Friends,
Last Halloween, I (Stoffel, here) was feeling awfully good about myself as an investor. I was up roughly 30% on the year, while the S&P 500 had only done half as well.
What's more, over the previous decade-plus, I had vastly outperformed the broader market:
- My Portfolio: averaging 19.6% returns per year, for 593% total returns since December 31, 2014.
- S&P 500: averaging 13.5% returns per year, for 294% total returns over the same time.
To any outsider, this easily justifies the work that goes into picking individual stocks.
And yet, since then, it has been nowhere near as pretty. My portfolio is down 20%, while the S&P 500 is up 9%. I'm still well ahead of the market over the long run, but the experience has not been fun.
How did this happen?
There are two key culprits:
Underestimating the AI Buildout
I didn't appreciate just how powerful a force AI is.
Sure, I had started to use it more often in my everyday life. But I wasn't keyed into the fundamental imbalance between supply and demand for chips, energy, and land for building data centers.
That imbalance sits at the center of everything that's happened since.
Here's a look at how 8 different stocks -- all vital to the AI buildout, all unable to meet the surging demand, and all currently part of the S&P 500 -- have fared since then.
While SanDisk is doing the heavy lifting here, the average return from this basket of eight is eye-popping: 333% in less than eight months!
And I own none of them.
A laser focus on moats
I think fellow investor Travis Hoium recently summed up the difficult place that many investors like myself are dealing with:
Remember, a moat is a sustainable competitive advantage. Being in the right place at the right time (providing what AI needs right now) is enormously profitable. But it doesn't mean that these companies have a moat.
In fact, let's see what Morningstar has to say about these eight. The organization rates companies has having No Moat, a Narrow Moat, or a Wide Moat (there are also some companies not covered by an analyst).
We're not saying Morningstar's ratings should be considered gospel -- but it's a starting place.
"No Moat" Rating: SanDisk, Intel, Western Digital, Micron, Seagate
"Narrow" Rating: Ciena
Not Covered: Coherent, Lumentum
Of those eight, only one is called out as having a moat, and a "Narrow" one at that.
We're not saying these stocks can't be huge market-beaters. We're also not saying they absolutely have no moat.
We're just saying that they exist in industries that have traditionally been commoditized. And when a product gets commoditized, it usually isn't good for investors.
But the past few months have not been "usual" ones. And my approach to investing has been wildly out of favor during that time frame.
Does that mean I'm making wholesale changes to my portfolio? Not quite -- moats still matter. But I am broadening my understanding of how moats form in this day and age.
Case in point: NVIDIA is now one of my top five holdings -- buoyed by the switching cost edge the company enjoys from its CUDA software, and the intellectual property that comes with being a first-mover in many important areas.
It's important to know what parts of your philosophy are written in stone (moats matter) and where you can be flexible (but they might look different than in the past). Over the long run, that process of evolution is vital to not just survive, but thrive.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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