2023 Annual Letter

Almaty, Kazakhstan

The partnership returned 35.8% for the year ended December 31st, 2023. This year’s result has been mainly driven by KSPI and META, as well as WOSG toward the end of the year. I wrote last year that I hope to “fill” the holdings of the partnership within two to three years (i.e. be fully invested in the way I want to be). I end the year, however, with a sizable cash position of ~45% and few ideas I find attractive.

At year end there were only 2 “true” positions (KSPI and WOSG), one placeholder position (MONC), and a range of tracker positions and short-term treasury ETFs. The basic strategy remains the same – to be a winner, work with winners. All three managers (Mikhail Lomtadze, Brian Duffy, and Remo Ruffini) operate like owners, have a pristine managerial track record, and are focused on strengthening the competitive position of their respective organizations. WOSG’s Brian Duffy, approaching 70, is showing no signs of slowing down and has assembled a best-in-class team in the luxury watch retailing space. All three managers understand their own strengths and weaknesses well and have assembled competencies within their management teams accordingly. More importantly, these three execute – they get the job done. Although their management style, personality, and personal background may differ, all three have exceptional track records, especially when benchmarked against most of their peers. My hope is to find more of the same. 

Much of my time is spent assembling a “wishlist” of businesses I would like to own and management teams I would like to partner with. I attempt to understand what the rough future of the business will look like 3-4 years out and then work backward to get to a ballpark IRR for the name. In most cases I want to see a ~20% IRR based on realistic (not necessarily conservative) assumptions about the future of the business. I do not care if a 20% IRR at current price levels is essentially impossible. I will add the name to a spreadsheet that tracks IRRs and check on it once in a while. My wishlist currently has 7 names. I would be very comfortable betting 20%+ on some of these names at the right price, and I’m certain Mr. Market will present an opportunity to do so at some point.

The wishlist also serves as a good filtering mechanism. If a business or its management do not match up to the quality of the other names on the list, I just move on regardless of valuation.

None of the 3 names (KSPI, WOSG, MONC) hit the 20% hurdle at current prices. I, however, will prioritize business and management quality over absolute valuation levels. The bottom line is the rate of return, but I find that for lower quality businesses (and poor managers) the expectation and reality of returns often differ. There are quantitative reasons for this too – it is far easier to estimate future per share earning power, and the appropriate multiple to place on that earning power, for a competitively advantaged, predictable business with excellent management.

KSPI and WOSG, at my entry price, offered 20% IRRs and then some, and so far that has been my experience. MONC probably does 10-12% IRR from my cost base, but with a more predictable business and lower risk of permanent capital impairment over time. 

By far the most meaningful event of the year has been my internship at a Virginia-based fund, and more specifically the ability to work under Michael, an investor at said fund. I have come across some good investors over the (almost) 5 years since I started studying investing. Michael, however, stands in a league of his own as both an investor and a teacher. I have never come across someone so detail-oriented or so driven to win at this game. If there is a set of traits an analyst tries to replicate, Michael’s are probably the ones to choose. He has been gracious with his time and patient with my mistakes (there were many). He is a phenomenal teacher and a great person to be around – I have enormous admiration for him. Much of my process and style today has been formed by the 5 months I spent with Michael. Anyone who gets the opportunity to work with him in the future is extremely lucky.

My ability to look at stocks is going to be constrained going forward for personal reasons, but you can be sure that whatever free time I have is going to be spent scouring through the names on my now 1,100-long watchlist. With every name my process gets more efficient and I get a better idea of what works for me and what doesn’t. This year’s result was produced while I was MIA for ~5 months (doing the internship), so I am not exactly losing hope.

There was a ~3 week period during which I shifted toward thinking that a more diversified approach leaning into my batting average is the way to go. Moncler is the byproduct of that short period. After the 3 weeks I came to realize that there is little chance I can generate the returns I want to generate following that strategy. I simply operate much better waiting for a very fat pitch and betting big. Many of the names I would have owned under the diversified model (upon review) would have reduced my returns. Moreover, the three big bets (KSPI, WOSG, and META) have been winners and KSPI and META have been my top performers (I don’t want to remind myself of my ATD blunder). Betting less on them for the sake of diversification does not make sense. The 7 names on my wishlist are exactly my types of businesses – they really stand out among their peers, have tangible competitive advantages, and are operated by excellent management teams. I just need one of them to meaningfully sell down.

And anyway, my batting average is nothing to write home about…

One final realization – any ideology regarding investment style is wrong. There is no “right” investment strategy, only one that works and one that doesn't. If you can achieve good returns day trading then the right thing to do is day trade. Being a “value” purist or a “microcap” purist closes so many other strategies into which you might naturally evolve if you gave it the chance. Although people correctly emphasize process over outcome, a lackluster outcome over a sufficient period of time indicates a poor process, or one that needs adjustments. What one should do is figure out what works for them and then doggedly iterate on and refine that strategy. I have tried my hand at the cheap, crappy companies, and that has not worked for me. Likewise, every time I partnered with anything less than VERY good management the outcome was inconsistent and often poor. Betting big on exceptional managers in good businesses temporarily trading for deep discounts for nonstructural reasons, on the other hand, has worked beautifully so far (although I will only be able to tell for sure in a couple of years). I hope to try my hand at special sits at some point, but I’ll have to do some reading before.

That’s it for this year’s letter. I have not posted much lately (largely due to my internship) but might occasionally share some thoughts as I did earlier in the year. This blog is more for my own personal use with no concrete target audience. I really enjoy interacting with investors I meet, with Andrew Coye probably being the highlight. He’s a lot of fun to talk to and knows worlds more than I do. His Twitter is @andrewcoye. Go follow him and read his stuff on AER.

Also do yourself a favor and read some Drucker.