Half-year 2024 review, reflections on +54.8%
Half-year 2024 review, reflections on +54.8%
An introduction into Inflection investing
Disclaimer: This is not investment advice and meant for entertainment purposes only, I hold a position in the discussed companies and therefore may be biased in my opinion. Please be aware that this is an illiquid microcap, please only buy and sell with a limit-order. I also may trade around the mentioned positions.
The first half of 2024 has been great. Not only from a return perspective, but my life has changed immensely. As you may have read, I am now in the privileged position of being able to make investing and writing about investing my full-time job. At least, I try to.
If you are a long time reader, you may have read the 2023 Review, where I reviewed the investment year 2023. I ended the year with a small gain of +2%. So going from 2% to 54.8% may have just been luck, but apart from that, my investment style and therefore the names in my portfolio have changed quite drastically.
So putting aside the premature results, let me explain my investment process. There are many ways to invest, and many names to call a particular strategy. Some would call them "deep value" investors, others "momentum" investors - it's all fun and games, but in the end it doesn't matter.
As in sports, it is the result that counts. Certainly the results (e.g. our performance) are influenced by an element of luck. Therefore, we should focus our attention on the process to increase the likelihood of great results. However, from a first-principles perspective, what matters is the IRR. Qualitative questions about a company are important, but they should come second. The first question should always be whether this investment can exceed our hurdle rate.
An introduction into Inflection investing
Sometimes I joke that I am a momentum investor, but no one should know that because everyone thinks I am a value investor. What I mean is that a lot of the stocks I buy would have been interesting to momentum investors.
I look for any type of change, within unknown companies. Change in a mega cap does not bother me at all. My investment universe is micro caps. Usually even smaller than $100 million in market capitalization. For the time being, I prefer US and Canadian microcaps for a simple reason: I am not a contrarian investor. I do feel that buying securities in beaten down equity markets, such as Great Britain or Hong Kong do provide an opportunity, but are ultimately a bet, that those markets will recover.
I don’t want to make that bet. I rather want to buy stocks in markets where people are looking right now. The only reason, they haven’t invested into the particular company, is because they haven’t looked closely enough. Meaning the company is experiencing some change, which will lead to increase EPS in the future. That is the whole strategy.
Or to put it very simply, I buy things that are going to have great news in the next few quarters. Some catalysts have a longer time horizon (like a permanent change in capital allocation), some have a shorter time horizon (like winning a contract). In the end, I do not care about my holding period. I care about my IRR.
How to play inflection stocks
The chart I am looking for, looks like this:
You have a company that has been going nowhere for years and then one day the news comes out. The stock is up big (in many cases 50% or more) and, most importantly, on huge volume. Now, there are three ways to play these situations:
1) You buy before. The risk is that you could be sitting on dead money for years. Not great for your IRR, but you can take all the upside.
2) You buy into the huge volume. This is probably the most IRR friendly option. However, you can only do this if you have been following the stock.
3) You buy after the huge volume. Depending on the potential upside, this is still a very valid option. Take Spar as an example, after the first jump from $1 to $1.50, the stock stayed at that level for about a month and then went to $3.