I recently penned my 2022 year end investment letter and discussed some traits that have made us successful over the last 15 years. We don't have all the answers and no one does, but sticking to our niche and focusing on risk management has kept us in business and able to offer an above average return with less risk to our clients. Below is some of the letter and touches on some themes that have contributed to our success.
While WCP was down slightly in 2022, we protected most of
our gains from the previous bull market and stand ready to deploy capital when
conditions become favorable for our investment style. Investing capital is not
about knowing things or predicting the future. Clearly Wall Street analysts are
not good at making predictions. Every single brokerage house predicted the
S&P 500 would be higher in 2022. To be honest, more information is always
better than less. However, to be successful you don’t need to know everything
about monetary and fiscal policy, economic indicators, earnings estimates, statistical
analysis, etc. Rather, a good trader needs to accept the unknowns and embrace
our fallibility while exploiting the edge that tilts the odds in our favor. The
foundation of our edge relies on our ability to reduce exposure during bear
markets through our relentless pursuit of risk management above all else. We
don’t weld ourselves to a specific opinion or prediction. Instead, we sift
through all the data to produce a thesis and use price action to confirm our
bias. And when the facts change or the tape isn’t confirming our direction we
are quick to cut our losses and reassess our positioning. We remain humble and
know it’s not always the most intellectual that survives a bear market but
rather the portfolio manager that is best able to adapt and adjust to changing
market environments.
2022 was a trying year for investors as almost every asset class lost ground. In a rare occurrence both stocks and bonds fell in unison as the Fed turned from investors’ best friend to the largest headwind. A 60/40 portfolio mix consisting of S&P 500 and US Aggregate Bond Index returned -16%. That was the second worst year on record since 1976. It was a year about survival and keeping losses to a minimum. We never like drawing down some profits from previous years but what made our small loss last year more impressive was the returns of risk assets that comprise our investable universe. It was an extremely difficult year in the growth sector which typically makes up our long exposure. On top of that, every speculative asset class got hit hard from growth stocks to cryptocurrencies to IPOs. For example, Tesla, which had been the source of alpha over the last few years fell over 65% for the year. To put in perspective how challenging the environment was for growth investors, look at the returns below for select growth assets.
Our key to success was attributed
to our flexibility as we were very early to reduce
risk exposure when our market indicator flashed a sell signal during the
beginning of this bear market. We stayed
very light on capital allocations as opportunities have been limited on the
long side. A continuation of our edge is knowing when our strategy is not
performing versus when to press the accelerator and go for big wins. As the
environment changed from easy money to a more difficult tape, we avoided most of the carnage
during the bear market by staying nimble, keeping risk under control
with low exposure, and remaining disciplined. During challenging times, it is
best to avoid landmines, keep powder dry, and live to fight another day. As
we weather the storm, we don’t plan on rushing things
but once the narrative changes and opportunities present themselves, we’re in a
great position to exploit the upside.
These are not easy times for investors as there are plenty of headwinds to deal with that could make 2023 another tough year. While bear markets are painful to endure, they are healthy and give the market a chance to reset. However, I try not to get sidetracked by splashy headlines, macro news, and noise in general. We are very excited about the path forward due to the technological revolution. In 2023 and beyond, we anticipate the largest technological breakthroughs with regards to some of the major obstacles we face as a country. Themes that are currently emerging to solve our most pressing issues are: artificial intelligence, clean energy, automation, obesity, cure for various types of cancer, and rare disease therapies. We remain optimistic, as it is an exciting time to be a part of the investor class. Our game plan is to remain cautious and flexible as market conditions evolve. We are like a big wave surfer in that it’s never clear just when and where the next big one is going to surface. When we identify the next monster wave, we’ll be prepared to pounce on the break, ultimately providing life-changing opportunities going forward.
I hope you enjoyed and after a difficult 2022 we are excited for what 2023 will bring!
