In this edition, we are going to look at the following:

• Portfolio performance

• Market volatility

• The mindset required during volatility

Performance

The portfolio is doing really well, we’re up 33.4% over the past year. A hundred dollars invested in our portfolio at inception would now be worth $167, whereas the same amount invested in the benchmark would only be worth $122.

The portfolio reached its third birthday, which means we have performance numbers for 3-years available. In that time, the portfolio has returned 19.06% per annum versus 6.94% per annum for the benchmark. Our outperformance was 12.12% per annum, which is a very good result over a long period.

In terms of risk, the portfolio beta is 0.92, meaning that it is less volatile than the market, which has a beta of 1.

Market volatility

Now lets address the elephant in the room - the market volatility in June and July 2024.

As you know, we added to our holdings of Nvidia and Novo Nordisk in June and that increased their combined weightings in the portfolio to 67%.

In the last portfolio update, we warned that the portfolio had been skewed by the recent additions and that Nvidia’s stock price was a rollercoaster. It seems that the stock market gods were listening because thereafter, Nvidia took at hit.

On 18 June 2024 Nvidia's stock price hit a high of $135 per share. It then dropped and hit a low of $99 on 7 August 2024. That's a 27% drop.

The Extraordinary Companies portfolio got slammed (or did it?).

The mindset required during volatility

As you can see from the fact sheet graph, the portfolio value dropped. At the end of June, we were up 50% and by the end of July, we were up 33%. That’s a 17% difference. It sure sounds like we got slammed.

But that is the wrong way to mentally frame our performance. Over the past 20 years, the MSCI World Index has returned 9.08% per annum. So being up 33.4% is actually superb performance, especially after the market dropped.

That might sound like finding a silver lining, but its actually a better way to think about your portfolio because it prevents you from making silly mistakes, at the worst possible time.

When the market is falling, you don’t know how far it will fall. Your fight or flight instincts kick in. You start wondering if you made a mistake with the companies you invested in. Then the doubts creep in.

• Maybe I missed something?

• Maybe I should sell out now, let it fall, then buy it back cheaper?

• Maybe the bear market has finally arrived and I need to be in cash for a while?

• Maybe that guy on CNBC was right?

• OMG, did I make a terrible mistake buying Nvidia?

Finally, you crack and sell out some of your shares to protect against further losses.

In this case, that would have been a very expensive mistake. In the two weeks, since Nvidia hit its low of $99, it has gained 31% and is currently trading at $129 per share. Selling out on the way down would have locked in losses, that have already been recouped.

Conclusion

Want to really know how worried I was I during the volatility?

I was not worried at all (but I was a tad annoyed with myself).

Principle #4 of being an Extraordinary Investor is to have the mindset of a family business owner. Family business owners do not care about the share price of their companies. They care about the operating performance of their companies.

Having grown up in a multi-generational family business, I can vouch that no one bothered about the share price for over 70 years.

Share prices are only useful to you on the day you buy the stock and on the day you sell the stock. In between, they serve no purpose. But they can scare you into silly behaviour.

Which is why I suggest that you don’t check share prices often. If you have purchased Extraordinary Companies or an Index, leave it alone. Come back in 6 or 12 months and see what happened.

I mentioned that I felt a little annoyed at myself during this period. I was annoyed because I could have spread out our Nvidia and Novo Nordisk purchases, but I didn't do so. I bought it all at once. Therefore, I held a full position and missed the opportunity to buy more when the prices dipped.

The lesson I learned from this volatility episode is to be patient and buy into stock positions over time. It gives you more flexibility to take advantage of market conditions.

If you want to know more about buying into stocks, we talked about dollar cost averaging here.

I would like to hear what you’re up to.

DM me on social media or email me.