November Investment Update

Dear investors and well-wishers,

The fund declined 4% in October. New positions in Crocs and ASML performed well, while much of the growth space remained weak. Companies like Shopify (-86%), Spotify (-81%), Atlassian (-75%), Salesforce (-55%), Amazon (-54%), and Google pushing to new lows, though there was some relief in recent weeks as inflation finally surprised to the downside.

Crocs share price. Profitable small caps have been amongst the first of the companies down 75-85% to recover. 


There was an important shift in market dynamics earlier this month, with US CPI data showing inflation has decisively rolled over in the United States. Transportation, medical care, apparel and household supplies are now in deflation on a month-on-month basis.  Inflation has been the main price driver this year, and peaks in inflation marked turning points in prior inflationary bear markets, like 1973-1974, so all market participants are watching this closely.

The largest remaining positive contributor is shelter, in green above. However we know that this too is currently falling, which means most of the major components are currently in deflation.

This is in line with what we’d been observing for months – falling prices across lumber, metals, energy, cars, shipping, and now housing.

US PPI confirmed the signal and there were signs of deflation in Germany too, at least on a month-on-month basis.

The market was largely positioned for inflation to continue to surprise to the upside, forcing the Fed to hike into a recession. But the growing body of evidence that prices are actually falling could spark a sustained regime shift in global markets.

Our companies have continued to grow over the better part of two years while selling off significantly. A peak in yields would likely mark the point at which multiple compression ends or even reverses, and our stocks’ performance matches the growth in fundamentals.

A key miscalculation this year was thinking the multiple compression had ended in February / March, only for multiples to halve again over the following three months as the Ukrainian war sent prices spiralling out of control.

Since June, the fund has largely moved sideways, while our portfolio companies have continued to grow. Sectors like software pushed to new lows, while life sciences and profitable companies buying back shares have seen some recovery.

This has been a spectacular sell-off. I wasn’t surprised to see companies drop 40-50%, but watching market leaders halve again to multi-year lows certainly took us off guard.

Now much of the investment community seems to have cast tech companies as ponzi schemes (some truth in some instances) and positioned for an extended inflationary bear market and recession. If inflation has peaked however, and the Fed no longer needs to induce a recession, then the rally over coming years will be on a similar scale as the crash. Which of course is usually what happens after large bear markets, with the 1970s and 1980s triggering extended rallies.

Traders have been buying protection at levels in line with 2002 and 2009 lows. 

There have been multiple false starts this year with yields falling, only to push to new highs. This time, rather than speculation on a Fed ‘pivot’, there is strong evidence from all parts of the economy that prices are falling.


Disney had a change of leadership with former CEO Bob Iger returning in a coup that will net him at least another $45 million.

Iger largely set Disney’s current strategy, but under exiting CEO Bob Chapek, streaming performed far worse than expected, or rather user growth was higher, but losses blew out. In the last quarter streaming cost $1.5 billion out of $3 billion quarterly operating income (excluding streaming), and streaming’s breakeven has been pushed out to 2024.

We were bullish on the long term prospects of Disney gaining hundreds of millions of direct subscribers paying monthly into Disney’s accounts, but it’s become increasingly clear that Disney would have done better in the short term by simply selling the rights to their content and letting the other streamers fight it out for subscribers.

There are many other strings to Disney’s bow – notably highly profitable theme parks. It seems strange to see Disney trade around COVID lows when all its parks were shut down, and looking further back, at 2014/2015 levels. Presumably the first item on Iger’s agenda will be reducing the cost base, so we are holding for now.

Disney is not alone – there are now a host of companies trading below their COVID lows. Given many of these companies are several times larger than they were two years ago, this state of affairs is unlikely to last long.

Disney traded back to where it was in 2014/2015, and at similar levels to when all its parks were shut down in the epidemic. 

Our largest thematic is semiconductors. We’ve added ASML (currently our second largest position at 8%), which is the only global manufacturer of the machines that print the highest quality chips, and Qualcomm, which makes Snapdragon systems-on-a-chip for the highest end Android devices. If you’ve used an M1 or M2 laptop, you’ll know how blazingly fast and long-living the latest specialized chip designs are. Think of how much faster your mobile phone feels than a typical PC – we suspect the industry is going to move rapidly in this direction. We have considered Taiwan Semiconductor, which is the manufacturer of choice for companies like Apple with the most advanced designs. But spurred on by Government subsidies in Japan, the United States and Europe, Taiwan Semiconductor is increasingly building plants in less contentious regions.

And even while consumers cut back on device spending, auto and industrial demand remains particularly strong. We own NVDA and AMD, which are prime beneficiaries of the immense demand for artificial intelligence and increasingly autonomous driving, as the semiconductor content of cars (and homes and factories) is increasing rapidly every year. It’s helpful with liquidity now at multi-decade lows that these companies are all buying back shares too.

This has obviously been a very tough year for us. Not only was this perhaps the worst time in perhaps wenty years to be invested in technology, but our approach of adding to stocks that sold off while posting improving fundamentals – a winning strategy under most conditions – was punished severely, as the sell-off stretched out over almost two years.

We’ve seen many companies recover from drawdowns like these in recent times. There were a host of companies that advanced several-fold after the sell-offs in 2020, but also December 2018, 2016, 2011, 2009 and ofcourse 2002, which marked the beginning of one of the most extraordinary periods of returns to long term technology investors in history. I have a lot more sympathy for those that saw the potential in companies like Amazon, only to see them lose basically their entire value (95%) over two and a half long years, before advancing several hundred times. Talking about Amazon is something of a cliche, but it wasn’t the only company.

Adobe, Priceline, eBay, NVDA, AMD, ASML, Autodesk, Salesforce, and a host of other familiar companies also handed long-term investors disastrous returns from 2001-2002, only to be counted amongst the best performers in the years and decades after, not only regaining their prior highs but advancing significantly beyond. One thing they all had in common was that they didn’t run out of money, and they all managed to grow in the aftermath of the sell-off.

For now, growth remains in the institutional and retail doghouse, right when the moment for investment is more attractive than at any point in ten years. And there’s no doubt the situation is more serious for tech companies than any time in the last decade, particularly any company planning on raising outside finance.

To make matters worse, executives of some companies have responded to falling share prices by doubling or tripling stock compensation, guaranteeing dilution at the worst possible time and sucking capital out of an already liquidity strained environment. Insiders, having just seen their prior holdings marked down severely, are invariably selling stock as fast as they can.

On the other hand, there are companies delivering record results that have been marked down by 65-75%. And even the largest companies are announcing significant lay-offs and cost cuts across the board, the benefit of which will be seen over the next six to twelve months. This year, some of the worst stocks to own have been fast-growing, founder-led companies executing long term business plans. These were the best performing companies in the years leading up to this crash, and will likely be the best performing companies after too.

A year ago every company was priced to succeed, even in situations where there were multiple competitors. Now in the growth space, companies are priced as though they will be the same size in several years time and (in many cases) only worth the cash on their balance sheet. This is just as extreme. We have always been bullish on the prospects of fast-growing, game-changing companies delivering serious revenue and profit growth. Now inflation is decisively rolling over, tech stocks have been bouncing along their lows for six months, and some the best companies on the planet are renewing their focus on cost discipline, right as the entire funds management industry has left growth stocks for dead. Needless to say, this crash has already cut far deeper and longer than I expected. But every quarter these companies report improved fundamentals and record results, the spring is winding for an eventual recovery.
Best regards




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