CIO Insights - 22 November

Hi everyone

I hope this finds you well and you’re all getting excited for some time off over the festive season and re-connecting with loved ones.
 
I saw a great quote this morning, which I thought was too good not to share:
 
“Expectation is the grandfather of disappointment. The world can never own a man who wants nothing.” 
 
Read that again.
 
Now back to business…
 
You all know by now that the conference is on ‘virtually’ on December 3, which is Friday of next week. A reminder to everyone who has bought tickets that you will be able to listen (and re-listen) to all of the pitches for 5 days, starting at 8:00am AEDT of December 3. As we’ve mentioned before, the Charlie Munger/Mark Nelson Q&A session will, however, only be available to watch/listen at 11:00am AEDT on Dec 3. As always, the stock pitches will be fascinating to watch, and I know the speakers are all excited about their investment ideas for 2022. If you haven’t already registered, you can purchase a ticket here. HM1 subscribers can access 20% off using the discount code: HM1-CONF at the checkout. A reminder that a large percentage of the ticket price is tax deductible and a DGR Status1 receipt will be provided upon purchase. We’ve had some excellent media coverage in the lead up to the event, here is an article in today’s Financial Review with one of our returning speakers, Nick Griffin.
 
Next Monday, 29th November, is the 2021 Annual General Meeting of Hearts and Minds Investments. Again, this will be conducted virtually from 3:00pm AEDT. Details of this can be found here.
 
With less than two weeks to go, most of the 2020 conference recommendations have now been sold, and as I mentioned last week, whilst we’ve had some super-normal gains (Bill. com, Hello Fresh, Yeahka) this suite of stocks has had more negative returners than in previous years (Ping An Good Doctor, Teladoc, Nintendo). Whilst these names may prove to be winners over a multi-year period, we have realised the losses in our portfolio, as our mandate dictates that all conference stocks have a maximum holding period of 12 months. This approach has delivered the portfolio good returns over the 3 years we have been in existence, which I think justifies the portfolio construction process we have in place.
 
In past notes I have written about how compounding returns over multi years is an integral part of investing. The G.O.A.T of investing (’Greatest Of All Time’) Warren Buffett said that an investor should only buy a stock they would be perfectly happy to hold if the market shut down for 10 years, and that his favourite holding period is forever. Warren’s mentor, Benjamin Graham is best known for his advice that “in the short run the market is a voting machine but in the long run it is a weighing machine.” 
 
65% of the HM1 portfolio is invested in multi-year investment recommendations, comprising the three highest conviction stocks from each of our six Core Managers, namely Caledonia, Cooper Investors, Magellan, Paradice Investments, Regal Funds Management, and TDM Growth Partners. These fund managers have all been successful in their own businesses, and many are closed for new investors. To have access to their intellectual property on an ongoing basis to me represents the core of HM1. The majority of our shareholder funds are invested in this portion of the portfolio (twice the capital that goes into the conference recommendations) and the holding period is for as long as our managers recommend.
 
To my point above about compounding, this is where it all takes place for us. Roughly half of the stocks (by number and value) have been in the portfolio since November 2018. Perhaps 15% of the core portfolio has been invested for under 12 months. Not every position has been profitable, but as I mentioned last week, even the best stock pickers in the industry get some of their ideas wrong. Overall, the winners tend to outweigh the losers. Pleasingly, we have seen that when an investment thesis appears unlikely to play out, our managers have generally been swift to advise closing out such a position. As one of the managers said to me recently, “Panic quickly when the game changes Rors, don’t let a small loss become a big loss by refusing to acknowledge that you were wrong”.
 
The flip side of multi-year investing is that often when a stock has a supernormal return over a shorter period, be it 6 or 12 months, the following period will often see underperformance, or some sort of normalising. Does this mean that the original thesis has changed? Quite possibly, yes. But also, quite possibly, no. Given the number of participants in global stock markets, all of whom have their own timeframe for holding an investment, large price moves often see some sort of shareholder register shift, as many take profits (or losses) while others see the opportunity coming to fruition and finally deciding to invest.
 
This weight of money (new buyers vs the sellers) is what dictates what a share price does immediately after such a move. Our portfolio has been experiencing exactly this situation this year, with a few stocks having had exceptional returns in 2020, and then run into some profit taking/new news in 2021, which has led to retractions in the share prices of some of our holdings. This is where the expertise of our managers comes in. We believe they are best equipped to judge whether the multi-year investment thesis they have built and presented remains intact. Where it doesn’t, we have, and will continue to close such positions. Where they believe that news/price movement is more ‘noise’, they/we continue to hold stocks, so that the compounding effect of multi-year investing can resume.
 
I hope this all makes sense to you, and helps you better understand how the portfolio is constructed into two distinct portfolios, with very different investment timeframes, where hopefully we can capture both the compounding effect described by Benjamin Graham, as well as the X-factor effect of new industries, disruptive technologies etc becoming more mainstream in the near term.
 
We believe the combination works over the longer term.
 
Stay safe

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

Reminder: these are simply my general views and should not be taken as investment advice

 

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DISCLAIMER: This communication has been prepared by Hearts and Minds Investments Limited (ABN 61 628 753 220). In preparing this document the investment objectives, financial situation or particular needs of an individual have not been considered. You should not rely on the opinions, advice, recommendations and other information contained in this publication alone. This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Past performance is not a reliable indicator of future performance. This document may not be reproduced or copies circulated without prior authority from Hearts and Minds Investments Limited.