cobbs law
Composite performance data represents all realized and unrealized losses and gains on the firm’s brokerage accounts (net of commissions and adjusted for currency) recorded by Interactive Brokers for the specified period. Index returns represent total returns, including dividends.
Dear partner:
For Q2 2023, our investments had a total return of -2.43% before fees and -3.06% after fees, compared to a total return of 0.80% for the MSCI EAFE Small Cap Index and 0.80% for the S&P The total return for the 500 Index was 8.74%. At this point, you will have received a report from Interactive Brokers with details about your balances, fees, positions and performance for the previous quarter.
Despite falling profits, U.S. stocks continued to outperform, buoyed by strong demand from tech giants. Profit growth was strong in 2009-16 and insane in 2017-22, thanks in part to intergenerational declines in US corporate taxes and interest rates, but has declined over the past year. Investors widely expect this to be a temporary recession, with growth returning soon, and it’s hard for anyone to disagree. For example, Google (GOOG) (GOOGL) has a 93% market share in search and regulators are only now starting to consider whether capitalism and competition in that market should be maintained; everyone understandably wants to get money out of these monopolies Take a share. Plus, any tech executive could push the stock price up by more than 20% this quarter by whispering about “artificial intelligence” on an earnings call, which is a hostile environment for fundamental investors. The S&P 500 equal-weighted index is up about 6% so far this year, with tech giants accounting for most of the year’s gains for the traditional market-cap-weighted index. With the top seven stocks by market capitalization delivering the highest volatility-adjusted returns over the past decade, it’s hard to blame investors for buying concentrated U.S. indices and ignoring nearly everything else.
Japan’s year-to-date stock performance has gotten a lot of headlines after Buffett convinced Americans that Japanese stocks exist. Despite a 30% year-to-date gain, the Nikkei is only up about 20% from the start of 2021, and since the yen has fallen 30% against the dollar over that period, Americans will lose money during that time. Much of this year’s growth has been driven by currency depreciation. The weak yen presents opportunities for foreigners; however, prices there are reasonable in yen terms, but not exciting on average. I’ve pared back my position buying equities in Hong Kong, but until our equities are priced reasonably, I’d like to maintain some exposure in Hong Kong, hoping to benefit from a stronger yen or continued purchases of foreign equities in cheap currencies.
After a brief rally at the start of the year, most funds abandoned Hong Kong stocks and dumped shares amid what they see as a weak recovery and more uncertainty ahead. There isn’t much competition for stocks there, which is understandable — it’s in a true bear market, with price declines in five of the past six years, total losses of more than 40%, and most small-cap stocks faring worse. Hong Kong is one of the worst performing markets in the world, and it’s a horrible place to be for foreign stock pickers, especially in the microcap space where I run, so prices are high. In my view, regardless of expectations, the recovery is still a recovery, and things are improving from the bottom up, while prices are down another 8%+ in the quarter. There are more than 2,600 stocks listed in Hong Kong, of which about 1,000 are micro-caps, depending on your definition, and we own 40 of them. We also have some minor exceptions in the U.S., Canada and Australia; mostly turnaround transactions under net cash, but a small number. Our small year-to-date gain of 5% is misleading as many of our Hong Kong stocks are down more than 10% over the past few months and I continue to buy as much as I can, so only a handful of our ~60 stocks Let’s stay optimistic so far this year.
We operate in a different sandbox than US megacaps, providing exposure not offered by an index or ETF, and own uniquely performing microcaps. I cannot provide value by duplicating widely held index constituents. As passive investing becomes a bigger part of public business ownership, it’s harder than ever to find uncorrelated investments that don’t rise or fall at the same time and to varying degrees. I specialize in different areas, so I don’t regret missing out on the tech boom, and I don’t compare it to the portfolios of the smallest companies in Hong Kong’s current torrent.
As always, please feel free to contact me with any questions or comments.
the best,
Aaron J. Saunders | Aaron J. Saunders Owner and Manager of Comus Investment, LLC.
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