Polaris's 2024 Annual Blog

Welcome to the third (2024) annual blog for Polaris Capital Management (PCM). I wanted to start this year's note by sharing why I write these annual blogs - it is for reflecting on the past year and primarily focusing on what I felt is relevant. I write monthly newsletters to my clients where I share information related to portfolios and other financial news. I will not talk about our portfolio holdings (or other individual securities) unless I use an investment as an example to make a point. (Also, please read the disclaimers at the end of the blog, nothing here should be treated as financial advice).

I have settled in on a format similar to the 2023 annual blog. This is to keep my annual blogs consistent to the extent possible and provide some continuation in the commentary. Our principle with these blogs (as with our advice and investments) - consistent but flexible. If you are interested in the blogs from previous years, here is the link.

As always, I want to thank my clients, who make this endeavor meaningful and joyful. Our clients are patient and steady, which allows Polaris to focus on playing the long game, which in turn is the key to wealth creation. As much as our clients have to choose us, we make every effort to attract clients with a long-term mindset.

Business status:

PCM’s assets under management (AUM) are up to ~$8.1M at the end of 2024 (vs. $5.7M end of 2023) . 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.

Reflecting back on 2024:

 2024 was another fantastic year for the U.S. Markets, the Nasdaq composite ended up ~29% while SNP was up about 25%. Apart from that, below is how I will remember 2024- 

1. Asset returns: Everything, everywhere went up most of the time - Gold, Bitcoin, Stocks (Midcap, Small Cap, Large Cap, US, Foreign...), as shown in picture 1. If there was a ranking of the years for 'buying the dips', then 2024 would likely be the King. By July 17th, 2024, the markets had gone 512 days (or 351 trading sessions) without a 2% drop (picture 2). The largest drop in 2024 was 3% on August 5th due to the 'Yen carry trade panic'. The rush to buy the market dips (in my opinion) is a combination of investors being ebullient and plenty of money in the system. The Magnificent Seven went from strong to stronger and continued to further dominate the stock market returns and the S&P 500/Nasdaq weighting.

   

   Picture 1: Returns of various asset classes - Source JMP Morgan Chase, Bloomberg etc. [1]

   

   Picture 2 -- Data from CHARTR and FactSet as of 7/17/24,[2]

2. Big Tech: The AI race escalated further with Big Tech spending big on everything from chips to nuclear reactors to data centers. This was undoubtedly the year of nuclear energy revival. Quantum computing finally made some waves with Alphabet (Google) showing off their Willow chips along with some good progress from other players like IONQ, D-Wave quantum, Rigetti Computing etc.

Picture 3 - Big Tech spends Big in the AI race. Source: The Wall Street Journal[3]

3. Market Predictions: It was yet another year where the market Pundits got their initial predictions wrong and scrambled to revise their forecasts mid-year. Better late than never and I don't envy the job of market predictors. Of course, the markets ended at ~5900, above most targets.

Picture 4 - The Mid -Year scramble to raise SNP 500 targets. Source: Yahoo Finance [4]

4. Resilience: The U.S economy stayed resilient despite many threats that are looming on the U.S fiscal front and Inflation getting further entrenched in the economy.

5. Crypto: Came roaring back and Bitcoin established itself as a mainstream asset class. At the inception of Bitcoin, it was largely held by Satoshi (the creator) and some others who were technology enthusiasts. Currently, the largest holders of bitcoins are the big wall street banks (i.e. via ETFs), Satoshi is still the second largest holder, Strategy (previously known as MicroStrategy) comes in fourth and the U.S government is the fifth largest holder of Bitcoin. It might be fair to say that Bitcoin has become digital gold. It is important to note that, while there are questions about valuations of Crypto companies, the technology is solid and can be used for many applications. For example - the entire banking industry can be built on a blockchain. Building supply chains and tracking inventory could be a good use case too. Lastly, there is the concept of web 3.0, where the entire internet as we know it can also be on a blockchain. The administration and the markets are behind this technology so it will be interesting to see what comes out of it.

6. Private investments: I saw a continued trend in reduction of the barriers to entry for investing into private companies/pre IPO companies. For example, the launch of the closed end fund Destiny 100 (ticker: DXYZ). Destiny adds to the options like Cathie Wood's ARK Venture fund (launched in 2022), along with already available choices like Fundrise, Forge Global etc. Please be aware that each of these vehicles come with their own set of challenges and risks, this is definitely not an endorsement or advice to invest in any of these vehicles.

7. Politics: Donald Trump is elected as the 47th president of the U.S. and Elon Musk becomes a force to reckon with in politics. It also felt like a year where many in silicon valley changed political leaning as seen by actions CEOs of Big Tech, VCs etc. One can observe this shift via interviews like this one by Marc Andreesen, with the Hoover Institution.

8. On Personal Growth/Sharpening the Saw:

   1. One of the best decisions I made for my professional and personal growth was joining the masterclass led by William Green, author of Richer, Wiser, Happier (Amazon Link). While the masterclass is on through September of 2025, the friendships, and perspectives I have gained already, is immense. I am grateful to William for this journey.

   2. I joined the Manual of Ideas (MOI) Global community (run by the wonderful John Mihaljevic). The high quality of this community as well the content, enables me to learn about investing and industries, efficiently and compound knowledge rapidly. As part of MOI Global, I got the opportunity to discuss with John the basics of semiconductors and then delve into the industry players. If you are a member of MOI, you can access the talks here - part1 and part2. If you are not a member of MOI, please reach out to me via LinkedIn (DM - Direct message) and I can send you the links.

   3. I attended two of my favorite conferences one hosted by XYPN and the second by FutureProof. While both cater to the finance industry, the experience and the nature of these conferences are very different. The interactions with various folks through these avenues have continued to enrich my knowledge about - life, running a business, financial advice and investing. I cherish the friendships I am building here.

9. "Charlie?": Last but not the least, it was the first full year of an investing world without Charlie Munger. Not getting to hear Charlie Munger at the Berkshire Hathaway annual meeting was weird and sad. At some point during the Q&A session Buffett, after answering it from his perspective, charmingly said "Charlie?", a poignant moment and hard to forget. Very rare is such a friendship in any field.

Looking ahead to 2025-2026:

Making predictions about the future is a daunting task (and 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.

With that said, it is useful to look at the tail winds and challenges which I will talk about 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], and like Buffett had said it has been a bad idea to bet against the U.S.

 Tail Winds/The Good Scenario:

• Monetization of AI starts paying off and the benefits spread to multiple industries in the US and globally. The global AI tech stack is built on technology provided by U.S companies.

• Potential swath of IPOs (especially in AI) could turbo charge sentiment and stocks in that area. Not to mention that the sentiment is spreading to areas like quantum computing.

• Sentiment in general is very bullish among investors. Possible de regulations and boosts to the financial and the energy sectors could drive the markets up.

• The actions of the Trump administration improve the U.S fiscal situation and reigns in our debt and deficit.

• Blockchain applications become more mainstream with favorable Crypto regulations. This can lead to growth of the industry, along with the new job and add to the GDP.

• The US employment remains healthy (< 4.2% unemployment) and inflation sustainably trends lower from here (<3%) and the fed fund rates (interest rates) go under 4%. Lower interest rates could help lending to small cap companies, make home buying more affordable etc. In general, it can promote overall financial activity/growth for the economy.

• Geopolitical flares ups do not get any worse and new conflicts are short or quickly mitigated.

Challenges

• The U.S. fiscal situation is (and has been) a big concern, at the end of 2024 our debt stood at $35.46T, which is 1.2 times our GDP ($29.37T). Also, the U.S. Total Consumer Credit Outstanding is at an all-time high of ~$5.1T and the U.S. Personal Savings Rate is at ~4.3%, well below the average rate of ~8.5%. Tackling these without causing some pain to the society will be daunting, let's hope for the best.

• We have had two back to back years in 2023 and 2024 where markets had gains over 20% . Only the second time since 1930s that this happened. So, my expectations from the markets are tempered in that sense, but we could still have returns ~10% in 2025. The valuation in the U.S stock markets is also of concern. In the short-term valuations are not a good market timing tool. But, over the long run, earnings, as well as valuations at which one purchases stocks matter for good returns. Even the best companies purchased at high valuations can cause trouble in portfolios. (Dollar cost averaging into various Index funds over a long period of time is the sagest advice.)

• For the U.S. stock market, the Mag7 are unable to 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. Compared to 2025, I do think that 2026 will be a more critical year for the tech space as the markets will look for the returns on all this spending on AI. In the meanwhile, Nvidia will have sold a lot more chips and built up a war chest of cash that will help them continue to further their technology leadership. This does not, however. mean that the stock price of Nvidia will double from here in two years. Nvidia the business will get stronger but stock prices don't have to rise. The same can hold true for many of the tech stalwarts like Google, Amazon, Meta etc. In some ways, we might see a bubble burst in 2026 or 2027.

• Inflation starts trending up again, the fed stays higher for longer ("too long") and it results in a hard recession.

• The actions of the Trump administration such as U.S. onshoring/friend-shoring, tariffs and immigration policies increases inflation and leads to higher cost for the U.S. consumers.

• Geopolitics – always a wild card at home or abroad, shocks from exogenous events can be harmful to human society and markets.

-------------------------------------------------------------------------------------------------

Data to ponder on --

The Shiller P-E (Price to earnings ratio) named after Nobel Laureate Rob Shiller, who developed the ratio. (click on the picture to make it bigger)

o   2000 Nasdaq bubble burst – peak of 45.

o   2021 Bubble – P/E ratio of 38.6.

o   December 2024 ratio was at 37.35

Picture 5 – Shiller P-E (Price to earnings ratio) named after Nobel Laureate Rob Shiller who developed the ratio. [5]

The S&P 500 sales (total revenue) to stock market capitalization Is at an all time High. The previous peak was in 2021 Nov-Dec (coinciding with the peak in the markets then). The following year, 2022, markets went down double digits.

Picture 6 - S&P500 Sales to Market Cap ratio. [6]

The way to read the above chart is that for every dollar of gross revenue an investor is paying $3 for purchasing the index.

Picture 7a and 7 b – Is inflation coming back? Courtesy: Torsten Slok/Apollo.

Pictures (click on the picture to make it bigger) below shows the parallel between 2014 to 2024 (the green curve is the current CPI trend so far, starting in 2014) and to what happened in the 1970s (blue color curve ). In 195-1976, the Fed raised rates, inflation came down and then Fed cut rates, but, inflation came back in 1977 and persisted through 1981. By 1984 the interest rates were at 14%!

Picture 7 a CPI data from 2014 to 2024 and comparison with the trend from 1966 to 1983. [7]

Picture 7 b – inflation has trended up May through -October of 2024.[7]

-------------------------------------------------------------------------------------------------

References:

[1] https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/market-updates/on-the-minds-of-investors/the-year-in-review-what-happened-in-2024/

[2] https://sherwood.news/markets/last-time-s-and-p-500-dropped-more-than-2-was-512-days-ago/

[3] https://www.wsj.com/tech/ai/tech-giants-double-down-on-their-massive-ai-spending-b3040b33

[4] https://finance.yahoo.com/news/wall-streets-2024-predictions-fall-165707629.html

[5]https://www.multpl.com/shiller-pe

[6]https://www.multpl.com/s-p-500-price-to-sales

[7] Torsten Slock, of Apollo, publishes inflation data on some regular basis.

December 2024 --> https://go2.apollo.com/e/1047283/suresOfInflation-121524-v4-pdf/2522r/158443597/h/gv-tlTBuPWX2exRwZE0Bcp1d8kgyAW0xP0JVdnJUtRo

Feb 2025 --> https://www.apolloacademy.com/when-history-rhymes/

----------------------------------------------------------------------------------------------

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 investment or personal finance decisions.

We get no compensation or any other remunerations on behalf of people or agencies mentioned in this blog. Neither are these endorsement of any products, books or agencies. They are merely mentioned for educational purposes or to share information.

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