The fiscal 4th quarter of 2023 produced a broadly based rally among all classes of equity index in North America.
The DJIA increased by 12.5% in Q4. The S&P 500 advanced 11.2% and the NASDAQ Composite Index continued its turnaround in 2023, increasing by 13.5%.
As for the Gnostic Capital portfolio, the NAV increased from $751.91 at the end of Q3 to $845.43 at the end of Q4, an increase of 12.4%.
For 2023 as a whole, the markets rebounded from the disappointing 2022 result.
The DJIA generated an increase of 13.7% for the entire year 2023. The S&P 500 advanced by 24.2% and the NASDAQ Composite returned an impressive 43.4% for the fiscal year.
The Gnostic Capital portfolio ended 2022 with a value of $677.31 per share and ended 2023 with a value of $845.43, a net increase of 24.8%. The account bested two of the three major US indexes, but underperformed the tech and knowledge based NASDAQ index by 18.6%.
Traditionally, the Gnostic account, with a global theme, has historically outperformed all major indexes annually while benchmarking against the US major indexes, the highest hurdles for comparison globally.
Absolute underperformance of the account vs the NASDAQ for 2023 appears to be a drubbing, a repudiation of active management. In isolation, a newer reader might view the very modest outperformance against the S&P 500, coupled with an 18.6% year one year underperformance against the NASDAQ and declare the Gnostic return to be as ordinary as any other, particularly since the portfolio is actively managed, whereas the NASDAQ represents a blazingly simple index, absent of thought. Why even go the route of active investing, when a simple tech heavy index almost doubled the return?
Why indeed, a very fair question, deserving of a fair answer. The NASDAQ result for 2023 does look absolutely astonishing in relation to other indexes, save for the point that at the end of 2023, the NASDAQ composite remained a full 633.62 points, or 4.2% lower, than where it closed at the end of fiscal 2021. All those who crow about the NASDAQ index return for 2023 are still lower than where they were two years back, and that does not include the time value of money, which is costly in a high interest rate environment. In contrast, the Gnostic Portfolio, having bypassed the index losses of the DJIA (-8.7%), the S&P 500 (-19.4%) and the NASDAQ (-33.1%) in 2022, continued to advance, unimpeded.
For the Gnostic portfolio, with its current design (one with limited composition changes over time) the strong advance of the NASDAQ in one year doesn’t refute the investment rationale one iota. In this multi-decade race, the entire peloton of NASDAQIANS had a massive crash on the road in 2022. They picked themselves up and peddled as furiously as they could in 2023, somewhat closing the distance of my breakaway, but remain far back in my rear view mirror.
2024 will represent the year to watch, because NASDAQ index investors now need to earn a 4.2% return, plus three years of time value of money, in order to move beyond the their 2021 high. It is possible, and under favorable circumstances, quite probable, for that to happen; the questions become “to what degree” is NASDAQ likely to outperform in 2024 and how will the Gnostic account perform in 2024?
For the vast majority of DIY investors and most active professional managers, who attempt to best indexes over a great number of years, and fail miserably, the NASDAQ index would represent the logical path for them to convert to passive management.
I have no problem with the inclusion of a NASDAQ ETF for most as an investment, should the objective be to address logic gaps among individual investors that lead to perennially subpar returns over time. The caveat comes from all that volatility. Personally, I do not handle extreme market volatility at all well, and with more than 4 decades of lived experience under my belt, if I cannot handle it, just how is Joe Q Public going to do so?
Sure, some do possess the intestinal fortitude to tolerate extreme swings, or at least that’s their claim. Those with the bravado of youth, who truly don’t have much steak on their plates, who state a willingness to tolerate loss in order to learn (yet refusing to legitimately learn from mistakes as they occur) and that have very little capital at risk, they want NASDAQ gains. On the other hand, those with capital and that didn’t get that capital from NASDAQ stock plans awarded at nominal or zero cost base by their employer, they tend to abhor movements that can remove millions, or tens of millions of dollars from an account value in just one year. Unlike executives at NASDAQ companies, who can just reset their stock options in bad years, most of us have to sweat out NASDAQ losses as they happen. Yes, the NASDAQ sounds great for most, were it not for extreme swings that most cannot abide and that leads to a transactional approach rather than an investment policy. That is the catch-22 of NASDAQ.
In contrast, I focus on consistency of result and attempt, within my wheelhouse, to source out securities among a variety of sectors to accomplish said objective. It is what works for me, what I have chosen to do, and has resulted in every $1 million of capital invested in the account in August 2000 compounding to $84.5 million in 23 1/3 years time. An acceptance of reasonable volatility, for a superior return over time, is how I invest. The portfolio didn’t beat the NASDAQ, this year. It did beat inflation, bested investment price inflation (IPI) and those with the portfolio ascended, yet again, in net worth rankings worldwide.
2023 individual equity returns within the account were quite varied.
On the plus column, the portfolio firmly benefited, in 2023, from the ownership of core large position investments in Novo Nordisk (+52.8%), Eli Lilly (+59.3%), Microsoft (+56.9%), Fomento Economico Mexicano (+66.9%) and Grupo Chedraui (+42.7%). Average performers for the year included Solvay (+28.6%) Visa (+25.3%), Mastercard (+ 22.7%), Grupo Aeroportuario Del Sureste (+ 26.3%), Grupo Aeroportuario Del Pacifico (+21.8%). Below average gainers in 2023 were reported by Union Pacific (+18.6%), Small positions in Palantir (up by 168%) and Lassonde Industries (+27%) sound positive, but were not weighted sufficiently to move the needle overall at this time. A further 25.6% of the portfolio was all in positive territory for 2023, but appreciated by less than 10% on average. Actual losers for the year were three companies; Unitedhealth (-1%), Cigna (-9.6%) and Adyen (-9.5%).
A potentially disastrous health care merger, a margin decline at a fintech and a unilateral government decision to sharply raise its take on private airport concessions in Mexico were sources of stress for the account during 2023.
2024 US government reimbursement changes were reset for health insurance companies at rates considerably lower than were earned during the pandemic years of Covid-19. As a result, many health insurers started to rationalize operations in preparation for leaner times. Some, like UnitedHealth, continued to acquire smaller bolt-on operations in efforts to become one-stop shops, with UnitedHealth also selling off money losing international operations in Brazil. UNH assumed incorrectly, as have many others, that Brazil represents an up-and-coming economic powerhouse of capitalism. The result of the Brazilian misadventure, one where Unitedhealth paid a total of $5.4 billion on a largely failing private health care company in 2015, further plowing billions into operations in an attempt to turn it around, only to ultimately elect to jettison the albatross for a nominal value, with a $7 billion write-off to be incurred in 2024. Other firms, such as Humana, attempted to shop their entire company prior to the introduction of the tighter payment schedules, and almost found a sucker. Sadly, for the Gnostic portfolio, that “mark” was determined to be Cigna health. The potential terms of a merger were so destructive to shareholder capital that in addition to publicly decrying the combination, I picked up the phone and made my objections clear to a number of prominent industry investment colleagues. I hate going activist, but what is the point of a speed dial if not for emergencies? Collectively, it was only due to institutional pushback that Cigna aborted the Humana talk. Nevertheless, considerable reputational damage was inflicted on the company, damage that will take some time to repair.
Adyen, a key holding for the portfolio, announced a sharp decline in EBITDA margins from prior years. To some extent, this was due to continued poaching of “talent” at other Fintechs to scale up their US and Asian payment processing offerings. More staff increases ongoing operating expenses and reduces margins until the hires can generate revenues. To almost an equal extent, margin compression was also due to a relative decline in the USD vs the Euro. Currency translation impacts at foreign firms can produce outsized changes in earnings and many newer holders of Adyen were largely unaware of the multiyear, one way move in currency that benefited Adyen. So, when currencies reversed, it would inevitably reduce rates of growth and also earnings.
Unfortunately for existing holders, the hiring spree and currency movement intersected in the first half of 2023, leading to a precipitous short term decline in margins. In the latter half of 2023, as investors parsed through the data, there is a growing view that the underlying growth of revenues may be sufficient to make 2023 a one-off. At Adyen, a firm that tends to not trumpet their business success to the institutional street, and with whom major equity houses have a long-standing grudge against (for NOT doing an equity underwriting when going public but who instead issued shares directly to the public), the decision was made to start offering fiscal reporting on a regular quarterly basis rather than semi-annually. The company also feels that employee poaching is largely done. We shall see. The confluence of events fully obscured what might be the most important business evolution in the history of the company, and one that should give competitors pause; that being the instant push of payments for merchants who choose Adyen as a processor vs peers.
Finally, the outgoing president of Mexico unilaterally wrought damage to the valuation of the Gnostic portfolio in 2023 via his decree that a gross revenue take by the government, on airport revenues, would almost double on a go-forward basis. It was a decree at the point of an implicit gun: “accept this decision without dissent, or you might lose your remaining 25 years of concession on any Mexican airport presently operated on behalf of your shareholders”. So, the 3 publicly traded operators, of which my account holds 2, ate the bullet. Multiyear gains were erased in a matter of days at one point, but have since clawed some of that loss back, resulting in a modest gain, yet still below that of the main comparative indexes.
Generative AI, or DEGENERATIVE AI?
As for the remainder of the investment world, they were enthralled with a newish, big investment theme. The media and investment firms were treated to the rollout of artificial intelligence by large vendors, such as Microsoft, and, to a lesser extent, Palantir. Microsoft insidiously attempted to insert its scraping bots into the operating system of every Windows user worldwide under the premise that it would benefit the public. That’s their story, and at some point, the corporate goal will likely be achieved.
What I have seen thus far is nothing short of the most intrusive collecting (scraping) of user data, of user intellectual property, ever recorded in the history of the planet. We might rail on the Chinese propensity to swipe IP, they have nothing on Microsoft AI algorithms in this regard. No matter whether one stores their data in the cloud or in their few remaining hard drives, Microsoft is presently compiling everything and there is almost no place left for information to hide, other than the single data center not yet networked onto their system, and that holdout data center is your brain.
The unholy bargain, a Faustian tradeoff if you will, is the olive branch extended to facilitate the information theft, a Trojan horse known as generative AI. Anyone can now ask a question of an AI bot run by Microsoft and have some public data or opinion dispensed, absolutely free of charge, in a format of their liking. They called it generative but it is not original, it is somebody else’s thoughts or data to use as you will, a form of plagiarism without attribution. To regulators, such as they are, Microsoft and others claim that generative data represents a social good, the end benefit of AI data scrapes, an expedient way for the public to save time sorting through an excess of data themselves, nothing more than a shortcut, no worries here.
I consider the word “generative” to be a gross misnomer and in this case, oxymoronic. A more appropriate term should be “degenerative”, because all that I have seen of it leads me to conclude that through its indiscriminate use, the public is getting dumber, not brighter. The medical industry is getting lazier, rather than more innovative. The scientific community is becoming more conventional, rather than inquisitive. What comes out of generative AI is nothing more than regurgitation of somebody else’s, or a collective of somebody else’s, perceptions and conclusions. What generative AI promotes is your acceptance of another’s views and conclusions. That is the furthest thing from the scientific method imaginable, and I consider it an abomination.
To a skeptic, AI represents a form of societal control, a brainwashing of uniform thoughts and views, but to what end?
For profit, of course. The Gnostic portfolio holds shares in Microsoft and has no issue with Microsoft’s guiding sheeples on what to think, on where to seek out information and to encourage linear thinking in a can, because it makes my job of finding investments easier. Just as ETFS were supposed to spell the end of active management, yet did not, generative AI will produce an entire planet of investment moles who will blindly tunnel past compelling opportunities, because they refuse to think for themselves.
As for those who predict the end of active management via AI, a further democratization of investment knowledge, think again. The operating model of generative AI (ask a question, get a quick answer, don’t think for yourself) isn’t dissimilar to the multi-decade subpar return experiment earned for Buffett acolytes, who missed out by limiting their worldview to a selection of presorted stocks that they were told were excellent, who accepted that premise without any further thought. After decades, they are, for lack of a better term, flat-earthers of a fashion, all trapped in groupthink. Now, envision taking such blind, unquestioning obedience onto a global scale over the coming years, via multi-daily fixes of AI propaganda to inexorably direct you to their end, that’s the risk of generative AI.
AI chooses your answer to your question, and inevitably, you lose the ability to choose for yourself. How many people will accept a response by an authoritative chatbot that types out the world is flat? This extreme example sounds ridiculous, but organized propaganda doesn’t start with an extreme position, it leads you there in a series of small steps, until one day, most conclude that the world is flat, because all of the groundwork to promote that conclusion has previously been laid out over time. Generative AI has as much potential as a propaganda machine as it does a tool for global advancement, and what I have seen from the public consumption to date, gives me pause with respect to its regurgitative, degenerative properties.
Meanwhile, the data mining underway by AI, the real output that the bottom dragging data scraping nets are hoovering up and intending to use for the benefit of certain large corporations, be they tech or investment, you will never see it.
In order for corporations to increase their control over what you think and what you do, how you spend your money, they don’t actually need to be smarter, they just need you to be dumber. And since artificial intelligence doesn’t yet have the ability to provide novel thoughts, but simply collects existing thoughts, the best and most profitable use of the capital invested in AI is to make us all dumber; a little dumber is fine, a lot dumber is great. The return on AI capital invested is inversely correlated to just how stupid and gullible we can become.
The scrapings of data are as openly brazen as social media flash mob thefts in stores, yet don’t raise any public suspicion.
I am aware of it, but it is likely good for me from an investment perspective, so I am conflicted. The wave of ETFs that were supposed to eradicate active investors made my job easier. My portfolio returns improved on an absolute basis once ETFs collected the majority of the investment capital on the planet, leaving entire sectors abandoned by research, affording me plenty of time to evaluate choices and nobody to compete against when placing equity bids. I suspect that as AI gets into investment models, it will be much the same; encouraging all of us to look in one direction, potentially a misdirection, all under the guise of altruism. That’s what a skeptic would think.
American troubadour Anthony Oliver wrote it better than I ever will, as he penned the chorus to his 2023 hit, “Rich Men North of Richmond”:
“Livin’ in the new world, with an old soul
These rich men north of Richmond
Lord, knows they all just wanna have total control
Wanna know what you think, wanna know what you do
And they don’t think you know, but I know that you do”
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