor letter would talk about market excesses and numerous signs of bubbles, such as the proliferation of meme coins, market concentration, disappearing equity risk premium, and extreme weight of US stocks in global markets.
I will spare you the details as they are widely available. It is important to understand the macro context, but it is much more important to accept that long-term results from owning stocks come primarily from the underlying performance of individual companies in the portfolio. You can either add value by timely switching between different stocks and asset classes or by identifying exceptional companies and holding them tight as long as fundamentals remain strong.
Portfolio Strategy
The portfolio follows the barbell strategy with a strong foundation of low-risk businesses such as Berkshire Hathaway, Exor and Loews, complemented by a handful of high-risk/high-return investments. The first group acts like an anchor during the storm, while the second group adds critical growth and valuation re-rating potential.
Rebalancing between the two groups is another essential element of the strategy. For example, in a downturn, the share of riskier investments in the portfolio will decline (as they fall more than the defensive names), which provides an opportunity to increase exposure to this riskier group at lower prices using relatively more expensive defensive stocks as the funding source.
There are two goals HVG aims to achieve.
Firstly, to own great businesses priced at a discount, benefiting from returns on capital that these businesses generate with an additional upside coming from potential share price re-rating. Secondly, to avoid heavy losses and to have flexibility to increase investments during market turbulence.
To achieve the second goal, I keep a high weight of low-risk companies with strong liquidity (almost 60%) and extra cash (9% weight at the end of Q4 2024).
Such an approach inevitably leads to underperformance during bull markets: cash and more defensive stocks drag down the portfolio when the best market performers are high-beta stocks. However, I expect such a portfolio to deliver better results over the long term as the portfolio has the resources that can be deployed in a downturn.
One of the changes I plan to implement in the following several months is to consolidate some of my smaller holdings by increasing their weights to 5% and potentially 10%. By exiting other small positions, I plan to have a more concentrated portfolio with less than 20 stocks.
Rebalancing between the two groups is another essential element of the strategy. For example, in a downturn, the share of riskier investments in the portfolio will decline (as they fall more than the defensive names), which provides an opportunity to increase exposure to this riskier group at lower prices using relatively more expensive defensive stocks as the funding source.
There are two goals HVG aims to achieve.
Firstly, to own great businesses priced at a discount, benefiting from returns on capital that these businesses generate with an additional upside coming from potential share price re-rating. Secondly, to avoid heavy losses and to have flexibility to increase investments during market turbulence.
To achieve the second goal, I keep a high weight of low-risk companies with strong liquidity (almost 60%) and extra cash (9% weight at the end of Q4 2024).
Such an approach inevitably leads to underperformance during bull markets: cash and more defensive stocks drag down the portfolio when the best market performers are high-beta stocks. However, I expect such a portfolio to deliver better results over the long term as the portfolio has the resources that can be deployed in a downturn.
One of the changes I plan to implement in the following several months is to consolidate some of my smaller holdings by increasing their weights to 5% and potentially 10%. By exiting other small positions, I plan to have a more concentrated portfolio with less than 20 stocks.
II. Two Podcasts I enjoyed this week
Finally, I would like to highlight two podcasts I enjoyed this week.
The first one is with Anthony Deden from Edelweiss Holdings. I do not agree with all of his views, but certain points are worth sharing. Here is what resonated with me.
The first one is with Anthony Deden from Edelweiss Holdings. I do not agree with all of his views, but certain points are worth sharing. Here is what resonated with me.
On Investment Mindset
“Many years ago, I met a wonderful man who gave me the metaphor that at the time I found to be simplistic and perhaps pedantic.
He said that financial markets were no different than a vegetable market. If you are a chef, you go to the vegetable market and buy whatever you need to make that dinner tonight for your customers. What the market does on its own is of no consequence.
All you're interested in is the quality that you want, at the price you want, and if you don't find something today, you'll find it tomorrow. But the market itself is a means to your ends rather than a means to an end in itself. And so, seeking to understand what the markets do, I think it's just perhaps not so interesting to me as it is perhaps for other people.”
He said that financial markets were no different than a vegetable market. If you are a chef, you go to the vegetable market and buy whatever you need to make that dinner tonight for your customers. What the market does on its own is of no consequence.
All you're interested in is the quality that you want, at the price you want, and if you don't find something today, you'll find it tomorrow. But the market itself is a means to your ends rather than a means to an end in itself. And so, seeking to understand what the markets do, I think it's just perhaps not so interesting to me as it is perhaps for other people.”
On Choosing Investments
“You cannot look at everything in life and try to find something that suits you. You have to, in order to find the kind of thing that is suited to your endeavor, you have to dismiss a whole lot of things to start with.”
“In the end, it may sound simplistic, but I have two or three important considerations. One is that, do I understand this business?
And the more you understand the business of the business, the more you are capable of understanding the risks you are taking or the risks you are avoiding. Do I understand how it works? Do I understand where the customers are?
Do I understand why people buy what it is they buy from them? Do I understand why they are relevant? Do I understand the economics of the business?
If I understand this business and am comfortable with it, the next question is, do I like it? Would I want to be involved in this business? Would I want to own this business?”
“In the end, it may sound simplistic, but I have two or three important considerations. One is that, do I understand this business?
And the more you understand the business of the business, the more you are capable of understanding the risks you are taking or the risks you are avoiding. Do I understand how it works? Do I understand where the customers are?
Do I understand why people buy what it is they buy from them? Do I understand why they are relevant? Do I understand the economics of the business?
If I understand this business and am comfortable with it, the next question is, do I like it? Would I want to be involved in this business? Would I want to own this business?”
On Analysing companies
“I don't believe in formulas or in the idea of having a scientific checklist of everything that has to fit a particular situation. In essence, when you are an owner of investments, you have a collection of assets, each serving a particular purpose towards the whole.”
“And where I think I have failed oftentimes, both on the decision to do something or not to do something, is on relying too much on financial metrics.”
“I think those are very useful. There's no question about it. But they do not lend themselves as much as one would think to the idea of what something is worth to me.”
“If you and I were interested in buying a company, let's say a restaurant down the street as partners, and the restaurant was for sale, we would walk into this restaurant and we would not ask them for their financial accounts, would we? What kind of food do they make?
Who goes to eat there? How often they go? How often they're open?
What kind of people they are? Is the place clean? What is their reputation?
There will be a thousand questions to ask before we decided that we liked the business. And then when we decided we did, it would be only then that we'll say, okay, where are your accounts? Let's see your tax statements.”
“And where I think I have failed oftentimes, both on the decision to do something or not to do something, is on relying too much on financial metrics.”
“I think those are very useful. There's no question about it. But they do not lend themselves as much as one would think to the idea of what something is worth to me.”
“If you and I were interested in buying a company, let's say a restaurant down the street as partners, and the restaurant was for sale, we would walk into this restaurant and we would not ask them for their financial accounts, would we? What kind of food do they make?
Who goes to eat there? How often they go? How often they're open?
What kind of people they are? Is the place clean? What is their reputation?
There will be a thousand questions to ask before we decided that we liked the business. And then when we decided we did, it would be only then that we'll say, okay, where are your accounts? Let's see your tax statements.”
On modern society
“Would you guys have anticipated what is happening in the UK today, once an extraordinary country, or Germany, or France, or Canada, or name it?”
“I'm really not an expert in these matters, and I certainly don't want to say anything that, but if you think of the period of the 1930s, if you study the 1930s as a period, and the kinds of things that contributed in the interwar period, it's quite similar.
I'm not sure what it will be, but I think that impoverishment is an ongoing affair. We might be seeing a lot of money and a lot of progress, but realistically, the vast bulk of people are being impoverished today. The middle class has been destroyed in the Western world.”
“I'm really not an expert in these matters, and I certainly don't want to say anything that, but if you think of the period of the 1930s, if you study the 1930s as a period, and the kinds of things that contributed in the interwar period, it's quite similar.
I'm not sure what it will be, but I think that impoverishment is an ongoing affair. We might be seeing a lot of money and a lot of progress, but realistically, the vast bulk of people are being impoverished today. The middle class has been destroyed in the Western world.”
On Financial Industry
“Show me your customers and I'll tell you who you are.”
“the problem with money today is the problem with the financial field is that if you're a financial practitioner, anybody with money in their pocket is potentially your customer. This is not true in, say, selling automobiles or anything else.”
“The person wanting to participate in what you do must be going in the same destination you are. You must like who they are. It's more of a personal thing than it is a business.”
“There's a difference between an investment practice and an investment business. In a business, you seek to do what the customer wants. A practice is in what you do the right thing by the customer, regardless of what he wants or what he thinks he needs. You seek to do the right thing. That's very difficult, actually. This is not very popular.”
“the problem with money today is the problem with the financial field is that if you're a financial practitioner, anybody with money in their pocket is potentially your customer. This is not true in, say, selling automobiles or anything else.”
“The person wanting to participate in what you do must be going in the same destination you are. You must like who they are. It's more of a personal thing than it is a business.”
“There's a difference between an investment practice and an investment business. In a business, you seek to do what the customer wants. A practice is in what you do the right thing by the customer, regardless of what he wants or what he thinks he needs. You seek to do the right thing. That's very difficult, actually. This is not very popular.”
On Money
“Someone said, money is like time. Everyone knows what time it is. But ask them, what is time? And that's a much more difficult question.”
“Having more money does not mean you have more wealth. And this is something most people don't really quite understand. You need to produce more.”
“Having more money does not mean you have more wealth. And this is something most people don't really quite understand. You need to produce more.”
On Valuation tools and formulas
“The point is that you are looking at invisible aspects of what something may be worth, that you cannot always put in a nice neat formula. And where I think I have failed oftentimes, both in the decision to do something or not to do something, is on relying too much on financial metrics. And I think those are very useful. There's no question about it. But they do not lend themselves as much as one would think to the idea of what something is worth to me.”
“And remember [when] accounting was first established, [it] was never meant to be a tool for valuation. It was meant to be a tool for accountability to the owners of companies.”
“And it's only in the last 50, 60, 70 years, I think, that we have taken financial accounts, the balance sheet and the income statement and and cash flows and made a science out of it and created an entire framework of rules and processes by which we can judge the value of something, particularly by guessing its potential future returns.”
“And remember [when] accounting was first established, [it] was never meant to be a tool for valuation. It was meant to be a tool for accountability to the owners of companies.”
“And it's only in the last 50, 60, 70 years, I think, that we have taken financial accounts, the balance sheet and the income statement and and cash flows and made a science out of it and created an entire framework of rules and processes by which we can judge the value of something, particularly by guessing its potential future returns.”
On Value Investing
“As to value investing, I don't quite know what it is, even though it's a very common phrase that is being used rather extensively in today's world. I've seen too many idiotic things take place in the name of value investing, and everyone's quoting Buffett, but no one really does what he does. So we need to be very careful about these words that we use, because you cannot define value in terms of metrics. Value is not quantifiable.”
On Airlines
“There are many businesses that I understand. For example, take the airline business.
I truly understand the economics of the airline business. But I don't like it. I don't want to be involved in it.
So, I don't care how cheap British Airways may be. I am just not interested at all, ever.
Why don't you like it? What is it about it?
It's not a business that suits me. It's not a business for me that has the resilience that I am looking for. It's a business that depends largely on external factors, external forces.
Whether it's the price of fuel or the cost of money or the geopolitical risks for people traveling or competitive pressures is a business easy to get into. It has a great deal of government regulation. It has too many things can go wrong in this business.
I truly understand the economics of the airline business. But I don't like it. I don't want to be involved in it.
So, I don't care how cheap British Airways may be. I am just not interested at all, ever.
Why don't you like it? What is it about it?
It's not a business that suits me. It's not a business for me that has the resilience that I am looking for. It's a business that depends largely on external factors, external forces.
Whether it's the price of fuel or the cost of money or the geopolitical risks for people traveling or competitive pressures is a business easy to get into. It has a great deal of government regulation. It has too many things can go wrong in this business.
On Banks
And you know that. And there are many, many other such businesses, the banking business, for example. I understand fundamentally the economics of the banking business, but I would never be interested in owning shares in a bank.
There are too many ways you can cheat. “There are too many ways you can obscure the reality in your financial accounts. There are just, there's too much government interference in the business. “There are too many externalities that contribute to your success or to your failure.”
There are too many ways you can cheat. “There are too many ways you can obscure the reality in your financial accounts. There are just, there's too much government interference in the business. “There are too many externalities that contribute to your success or to your failure.”
On Tech
“The high-tech business is another one of those that years ago, I'm talking about before.
Well, there was a time when the only people who had networks was a company called Novell. This is in the 80s, late 80s, early 90s. There was a company, I will not mention its name, but who came up with an incredible way to connect computers and make them all work.
It was a very novel thing and it was an IPO in New York and it went crazy. I think the IPO was at 10 and it went to 28 the same day that it opened. I looked at it and I said, this is a very wonderful business for the future, but it's a bit expensive, so I'm just going to keep it on the list.
Three months later, the shares were down at seven. What just so happens that while they were so excited about having discovered a new thing, some young fellow at MIT discovered a new way to connect computers. They literally put them out of business within three years.”
“This made a huge impact on me because, you look, in order to remain relevant in many of these fields, you have to constantly take money and put it back into making new gizmos. There's a lack of resiliency in this business. You can look forward 10 years and you don't know.
It could be triple the size or it could not be in business any longer. This does not interest me.”
Well, there was a time when the only people who had networks was a company called Novell. This is in the 80s, late 80s, early 90s. There was a company, I will not mention its name, but who came up with an incredible way to connect computers and make them all work.
It was a very novel thing and it was an IPO in New York and it went crazy. I think the IPO was at 10 and it went to 28 the same day that it opened. I looked at it and I said, this is a very wonderful business for the future, but it's a bit expensive, so I'm just going to keep it on the list.
Three months later, the shares were down at seven. What just so happens that while they were so excited about having discovered a new thing, some young fellow at MIT discovered a new way to connect computers. They literally put them out of business within three years.”
“This made a huge impact on me because, you look, in order to remain relevant in many of these fields, you have to constantly take money and put it back into making new gizmos. There's a lack of resiliency in this business. You can look forward 10 years and you don't know.
It could be triple the size or it could not be in business any longer. This does not interest me.”
On Bitcoin
“I don't know how it works. It's not something that I have given any thought to. I understand its price and money is going up every day.
And I understand in a few years, it's going to be like several hundred thousand dollars of Bitcoin, but I have no idea what it is. Any more that I'm interested in exotic African art or anything like that. It's just not something that I find suitable for my needs.”
And I understand in a few years, it's going to be like several hundred thousand dollars of Bitcoin, but I have no idea what it is. Any more that I'm interested in exotic African art or anything like that. It's just not something that I find suitable for my needs.”
The second podcast is with Tom Slater, a portfolio manager at Baillie Gifford. The first 20 minutes were particularly interesting. Tom shared a different approach to discussing stocks within the investment firms.
There is an issue with the traditional approach to stock selection. Typically, an analyst or PM has to persuade his colleagues to buy a stock. However, investors never have 100% conviction; there are things they like about a company, but there are also doubts. As a result, they overstate the positives and de-emphasise the negatives. Moreover, once the stock enters the portfolio, it is much harder to remain objective once negative developments unfold since we want to appear consistent, sticking to our original view.
Tom discussed a different investment process at Baillie Gifford to avoid these issues. In their firm, if an analyst/PM wants to buy a stock, it will most likely be bought, which removes the need to persuade your colleagues. Consequently, the discussion becomes much more transparent from the start. Even more important is that analysts pitch only the ideas with the highest conviction, knowing they will end up in the portfolio regardless of their effort to sound convincing.
In the first approach, the speaker usually gets defensive, trying to show how much work he has done, which takes the conversation in an entirely different direction.
I also liked Tom’s perspective on Value vs Growth investing:
There is an issue with the traditional approach to stock selection. Typically, an analyst or PM has to persuade his colleagues to buy a stock. However, investors never have 100% conviction; there are things they like about a company, but there are also doubts. As a result, they overstate the positives and de-emphasise the negatives. Moreover, once the stock enters the portfolio, it is much harder to remain objective once negative developments unfold since we want to appear consistent, sticking to our original view.
Tom discussed a different investment process at Baillie Gifford to avoid these issues. In their firm, if an analyst/PM wants to buy a stock, it will most likely be bought, which removes the need to persuade your colleagues. Consequently, the discussion becomes much more transparent from the start. Even more important is that analysts pitch only the ideas with the highest conviction, knowing they will end up in the portfolio regardless of their effort to sound convincing.
In the first approach, the speaker usually gets defensive, trying to show how much work he has done, which takes the conversation in an entirely different direction.
I also liked Tom’s perspective on Value vs Growth investing:
We’re all taught that stock market returns are normally distributed, and the outcome of stocks are normally distributed. But actually, if you extend the time horizon to 10 years, you get this log-normal distribution. You get these outliers.
And there's nothing then that says those outliers have to be growth stocks. And indeed, some are, some aren't. So, I don't see that it is a Growth versus Value thing.
It's a time horizon thing. If you identify attractive opportunities, underpriced opportunities, then they can pay off many, many, many times over a 10-year time frame.