Lessons of 2023

Update Week 2 2024

Let me once again express my best wishes in this first update of 2024. During the holiday period, there have been few noteworthy messages from our companies, which is why I also took a break for two weeks. A time to reflect on the past year and look ahead to the new year.

A new year, a fresh start, that's the idea. In investing, the returns are closed, and the counters start anew. In my opinion, it's somewhat artificial, and you should view an investment over its entire duration, but it's pointless to fight against it; those annual returns are what we as investors are judged on.

That's why it's always valuable to look back on the past year, and one of the most important things is to see the mistakes you've made and learn from them. This is a better use of energy than trying to predict what will happen in the year ahead. The macroeconomy cannot be controlled, and there are always unexpected events. In recent years, there have been plenty of such events, like the coronavirus pandemic, the war in Ukraine, rising inflation, and this year, the war in Israel.

Although it will be argued that you could have seen many of these things coming, the timing of them was still unpredictable. That's why I don't let macroeconomic matters influence my investment decisions. The time and energy wasted on them are better spent on monitoring, analyzing, and valuing companies, even if it doesn't lead to concrete investments. With each analysis, you learn something.

Mistakes and learned lessons

It may come across as a bit arrogant, but personally, this year I think the mistakes are quite minimal. The biggest mistake is something I didn't do, namely buying Meta - the company behind Facebook.

Although I looked at the company in 2022, after a conversation with Luc Kroeze, I got fixated on Mark Zuckerberg and his plans for the Metaverse. I thought it was such a waste of money, and in combination with the younger generation here at home, all of whom are ignoring Facebook and not using Instagram as often anymore, I didn't assess the company rationally.

From October 2022 to February 2023, Meta was just cheap enough to take that risk. As a result, I missed out on the stock of the year, even though I recognized its undervaluation. I wasn't open-minded enough.

I consider this a mistake. On the other hand, there was another company on which just as much profit was missed. I looked at Hotel Chocolat, a chain of upscale chocolate stores with their own plantation and a hotel on the plantation, hence the name, listed in England. In the end, I didn't buy because the liquidity of the stock was too low. However, at the end of last year, Mars made a bid for the company, 360% above the last market price. An opportunity that passed me by.

However, I don't consider that a mistake. Not only because, in my opinion, Mars overpaid, but mainly because, due to the limited liquidity, it was uninvestable. In short, it was unfortunate because, with a takeover bid, the exit would not have been a problem, but it wasn't a mistake.

The biggest lesson learned is patience. I can say that last year, I had a lot of doubts and conducted research. Not only on individual stocks but also in the niche I specialize in, namely smaller stocks, or Small- & midcaps. The question arose as to whether these are still investable.

When you see certain stocks rising strongly while the stocks in your portfolio aren't moving, it's healthy to question yourself and consider if you should do something different. Note that I don't mean you should change your strategy or chase one hype after another. But you should question whether small caps as an asset class are still suitable for investment and whether the stocks in your portfolio are the right choices. We have been in a market segment for a while now where the blows are landing.

This led to my next post on X (formerly Twitter), which Compounding Quality picked up.

Where are we today? 

We also enjoyed the year-end rally, which made the year not bad but also not great. This has also led me to decide that when starting Valuing Dutchman, the English version of my Dutch newsletter, I won't simply copy all the stocks in the selection, but reanalyze them one by one to see if I would still invest in them today or not. A clean slate for myself.

For the majority of our stocks, the belief was confirmed. There are some that I will part ways with, not based on valuation, but based on my fear of opportunity loss. More about this below.

In the past, from time to time I looked at the overall market condition through the so-called Buffett ratio, and I intend to do that more often again. This indicator is a ratio calculated by dividing the value of a country's stock market by its gross domestic product. This is, of course, not a perfect ratio, but it still provides us with some insight.

For the United States, we can see that 'the market' has become expensive again. We briefly saw a decrease, but that is no longer the case. Now, this is concentrated in a few stocks, with the 'Magnificent 7' (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia) leading the way, but not all companies are expensive. Small-caps in the United States are primarily cheap.

Looking at the United Kingdom, we see that the market there is relatively cheap, as well as in Belgium, Spain, and Sweden. Germany, France, and Switzerland are more fairly valued, while the Netherlands is on the expensive side, mainly due to ASML.

I think we can say that greed currently dominates the market, although you would think that two wars, threats in Taiwan, inflation, and the like should instill more fear.

However, it is clear that this is concentrated in certain parts of the market, where not all stocks are part of this greedy story. The popularity of passive investing in ETFs after these great years reinforces this, which leads me to conclude that the market is currently favorable for stock pickers. But what is expensive can become even more expensive, so when it will be our turn is unpredictable.

Our year in stocks

In 2023, we didn't make too many transactions. We bought some new stocks but also invested more in existing positions. I went a bit overboard with Sofina myself. I couldn't resist it below €200, and when it further dropped to €180 and €175, I went too heavy in on the stock, which I reduced in December, albeit a bit too early.

I considered labeling this as a mistake because I went against my own rules, especially since it involved money intended for renovations to our new house, which was needed in the short term. But when you see something like that as an investor, and you've been following the company for so long, that quick 20% gain was irresistible. However, I won't make a habit of such actions. Normally, I can't do that either because I don't keep that much money in an account.

Another stock I want to revisit is Euronav. This stock was part of our selection for many years. We bought and sold it occasionally, but in 2022, when the battle between the Saverys family and Frontline began, I exited. I didn't and still don't believe, in both stories.

The Saverys family is holding an investor day for Euronav today. It is said that they won the bidding war against Frontline, but in my opinion, it's at the expense of other Euronav shareholders. They sold Euronav's modern fleet to Frontline and are now using that money for their green fantasy CMB.Tech to sell it back to Euronav.

The valuation has been set at over $1 billion. Whether this is correct or not cannot be determined based on the valuation reports because so much information is missing due to competitive reasons. This makes it a farce. The fact that less than two years ago, the Euronav board of directors rejected the contribution of CMB.Tech at a valuation that was more than 30% lower, says enough in my opinion.

It seems that all other Euronav shareholders are now bearing the brunt of this bidding war. But, of course, they have the option to sell their shares to the Saverys family, who must launch a public offer. They will do everything to convince shareholders not to do so, but as far as I'm concerned, they could buy all my shares at that price if I still held any.

The year has been a real rollercoaster, with an initial rise followed by a drop, then a summer rally turning into a significant decline until November, only to end with a year-end rally.

Because the stock prices didn't recover strongly, the sales last year were relatively limited. We parted ways with Kernel because we had no other choice. From this, I learned that the regulation in Eastern Europe is not at the same level as in the West.

Additionally, I decided to discontinue the coverage of Burcon Nutrascience and Colruyt. With the former, it was a calculated gamble that unfortunately, like most gambles, resulted in a significant loss. Colruyt wasn't actually an investment, but I just wanted to keep following it because it was my very first stock. However, given the abundance of news articles, it was taking too much attention, and that's why I decided to stop following it.

The most significant sale was X-Fab. Although I still consider it a good company, I found it time to part ways at €9.81 with a substantial profit ranging from 34% to 228% (different entry points). There were too many opportunities elsewhere that offered greater potential. For the same reason, I sold Foot Locker with a 10% loss, including dividends.

Some of those opportunities were: