Observations: Learned & Earned, on the 100-BAGGER Portfolio Return.

In a smallish western film titled Appaloosa, a US Marshall and his deputy are tasked with arresting and/or killing several criminals trying to facilitate a prison break. Preceding the battle is a typical build-up of tension, with the heroes and villains sizing up one another, engaging in requisite banter.

Modern western gunfights seem closer to a “beaches of Normandy storming” in terms of ammunition expended, thousands of bullets fired. Not Appaloosa. The good guys vs bad guys gunplay is over in exactly 30 seconds of screen time, start to finish. At the conclusion, the deputy, played by Viggo Mortensen, crawls to the Marshall and grunts:

“That happened quick“.

To which the Marshall, played by Ed Harris, responded:

“Everybody could shoot”.

This quarter, the Gnostic Global Portfolio surpassed the $1000 per share unit NAV.

In August 2000, the portfolio started out with an NAV of $10 per share. I was informed that this capital growth, this milestone, represents a very big deal. I was also advised to write about it at some length rather than just chalk it up to another “aw-shucks” quarter.

A $1 million dollar initial investment made in August 2000, has grown to a value of more than $101 million in capital, a time-frame of less than 24 years. On a compounded annual percentage terms, that represents a 21.5%+ growth rate.

A point seldom written about, but deserving of mention, is that the estimated 2024 dividend payment rate at this time, to be made from the varying equities within the account, may likely exceed $1.51 million US. Such a payment represents a modest and sustainable 1.5%ish current dividend yield, but on the original capital invested, forecast dividend income now represents a greater than 150% annual return.

For those intrepid souls who chose to participate, at the outset, of this exercise; far from a theoretical venture, but rather, a practical one, they have achieved the 100-bagger. That hundred bagger isn’t an individual stock that has grown by 100x, surrounded by a group of subpar performers that weigh down the end result; no, the entire portfolio has grown in value more than 100fold. We also refer to the 100bagger in its true frame of reference, investors now have their initial $1 million, plus another $100 million on top of that initial investment.

Differing from many, likely it seems, from most, Gnostic has resolutely preached, and put into practice, the concept of staying on trend, surfing if you will, and on more than one occasion, investing slightly ahead of conventional investment media models. Often, I have found myself pushing off of rather important reef breaks largely alone, at least at the outset. In December, 2017, the portfolio had breached the $200 NAV per share mark, and I thought that was quite something at the time, a 20 bagger, in 16ish years of portfolio existence. Subsequently, over next 7 1/3 years, an additional $800 per share in NAV growth has been achieved. Maybe I shouldn’t be so surprised at the acceleration of return, because an increase from $200 to $1,000 in value is just a doubling, then another doubling, and finally an increase of 25%. A 100bagger isn’t nearly so herculean an achievement when one breaks it down into a series of steps. Growth was achieved entirely with a long only focus; there was no hedging, no futures, no options, no leverage, no currency swaps, nothing arcane involved. Stocks were bought, stocks were held.

Participation was set at $1 million per unit at the creation of the portfolio.

The minimum was set, not to prevent retail investors from participating, but rather, to reflect a certain reality of the investment psyche; a reality that an overwhelming percentage of individual investors will bail out on their journey before arriving at the destination. Inexplicably, history has demonstrated that retail sells, not when a portfolio is unsuccessful, but confoundingly, when a portfolio IS successful. Had a retail investor been offered an opportunity to deposit $10,000 at the outset, and experienced pro-rata percentage growth, to say, the 2017 range of $200,000; their typical response wouldn’t have been to continue and hold for better things, but rather, to avail themselves of the many opportunities that may be seized in the consumer economy along the way. Without fail, people that hold themselves up to be a Charlie Bucket, transform, after what they decide arbitrarily to be a big run, into a “Veruca Salt” (that’s a great Chevy Silverado, I DESERVE it, I WANT it NOW, and I will still have $120,000 remaining for further growth.) For the most part, a $10,000 investor never gets where they want to go, due to their distractions by the consumer economy and an inability to delay gratification beyond a point of their choosing.

As to the investor with perhaps $100,000 to put into an SMA, they are less prone by diversions of the consumer economy, but tend to be quite preoccupied with real estate ventures. When that $100,000 investment rose to the first $2 million (again, on a pro-rata basis), inevitably, an Arkansas or maybe a New York lake-house, complete with a boat dock, would most assuredly be found on Zillow, for the irresistible bargain price of $1 million, still leaving a cool $1 million behind to compound, because they “deserve to have some fun with what was earned”. Those with that $100,000 to spare failed to take into account that by engaging in impulse control, had they waited, they could have purchased a $5 million Arkansas castle someday, all the while leaving $5 million on the table for future growth. Those considering themselves to be “mass-affluent” aren’t completely prey to consumerism, but they do tend to suffer from their own variation of appearance-spending, one that shows up on the real estate ledger.

This portfolio had designs upon a greater purpose than a supplementary spending mechanism to promote rampant consumerism.

I am an investor, first and foremost, not a “cult of consumerism” deprogrammer. Financial deprogramming is Dave Ramsey’s job and he beats himself against a wall, daily, on syndicated US talk radio. Nor was I interested in those preoccupied with small scale real estate empire building, intent on profit skimming of portfolio returns when the mood strikes them, to dabble elsewhere. No, If successful, the output of my work is designed to be potentially life altering, likely on a multigenerational basis. The portfolio qualification was set at a bar designed to aid certain persons in ascending global wealth rankings. Serious money self-qualifies parties; only the most settled of persons would have an opportunity to participate on this ride-along.

My only stipulation, other than initial investment, was that investors were not permitted to dip into the accounts until we arrived at our final destination. They COULD withdraw 100% of their holdings at any time and close out their account in its entirety, but partial redemptions were not permitted; the stipulation was designed to prevent participants from using my work to subsidize their present standard of living, or to put their idiot relatives through film school, only to learn that nepotism supplants talent in most sectors, or perhaps to lose 1/2 of what was earned on vanity business ventures of zero merit and then doubling down on the stupidity via periodic withdrawals to prop it up.

To achieve a big goal in life requires big discipline. Such self-discipline cannot be taught in a university or a money management course; one either has it, or they do not. That is why the term is “self-discipline”, you possess it, but cannot buy it. Unlike hedge funds, who often lock people into holding periods, one can fully exit a Gnostic account at any time, because it is always their money, under their control; so the challenge was to find parties who could recognize the value, the importance of maintaining a good thing for the duration. Hence, the one, and only one, handcuff to our business relationship, an “all-or-nothing” clause. Third party investors could get their money at any time, in full, but would then forego further access to the portfolio composition. At any step on the journey, when one became tempted, to the point that they could not sleep at night, on a competing use for some of that profit, they were to refer to the terms of service PDF and make a choice, because the choice was binary. Is the PV (present value) of that lake house > than the FV (future value) of the Gnostic Portfolio?

An all or nothing clause promotes critical thinking, and over years, with above average returns and below market volatility, hopefully that should have been enough for most to stay on course, and for most, it was. Of course, a few did fall off the wagon, as expected. They succumbed to temptation after what they thought was a big year, or were frightened by transactional media that forever preach to take money off the table. Perhaps a few lost their way from chirruping competitors who preached that profits should be taken and rolled into their products when their competing funds were down sharply in value, because “investments always revert to a mean”. I still see some of the departed at conferences, almost all too sheepish or chagrined to even look my way.

Capital compounded via correct identification of important secular trends and selection of key businesses that benefit from such trends.

Once a trend was fleshed out, declared to be something noteworthy from mainstream investment media, and after others opted to participate, mid-caps became large caps and some smallish large caps have become mega-caps. Mastercard is a notable example. It went public as a mid cap and now sports a market capitalization of $447 billion, far more than a 100 bagger on my purchase, post split, in just 18 years, and that doesn’t even account for dividends and the subsequent reinvestment along the way. At the time of the acquisition, I was chastised and berated by peers for overpaying, with declarations that Mastercard was embroiled in anti-trust issues, was the subject of class-action lawsuits and that I was stupid to own a payment processor in the era of the internet. To top it off, I was counseled that the banks, being the initial sellers of Mastercard shares to the public, were surely getting out on top, to leave me hanging, holding a bag.

I can relay similar objections on virtually every business owned. Microsoft in 2008? A flailing business with flawed software being thrashed by competitors, that’s what I was told, and too pricey as well; after all Microsoft had a lofty valuation of more than $100 billion USD at the time, considered one of the most expensive businesses on the planet using conventional valuation metrices. Visa in 2008 as an IPO? I was not only about to get my head handed to me in buying a business verging on antiquity, but was also getting too heavily invested in the payment processing space, breaking the cardinal rule of concentration of capital within one industry.

Each and every investment purchase made of note, took place on the backs of uproars, with the most vocal of objections and grenades being lobbed by investment professionals. More recently, the same objections that I heard on Microsoft, on Mastercard, on Visa, more than a decade ago, have been expressed from readers on companies such as Adyen and on Palantir; one is a 4+ bagger in 5.65 years and the other is a 2.5 bagger in less than 4 years.

When it comes down to it, a business is a for profit enterprise and the present value of that business is either determined by current underlying level of profitability, or, by extrapolating a forward valuations laid out via expected growth rates and some other stuff. All that was expected of me was to find businesses that were highly profitable today with fast growing revenues, or that had low fixed costs and rapidly increasing revenues. It was simplistic, grounded entirely using investment common sense written up in the many investment management textbooks and investment treatises penned by the great minds of our time.

I posited that if we actually did what we were told to do, and avoided doing what we were told to NOT do, then the potential existed for a better than average return. I distilled most of the advice out there down to the following 8 points.

1. Own the best investments available on a global basis.
2. Overwhelmingly weight the portfolio towards the consumer economy, rather than the producer economy. The consumer economy accounts for roughly 70% of global GDP growth while producer oriented businesses only can, at best, directly capture 30% of global GDP growth.
3. Don’t own cyclical investments, but rather, invest in secular trends; invest in major trends, not fads.
4. Invest, to the greatest extent possible, in monopolies or businesses with oligopolistic pricing power in order to capture extremely high EBITDA margins as a percentage of the net revenues.
5. Own the strongest balance sheets and income statements possible. Don’t fall for the hype of profits earned through leverage, but rather, focus upon high gross operating margins achieved without leverage. Anyone can goose up a return through leverage; the real winners are companies that can demonstrate abnormal levels of profitability without resorting to accounting and banker tricks.
6. Keep the winners and do not portfolio rebalance; let the winners run.
7. Don’t invest in losers or plodders.
8. Should you wind up with a loser, through either an incorrect investment premise or via a corporate misadventure, just admit it and sell it. Don’t fall in love with a loser, because losers will break your heart and you will either average down, compounding the loss; or, you will further seek out solace and commiserate with others experiencing the same loss on the same sorry business, the investment equivalent of “Al-A-Non”. Like-minded commiserating fails to recover a foregone opportunity cost.

That is it for the policy statement. Overlaying this is the following piece of advice, one that needs to be taken to heart.

Be a collector, but NOT a hoarder.

My policy map is blazingly straightforward, completely logical, nothing even remotely contentious. Any point indicated above can be confirmed through reading an investment magazine, via listening to almost any radio talk show host, by watching an investment talking head on cable or from attending any reading by the thousands of notable investment authors in print. Rigorous adherence to these, almost childlike, templates has been entirely as expected: investors who started out with $1 million US now have more than $100 million each as a result.

If holding winners, removing losers and assembling a portfolio only using the best investments possible represents an effective way to produce above average returns, and this portfolio result, over decades, clearly demonstrates that it is, why don’t more achieve these sorts of returns?

1. Investment industry pushback is insurmountable. Low turn, high quality investing creates an incredible amount of tension among those in the professional investment management industry, because adherence to such policies obviate their profession. In practice, every $100 million of capital in the Gnostic account has virtually no portfolio turn; absent the removal of an occasional dud, an overwhelming majority of investment transactions are just dividend reinvestments. Total investment commissions to initially assemble the portfolio of 23 securities wouldn’t exceed $225 US upfront, even with $100 million, using any online firm. After that cost, had one subsequently paid commissions to manually reinvest the 92 annual dividends, ongoing charges certainly wouldn’t have been more than $900 US. Most firms offer automatic dividend reinvestment at no charge, which means that after the initial expense of $225 on purchase, ongoing costs might effectively be as low as zero.

Just how does any investment manager, or brokerage firm, earn a living on a $100 million US portfolio when the sum total of their fee is less than $1,000 per year, tops? The answer is that they don’t. Should one multiply the asset by 10, a $1 billion book of investment wouldn’t be even expensing $10,000 per year US in transaction fees. That’s an untenable fee among investment managers. Push that math out further and imagine oneself to be a portfolio manager rather than a client; if a fund manager ran 10X more of this capital, more than $10 billion US under management, total annual fees to hold and maintain that capital is less than $100,000 USD, not even what a registered nurse, putting in a bit of overtime, presently earns annually. Low turn accounts accumulate wealth that remain entirely in the hands, and under the taxation control, of the client. This leaves any investment manager tasked with overseeing such an account having the sorry luck of watching crops grow, and ultimately, being forced to bus tables at a local restaurant to keep up with their own mortgage. A low turn manager, steadfastly practicing what they preach, cannot even justify the hiring of full-time staff, unless it comes at the expense of client returns. My staffing expenses come directly out of my pocket.

ETFs also cannot compete against low turn accounts on a fee basis. Even the lowest of the low ETF fees, say 5 basis points, will still represent about $50,000 in annual costs on that $100 million; for what exactly? For the purpose of bookending a handful of winners with a sorry bunch of also-rans in an index? To be an investment manager equivalent to an elementary school recess monitor, to observe 500 children bash into each other on a playground and break up fights? And precisely how does a $50,000 annual charge from an ETF manager compete with DIY commissions below $1,000 on setup, and ongoing expenses at most firms that offer dividend reinvestment of zero? Again, they do not.

How does an ETF firm earn their income in any event; much of it is based on transaction flow rebates and via obtaining a portion of the bid-ask spreads on volume flows. When there is zero transaction flow, there aren’t any spreads. ETF sponsors, even more than active managers, despise low turn accounts, because the overwhelming share of their income base is proportionately tied to transactions.

No; nothing, absolutely nothing, in the professional investment industry, can come remotely close to the ultra-low costs associated with an ultra-low turn portfolio. Once one starts accumulating capital, a DIY account expense being just 1/50th of the annual fee levied at index funds, while maintaining almost total control over the level of capital gains and transaction taxes, represents the utter ruination of any argument made for passive index investing being the best choice, expense wise, for investors. Low-turn accounts represent a clear and present danger to an industry that exists, not for the purpose of bettering the financial future of individuals, but primarily for the bettering of the pockets of those overseeing accounts which should be best just left to their own devices.

The professional investment industry abhors low turn accounts. They despise buy and hold and they hate letting winners run up to lofty heights.

When stock commissions were deregulated and discount brokerage firms were created, a massive leveling of the playing field was tantalizingly possible. But, the professional investment industry was having none of it; discounted trades are just another misdirection, ruined by an insidious multi-decade programming campaign that converted buy-hold investors into traders. Investment managers rely upon propaganda campaigns, complicit friendly media is purchased to promote transactions, supplemented by a series of firm specific policies, compliance restrictions and guidance. This all adds needless complexity, negates simplicity, all with one unexpressed purpose, to create a flow of trades and increase revenue. The entire industry schools the public into believing that transaction flow is paramount, that trading supplants investing.

Worst of all, major firms counsel, badger, berate and on occasion, force transactions of highly profitable investments under the guise of “automatic portfolio rebalancing”. Because the professional investment industry is held up on a pedestal, surely they won’t orient an entire global system of investment management out of self-interest, now will they?

To the investment industry at large, a buy-hold investor is every bit as despicable as a person with a credit card who pays off the entire balance monthly (avoiding the interest charges). That credit card holder, who games the system by earning miles/rebates/points while dutifully avoiding interest expense, is barely tolerated and is given the private moniker of “free-rider” by credit card issuers. Credit card companies would end free riding completely, but that would also end the hook for obtaining a credit card in the first place, so a certain minority of free-riders must be tolerated, grudgingly.

So too it is with the investment industry; an incredibly small number of investors who buy-hold equities are tolerated, while the majority of investors are caught in a massive trading net that wrests enormous revenues on transaction flows. Buy-hold investors are the free-riders of money management; they would be rid of us all, if only they could. The industry catch-22 is that a low-turn account represents, by definition, the low cost producer of investment return. Any “business 101” text indicates that it is virtually impossible to unseat the low cost producer in an industry.

2. Investor misadventures come about due to bias. Investors, be they professional or amateur, delude themselves with a false belief they possess superior acumen to the markets as a whole. The longer the delusion persists, the greater the likelihood of an abdication of personal responsibility for investment actions and inactions that result in a purchase or continued holding of an inferior investment: “it is not me, it is the market”, “it is not me, it is bad luck”, “it is not me, it is interest rates”, “it is not me”.

In fact, it IS you; you choose to purchase a specific company, in a specific amount, within a specific portfolio. What is almost always missing from any failed investment thesis is oversight in the research, be it a proper comparative analysis or just downright lazy behaviors. One should model interest rate changes into investment management. One should model operating managerial decisions of any specific company and how that might negatively impact investment returns. One should model EVERYTHING possible, both internal as well as extraneous, right through to the actions of competitors, before choosing to hold a specific company. I don’t profess to be a smart man, certainly not smarter than any other investor out there. What I do though, is to attempt to be as thorough as possible. Being thorough, on more than one occasion, has started me down one road, yet resulted in ownership of a completely different investment at the end of a line of inquiry. What I might have originally posited as being a great company sometimes was revealed to be little more than second rate in comparison to another firm, and my goal is to always own the best. I don’t ever choose to act in haste; rather, act correctly and if that increases the lead time required for an investment decision, then so be it.

3. The moat of any business is ALWAYS fully reflected in its operating and net profit margins. I cannot recount the number of conversations endured, over the past 40 years of my investing life, with those trying, fruitlessly, to delude themselves into a belief that an ordinary business possesses some sort of moat, a barrier to competition. If I hear the term “moat” misused one more time, I might actually hurl. So, get this straight, once and for all time; if a business operates with a defensible moat, the profit margins represent the confirmation and such confirmation is easier to assess than any drawn out, convoluted and indefensible preamble. A company generating a sub 20% EBITDA margin lacks a moat. A company bumping around a 30% EBITDA margin possesses a protective ditch against an occasional hard spring rain, maybe just a windrow, but it is certainly not a moat. Only when a company generates a 40% EBITDA margin do I consider my classification of a business with a moat to be present. A 50% + EBITDA margin represents a strong moat, and a company generating a 60% + EBITDA margin possesses a largely impenetrable moat. Oddly enough, should EBITDA margins rise above 70%, then the moat is so strong it creates managerial risk, a potential complacency at the top.

Margins tell you everything about competition, or lack thereof, and margins are what a business generates to reward shareholders and grow the company. In aggregate, the collection of investments comprising my portfolio earned an average of a 47.6% EBITDA margin overall in 2023. They are also growing revenues at a steady double digit annualized rate, with 2024 forecast aggregate revenue growth for the businesses held on account in the range of 15.6% on a mid-point basis.

Provided that expense rates fall below the forecast growth, it would seem that net income growth in the portfolio will once again continue into 2024. Collectively, about 20%, well under half, of the portfolio EBITDA is used by the corporations to expand operations, to pay dividends to shareholders, to pay taxes, to reward executives atop the corporations and to pay lobbyists, regulators and pliant media to support the business models. Despite the astounding growth of the various investments within the portfolio, EBITDA margins on the whole have increased, which indicates (to me at least) that the businesses are better now than they were the year before, the year before that, or the years prior.

Factoring in EBITDA margins of the entire portfolio represents a holistic approach to portfolio building, allocation and management. I use the term holistic as it should be used, referring to the aggregate, the whole, the totality, rather than the tree-huggery, new age, misappropriation. I often query other managers on the EBITDA margin report for the entirety of their investment portfolio, and inevitably, their eyes glaze over, which suggests to me that a total of zero work was done on that front, maybe that the thought has even never crossed their mind. What that tells me, in no uncertain terms, is that they don’t actually know what their portfolio of businesses are earning overall, as a percentage of the capital allocated towards each security. Sure, they know the overall return of the account, but just how did it get there?

My holistic approach also goes a very long way towards putting to rest certain “squirrel” mentalities adopted by investors: “I have to own this specific investment because I want industry participation in a specific sector“. Do you really need that specific investment, or do you just WANT that investment? Does it help or does it hurt your account over the long term to own stock Z? If inclusion of a stock reduces the overall portfolio EBITDA of the portfolio, what do you think? Are you investing, or, analogous to a squirrel, are you just stashing caches of capital everywhere, hoarding, with much of your many caches of capital going to waste over time?

4. A moat isn’t enough to determine investment outperformance. One also requires abnormally high growth for a product or service. Otherwise, any business, shrinking or stable in revenues, is simply defending a niche that nobody else wants to participate in, limited in future size, potentially at the perceived risk of obsolescence.

5. Don’t waste time on losers and plodders. We live in a capitalist society, divided into a business world characterized by outright winners, outright losers, and perpetual plodders. What is the point calling a business defensive in the first place, what does that even mean? Most refer to an investment that misses out on the market upswings but that doesn’t fall as fast as strong performers, on a pullback, as “defensive”, particularly when that company pays a dividend deemed of some value relative to others. But that misses the point of equity investing, because investments are characterized by total return. What the masses deem a defensive investment isn’t typically defensive at all, but rather, is generally nothing more than a PLODDER.

My goal is to accumulate capital and this focus requires continual attack. Investors who attempt to impart upon me their own pearls of wisdom: “sure, this company isn’t an outperformer, but it has wonderful defensive attributes” are as delusional as were the French when constructing the Maginot Line prior to WW2. Defense against what? Interest rate changes?…..all investment are hit when rates shift, differing only by degree. Defended by a high dividend? When a dividend is so high, as a percentage of profit, that it runs the risk of being cut, it isn’t defensive at all, but represents yet another risk inflection point. If the business doesn’t grow adequately, then dividend growth isn’t coming, and I invest for the future, not for yesteryear.

I will take a modest dividend payer with a strong growth profile, over a high dividend payer saddled with minimal growth, any day of the week. Grupo Chedraui, at my time of acquisition, offered up an ordinary 1% dividend on the purchase price. In the past 3 years, that dividend payment has about tripled on a normalized basis, yet is still less than 20% of the forecast after tax profit, so there is little risk of reduction. Grupo Aeroportuario Del Sureste (ASR) has more than tripled the annual dividend from 2018-2024. Presorting equities on the basis of high dividend yield, or for that matter, sustainable high dividend yield? That is a mug’s game. I seek the potential for abnormal growth in dividend payouts and that requires a company, if well run, to offer the likelihood of abnormal revenue and profit growth rates.

6. Let secular trends run to their logical conclusion. Neither I, nor you, have the slightest idea when a secular trend will end, or how far that trend will propel a company’s revenue and earnings. So, why get bogged down on a specific number or target?

I do repeat myself often on paper because trends still require monitoring. Case in point: after a 14 year prior buy-and hold of shares in Novo Nordisk, the competitive failure of the company’s most profitable product had resulted in deteriorating fundamentals, which led to my sellout of the entire position in 2014. In August 2015, the blog then wrote about the coming trend in GLP-1 medications. It took an entire year to go through the body of science on that premise, and in October 2016, the portfolio repurchased Novo Nordisk shares. It is about the only time in the history of the account whereby an entire position was removed and ultimately replicated. It then took a further 6 years for the mass investing public to firmly understand profit implications of how just 2 companies were poised to capture the lion’s share of the obesity trend, a pharmaceutical duopoly fully protected by the science. Once the investing public grasped the profit trends for companies generating 70%+ gross margins with 20%+ revenue growth rates….well, the market is where it is, a 5.5 bagger in 6 years. The portfolio owns both participants in the duopoly.

In August 2021, the blog posited that food inflation was not transitory, but sticky. The portfolio chose to invest in what has subsequently turned out to be the top performing publicly traded grocery store chain globally, from a shareholder return, for the past 3 years, not Costco, but rather, Grupo Comercial Chedraui. The result was a more than 300% growth rate on capital invested in less than 3 years, the sort of return one only imagines to be possible on the trendiest of high tech or AI type investments, slightly outperforming NVIDIA since the end of 2021. To obtain tech-type returns on a simple grocer? it wasn’t crazy, it was a thesis based upon the math of inflation and scarcity of likely beneficiaries. Objections against ownership from some non-portfolio holders were “my investment firm doesn’t buy equities on international exchanges”, or “we don’t buy non-ADR equities”. Which begs the question “why even deal with a firm that cannot own a foreign security” and “why are you unwilling to own foreign securities?”

Almost without fail, objections are revealed to be a form of laziness, a lack of will to put in the time and do the work, or outright cheapness to pay a commission. One won’t pay a moderately higher, one time, jitney fee to buy a foreign stock, but one will trade the heck out of a North American portfolio at a higher cost over a year? Why does one willingly choose to limit themselves to a selection of local businesses, even when that selection might be ruddy awful, if not for sloth? And if one pays a higher one time fee on a foreign stock, and doesn’t sell that security for a few decades, maybe amortize that single fee over 20 years and estimate the potential future value of that equity, and see what the net purchase cost truly amounts to over the life of a security. The execution cost of ANY purchase is insignificant, when one adopts a buy-hold philosophy.

The portfolio has owned many winners, some quiet ones, some vocal ones.

Most are in industries well known to others, but constantly are deemed as being too pricey for ownership, so investors watch and fume as the appreciation piles up. Other investments are yawned at, or scoffed at with disdain, determined to be objectionable by other minds. All have certain commonalities.

1. They are, in each of their respective industries, what I consider to be the absolute best in their field: I make that assessment, not by reading any specific analyst report and then agreeing wholeheartedly, but rather, by examining in detail, each and every competitor in the space. There are no shortcuts to that end.
2. They all have tremendous balance sheet strength; the ability to withstand headwinds that topple most other companies.
3. They all generate abnormally high levels of gross profitability relative to peers. Again, there are no shortcuts to those determinations. Analysts typically exclude better peers in order to make their thesis look good, I do not. EBITDA is to potential portfolio return what artillery shell production is to land wars: the greater the EBITDA percentage earned by a portfolio of equity investments, the more likely it is that a portfolio will win the battle of capitalism when contrasted against portfolios with lower levels of EBITDA.
4. Finally, and this is a biggie: a company should be so dominant that management is largely incidental to the success of an investment thesis. I yawn at the phrase “great management”. A company either generates a high profit, or it does not. Those running a company charge as much as they can for their output, and that is the extent of what they do. Secular trends determine growth rates and competition, or lack therein, determines pricing. Colleagues challenge me regularly: “you gotta meet this CEO, do you know that CEO?”. Who sits atop any company is not pertinent, because a CEO is incapable of raising product prices above the run rates determined by a competitive position in the marketplace. So, meeting corporate heads, or their flunkies, to potentially sway any investment decision, represents a complete and utter waste of my time; my decisions to own a specific business is made using different criteria. I am fortunate to own some of the great investments on the planet, yet don’t consider management to be worth spit on at least 1/2 of my portfolio, interns could produce equivalent results were they heading those businesses and interns wouldn’t have the temerity to carve out billions for themselves in compensation.

While the investment public at large continues to pile into sub-par returns on ETF products, transacting with great frenzy due to the belief of execution costs being insignificant; while the professional investment industry continues to push transaction oriented active management, owning ordinary plodders to fill up a portfolio because there are too few world class businesses to flesh out an account deemed suitable for their compliance departments, secular trends continue.

Finally; most individual investors greatly misunderstand their role in the portfolio process. They believe that to achieve superior results, an active portfolio needs to be very actively managed. I hold that up as the single greatest fallacy in modern day investing. Too active a manager and a portfolio is bombastic, discordant, overproduced.

What more should do, is to think smaller, to consider their one and only part to be that of an “arranger”, completely analogous to that of a musical arranger. An arranger? That is a simple job. Find an already great piece of music, something tested and true; assemble the very best vocalists, the very best musicians, Grammy winners all, stick that score in front of them, offer up a few instructions in a sound booth and let them alone to do their thing.

Some arrangers prefer the Phil Spector “Wall of Sound“; this approach can serve to hide flaws, but tends to make my ears bleed. Myself, I prefer a spare, stripped down, acoustic arrangement; less is more. To each their own. As the results of the Gnostic Portfolio attest, a musical arrangement doesn’t even have to be particularly unique; but when you place world class vocalists and world class musicians in that room, in front of that proven and time-tested musical score, output can be sublime.

My initial portfolio end-goal goal has been achieved.

A globally themed portfolio, chock full of remarkable businesses, unconstrained by the inclusion of plodders, arranged in a fashion that plays off of the strengths of each business model, just keeps doing what is designed to do, as it was arranged. There is nothing accidental, or unintended about the returns. The premise, two plus decades ago, was to determine how best to achieve index leading results with a minimum of fuss and bother. I chose to assemble a portfolio of businesses earning abnormally high EBITDA margins, with revenue growth rates expressed as multiples above annualized GDP in any given year, and that featured extremely strong balance sheets.

To be sure, it was quick to get to that 100 bagger result, but then again, every company owned could shoot. My job, such as it is, then and now, is to stay out of the way and let them shoot; I remain a resolute free-rider.

Per the TOS, every investor in the SMA program is now released, free to go. This job is done.

2024 forecast dividend income on the portfolio in currently in the range of $1.51 million US, so the annual dividend income, by waiting, certainly facilitates a measure of current gratification.

Some might opt to stay on for the next objective, which is set at a lowly 10-bagger, but a 10 bagger, on top of a 100 bagger; that gets an individual investment account to the $1 billion threshold. A 10 bagger is just a double, then a double again, one more double and finally a +25%. Breaking down, what many consider a daunting goal, becomes much easier as a series of steps.

I thank all the participants on this journey, regardless of whether they were a bystander or one of those select persons maintaining the discipline to see it through. Equity returns aside, I do hope that readers gleaned something of utility, because there was a lot that needed to be said over the years and I did my utmost to put it out there.

Jotting thoughts to paper provides me with focus and clarity. I will continue to publish pieces that I consider to be of interest, as they come to me.

Finally, I took the opportunity, over two weeks, to reread every single published blog piece since inception. They aged exceedingly well; so well, in fact, that we recently removed all article bodies going back more than 24 months from the public page, to be archived. After 320 plus articles, with more than 600,000 total words written (exceeding that of Tolstoy’s War and Peace), by this time, readers are either fully onboard, or they will never be; there is no need to keep beating on the same drum.

Winners, losers and plodders. With investments, as with life, surround yourself with winners, shed the losers and above all, avoid the plodders; you will be more than fine.