Hope you had a great start to the year. Talguard did well in 2023, beating the pessimism by Wall Street experts who thought it would be another negative year for the Markets. Talguard beat most indices from around the world as seen in the chart included in your personalized Year End Report. We crushed our competition, the Barclay Hedge Fund Index, which measures average returns of over 3,000 hedge funds around the world.
After a tumultuous 2022 for the Stock and Bond Markets, the vast majority of Wall Street thought 2023 would be a continuation downward for financial assets. In many ways that should have been the case. 2023 saw the continuation of the war in Ukraine and the start of another regional war in Israel. Interest rates rose to a multi-decade high. Inflation reached a peak of 9.0% in the United States, and it was over 10% in many other parts of the world.
Pessimism abounded on Wall Street, but we stayed the course at Talguard and were rewarded for it. Of course it was not a completely smooth ride. There was a sizeable decline in the Market from August until late October. We took advantage of that drop and allocated more capital into new investments right before Halloween, and we benefited from that.
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| Talguard technology stocks did well driven by the emergence of artificial intelligence, a timely investment in the tech media subsector, and continuation of software strength. |
What Went Up For Us In 2023?
Talguard was up due to strength in our Health Care and Technology stocks. Our Health Care investments went up due to our successful long term investment in Novo Nordisk, maker of both diabetes and obesity GLP-1 drugs and the consistency of our other stocks in this sector. This is against the back drop of the Health Care Industry coming under pressure from political rhetoric about cost and the current administration changing the rules to allow Medicare to negotiate drug prices.
Our technology stocks did well too driven by the emergence of artificial intelligence, a timely investment in the tech media subsector, and continuation of software strength. Corporations in all industries have been spending to upgrade their hardware for the next generation of technology. It appears we are at an inflection point for A.I. spending. However, upgrading chips and hardware is not a consistent activity. The chip industry has been historically very cyclical.
What Went Down For Us In 2023?
Consumer staples such as snacks and other packaged foods along with restaurant stocks decreased due to the rise in popularity of GLP-1 drugs that fight obesity. Consumer discretionary had its ups and downs as the Market worried about potential weakening of consumer spending. In reality, consumer spending has remained resilient.
The rise of GLP-1 obesity drugs also negatively affected niche industries such as gyms, fake meats, and medical device makers that treat obesity. Good thing we are not invested in these industries.
What’s Ahead?
2024 brings many of the same predictions similar to the start of 2023 by Wall Street Market experts. Many think a big downturn is ahead due to the two regional wars in Ukraine and Gaza/Israel, potential weakening of consumer spending, commercial real estate bubbles, and a contentious Presidential Election. My view is that the Market often surprises most people. Historically, an Election Year with a sitting President seeking re-election has been fairly positive for the Market. Note that there are generally some downturns during the summer and fall leading into the Presidential Election.
In some aspects, valuations for many companies appear high. In other aspects, it is hard to argue this is anywhere near the mania of the dot-com bubble of the late 1990s. Back then most tech company darlings were not generating positive cash flows. Now you have Market leaders generating enormous positive cash flows and some growing by a lot year over year.
The great news is that as a long term investor, I am more focused on the long term prospects of the companies we invest in. Thus, I am less concerned about short term volatility than about making sure we invest in quality companies at reasonable valuations for the long run.
Passing of Charlie Munger
The legendary investor Charlie Munger passed away at 99, just one month short of his 100th birthday. I learned a lot from Charlie and his partner Warren Buffett’s investing style and tailored it to my own. We both seek quality companies to invest in for the long term. However, they generally invest in #2 companies of industries, I tend to focus on #1 leaders of industries. I am also more nimble in the size of companies I can invest in. My children and I had the opportunity to meet Charlie several times, which I will forever be grateful for. Charlie had a practical approach to life centered on “reading a lot”, “not doing stupid things,” and “avoiding envy of others”. I completely agree with these philosophies. Rest in peace Charlie.
Conclusion
Now it is a new year but our fundamental bottom-up investment process remains the same. The key is to invest for the long run with quality companies that you buy for a good price, and to recognize when to divest when necessary. The rest will take care of itself. Stocks may get depressed because of high inflation in the short run, but in the long run stocks of quality companies are one of the best hedges against inflation. This is because quality companies can raise prices, retain their customers and grow over the long run.
We do not evaluate investments or the Market environment on a quarterly or one year basis. Our time horizon is 5+ years, ideally forever for our investments assuming they stay dominant in their position and nothing fundamental changes. That is the only way you can achieve the power and benefits of compounding returns.
Here’s to a happy 2024 and beyond!
Best,
Dan H. Chen
President
Talguard Investments LLC
531 Main Street
Suite 1165
El Segundo, CA 90245
Tel: (310) 923-2138
Email: dan@talguard.com
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