Below is a preview of our 2021 Investor Letter III (Year-End).
Click here to read the entire letter.
“Knowledge grows, but wisdom, though it can improve with years, does not progress with centuries. I cannot instruct Solomon.”
Will Durant, Fallen Leaves
“Trust me, Wilbur. People are very gullible. They’ll believe anything they see in print.”
E.B. White
“The possession of a strong will and a clever head makes some things very difficult to see.”
Alan Watts
Dear friends and valued investors,
CTG Fluxion returned +10.86 percent net for 2021 versus +12.35 percent for the 70/30 benchmark.[1] Twelve months ago, if the grand market deities had promised me a 10 plus percent return for 2021, after a +35 percent year in 2020, I’d probably have taken it with joy. However, I’d be lying if I said the last half of last year was easy. That desire to keep pace with those highflying indices and entities is potent and pervasive, even when one knows they’ll eventually come tumbling down. To be frank, I was fairly disappointed with how our portfolio performed relative to those benchmarks in the latter part of the year. In the first nine months of the year, the fund returned +12.4 percent versus +7.1 percent for the 70/30 benchmark, +10.9 percent for the MSCI All-World Index (ACWI), and +15.9 for the S&P 500. Then the last quarter left became a sell-fest, primarily of that which was already attractively- or under-valued. For most of the last half of 2021, what went up kept going up and what was expensive got more expensive—with the same rationale that those who are famous for being famous keep being famous. And vice versa—what had been muddling through just kept muddling through. That began to change in late November.
Positions & Holdings
I am quite excited at the moment about our current holdings and some of the opportunities brought about by recent declines.
First, Expedia is a new position added late last year at around $160 per share. The company has two main lines of business — traditional travel booking like hotels and flights and VRBO.com. Through the end of 2021, VRBO.com was outperforming AirBnB in terms of site activity, while Expedia traded at about half the valuation.
Our primary holdings largely remain the same. Amazon, Dropbox, Meta, and GoDaddy are all the “muddlers” I just referenced. Yet our calculation of value has only grown over the past year, making them ever more attractive holdings.
Finally, there is unique and burgeoning high conviction holding which we are currently adding to. I will avoid going into detail at the moment, but I look forward to giving a full debrief once we’re fully invested.
Contrast Dictates Emotion
In one of the final episodes of his ESPN docuseries, Tom Brady tells the story of “The Chinese Farmer”, a powerful parable illustrating the importance of keeping an even demeanor. The story, as originally told by Alan Watts, goes as follows:
Once upon a time there was a Chinese farmer whose horse ran away. That evening, all of his neighbors came around to commiserate. They said, “We are so sorry to hear your horse has run away. This is most unfortunate.” The farmer said, “Maybe.” The next day the horse came back bringing seven wild horses with it, and in the evening everybody came back and said, “Oh, isn’t that lucky. What a great turn of events. You now have eight horses!” The farmer again said, “Maybe.” The following day his son tried to break one of the horses, and while riding it, he was thrown and broke his leg. The neighbors then said, “Oh dear, that’s too bad,” and the farmer responded, “Maybe.” The next day the conscription officers came around to conscript people into the army, and they rejected his son because he had a broken leg. Again all the neighbors came around and said, “Isn’t that great!” Again, he said, “Maybe.” The whole process of nature is an integrated process of immense complexity, and it’s really impossible to tell whether anything that happens in it is good or bad — because you never know what will be the consequence of the misfortune; or, you never know what will be the consequences of good fortune.[i]
Little is good or bad. It just is—and it’s important to figure out “what is.” We have to deal with “what is” rather than what we wish was. Putting a label on it often makes the event more than it is and confuses how something feels for what it is and how to deal with it. We want to avoid pain when pain is where the lessons lie. (Here I do not refer to real life-or-death ordeals, rather personal and mental ‘going against the grain’ challenges applicable to investing.) The desire to have it good all the time is more than just unreasonable. It’s detrimental. That is, the desire to avoid necessary pain (or strain) sooner or later causes more pain than was ever avoided, whether one is aware of this or not.
In reality, how we perceive what we experience in one moment is dictated by how it contrasts with other recent experiences.
Investing ain’t easy. As Munger once said, “Anyone who thinks it’s easy is stupid.”
Market Environment
Oh, the storm and its fury broke today, Crushing hopes that we cherish so dear. Clouds and storms will in time pass away. The sun again will shine bright and clear.
Keep On the Sunny Side, The Carter Family
Markets have now had one of the roughest beginnings to a calendar year on record. The down swing has been swift and, in many cases, violent. For instance, Netflix was down -34 percent for the year through Friday, January 21st. Through the same period, Nvidia, Shopify, Sea Ltd, Moderna, Square, Rivian Automotive, Snap, Datadog, Coinbase, Robolox, and DoorDash were all down more than -20 percent for the year.
YTD through 21-Jan-2022, the S&P 500 ETF (SPY) was down -8.03 percent, the Nasdaq (QQQ) down -11.77 percent and the Russell 2000 ETF (IWM) lower by -11.66 percent. Worse, 20-year government treasuries and corporate bonds provided no relief, declining by -3.08 and -2.32 percent, respectively. A portfolio of all five ETFs weighted 70% to equities and 30% to bonds would’ve generated -8.15 percent in the first three weeks of the year.
In early December of last year (2021) I sent the following message to one of our most successful and sophisticated investors:
“...bubble-like behavior expanded with broader participation among less experienced investors [as prices] had been driven up to even higher levels. Much of what has fallen will never come back. For instance, AMC has no prospect to reach its current valuation. Lots of non-profitable, non-FCF generative, but high top-line growth stocks will also eventually falter for good (or for 5-10 years). After the dot com collapse names like Cisco still haven’t recovered from their January 2000 highs. Even Amazon took about 7 years to get back to even (Jan. 2000 to mid-2007). We do not own these type names. I will be wrong about some of our holdings, but I’ll also go to my grave avoiding 1929- and 1999-like valuations...
Let me sound like a broken record again by saying price volatility is the expectation, the norm—not the exception. The pain it causes is fleeting if our underwriting—the underlying assessment of the investments—is generally correct (i.e., we can still be wrong on some of the holdings). The problem is one cannot say if transient is a few months or a few years. Still, the ideal point to get to is one where we can almost ignore, after double and triple checking our analysis, the market’s panicky swings.”