IMBIL - Reflections On 2023: Blended 98.4% Total Return

2024-01-01 08:00:02 ET

Summary

• In 2023, across two accounts, my portfolios returned +98.4%.
• In the flagship account, my four-year CAGR (pre-tax), from January 1, 2020 - December 31, 2023, was 46%.
• This piece discusses what did and didn't work in 2023.

What a difference two months makes! On October 27, 2023, on an intra-day basis, the Russell 2000 ( IWM ) craved a fresh 52-year low at 1,634. A few days later, at October 2023 month end, the Russell 2000's close wasn't much better at 1,662. Lo and behold, only weeks later, after Mr. Market was shown clear and compelling evidence that Federal Reserve's strong medicine, in the form of a 5.5% Fed Funds Rate, finally whipped inflation, and without killing the patient, small caps absolutely ripped in November 2023. Better yet, and perhaps driven by short covering and performance chasing, December 2023 was just as good a month, at least for the bulls.

As the closing bell of 2023 rang on December 29, 2023, at 4 PM, the Russell finished at 2,027, which including dividends equates to a 2023 total return of 16.6%.

Although, I understand and appreciate there are some institutional, family office RIAs, and maybe even some hedge fund analysts that regularly read Seeking Alpha, no question, though, I would argue the vast majority of SA's readership consists of retail and individual investors. SA can be a great resource for the retail investor to learn and hopefully get ahead.

Unfortunately, I would venture to guess, at least based on what trends on the SA's home page, on nearly a daily basis, perhaps way too many people might have missed out on the specular equity returns of 2023. In 2023, the S&P 500 ( SPY ) was up 24% and the Nasdaq Composite ( QQQ ) was up a blistering 43%! I'm basing this hypothesis on the fact that many people might have lost the scent of stock picking by spending way too much of their bandwidth on following macro signals, technical analysis, chasing low-quality high-yielding equities or engaging in market timing.

As I've said in this June 15, 2023 piece, I wrote on one of Peter Lynch's most famous quotes, ( As Peter Lynch Said: 'If You Spend 13 Minutes A Year On Economics, You've Wasted 10 Minutes' ), as well as during my two audio interviews with SA's Rena Sherbill, ( Small Cap Alpha, Commodity Danger And Advanced Emissions Solutions With Courage & Conviction Investing - July 24, 2023) and ( 'Stay Hungry, Stay Foolish' Small Cap Strategies With Courage & Conviction Investing - September 27, 2023), the way to find alpha isn't worrying about high-frequency macro data, it isn't about buying low-quality high-yielding dividend stocks, it isn't about technical analysis, and is sure as heck isn't about market timing. That said, if you're always worried about a market crash or constantly afraid of a portfolio drawdown, then perhaps equities aren't well suited for you.

I'm 43 years old, spent five years on the buy side, and have been passionately borderline obsessed, with becoming a better analyst and working on the 'craft of stock picking' for the better part of twenty years. Over that time period, and through the wise counsel of a few great mentors, I've learned not to get overly distracted by worrying about high-frequency macro data points, technical analysis, chasing shiny objects (high-yield dividend stocks of low-quality companies) or market timing. The reason, well, over time, the United States is among the most dynamic, ingenious, inventive, and entrepreneurial economies the world has ever known. Unlikely in past eras, going back thousands of years, in the modern day, individuals and average people can participate in the stock market whereas the great wealth creations and unique business opportunities were mostly controlled by a handful of plutocrats or government entities.

With all of its faults, shortcomings, and imperfections, capitalism is far and away the best system for wealth creation and raising the standard of living for the average person. And yes, by design, there are social safety nets, guardrails, and stop-gap measures for people with disabilities, people born into poor/disadvantaged circumstances, or people who face adversity in the form of creative destruction. For example, perhaps if their industry, sector, or specific job function gets displaced from by capitalism's creative destruction. Warts, wrinkles, and imperfections in all, the U.S. and the U.S. stock market have done so well because America is a land of risk-takers, entrepreneurs, hard workers, and capitalists. The U.S has the best higher education and some of the world's most enterprise-driven systems. Many intelligent people come from all over the planet to earn their graduation or PhDs at U.S. universities. Since the rewards and upside are so outsized here in America, new ventures tend to start here, as the best minds fall in love with American culture. If you have the ambition, intellect, resourcefulness, and persistence, the streets are truly paved in gold here in America. Sadly, though, perhaps too many people get too distracted to notice (watching sports or following pop stars or on social media) or were never taught or never learned that playing the long game, in a career, via education, via investing, or entrepreneurial ventures can be highly lucrative and intellectually rewarding.

Therefore, despite all of America's issues, including ballooning deficits, a deeply divided and unpopular Congress that can't seem to get much done, and despite all of the world's issues (and there are too many to list), the U.S. stock market is the best place to create wealth via passive equity ownership in the form of fractional equity ownership in businesses. Yes, of course, over periods of time, the stock market and many stocks can get ahead of themselves. Perhaps, the Magnificent Seven are way ahead of themselves now, at least when it comes to their valuations. After a monster run in 2023, where Meta Platforms, Inc. ( META ), Amazon.com, Inc. ( AMZN ), Apple Inc. ( AAPL ), Alphabet Inc. ( GOOGL ), Microsoft Corporation ( MSFT ), Nvidia Corporation ( NVDA ), and Tesla, Inc. ( TSLA ) absolutely ripped, maybe they are overvalued. Overvalued they may or may not be, I sure as heck am not smart enough to know, as that is way above my pay grade. To be crystal clear, I'm definitely not wasting any dry powder or precious bandwidth shorting these companies, I wouldn't even contemplate it. Let's face it, that has been a fool's errand, at least most of the time.

Moreover, many companies go out of business (see SPACs) and there can be periods of irrational exuberance, to borrow Yale professor Robert Shiller's famous phrase. Heck, look no further than Cathie Wood's ARK Innovation ( ARKK ) fund. That said, I'm a value investor, so I try not to get mixed up in chasing momentum or buying growth companies that trade at rich valuations. The game is hard enough as it is and I don't want to make it more complicated by worrying about exiting ahead of the growth slowdowns (or when the music stops). Instead, let's not take our eye off the prize and get lost going down rabbit holes. The reason I've devoted my professional life to this art (and I'm very lucky I actually get to pursue, as in actually trying to make a living pursuing this passion), twists and turns, and job sabbaticals notwithstanding is because 1) I love the game and the art of investing, and 2) The rewards and upside are so massive for small-cap value and special situation investors that can actually pick stocks.

To wrap up this lengthy opening section, it really bothers me to see so many retail investors, dare I say, shoot themselves in the foot by chasing low-quality high-yield dividend stocks, caught up trying to chase their tails tracking high-frequency data, worrying about technical analysis, or worst yet, trying to run between raindrops, which usually only end up in people getting lost on quixotic market timing misadventures!

In 2023, And Through My Career, I've Made So Many Mistakes, But It's Par For The Course

Although my blended total return was +98.4% in 2023, meaning, I was lucky enough to take a January 1, 2023 available starting base of capital of $414,720 and grow it by $407,987 by December 31, 2023, let me tell you I made so many mistakes in 2023! Honestly, it is embarrassing how many mistakes, unforced errors, and bad decisions I made in 2023. If I were to objectively evaluate my 2023 overall performance, I couldn't give myself more than a 'B-' grade.

1) Let's Start With Yield10 Bioscience, Inc. ( YTEN )

Enclosed below, as you can see, I was long this name on three attempts throughout the year in 2023. Cumulatively, when the dust settled, I lost a cool $49K here (remember my blended entering base of January 1, 2023 starting capital was only $415k). I really thought this was going to be a home run, bordering on a grand slam, as the company and its team of MIT scientists appeared to have developed a better camelina seed (that was way out in front of its peers) that would be the seed to turbocharge and lead to massive adoption and production of SAF (sustainable aviation fuel) in late 2025 and beyond. The company did win most of the necessary patents and USDA approvals, and was purportedly really close to getting Marathon Petroleum ( MPC ) to make an investment and sign an off-take agreement that would've ensured they threaded the needle and escaped its burning platform.

Only it didn't!

And although the company's annual burn rate wasn't that demanding, at only $13 million per year, and although the management team appeared to have a good playbook in motion, quite frankly, they weren't able to sign MPC and weren't able to get Mitsubishi (at least not in 2023) (whom they had an MOU with) to make an investment.

Given the binary nature of this type of bet, not to mention a disastrous secondary offering at $0.65, which included full warrant coverage, also struck at $0.65 per share, management knowingly or unknowingly got mixed up with some nasty (although legal) loan sharks that short best efforts secondaries. Although I'm smart enough and where I purportedly learned this lesson (many times over), betting on weak management teams usually ends in losing a lot of money, evidently, I didn't! Mr. Market tuned me up and charged me $49K for this year's tuition at his school of hard knocks. Unlike Harvard, attending the school of hard knocks doesn't look good on a resume.

2) iMedia Brands ( IMBIL ) Baby Bonds

As you can see below (a little further down), and I'm going to kill two birds with one stone, in the flagship account, I allocated $23,206 in Legacy iMedia Brands 8.5% ((IMBIL)) baby bonds. The company, which was grossly mismanaged, filed for bankruptcy in late June 2023. Stupidly, I got way too cute while on vacation (that is like smoking in bed - always a bad idea) and allocated about $30K (across two accounts) at $1.23 (or $0.05 on the dollar as the par value was $25). Lo and behold, and if I was paying closer attention as I was on vacation, I overlooked that these baby bonds would be delisted. Secondly, I incorrectly assumed that, like so many bankruptcy equities, the IMBILQ version would trade on the pink sheet while the bankruptcy process was ongoing, as it did for the equity IMBIQ. I was wrong and the bonds haven't traded since getting delisted. Although the company would've gotten back and returned about $0.05 on the dollar, the lawyers and other usury actors are taking upward of $4.4 million in fees, according to the latest documents, including interest and other costs. Although the final bankruptcy vote is set to take place on January 6, 2024 to approve (or reject) the bankruptcy plan, I will be lucky to get back 2/10 percent of one percent here, resulting in about a 95% loss! The bonds are already marked at zero in the account anyway.

Imagine that - even John Lennon might be astonished to learn that these 8.5% baby bonds that I bought at $0.05 on the dollar in the end, after all the lawyers take their pound of flesh, might only be worth $0.002 on the dollar!

So again, this was a $30K unforced error!

3) Not Effectively Managing My Investment Committee

Although 2023 was a spectacular year for small caps and for small-cap stock pickers, the nasty three-month plus drawdown, taking place from August 1, 2023 - early November 2023, completely frayed the nerves of my investment committee. If you look at the monthly cadence of returns in the appendix section, we had a big drawdown from July 31, 2023 - October 31, 2023. To make a long story short, my investment committee wanted to go to 100% cash and put it all in high-quality investment grade bonds the second the account crossed back over $800K in value. At that point, I was on my back foot and already had $300K in cash, as my investment committee was nervous and wanted to hold more cash. To appease them, on November 16, 2023, I was strongly encouraged to close out what went on to be a number of massive winners and instead put to work $250K in investment grade bonds. This was in addition to at least $250K that needed to be kept in cash (see below):

To give you a sense of the gems that I had to sell to raise that cash, as again, I had to keep $250K to $300K in cash, then had a $22K required annual distribution outflow to plan for, which was set for early December 2023. Therefore, as I didn't want to sell my core names, these would-be winners got sold way too early.

I absolutely loaded up on Enphase Energy ( ENPH ) between $78 and $82. To be clear, before then, I never owned any ENPH, as the valuation never made sense to me. At $82, it did.

See here: (From my Second Wind Capital archives):

For the first time ever, I bought Align Technology, Inc. ( ALGN ) for just under $200.

As you can see, ALGN worked.

Here is one more example of something I loaded up on and was then quickly forced to sell it.

4) Beauty Health Company ( SKIN )

Candidly, on November 14, 2023, I bought 40,000 shares of SKIN at an average cost of $1.80. The stock closed that day at $1.39. My investment committee was pretty upset! Once again, or so the call went, I dramatically overbet a name, and suddenly, we had a $16K mark-to-market loss. By the next day, or the day after that, I can't remember exactly, SKIN shares ripped back into the $1.90s. You guess it - I was asked to sell it and make $0.05 per share on 40K shares!

Lo and behold, by the end of December, SKIN shares traded north of $3.30. Oops!

I have many other examples, but I think you get the point.

The Winners

There is no real reason to belabor or really talk too much about the winners. Yes, there were a lot of winners and some good stock picking in 2023. However, I'm not sure readers really benefit from learning about the winners. Therefore, as a concession and a proxy, I will just share six snapshots from the free site or from my Second Wind Capital archives.

1) RCM Technologies ( RCMT ): $13 to $30

2) Alto Ingredients ( ALTO ): $1.55 to $5 (Before it got dinged)

3) Orion Group Holdings, Inc. ( ORN ): $2.5 to $6 (I sold at $3.75 but owned a lot)

4) Unisys Corporation ( UIS ): $3.5 to the Upper $5s

5) TravelCenters of America ( BP ): Owned it in Size at $50 and it Got Bought Out for $86

I was invested in TA since September 1, 2021. I continued to cover it, behind the pay-wall, from that point until its February 2023 announcement of a $86 buyout by BP plc ( BP ).

6) The Honest Company ( HNST ): $1.35 to $3.3

Pretty much low-ticked the bottom and chronicled the inflection point (see below). That said, I didn't let this winner run. Another big opportunity cost/unforced error of sorts.

See here:

About Those Other High Conviction Bets

I almost forget, lost in thought, yes, yes, of course. You might be wondering if I'm still long some of my largest, highest conviction, and publicly chronicled bets, all shared here on SA's free site.

I still own a ton of Advanced Emissions Solutions ( ADES ). The stock has performed very well in 2023, and it was a remarkable buying opportunity, when it traded in the low to mid $1s .

See below:

As far as Red Robin Gourmet Burgers ( RRGB ), Farmer Bros. Co. ( FARM ), and eHealth, Inc. ( EHTH ), you're correct. I still own them all. I still feel really good about my thesis on them all. The judge and jury, Mr. Market will weigh in, though, in late January or mid-February 2024.

Putting it All Together

2023 was about playing the long game. It was about believing in America, about weathering the drawdowns, about taking advantage of and aggressively adding to your highest convictions and best ideas, when Mr. Market got overly pessimistic. It was about not getting lost in quixotic misadventures (i.e., not engaging in tracking high-frequency macro data, not chasing low-quality high-quality companies, not worrying about technicals, and certainly not market timing).

Once again, we learned that the U.S. stock market is the best play to be and the best market to be listed on. The largest pools of capital are here, and the U.S. economy is among the most dynamic the world has ever known.

2023 was an amazing year for stock pickers, and despite all of my big mistakes and unforced errors, I was able to eke out a decent year. Yes, I only played 'B-' baseball, but that's ok. This is refreshing as I've got so much more to learn and so much better to get as an analyst and stock picker. This is what makes the art and the game so much fun!

In closing, I hope you had a good year in 2023.

And perhaps more importantly, wishing everyone a Happy New Year and an auspicious 2024!

Cheers, CCI

Appendix:

Seeing Is Believing: Fidelity Account Snapshots, With Monthly Cadence

Flagship Account (Fidelity Performance Tracker):

Smaller Account (Fidelity Performance Tracker):

45% (Pre-Tax) 4-Year Compound Annual Growth Rate (Flagship Account)

Enclosed below is the (pre-tax) and 4-year compound annual growth rate of the flagship account. Despite having to maintain at least $200,000 in cash since July 1, 2020, later upped to $250,000 in cash in 2021, and then upped once again to well over $300,000 during the second half of 2023, for simplicity purposes, I'm showing the CAGR on the entire account balance. Therefore, this arguably (greatly) underrepresents the return on available 'at-risk' equity capital. However, for simplicity purposes, let's just look at the entire account. This makes the calculations easier. If we add back the two withdrawals ($21,018 and $22,168, both of which were required minimum distributions) over the four-year time period, January 1, 2020 - December 31, 2023, the account has grown in value from $205,188 to $931,066.

See below:

Enclosed below, this computes to a 4-year (pre-tax) CAGR of 45.95%.

For further details see:

Reflections On 2023: Blended 98.4% Total Return