BIPAF - Our Biggest Mistakes Of 2023

2024-01-02 07:07:00 ET

Summary

• Every investor - even the best ones - makes mistakes.
• We made our fair share in 2023 despite overall outperforming leading dividend ETFs.
• We delve into our three biggest mistakes that we made in 2023.

Every investor, including all-time great and brilliant investors like Warren Buffett of Berkshire Hathaway ( BRK.A )( BRK.B ), is not immune to making mistakes in their investment decisions. These errors serve as valuable learning opportunities, highlighting the importance of regularly reviewing and analyzing our investment choices. As a result, by acknowledging and learning from these mistakes, we can become better investors and hopefully make fewer mistakes in the future, ultimately improving our overall investment success. Given that the calendar has now flipped to 2024, it is a great time to look back and reflect on what went right and what went wrong in our investment portfolio in 2023. In this article, we will share our three biggest mistakes of 2023.

Mistake #1: We Missed The A.I. Boom

As dividend investors, we have a very narrow pool to invest in when it comes to technology stocks ( QQQ ), and that pool gets even smaller when looking at Artificial Intelligence stocks. The leading 'Magnificent Seven' A.I. players - Tesla ( TSLA ), Amazon ( AMZN ), Meta ( META ), NVIDIA ( NVDA ), Apple ( AAPL ), Microsoft ( MSFT ), and Alphabet ( GOOG )( GOOGL ) either do not pay a dividend at all, or pay such a miniscule one that they do not fit in with our strategy. Moreover, emerging defense tech primes that specialize in artificial intelligence and data analytics such as Palantir ( PLTR ), are barely profitable at this point, much less dividend payers.

That being said, we are not completely off the hook here for missing this boom. Broadcom ( AVGO ) - a beneficiary of the artificial intelligence boom - offered a decent dividend yield at the beginning of this year and has an impressive dividend growth track record to back it up. Had we bought it at the beginning of the year (when we were actually considering doing so), we would have more than doubled our money by now:

We did not buy it because we (1) vastly underestimated the impact that the artificial intelligence boom would have on public market pricing and (2) were trying to get too cute with buying AVGO at a deep discount to our (what turned out in hindsight to be overly conservative) estimate of its fair value. While we are not going to beat ourselves up too badly over reason number one given that few investors saw an A.I. boom of this magnitude taking the market by storm in 2023, reason number two does provide a useful takeaway for us. Given that we lacked any technology exposure - particularly in technology as powerful and disruptive as artificial intelligence - in our portfolio, we should not have tried to be so picky with valuations and instead pursued better diversification for the portfolio. In hindsight, we can see that the opportunity cost risk of missing out on a potential rally in an emerging and increasingly important sector was far greater than the risk of not buying a stock in a great company at a wide margin of safety. As Warren Buffett famously once said :

"It's better to buy a great company at a fair price than a fair company at a great price."

We flat-out missed out on buying a great company at what turned out to be a fantastic price because we were trying too hard to get it at a great price instead of paying what we thought at the time was around fair value.

Mistake #2: We Bought Infrastructure Stocks Too Aggressively Too Soon

Another big mistake was that we bought infrastructure stocks too aggressively, too soon. Throughout the first 6-9 months of the year, we began to aggressively buy infrastructure stocks like Brookfield Infrastructure ( BIP )( BIPC ), Brookfield Renewable ( BEP )( BEPC ), and NextEra Energy Partners ( NEP )( NEE ) (along with several more). However, we underestimated the Fed's determination to maintain a firm stance on monetary tightening for as long as they did, weighing on these interest rate sensitive bond-substitute stocks. As a result, we ended up buying these stocks far too soon. While we opportunistically doubled down on these positions and even ended up nicely in the green on BIP and BEP (and our overall portfolio) by year-end, we remain deeply in the hole to this day on NEP and several other infrastructure stocks.

The takeaway here for us is that - no matter how appealing the value looks - never tremendously overweight any single sector, especially when that sector's value is so sensitive to such an unpredictable factor like interest rates. Had we applied this principle more judiciously in 2023, our overall total return performance would have been even stronger than it was.

Mistake #3: We Underestimated Office And Interest Rate Headwinds For W. P. Carey Stock ( WPC )

Similar to our second big mistake in 2023, we underestimated the headwinds that elevated interest rates would have on WPC's value. We saw their significant CPI-linked lease exposure as a bit of a hedge against persistently high inflation and corresponding higher-for-longer interest rates.

While their CPI-linked leases have without a doubt provided a nice organic growth tailwind for the REIT, higher-for-longer interest rates have hurt the market's appraisal of WPC quite a bit. Even worse, WPC's relatively laid-back and unconcerned tone when discussing their office assets on earnings calls led us to a false sense of security about these assets. As a result, we were stunned when management suddenly did a 180 on those assets by dumping them as quickly as possible and slashed the dividend by ~20% as a result.

The takeaway for us here is that if a meaningful portion of a REIT's ( VNQ ) investment portfolio appears problematic, do not take management's word for it that everything is fine. If there is smoke, there is likely fire. In hindsight, we should have dumped WPC stock early in the year when it was trading north of $80 (and close to our fair value estimate) and recycled the capital elsewhere.

Investor Takeaway

2023 - despite all of the headwinds it posed for dividend stocks - actually turned out pretty well for us as our portfolio returned 14.4% during the year. While it lagged the S&P 500 ( SPY ) (due to missing the aforementioned AI boom that SPY's largest constituents benefited immensely from), our performance still meaningfully outperformed virtually every high-yielding ETF, including SCHD , JEPI , DIV , and VYM :

That being said, as pointed out in this article, our performance was far from perfect. As we head into 2024, we are going to try to take these lessons with us by trusting our own judgement over management's more, not dramatically overweighting our portfolio based on interest rate assumptions, and not missing out on great companies in sectors where we lack exposure simply because they are not undervalued enough.

For further details see: