Dear Partners
In 2023, Delphi delivered a significantly nice returns. The main contribution to this performance came from the fact that the stock prices of the companies we invested in at the beginning of the year were absurdly low.
Fund Performance
It was a year that began with deep concerns about inflation and a potential recession in the U.S. Our outlook was different—we believed inflation was easing, that there was no real reason to expect a recession (certainly not a severe one), and that the interest rate hikes had run their course.
At the same time, as always, we aimed not to rely on external factors, because we want our investment portfolio to deliver solid returns over time even if our assumptions about interest rates or inflation turn out to be wrong. That’s why our portfolio was composed of companies that are strong both financially and operationally. For this reason, a potential recession did not worry us.
Especially, we continued to invest in companies whose ability to generate increasing profits over time remained clear to us, even when their stock prices were low. Too low. When you invest in such companies, their prices tend to rise quickly after periods of decline that are not related to the company’s actual economic condition.
In the second half of 2023, as stock prices continued to rise, we sold investments that, in our opinion, had become too expensive. In the previous quarter, we mentioned AMD and TSMC. This quarter, we sold almost our entire position in Adobe and most of our shares in Apple.
The main consideration in selling these stocks was price. In our view, it was too high. A high price implies a lower return potential, which doesn’t align with our return objectives. With some of the proceeds, we took the opportunity to invest in companies that, in our opinion, offered a more attractive return potential.
Meta (Facebook) was a key contributor to our 2023 returns, and we expect it to continue contributing in the future. A return to growth, alongside the strengthening of Reels advertising and disciplined expense management, creates an attractive opportunity for significant profit growth. The company’s current stock price does not reflect the expected earnings increase, which is why Meta remains one of the core holdings in our portfolio going into 2024.
Market Illusions
Over the past year, the S&P 500 Index delivered a return of approximately 24 percent. Impressive, but 72 percent of the stocks in the index underperformed the index itself. In fact, most of the return came from just seven stocks out of 500: Nvidia, Meta, Tesla, Amazon, Google, Microsoft, and Apple. Selectivity was extremely important in 2023, and we believe it will remain critical going forward. The government is no longer injecting free money into the market, and interest rates are no longer at zero. In fact, they are at their highest level since the 2008 crisis. In this environment, strong companies have an advantage. A company that knows how to generate profit can grow its revenues more easily compared to the era of easy money. Competition for workers is less intense, and acquisition targets are cheaper. We believe this situation should benefit the type of investments we focus on: profitable, market-leading, debt-free companies.
Out of the seven stocks that drove the index’s return, we held five and continue to hold them, though with different weightings compared to last year. As mentioned, we have reduced our position in Apple. We do not hold Tesla or Nvidia. In our view, Tesla is too expensive, especially since it is no longer the only player in the electric vehicle market and is already feeling growing competitive pressure. It is becoming harder to drive sales growth, and profitability is being squeezed by competition. We believe that in the coming years, the EV market will include more and more significant players, making it even more competitive than it is today. Regarding Nvidia, while we admire the company’s execution and clearly its products lead the market, we see a number of risks that we believe are not reflected in the stock price. In our view, the current price reflects only an optimistic forecast (amplified by hype) while ignoring competition that may increase in the medium term and the fact that we are currently at a peak in AI infrastructure investments, which may not continue at the current pace.
In Conclusion
We continue to concentrate our portfolio on companies that are financially and operationally strong, lead the markets in which they operate, and have clear advantages over their competitors. In a normalized economic environment, where the government is no longer injecting money, interest rates are positive, and the labor market is balanced, the gap between these companies and weaker ones should become even more pronounced. Naturally, in scenarios of economic slowdown or recession, these companies are also far more resilient than others.
While general market indices have recently delivered strong returns, this performance is driven by just a handful of companies. We do not see a change in the relative outperformance potential of these companies compared to the broader market, and therefore we are not making any significant changes to the portfolio beyond those outlined in this letter.