51吃瓜

Last year brought me back to a core Stoic principle that I hold close to my heart: the dichotomy of control. Here鈥檚 the gist: Some things are within our power 鈥� our values, our character, our decisions 鈥� and some aren鈥檛 鈥� like your brother-in-law鈥檚 random (and possibly dumb) comment, your spouse鈥檚 mood or the fact that every traffic light turns red right as you pull up.

In investing, it鈥檚 the same. We can control:

• The quality of our research 鈥� being logical and thorough in our research
• Our decisions and discipline 鈥� systematically following our research
• Our reactions 鈥� how we react to the news and external environmental pressure (I will discuss this at the end of the letter)

The market can price our stocks however it pleases on a month-to-month 鈥� or even year-to-year 鈥� basis. That鈥檚 the part we can鈥檛 control. We have to remember that these market prices are merely opinions, not final verdicts. The Stoics teach us to focus our energy on what we can influence (our process) and accept what we can鈥檛 (the market鈥檚 whims).

This probably sounds straightforward, but there鈥檚 a twist that makes it harder for you, the client, to see how this all plays out in real time. You can easily check the portfolio鈥檚 value 鈥� my decisions, not so much. In theory, I could make subpar investments and hide behind fancy Stoic talk.

That鈥檚 exactly the why of these very detailed letters: to show you our thinking, walk you through our individual decisions. I write, you read 鈥� that鈥檚 our agreement. You鈥檙e the judge of whether my process makes sense. But I can鈥檛 do that part for you.

2024

Our final returns in 2024 ranged from 鈥渙kay鈥� to 鈥渕ediocre,鈥� depending on the vintage of the portfolio. This isn鈥檛 the most exciting news to share, but it鈥檚 a perfect example of how Stoicism applies. Early in the year, we were beating the market 鈥� despite the market鈥檚 gains being driven mostly by a few large-cap tech names. Then, in late June, it was as if someone flipped a switch. Even though nothing in our holdings had fundamentally changed, the stocks in our portfolio started giving back earlier gains month after month while the market surged ahead.

A couple of our companies hit temporary snags, which shaved a point or two off our returns, but others had some good news. In the big picture, it was just the market鈥檚 focus shifting. My IQ didn鈥檛 drop in the second half of the year (at least, I hope not!). The short-term sentiment did.

This is what Stoicism looks like in practice. We stay grounded in the things we can do 鈥� solid research, thoughtful decisions, transparent communication 鈥� and accept that we don鈥檛 control how the market prices those decisions in the short run. When I say 鈥渁ccept,鈥� I don鈥檛 mean 鈥渋gnore;鈥� I mean we don鈥檛 get caught up in the daily drama of stock prices. We keep refining our process, making the best decisions we can and communicating openly to you.

I鈥檝e been doing this for more than a quarter century, and I鈥檓 certain this won鈥檛 be the last time the market teaches us to embrace Stoicism and reminds us what we can and cannot control.

What can you expect going forward?

As a firm, we鈥檙e obsessed with the Japanese principle of kaizen 鈥� constant, slow improvement. Our operations folks are fanatical about improving internal processes and our service to you.

I love investing. I鈥檓 obsessed with getting better at it. There are many reasons for that: It鈥檚 one of my core identities. I want to feel good about myself, and helping you achieve your goals while moderating the volatility of your blood pressure gives me great satisfaction. I have in the game 鈥� Investment Management Associates, Inc. manages the bulk of my, my family鈥檚 and our employees鈥� liquid net worth.

Thus, kaizen are we.

Our decision-making and investment process have improved over time. We鈥檝e made several important improvements 鈥� we鈥檝e enhanced our focus on quality, with our latest emphasis on the management quality of the companies we research. This is our analyst Max鈥檚 obsession. I鈥檓 obsessed with it, too, but next to Max鈥檚 fixation on it, mine is just a 鈥渉obby.鈥�

We鈥檝e expanded the ponds where we fish for stocks. As I wrote in my late-December letter, while the US pond has lots of great fish, they鈥檝e become insanely expensive and thus offer low future returns. Though we still own plenty of American fish, we鈥檝e expanded to foreign ponds where we can find wonderful fish at a fraction of the cost. This international fishing actually hurt our returns in 2024, as the market remained obsessed with 鈥渕ade in the USA鈥� fish.

We鈥檙e in an environment where market participants only care about quality and growth and are indifferent to the price paid. Valuations won鈥檛 matter until they do, and then years of gains vanish in days or weeks.

We鈥檒l discuss the market next, but let me conclude this section with one more thought: I smile when Apple says, 鈥淭his is our best iPhone yet.鈥� You鈥檇 expect a company to keep making a better product if they want people to keep buying their stuff. You can鈥檛 see this in our numbers for 2024, but I think we鈥檙e making a better product.

Clients asked, what can you expect going forward?

When buying new stocks, we target 15鈥�20% annualized returns based on middle-of-the-road scenarios, not optimistic ones. We鈥檒l have upside surprises to conservative fundamental estimates 鈥� like McKesson鈥檚 exceeding expectations. But we鈥檒l also have disappointments. We maintain models for every company, updating them when we learn new information to stay grounded in fundamentals: revenues, margins, cash flows and earnings.

Based on these models, we project fair value four to five years out to calculate expected annual rate of return (including dividends) for each stock we own. Currently, our top 20 holdings show about a 16% expected annual rate of return, with our top ten stocks, which have higher weight, around an 18% annual rate of return.

Remember, these are our best estimates, not guarantees. Fundamentally, our portfolio did absolutely fine in 2024, as earnings growth outpaced our returns.

The market

It seems like there are several tiers in the US market. There are ten wonderful, awesome, unbelievable, incredible (I am running out of adjectives) US tech companies, which represent about 40% of the value of the S&P 500, and then there are 490 shmucks and everything else.

A lot of these shmucks are not cheap, but most of the returns in 2024 came from the ten stocks with great adjectives. I wrote about them and , so I won鈥檛 waste your time reviewing.

Let me just touch on one of those infinite-adjective companies 鈥� Apple 鈥� which will also shed light on its brethren. Apple is very close to me, literally 鈥� I typed this on a MacBook Air.

Since the launch of iPhone and iPad, Apple has always seemed one product away from creating another iPhone-like success. But other than services, the company hasn鈥檛 released a major successful product category since AirPods and the Apple Watch, almost a decade ago. The Apple Car is a no-go.

Then there鈥檚 Vision Pro. As much as I admired the commercials for it and the early reviews 鈥� and I buy almost everything Apple makes 鈥� my Vision Pro went back to the store after two weeks of giant headaches. Aside from the confusing interface, it literally gave me migraines. So far, it鈥檚 been a major market , too (though there鈥檚 a lot of great technology for Apple to use in future products).

Apple is late to the AI party. Its AI integration in the iPhone is a joke. Siri鈥檚 IQ has remained at a well-trained cat level for years, while its competitors are approaching human intelligence. (I use the ChatGPT app instead of Siri.) Apple will solve a lot of these problems. It has cash to buy its way out of many of them. It has a strong ecosystem and loyal customers (though this loyalty isn鈥檛 infinite).

Maybe the market sees Apple as an AI play, but AI is becoming crowded with companies that didn鈥檛 even exist a decade ago. And for Apple, AI mostly means that people will keep upgrading their iPhones 鈥� which they鈥檙e doing anyway.

Apple鈥檚 revenues haven鈥檛 increased in three years, nor have its earnings, which have steadily hung around $6 per share. This is why I鈥檓 writing 鈥� nothing in January 2024, or since, indicated Apple鈥檚 valuation should go up.

If I told you in early 2024 that you could buy Apple stock at 30 times earnings, a reasonable person would have said, 鈥渘o, thank you.鈥� That’s what Warren Buffett did: He a good chunk of Berkshire Hathaway鈥檚 Apple holdings. But if you had followed this reasoning, you would have missed out on a 33% return. Today, you can buy this wonderful Apple stock for 鈥渙nly鈥� 40 times earnings.

If over the next ten years Apple鈥檚 earnings double (a big if), and it trades at 20 times earnings in 2035 (a generous assumption), current investors will make no money if they own Apple stock today. This describes 2024 and the bulk of the market.

Let me highlight one of the 鈥渟hmucks鈥� as an example of the rest of the market.

Walmart 鈥� another wonderful 鈥渕ade in America鈥� company. Its revenues basically grow with GDP, maybe slightly faster at times. It has already conquered the US retail market. It has already failed and succeeded in international markets 鈥� that might have been a story of optimism three decades ago. Its international growth story was spotty. But that chapter is behind the company. It is now at 2鈥�3% real earnings growth plus inflation.

Its earnings were around $1.60鈥�1.90 for a few years. In 2024, you could have owned this American icon for 鈥渙nly鈥� $52. You would have paid 27 times earnings in the best case or 32 times in the worst. Walmart is a retailer fighting with Amazon for consumers鈥� wallets that have been shrunk by higher interest rates and inflation.

Again, a great company, but severely overvalued. Probably a decade of no or little return ahead of it, or even worse, if you ask me.

That is what I would have told you in January 2024, and I would have been wrong! Today, you can pick up Walmart shares for LVMH-like prices of $90 at 鈥渙nly鈥� 45 times earnings.

If you鈥檇 listened to my sound but wrong advice in 2024, you would have left 73% on the table. This market is filled with schmucky stocks like this. It鈥檚 a good thing we don鈥檛 own the market.

A brief (and smelly) case study

You want to hear how 鈥渘ot rational鈥� the market is? We鈥檙e all adults here, so I try hard not to use childish vocabulary, but this market stretches my ability.

One of the best-performing investments in 2024 鈥� of course, we didn鈥檛 own it 鈥� was a digital cryptocurrency called . If you wanted to buy its full (airy) supply, it would only cost you a billion dollars. Yes, the value of Fartcoin is a billion American-with-a-capital-B dollars. A gift!

Its utility is unknown (it has no earnings or use) other than being a vehicle for great fools selling to even greater fools, with everyone supposedly becoming rich in the process. (This is not how wealth creation works.)

I didn鈥檛 subject you to hearing about this juvenile nonsense for nothing, because Fartcoin鈥檚 slogan perfectly describes today鈥檚 market: 鈥淗ot air goes up.鈥�

Physics was not something I excelled at, but I know this much: At some point, the holders of this magic coin (and the rest of the airy market) will discover that hot air doesn鈥檛 stay hot forever. When its temperature drops (even just relative to its recent high), it goes down 鈥� and then goes down fast.

Here鈥檚 the irony: If my money manager had bought Apple, Walmart or especially Fartcoin, I would have questioned his investment process, because the risk reward of these decisions made no sense. But this is what worked in 2024.

Our message for 2025 and beyond

Our message to you is as follows. If 2025 is going to be like 2024, I鈥檒l just send you this piece in January 2026. In the meantime, we are going to continue to buy high-quality companies, run by awesome (shareholder-friendly) management, and we are going to buy them at a significant margin of safety. This strategy should work; we just don鈥檛 know when the air cools.

The market may be reaching crazy valuations and doing crazy things (that is what markets often do). We are playing a very different game 鈥� the only game we know how to play. Our goal is to grow and preserve your wealth.

One thing we can control is how we react to the market. So, we鈥檙e going to keep our heads down and keep doing what didn鈥檛 work in 2024 鈥� until it does work. Yes, that may mean sticking to unpopular decisions, especially when things like 鈥淔artcoin鈥� are suddenly worth a billion dollars and already-overvalued stocks have surged another 70%. It might not look brilliant at the moment, but it鈥檚 the only rational path.

Remember: Rational investing doesn鈥檛 always pay every single year. That鈥檚 both the feature and the bug of the stock market. For those currently enjoying big gains, I鈥檇 point you to Mark Twain鈥檚 advice: 鈥淲henever you find yourself on the side of the majority, it is time to pause and reflect.鈥�

Not too long ago, when the market was tanking, our portfolios were headed in the opposite direction: up. I told you back then to bottle that 鈥淚鈥檓 a genius鈥� feeling, because eventually I鈥檇 look less than smart again. Well, that time has arrived. Let鈥檚 uncork that bottle and remind ourselves that just because it isn鈥檛 working now doesn鈥檛 mean it won鈥檛 work later. In the long run, hot air or cold air, none of those things matter. All that matters is intrinsic value 鈥� what companies are truly worth. That is what we focus on and will continue to focus on.

The question of AI

A few clients asked if we鈥檙e concerned about AI.

As one long-term client, who has become a close friend, proudly (and appropriately) described me to his acquaintance: 鈥淢y money manager is a paranoid Russian Jew.鈥� Paranoid I am, but also excited. We鈥檝e already integrated AI into our investment process. Artificial Intelligence is a terrific tool that allows us to dig deeper and wider, but it is not a replacement for human intelligence.

AI is definitely going to change the world. We鈥檙e learning as much as we can about it and assessing its likely impact on our portfolio, both good and bad.

A few months ago, my daughter Hannah, a freshman at the University of Denver, participated in a mock version of an AI science fair. Her freshman class was divided into a hundred groups of four, and they had to create a product using the latest sensor technology and AI. The top 15 groups presented their products at the science fair, and then six finalists presented their ideas. Hannah鈥檚 team was in the top six 鈥� but that is not why I am writing this.

I was blown away by what AI and sensors will be able to do. To make sure that I鈥檓 not caught flat-footed by AI, I鈥檓 going to the Consumer Electronics Show in Las Vegas 鈥� that鈥檚 not exactly my favorite place in the US, but I am really excited about what I鈥檒l learn.

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The views expressed in this article are the author鈥檚 own and do not necessarily reflect 51吃瓜鈥檚 editorial聽policy.