2023 Year End Letter
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."
- Charlie Munger
The Portfolio Performance
The portfolio is UP +27.32% to close out 2023
The S&P 500 is UP +24.23% to close out 2023
ENTER YOUR NAME & EMAIL ADDRESS TO SUBSCRIBE
2023 Annual Letter
Happy New Year. I hope everyone had a prosperous 2023 and is looking forward to 2024. I think 2024 is going to be a year of surprises, both good and bad.
There is so much I want to talk about in this year’s annual letter because I think every one of these issues will impact how the Stay Invested Portfolio invests in 2024. Instead, I’m going to give you the highlights of what I’m thinking about as I make investment decisions in the new year. I could write several pages on any one of the issues below.
But what’s the point?
Almost every issue below is worthy of serious concern, but none of these issues are within our individual control. Knowing these risks exist is just a matter of being aware. Being aware doesn’t mean we have to be afraid. Being aware doesn’t mean we change our strategy. Interest rates may change the companies I invest in, but rates won’t change the way I select companies that have the growth potential this portfolio seeks.
I think I was too conservative in 2023. I allowed macro issues to play too big of a role in the portfolio. The result was a good return of +27.32%, which outperformed the S&P 500 by only 3%. Keep in mind that the long-term average for the S&P 500 is around 9%, so Stay Invested beat the average by a wide margin. I think I’ll be looking to consolidate more in 2024 and invest more in companies that will benefit from declining interest rates, shortages, and demand for new technology. Housing, AI, electrification, healthcare, semiconductors, and EVs are all places where I’d like to invest more to grow this portfolio for my subscribers. As interest rates decline, smaller companies with aggressive growth plans should outperform.
We could see more IPOs in 2024. There are 1500+ unicorn companies that have not yet gone public. I expect more mergers and acquisitions, especially in biotech, healthcare, and communications. The battle for leadership in AI and a better understanding of which companies will benefit the most from the applications of AI should develop more clarity. When I look at other industries, rarely do I find that the invention of a new technology benefited the creator. When refrigeration was invented, the biggest beneficiaries were restaurants, hospitals, grocery stores, and consumers. All the users of refrigeration benefited more than the companies that made refrigerators. AI could unfold in a similar way, which means that our focus on Microsoft, Nvidia, OpenAI, and others may be misplaced. Looking downstream, thousands of smaller companies could see significant growth from the application of AI.
2024 could be a transition year for communications companies, with 2025 being the big year for deals. Lower rates are part of the reason for more acquisitions, but the failures of Lina Khan at the FTC and Gary Gensler at the SEC have emboldened CEOs to start shopping for acquisitions again. CEOs are willing to take their chances in court with these two agencies.
Here is my Bearish wall of worry and some Bullish optimism.
Bearish Risks
50% of all humanity will vote in a consequential election in 2024 as several countries have important elections.
The war in Ukraine
Russia possibly advancing on other European countries
Will China possibly take control of Taiwan, politically or by force?
North Korea is ramping up its military.
US Airforce reopening a WWII air base on Tinian Island in Northern Mariana Islands
Attacks in the Red Sea and blocking Suez Canal
Shipping costs escalating due to terrosit attacks
Politically divided America
Uncertain Presidential election year
Restructuring of the global order
Goldman Sachs Group, Morgan Stanley, and UBS Group are concerned about the market’s prospects next year.
Bullish Thesis
No recession
Rise of India’s economy
Japan doing exceptionally well
$4 to $6 trillion in cash sitting on the sidelines
Hedge funds and private equity are sitting on record cash levels
Job market is tight but getting softer, that's good for interest rates
Artificial intelligence (AI) may see a potential boost in productivity, with governments incentivizing certain industries like financials, airlines, and healthcare.
Governments around the globe are also incentivizing investments in important areas like national security, the energy transition, semiconductors, infrastructure, and supply chains.
This year, just seven companies provided most of the returns for the S&P 500 and the NASDAQ. Known as the Magnificent Seven, these stocks, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, makeup about 30% of the S&P 500. We could see more movement in the remaining 493 companies next year. Midcaps and small-caps could outperform large-cap stocks.
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, has joined Bank of America’s Savita Subramanian in adopting 5,000 as her year-end target for 2024.
Tom Lee at Fundstrat thinks the S&P 500 could pull back to 4400-4500 in February or March but see 5200 by year-end.
Macro Outlook
Americans plan to invest in 2024. About half (51%) of Americans say they plan to invest outside of retirement accounts in 2024, while 60% say they'll invest in tax-advantaged investments.
The economic outlook is mixed. 62% of Americans are optimistic about their household's income growth, while 59% are optimistic about the job market. Half (50%) of Americans are optimistic about the stock market, but only 46% are optimistic about the real estate market. Only 37% are optimistic about inflation coming down. This last statistic is interesting since inflation is teetering on deflation.
There's a gender gap in investing comfort. While 58% of men say they're comfortable managing stock investments, just 41% of women say the same. Similar gaps exist for retirement planning, real estate investing and cryptocurrency.
Recession Watch continues to stoke fear
JPMorgan: “The recession that everyone expected in 2023 never materialized. Looking into 2024, our strategists now expect that while the U.S. economy is likely to slow, it should avoid recession.”
JPMorgan: “clients have more than doubled their allocation to cash in investment accounts since 2021.” JPM hasn’t been recommending this strategy.
A shrinking gap between job openings and unemployed workers in the U.S. – as well as a cooldown in U.S. wage growth to less than 5% from a peak of over 7%, suggests that the Federal Reserve is making progress in its fight to reduce inflation.
The Fed could start to cut interest rates sometime in the second half of 2024. If the rate cuts come in response to normalized inflation rather than a recession, the cutting cycle will likely be slower than during the early 2000s, the Great Financial Crisis (GFC), and the COVID-19 pandemic.
The Bipartisan Infrastructure Bill, CHIPS Act, and Inflation Reduction Act have contributed to an unprecedented surge in manufacturing construction over the past two years.
Although cash has a place in every investor’s plan and looks even more attractive today, strategists expect cash to underperform most asset classes in 2024.
Niladri Mukherjee, Chief Investment Officer for TIAA Wealth Management: “Next year, investors can expect declining inflation, reasonable economic growth, and potentially, interest rate cuts by the Federal Reserve.”
Inflation
2023 deflation
Gas, oil, food, ag commodities, cars, housing
2024 deflation
More of the same, possible acceleration of deflation
The greater risk is in deflation.
Following interest rate hikes by central banks around the world, global inflation has moderated from its peak of close to 10% in the summer of 2022 to a current pace of less than 5%. Although geopolitics and energy prices pose a risk, strategists see more gravity weighing down inflation than buoyancy pushing it up.
The Federal Reserve
Holding rates of 5.25-5.50% is not sustainable or necessary.
Fed pivoted at the last meeting, signaling possible rate cuts in 2024.
Lower rates will advantage growth investments, small-cap, mid-cap, and unprofitable companies.
Watch for a return to wage inflation, more business starts, demand for employees, used car prices, home prices, and new immigration policy. All of these could trigger the Fed to keep rates higher for longer or raise again.
I look forward to another year of navigating the markets with all my subscribers. I hope you all will engage in conversations in the comments area of the blog. Feel free to keep emailing me with your ideas, thoughts, concerns, and questions.
"Markets don't go to zero; portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
Stay Invested,
Clay Baker
ENTER YOUR NAME & EMAIL ADDRESS TO SUBSCRIBE
Clay's Rules
Rule #1: Don't lose money
Rule #3: Portfolios go to zero, markets don't; Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your homework.
RULE #10: Don't expect a company's stock to perform according to your timeline; be patient.
Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.
Rule #12: It's hard to be incrediblly intelligent. Not being stupid is pretty easy.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
None mentioned
I am invested short in these securities mentioned in this post:
None mentioned
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or be interpreted as providing a personal recommendation. This and all articles on this website are provided for entertainment purposes only. Investing involves risk and risk of loss of part or all of your capital. Invest wisely, make your own decisions, seek advice from multiple sources.
