The Patient Compounder portfolio was started in March 2020. As of writing this, it is down 29% on a simple return basis.
Given how pessimistic things appear to be, i’m honestly surprised the portfolio isn’t down more. Underperformance began in late 2020 when I started aggressively buying Alibaba, building it up to a massive 22.6% of the portfolio’s cost basis. I’m happy with this allocation.
If I had to complain, I wish my timing had been better and I had been patient when purchasing Alibaba. With the stock trading down to the HK$70s region, on hindsight I did have plenty of time to buy and lower my cost basis. Alibaba is a divisive company today given the negative news around China. However, if you believe Alibaba can grow 11% a year with 18% EBITDA margins and trade at a 16x EV/EBITDA multiple, 2026’s price target is about HK$196, about a 7% annualised return from my cost basis.
It is a bet i’m willing to take. Your conviction may differ.
The top 7 positions of the Patient Compounder portfolio make up 81% of the portfolio value. I believe with the exception of Tesla, all 6 companies are undervalued.
A Macro Driven Market
If the Fed hikes rates past 5%, anything trading at a lower earnings yield will sell off as bonds become attractive once more. However, as a young investor, I prefer loading up on long duration equities as they get cheaper. The bet i’m making here is 2 fold :
These companies continue growing earnings long term
Inflation eases up and Fed rates drop
I believe the top 7 positions within the portfolio have an excellent long term chance of growing the top line. How much of that drops to earnings is a question mark as many of them are continuously investing into R&D and SG&A.
KKR is an exception here as an alternative asset manager. I did some valuation work on KKR here.
The remaining 19% of the Portfolio
I will not be allocating funds to the remaining 19% of the portfolio. These are small positions taken on during an extraordinary bull market. I did overpay for many of these firms which is a sin I committed during an exuberant period.
However, I did exercise prudence in sizing these positions small.
While I could have sold these off, each of these firms have their stories yet to play out fully. Yes, even Peloton. They’ve successfully launched a new Rower and launched an update for the Peloton Guide that finally makes it good. If Peloton can get a handle on their pricing model, CAC and balance sheet, this company can make a comeback 20 years out. I will maintain the position to keep tabs on it.
What am i buying next?
I will be allocating heavily to Tencent, Google, KKR, Amazon in the coming months to build these out to full positions. If the macro continues being bearish, I will have time to do this.
I am also looking at high growth software companies such as Datadog, Cloudflare & MongoDB. Position sizes will be much smaller.
The Macro is rough, but I look at this as an opportunity to sharpen up my valuation framework and to allocate to the best ideas that seem to get cheaper and cheaper. Most of what I buy are plain vanilla stuff. Companies that are covered widely. I have been told that there is no alpha in these firms, but one does not need to buy the esoteric to get a decent return.
Sometimes, the good deals are right in front of us.
Note : I am not a financial advisor and this is my personal portfolio. Do not blindly follow and do your due diligence. You can lose money by investing in the stock market. All my writing is opinion and NOT advice.
I have been wrong on some firms. Peloton for example didn’t grow as intended and management tore through the balance sheet with little discipline. This is par for the course in investing. You win some, you lose some. Had you blindly followed my work on Peloton, you’d have lost over 80% of your capital. Proceed with caution.