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We have returned close to 6% ABOVE the S&P 500 for 2025.
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We generally have had a portfolio with very little turnover. The portfolio is mostly made up of small names in boring industries and they have held up well. Interestingly, the portfolio never really dipped below the market performance all year last year.
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What is 23.5% annual return (TWR), when you have so many investors returning 100%+ for the last year?
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This is certainly a problem I face every single year. There are always people who do spectacularly well, leaving me behind in dust for that year. I don’t mind.
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Value investing is about discipline and process and the results come over time. My goal is to generate consistent market beating returns every year. And, not to lose money in any year. With time and compounding, this creates significant wealth, without all the exciting and wild performance swings.
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My Thoughts on the Market Today
We just ended a strange year and the new year is now getting stranger.
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I have been watching the precious metal markets, with gold and silver breaking new all time highs seemingly every trading day. The geo political environment may have some impetus for the investors to seek out safe havens, but a lot of this is also driven by the enormous demand for metals and commodities, and many other rare earth minerals, to support the epic levels of data center construction around the globe to support new AI models and future AI demand.
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As I have said earlier, we are in an AI bubble. I repeat it here because it is important to take note.
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These things are hard to call, and being primarily a value investor, I should not be making judgements at macro level. However, high valuations make me uncomfortable, and the expectation of unrelenting double digit revenue/profit growth for AI related companies as far as eye can see in the future, tempts me to take the other side of the trade.
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Fortunately, I do not short stocks.
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There are catalysts that can pop the bubble. Below are the few I see today:
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- There will be delays and postponing of some data center projects due to funding issues or soft demand
- Hyperscalers are on a construction binge which is fueled by debt. This cannot last. Debt will get expensive to issue as credit quality deteriorates and interest rates start going back up.
- Inflation exists and trying to mask it now only means that when it cannot be hidden, it will be already too late to do anything about it
- Enterprise users of AI have not seen paybacks yet. Eventually they will, but time has a curious way of tempering enthusiasm and the investors will cool on how high multiples they are will to pay for these stocks
- There will be shortages of critical precious metals. Silver is being throttled by China, and it is a key component of GPUs. Silver is also a key component of EV solid state batteries.
- And then there is the global political environment. It is important for us investors to observe and plan for how these may play out.
All in all I believe some cash today is prudent. You may wish to maintain a reasonable amount of cash or cash equivalents (short term treasuries, CDs, etc) outside of this portfolio.
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2026 promises to be a year where discipline and valuations will matter more than ever. As prudent investors, we have the edge.
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Have a most profitable year.
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Inner Circle Portfolio Performance
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The portfolio performance is updated once a month, and tracked YTD until the end of the prior month. Performance is tracked as time weighted total return.
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Upgrade to Inner Circle
- My actual Small Cap Value portfolio with highly profitable but under followed stocks and Kelly Criterion optimized weights
- Detailed investment thesis for portfolio stocks, including target prices and expected returns emailed to you as soon as published
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Shannon's Demon Explained: Why Rebalancing Beats Buy-and-Hold Over Time
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I want to tell you about one of the most counterintuitive ideas in all of investing, an idea so strange that when I first encountered it, I spent about an hour with a spreadsheet trying to convince myself it was wrong before I finally accepted that it was right. It is called Shannon's Demon. And once you understand it, you …
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Full Kelly vs. Fractional Kelly: Which Position Sizing Approach Is Right for You?
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Most investors spend enormous effort deciding which stocks to buy and almost no effort deciding how much to buy. That is exactly backwards. In the long run, position sizing will have as much impact on your returns as stock selection and it will have more impact on your survival as an investor. I use the Kelly Criterion as the mathematical …
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My Deep Value Stock Screening Process: From 3,000 Stocks to a Short List of 5
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There are roughly 3,000 publicly traded US companies with a market capitalization under $2 billion. Most of them are not worth your time. A small number of them are great values hiding in plain sight. Genuinely cheap, financially strengthening businesses that the market has overlooked, misunderstood, or written off prematurely. The challenge is finding them without spending your entire life …
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