Today, we are going to go over:

• The portfolio performance and expectations.

• What’s next for the portfolio?

The Extraordinary Companies portfolio performance

Our portfolio is up 27% over the past year. That performance is significantly ahead of the 18% that the MSCI World Index achieved. The world index is a decent benchmark for us since we are picking companies from the global opportunity set. But if you’re curious as to how we did against the S&P500, we are also ahead of the 23% achieved there.

We made the portfolio public and really kicked it into gear during the third quarter of 2023. As a result, a number of positions were initiated late in the year during a dip in the equity markets. That means they did not contribute to our performance for the entire year. Had we held all the positions (shown above) for the entire year, our portfolio would have returned an astounding 45.8%.

Now let’s temper our expectations by looking at the historical record. The MSCI World Index delivered 8.28% per annum between 1987 and the end of 2023. Over the past 30 years, the S&P500 has returned 10.04% per annum.

Clearly, last year was a good year for equities. These markets don’t happen often. So there are two lessons: 1) don’t expect massive returns every year and 2) “you have to be in it to win it”. Sitting on the sidelines and waiting for the perfect time to invest can be an expensive game if you miss out on great years.

What’s next for the portfolio?

The image below might give you a clue that we should look at semiconductors. Semiconductors is not a homogeneous industry. It consists of chip designers (analog chips, digital chips, memory chips), manufacturers of chips and suppliers to the industry. It is a highly specialized industry which makes it difficult to understand.

But we might be in luck, because I actually started my career in the semiconductor industry as a chip designer. Now that I see these returns and know they pay with stock, I can’t help but wonder why I left. Then again, it was probably for the best, after those two “minor” explosions in the lab.

That’s a joke. Maybe.

The semiconductor industry is highly cyclical and currently highly valued. That causes all sorts of problems for investors. In a future edition, I will share a few thoughts on how we can design an investment strategy for this industry. The trend that I think will support the industry is the artificial intelligence (AI) wave. No doubt, AI can be used in almost every electronic system you can think of.

Defeating aliens

Let me end this newsletter by sharing something educational with you. Microchips are designed to operate in a temperature range, usually from -40 degrees Celsius to +105 degrees Celsius. That means there are places on earth where it is too cold for electronics to work. One such place is a village called Oymyakon in Russia, where the average temperature is -50 degrees Celsius.

The reason electronics stop working reliably at extreme temperatures is down to pure physics. The cooler it gets, the less energy electrons have and the less electric current flows. If it heats up, the opposite happens.

Space is -270 degrees Celsius. In the movies, aliens from outer space keep invading earth. Usually, the USA sends up Will Smith or Captain Kirk to blow these guys up. I’m wondering, why don’t we just send up an aircon guy to break the air-conditioning? As soon as the alien ship cools down, it stops working and we win.

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