A troll insulted our portfolio on New Year's Day

Extraordinary Companies portfolio up 20.8%

Dear Friends,

Happy New Year.

My wish is that you end this year happier, healthier and wealthier than ever before.

On New Year’s Day, I shared our portfolio's performance and an internet troll immediately criticised it.

But.. I was in mischievous mood, so I decided to provoke him with a compliment and dig all rolled into one. I might have been too subtle, because he never responded.

I was sad. It was the first day of the year and I had already failed at being a jerk on the internet.

Having failed to insult him, I got to thinking about his criticism and realised that it had the makings of an interesting newsletter.

Today, we will look at that criticism and our portfolio.

But before I get to that, let me give you some coming attractions for 2025.

Sincerely, Raj

This is an AI image. Don’t worry, AI is not replacing you in 20225.

2025 Coming Attractions

As always, our lodestar remains Extraordinary Companies and how to be Extraordinary Investors. So we will keep talking about that.

But we’re also going to introduce a few new categories:

The first category is Investment funds and exchange traded funds (ETFs). Most people invest using these financial instruments, so it makes sense that we understand them better. There are also a few hidden tricks going on with these.

Then we get to the categories that I like to collectively think of as an “Executive MBA in Investing”.

The second category is looking at important factors and ways of thinking about companies in different industries. At the end of the year, hopefully you will have a deeper understanding of industry dynamics and a collection of important factors that you can call upon for your own investing.

The third category is about competitive advantage or the more colloquial term that Warren Buffett coined “economic moat”. There are a number of different durable competitive advantages that companies can possess. Great investors understand these thoroughly. They are very interesting, so we will look at them too.

In the fourth category, we’ll look at non-durable competitive advantages. These are things that are often ignored by investors, because they think these advantages are fleeting. However, most businesses in the world have non-durable competitive advantages. They still make lots of money. Dare I say that the private equity industry makes tons of money on non-durable competitive advantages. These might be handy to know if you run a small business or intend to buy one.

As always, our newsletter will remain light-hearted, fun and concise. This is a happy newsletter because getting wealthy is a happy thing. The newsletter should also be a good accompaniment to your Sunday morning cup of coffee. There should be something silly in it that makes you smile (usually the pic) and something interesting that makes you think.

2024 Fact Sheet

Here’s our fact sheet for 2024. We were up 20.8% for the year.

That’s a pleasing performance. It is double the S&P 500 long-term return of 10.3% per annum and almost triple the MSCI World long-term return of 7.19% per annum. But we will dissect this performance below.

The Insult

Here’s what I posted:

Here’s the troll's reply:

Troll comment

How did our portfolio perform?

Extraordinary Companies vs. NASDAQ 100, S&P500, MSCI World

Here are the 3-year returns for the portfolios mentioned by our troll:

  • Extraordinary Companies: 56%

  • Nasdaq 100 (QQQ): 31%

  • S&P500 (SPY): 29%

  • MSCI World (URTH): 21%

Ahem Thucydides!

This table shows the returns as compound annual growth rates (CAGR). You can think of CAGR like the interest rate on your savings account. CAGR takes the return above and converts it into an annual “interest rate”. The higher the better and the longer the time period the better.

Portfolio

1-year CAGR

3-year CAGR

Since inception

Extraordinary Companies

20.8%

16%

15.8%

NASDAQ 100

25.7%

9.4%

11.2%

S&P 500

24.9%

8.8%

10.5%

MSCI World

18.8%

6.5%

7.4%

Extraordinary Companies is ahead over 3-years and longer, but it ended 2024 (1-year CAGR) behind the Nasdaq 100 and S&P500, which is where our troll’s criticism comes from.

But that wasn’t the case all year. Here’s our performance in the first half of 2024. We were significantly ahead of all the indexes.

January to June 2024

Here’s our performance for the second half of 2024. Our second largest holding (Novo Nordisk) started to underperform and from leading the pack, we went to lagging the pack. That's the market for you. Just when you think you’re in charge, it reminds you whose the boss.

July to December 2024

In December 2024, Novo Nordisk had a 20% price drop. This was due to disappointing results from a late-stage trial of their experimental obesity drug, CagriSema. The trial results showed that CagriSema led to an average weight loss of 22.7% after 68 weeks, which was below the market's expectations of around 25% weight loss.

It's hard to believe that financial analysts around the world had valuation spreadsheets with a line item called Cagrisema weight loss = 25%. When they changed that to 22.7% it suddenly lopped one-fifth off Novo Nordisk’s valuation.

Clearly the market overreacted. But we don’t have to.

A problem for fund managers

Underperforming a benchmark can be a death sentence in the fund management industry. Clients withdraw their money and move to the next fund that performed well last year. That fund promptly begins to underperform and investors keep moving as they chase performance.

This incentivises fund managers to hug their benchmarks. A Goldilocks type of investing, not too far above, not to far below, just right. Then investors are not offended enough to leave but no one is significantly outperforming either.

We don’t have this problem at ROA. No one is taking out their money when we underperform the index because we aren't playing a price-watching game, we're trying to own the best businesses in the world. We don’t want our money back, we want the shares. We hope to do well over long periods because that is the time period our money is invested.

How to think about benchmarks

Strictly speaking a benchmark is both important and unimportant at the same time.

As an investor, you want a benchmark so that you can gauge how you have done in relation to the market. So it is important.

At the same time, you don’t want your benchmark to dictate your actions. So it is unimportant because you have to ignore it at times.

Many investors think of a benchmark like the bar at the top of a pole-vault. Make it as high as possible, then try to surpass it. Every year, the fund manager must take a fast run up, then vault the portfolio into the air, while contorting its constituents to make sure that it clears the bar at the top.

That may feel right but it is actually superficial thinking.

I prefer to think of investing as a 100 meter hurdle race. The aim of the fund manager is to get the portfolio over a series of moderately high hurdles and keep going uninterrupted for as long as possible. At any point if he knocks a hurdle down, all he has to do is keep running. The game is not over if a single hurdle (benchmark) is knocked over.

Why is this better thinking?

Because of compounding - the 8th wonder of the world according to Einstein.

Remember I said “The higher the better and the longer the time period the better”?

Let me explain.

The secret to investing is to earn good returns over a long period of time. Small percentage differences then compound to make massive differences in the final outcome.

Let me show you by taking the CAGR for each portfolio and seeing how much $100 000 would be worth after 10 years at that rate:

Portfolio

Value in 10 years

Difference to Extraordinary

Percentage of Extraordinary

Since inception CAGR

Extraordinary Companies

$433 596

0

100%

15.8%

NASDAQ 100

$289 099

- $144 497

66.7%

11.2%

S&P 500

$271 408

- $162 188

62.6%

10.5%

MSCI World

$204 193

- $229 403

47.1%

7.4%

A seemingly small CAGR difference of 4.6% between the Extraordinary Companies and Nasdaq 100 (the next best) can result in a $144 497 (33%) difference in final value. It’s even worse for the other portfolios and over longer time periods.

Why did we pick the MSCI World benchmark?

The answer is at the top of our webpage - Investing in the top 1% of companies in the world.

In the world, not in the USA.

At the moment 19% of our portfolio is in Europe and 81% is in the USA .

  • The MSCI World has 14% in Europe and 71% in the USA.

  • S&P500 is 100% in the USA.

  • NASDAQ 100 is 97% in the USA.

Which one seems like the best benchmark for us?

Clearly it’s the MSCI World.

We are free to invest around the world, without changing benchmark. That is why we picked it. It is our 100 meter hurdle height. We just have to keep running and jumping over it. Every now and again, we’ll knock a hurdle down. But that is not a problem, we’ll just keep running.

As an added bonus, we’re also way ahead of the Nasdaq 100 and the S&P 500.

How to handle trolls

For those of you not on social media, here’s a few characteristics of trolls:

  1. A troll is a person who deliberately makes offensive or provocative online posts.

  2. They never have a profile picture of themselves.

  3. They never use their real name.

  4. They never create anything, they only criticise others.

  5. They will attempt to offend you by being cynical of your work.

Your best defense is to ignore them because they crave attention. Logic won’t work because they intentionally misunderstand things so they can be offensive.

I would like to hear what you’re up to.
DM me on social media or email me.

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