Welcome to the second (2023) annual blog for Polaris Capital Management (PCM). I want to begin by thanking my clients, who make this endeavor meaningful and joyful. More importantly, I want to thank them for their commitment and sticking to the proposed financial plans. 2023 was a roller coaster ride in the markets with inflation, a banking (mini?) crisis, interest rate increases and tense geopolitics, much would be lost if our clients had wavered.
Business status:
PCM’s assets under management (AUM) are up to ~$5.7M end of 2023 (vs. $3.63M end of 2022) . Of course, this is a combination of new assets and growth in the invested assets. While I talk about assets under management (public info), please be aware that PCM provides a lot more in the way of financial advice than can be captured by the AUM number alone.
Looking back at 2023:
“The stock market is a device for transferring money from the impatient to the patient.”
-Warren Buffett
“The essence of investment management is the management of risks, not the management of returns.”
-Benjamin Graham
Years like 2023 show that the most important plan is - to stick to the plan. Despite the historical pace of increases in interest rates, higher inflation, and conflicts around the world - Nasdaq ended up ~40%., SNP was up about ~24%. Apart from that, below is how I will remember 2023-
The year we went from There Is No Alternative (TINA), as in stocks, to TARA (There Are Reasonable Alternatives) with treasuries, CDs, bonds, I-Bonds etc. Cash was not trash, anymore.
Everyone and their aunt learnt about PCE, CPI, Core PCE, Super core etc. (various measure of inflation).
ChatGPT, Sam Altman and Jensen Huang.
Did you hear about the Magnificent 7 (Mag7)?
The collective gains from them (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) were about 62% of the SNP 500 returns in 2023 and the Mag7 are now > 30% of the index[1]. Also, their market cap is ~10% of the world’s GDP. Collectively the Mag7 would be the second largest economy in the world[2]. Of course, the crown goes to Nvidia which had a ~240% return, followed by Meta at ~194%.
Many pundits and predictions were wrong about a recession in 2023.
SECURE act 2.0 - hope you have heard of this in some form another, the act of course has had several changes since its initial version of 2.0. This article is a decent starting point. (I encourage you to talk to your financial advisor on how it impacts your situation.)
IRA (Inflation Reduction Act) & CHIPS and Science Act are in play. I watch the rollout of both these acts intently, as a citizen, as a financial advisor and as someone who was in the semiconductor industry for 2 decades.
Attended my first conference (XYPN live) as a financial advisor, made new friends in the world of finance, many of whom are independent advisors, like myself.
Effect of inflation on market returns:
Probably no better (or worse) year than 2023 to live through it and learn about inflation. It is a good reminder that one big reason to invest in the stock market (or productive assets) is because inflation eats into your returns over time. Inflation was sustainably low ( avg <2.5%) for most of the 2000s; the sticker shock had to hit us at some point.
Below are the returns over a 3-year period 2021- 2023 with and without inflation on the SNP 500 (using ETF SPY[3], dividends reinvested). As you can see the returns are just 4.12% with inflation vs. a robust looking 9.96% without inflation.
Starting Amount Jan 1st 2021 | SPY (SNP 500 ETF) returns end of 2023 without inflation | SPY (SNP 500 ETF) returns end of 2023 with inflation |
$10,000 | $13,294 a CAGR of 9.96% | $11,289 or CAGR of just 4.12% |
Data source: portfolio visualizer.
CAGR - Compounded Annual Growth Rate.
Now, let us say I had invested $10,000 in January 2020 (just 1 year earlier), my returns (show in table below) even with inflation is 7.15% (compounded)! A neat lesson in the importance of long-term investing. This also ties to the concept of sequence of returns and when one retires etc. but that is a whole topic by itself, so I won’t discuss it here.
Starting Amount Jan 1st 2020 | SPY (SNP 500 ETF) returns end of 2023 without inflation | SPY (SNP 500 ETF) returns end of 2023 with inflation |
$10,000 | $15,736 a CAGR of 12.0% | $13,183 or CAGR of 7.15% |
Data source: portfolio visualizer
Looking ahead to 2024-2025:
Making predictions about the future is a daunting task (and maybe a fool’s errand). At PCM, risks are something we need to consider but not dwell on. We focus on what we can “control” for our clients and focus on being prudent in capital allocation based on client needs and circumstances. Both tactical and long-term strategic options are in place with our clients’ best interests in mind.
But there are what I would like to frame as a good scenario vs. a challenging scenario. I will talk about it a bit below. In any situation, it is important to remember that in the long run, the best opportunity for building wealth has been in the stock market[4].
The Good Scenario:
The US employment remains healthy (< 4% unemployment) and inflation sustainably trends lower from here (<3%) and the interest rates go down to maybe 4% or lower (??). Lower interest rates should help small cap companies, make home buying more affordable etc. in general it promotes overall financial activity/growth.
Monetization of AI starts paying off and the benefits spread to multiple industries in the US and globally.
Geopolitical flares ups do not get any worse and new conflicts are short or quickly mitigated.
The Challenging Scenario:
Inflation starts trending up again, the fed stays higher for longer ("too long") and it results in a hard recession.
Commercial real estate loans could have a blow up dragging more banks down and who knows what else?
US onshoring/friend shoring efforts hit a major road bump.
For the US stock market, the Mag7 are unable drive the returns higher and the rest of the companies cannot generate much in terms of earnings. AI monetization is pushed out for 2-3 years.
Geopolitics – always a wild card at home or abroad, conflict between countries or even elections (> 50 countries[5] hold elections in 2024).
In honor of Charlie Munger:
As mentioned in my 2022 annual blog, much of my financial and investing lessons are thanks to Warren Buffett and Charlie Munger. I am glad that I made it to the 2023 Berkshire Hathaway Annual Shareholder's meeting (blog) and was able to be in the same hall as Charlie, one last time. I can do no justice writing an ode to Charlie, so much has been written/said about him by folks far more knowledgeable than me. But, I provide some links below which I liked best. For sure Berkshire and the investing world has lost a hero in the irreplaceable Mr. Munger!
Poor Charlie's Almanack– One of the best free resources online!
The Investor’s Podcast – CELEBRATING CHARLIE MUNGER With MOHNISH PABRAI, TOM GAYNER, JOEL GREENBLATT, & CHRIS DAVIS
CNBC’s article
As always, thank you for reading!
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Data sources:
[1] Yahoo Finance article & WSJ article (pay wall)
[2] CNBC article
[3] I use SPY and ETF since one cannot directly invest in the index.
[4] This blog carries the chart from Professor Jeremy Siegel of Wharton, University of Pennsylvania.
[5] AP news article
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Disclosure:
This blog was written by Adarsh Shyamsundar, Owner & Financial Advisor, Polaris Capital Management, LLC, a Financial Advisory firm based out of El Dorado Hills, California.
No part of this blog should be treated as financial advice. Please refer to a financial advisor/fiduciary for any actions regarding investing on any equities mentioned in this article. Adarsh Shyamsundar and/or Polaris Capital Management have positions in the securities mentioned in this article.
This blog is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This publication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this blog.
[3]One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by PCM that any stock index constitutes an investment alternative to any PCM equity strategy or is necessarily comparable to such strategies.