Holiday Reflections: 9 Things I Got Wrong This Year

What I got wrong in 2023 and improvements I will make for 2024.

Summary

• Looking back at my mistakes from this year.

• Insufficient curiosity toward new developments such as GLP-1 drugs.

• Overreliance on historical datasets for forecasting future results and misjudging how far central banks could raise rates.

• Macroeconomic forecasting, holding cash, and communicating about the portfolio outlook.

Merry Christmas and happy holidays to everyone! It'd be easy to write a self-congratulatory post; the aggressive portfolio is up 23% for the year and several of our holdings hit new 52-week highs last week. But there's plenty of time for talking about winners another day. With the passing of the year, it's time for some introspection.

Ultimately, in rereading my work this year, it's apparent that 2023 was the first year where my writing was no better than it was in the prior year. I take pride in my writing and seek constant self-improvement, and I did not reach my objectives this year.

Furthermore, at the root of it, writing is a tangible output of the thinking and research process. I stagnated in these areas in 2023. I've spent a long time reflecting on my process. Here are nine of the biggest things I did wrong in 2023 and how I will improve on my investment process and the resulting investment ideas in 2024.

Playing Constant Defense - Since March 2020, most of my day-to-day experience has been that of a firefighter constantly reacting to the latest inferno threatening to burn up some of my properties. From my view, the market has been a series of constant rolling crises.

I have an economics degree and have long viewed financial markets as a way for investors to earn tremendous returns enforcing Adam Smith's invisible hand and the creative destruction that is capitalism.

Since COVID, though, I have gradually lost that bigger picture focus. Instead of being the detached capital allocator that watches the world impartially, investing has become an increasingly dour series of crisis responses. COVID, inflation, Russia war, bank failures, and so on. My attention drifted from attacking new opportunities vigorously to merely enduring the latest catastrophe that was coming over the horizon.

Lack Of Imagination/Wonder - I was initially drawn to investing because it gives us a chance to earn large sums of money by studying the world and making rational decisions about it. In a world run by emotions, herds, misinformation and so on, the unflappable capital allocator dominates. Investing is the world's best strategy game. Learn the rules, study the tactics, and observe how your fellow players are likely to act. It's all there, and we earn a fortune when we outsmart the competition.

We get paid to learn about the world and apply this knowledge to the world's greatest companies. Having a childlike passion for discovering new things allows us to do well in our career. How cool is that! And yet I allowed investing to turn into drudgery by the end of this year.

A Specific Example: GLP-1 Drugs - I sent around my draft for my piece on the GLP-1/weight loss drugs to several trusted friends in October and they said it sounded bitter and close-minded. Which was fair and true. 

It comes from this crisis mentality. I initially saw GLP-1 as yet another in the long string of recent attacks on my portfolio. "Oh man, here we go another random sudden 30% plunge in many of my holdings."

Whereas a more curious investor would say something closer to: "This is cool. What if we really could cure obesity? Or failing that, at least sharply reduce the recent explosion in diabetes and obesity related illnesses." But I was fending off the collapse in my regional bank stocks and the Mexican government sending my largest holding (the airports) down 40% in a single day. In that constant crisis mindset, GLP-1 was yet another assault from an unseen enemy that I had to disarm.

That's no way to view the world! If these drugs do change society, maybe I should change my investment allocations in staples and healthcare significantly. The flexible and optimistic person views every move on the chessboard as a chance to adopt improved tactics. When a potentially big rule change occurs, that should fill us with excitement as we eagerly pursue new ways to exploit the opportunity.

Instead, with GLP-1 drugs and several other matters this year, I viewed them as more opposition to my existing portfolio. No one is forcing me to cling to my prior holdings or theses. Always beware of endowment bias -- stocks aren't worth more simply because we already own them. And just because I spent dozens of hours on a thesis; that's irrelevant if the facts change. When things change, I seek to eagerly learn about the new situation and calculate the optimal reaction. I fell short here in 2023.

Undercapitalizing On The Regional Bank Opportunity - As you may know, I've been a big proponent of regional banks since COVID, and this was initially a great call, as the regional banking ETF delivered tremendous returns in 2021. Since then, they were already lagging, and then obviously March 2023 hit with Silicon Valley, First Republic, and so on.

My initial call in spring 2023 was correct: This was isolated, not systemic, and that the vast majority of the sector would be fine was thus a buy at bombed out prices. The analogies to 2008 were absurd and utterly unwarranted. At the time, I recommended a New York Community Bancorp (NYCB) call option purchase on what ended up being the exact dead low at $6. Good fortune there.

From that point on, however, I got lost in the weeds. Viewing the situation as a battle, I got antagonistic.

I spent a lot of time arguing with bank short sellers on Twitter. I viewed them as an opposing team that I had to overcome with arguments. My thinking was that I was on defense against yet another attack against my portfolio and had to make sure my side wasn't defeated.

Whereas the facts were clearly on my side; winning a dispute on social media was irrelevant. The bank short sellers were fish at the poker table, and it was my job and duty to extract as much of their dumb money for myself and my readers as possible. We should all dream of investing against folks who think they are roleplaying a reenactment of The Big Short. The farther your opponent's worldview is from reality, the greater your chance to shake a mother lode of chips from them. It was a perfect time for skillful investors with a solid understanding of history and banking mechanics to make a killing against aggressively uninformed counterparties.

I should of have been doing the deep work to continuously update my bank watchlist and constantly adjust allocations as prices were swinging around 5-10% per day. Instead of that, however, I largely held my existing positions while arguing pointlessly with the bears. My positions went back up and the bank short sellers got carried out on stretchers this past quarter. So that's fine. But there was a chance to make huge tactical moves at fire sale prices and instead I largely sat on my existing positions.

Underestimating Central Bank Hawkishness - I'm shocked that Central Banks jacked interest rates up as far as they did. Reading my pieces from 2021 and 2022, I was frequently casting doubt on the idea that the Fed would raise its central bank rate past 4%. It went well beyond that point. I ultimately traded bonds alright this year, and the newsletter recommendation to finally buy long bonds in September 2023 after years of being on the sidelines there worked out.

But while the outcome was good, my thinking was sloppy and many readers likely didn't follow my trades there as a result. I was approaching "old man shouts at cloud" territory in my insistence that long-duration interest rates were not making sense, and thus lost credibility by the time there was an actionable turning point in the market.

In some markets near and dear to me, things got even more hawkish than the Fed.

For example: Mexico's inflation rate peaked in early 2022 around 8%. It was already well into decline heading into 2023. Despite that, their Central Bank continued raising from 10.5% to a mind-blowing 11.25% this year and has now left the rate there for months even as Mexican inflation is down to 4%.

Why does the real rate need to be at 7%? I have no idea. In 2021, would I have said it was plausible that Mexico would be running a 7% real interest rate? No. Yet here we are. A scenario I would have assigned an exceptionally low probability is now in fact our current operating conditions. That's a failure of imagination on my part -- risks we're aware of can be planned for and mitigated; it's the stuff we don't think about that can end up biting us.

Will Mexico return rates to a more sensible level? I would expect so. But their insistence on such profoundly hawkish policy has already significantly delayed the intermediate-term upside for several of my Mexican picks such as Rotoplas (GRPRF) (Mexico-AGUA) and Mexican real estate investment trust Fibra Monterrey (Mexico-FMTY14). I certainly wouldn't have recommended a Mexican REIT yielding a mere 7% a while ago if I had given more thought to the possibility that Mexico would not only maintain its already hawkish rates but allow its real interest rate to rise hundreds of basis points further in the months subsequent to my purchase. 

History As A Defense For Rejecting Ideas - Looking back through my work in 2023, I lost count at the number of times I suggested that something hadn't happened historically in decades, or never at all, as the reason that it wouldn't happen now. 

To be clear, I believe historical knowledge is one of the greatest tools we have as investors. Particularly as computers and algos arb out many statistical quirks and patterns in markets, investing becomes ever-more about outthinking other (human) investors. Observing past decades of human behavior is an invaluable guide for making an informed guess about how humans will react when similar conditions occur again in the future.

I think most investors and fund managers nowadays have a poor grasp of financial and economic history. This is certainly not a call to stop studying past market cycles. 

However, in 2023, I became close-minded to many ideas simply because they were highly improbable or impossible based on past historical events. You know what else was highly improbable: The 2016 election of Donald Trump, COVID-19, Russia's invasion of Ukraine, U.S. inflation spiking to 10%, Argentina's new anarcho-capitalist president... and I could name many more from the past few years.

Historical knowledge is highly useful for things such as avoiding bubbles, understanding market behavior during crashes, and having a good sense for base rates/probable future returns from a given asset class. Investors can avoid a lot of silly mistakes by having a good grasp of what the past generations of investors have experienced.

However, I used historical record as a cudgel to avoid engaging with contrary feedback. On several matters, I should have explained why certain events were unlikely to happen rather than simply using the "history says it will not" cop-out. That's lazy thinking. And I was often guilty of it this year.

Global Vs. U.S. Perspective - I'm still working through this one and haven't arrived at an actionable step to improve it. But it's something I'm reflecting on.

Namely, as someone that has lived in Latin America since 2014 and infrequently travels outside of it, my global economic perspective is much different than many of you as readers.

From the perspective of a South American looking at the world, the world economy looks rather tenuous. Many of our local economies went from double-digit GDP growth in 2022 to zero or negative readings by Q3 this year.

If I tell a global investor that the economy is going into a recession right now because of tight monetary policy, that's an anodyne observation. European GDP is negative in Q3, Japan is negative, and Canada and the U.K are flat. And while there are no reliable economic statistics out of China, things appear to be bleak there.

The global economic stall is already reflected in Q3 numbers, with France being the only other G7 country to grow at all aside from the United States. And this economic stall is likely to intensify heading into 2024 as central banks maintain unusually hawkish monetary policy.

Yet, talking to American investors, people complain about my persistent calls for economic slowdown and recession toward year-end 2023. The U.S. economy remains hot, so I was wrong. And stocks are up, so I was also wrong. From the perspective of an American reader, I warned about a slowing economy in 2023, it didn't happen, and so I was wrong. That's valid and I accept it. 

When I'm thinking and writing about economic growth and interest rates, I'm considering if I want to be investing additional funds across my opportunity set in North America, Latin America, Europe, and Japan. I'm not just thinking about the S&P 500 and Nasdaq 100 exclusively. 

Judging by the amount of negative messages I've received over the past couple of months related to macroeconomics, however, many people misunderstood my perspective. And, as a writer, my job is to communicate effectively. I clearly failed on this part. 

Too Cautious - Following up on this, the Ian's Insider Corner aggressive portfolio was heavily in cash for much of 2023. Judging by the stock market's returns this year, we would have been better served with a fully deployed portfolio rather than holding that cash. I hope it's a testament to my craft that we matched the S&P's returns for 2023 while holding as much as a third of the portfolio in cash. The individual stock positions by and large worked. But there should have been more of them.

And, unfortunately, when many people hear taking a cautious approach due to a potential recession, they start thinking about huge short positions and options bets against the market. I think the media plays a role here in driving this binary thinking: "Either stocks are going to the moon or they're going to crash." The most common question whenever people asked about my macro perspective was "How are we going to make a killing on the next correction?"

Whereas what I'm trying to get across is that I see forward returns for, let's say, the S&P 500 at 3%/year through 2030 from current prices. That's far short of the historical 9%/year or so. When cash is yielding more than projected forward returns on equities, in my opinion, it makes sense to have a much higher bar for deploying said cash into stocks. When the market has high forward returns, we should be swinging at lots of pitches. In times like now, where the stock market has disconnected from fundamentals and the intermediate-term economic outlook, I have a higher threshold for putting money to work.

That said, my picks outperform and have done so consistently. Given my global focus, no one is forcing me to worry about overvalued U.S. momentum stocks when I make investments. Perhaps the right answer is to always run the aggressive portfolio at 100%+ long exposure even when I am not upbeat on U.S. or other developed market equity valuations. It's something I am thinking about and I'm open to criticism here.

In any case, judging by results, I made the wrong call in 2023. The aggressive portfolio would have been up at least 30% this year with cash fully deployed all year.

Judging by investment routine, I'm not sure. Sometimes you make a prudent decision, and the results don't match up. Over enough iterations, a healthy process is rewarded, but that is no guarantee of how things go in any one discrete outcome. Some of this may simply be a question of an investors' individual risk tolerance and preferences as well. Regardless, the market disagreed with my skeptical view in 2023, so it goes on the list of this year's mistakes.

Reduced Enthusiasm For New Ideas - There's a debate to be had over how much cash to allocate to a historically overvalued market. 

Where I unacceptably erred was that by the last quarter of 2023 I had lower passion for seeking new ideas. I reached the point where I effectively said: "The only stuff that is cheap is in areas where I already have full allocations already. So why bother turning over more rocks?"

This perspective closes the mind off from any idiosyncratic or sudden opportunities which may arise. And quiet periods in the market are a great time to gain deeper knowledge of a sector, industry, or country. Often, we (certainly myself included) look at a rising/overvalued market and either check out because there's "nothing to do" or get greedy and start making irrational/dubious investments to chase the trend.

The market has been in crisis mode since March 2020, fending off one shock after another without fail. 

But, it appears, we may be heading to more normal market conditions that are slightly less historic (sorry if I jinxed something) going forward. I need to adjust my mental framework and get back the passion I had for investing as the world's greatest game prior to March 2020.

2023 was a good year, and it certainly ended on a high note with the big win in CAAP, rebounds in the Mexican stocks, and various moves higher in the U.S. compounders we bought this summer. But 2023 should have been even better. In 2024, I intend to fix these errors of omission around being curious, open-minded, and eager to play and win the world's greatest game through all market environments. 

I deeply value your readership and the trust you've placed in me. I hope my ideas helped you and made you some money in 2023. Here's to an even better 2024. Wishing you and your families all the best this holiday season - Ian