Betting Against Polarization

In Q4 the portfolio returned 11.8%, vs the S&P 500 at 2.3% and Nasdaq at 6.5% (the end of the letter contains monthly performance since inception as always).

Know Thyself

One of the hardest things in investing is finding an investment style that fits your own ethos. For some people that’s deep value investing, others it’s momentum investing, and still others it’s compounders to buy and hold for the long term. 

For me, I fall into the 3rd bucket. I like to find excellent businesses with exceptional management and large moats and hold them for a long time. For those who read my Q3 letter, it may make you wonder how I can say I hold things for the long term when my portfolio changes every quarter. 

I borrow from Peter Lynch, One Up On Wall Street in this regard. I have a portfolio of Compounders (steady businesses that I believe can grow at above market rates over the long term), High Growers (pretty much most of my tech exposure), Venture (venture like return profile in public markets), Cyclical, and Turnaround (cough cough Paypal). The pie chart below shows how my portfolio is currently allocated in these buckets.

As long as I have 50-60% of my portfolio in Compounders I can rest easy at night having a “solid base” where I don’t really care about what the macro or markets do and will readily buy plenty more of the stocks if they do become dislocated at some point in time. For the most part that 50-60% allocation doesn’t move much even if the companies I own in that bucket do change.

This is a behavioral nuance I’ve figured out about my investment style. Feeling comfortable with half my portfolio allows me to embrace more risk for the other half. 

This brings me to the next aspect of my public investing style. While I love holding businesses for the long term, I also like to be active. Unfortunately, I don’t have the temperament of Warren Buffett to read all day long and not pay attention to the market moves. When I find companies ($TEAM, $BRZE, $CRWD, $WDAY, $MELI, $V, $NVDA were examples from this year) trading at what I believe is a cheap relative valuation compared to the market I need to jump in. 

Being long $CSU.TO, $KPG.AX, $GOOGL, $SPGI etc allows me to build positions in venture return assets like $KSI.TO or buy into high growers that I believe are being undervalued by the market like $BRZE and $HOOD. While stylistically these two may seem at odds, it actually helps me behaviorally be a better investor since I can size the long term holds appropriately and then concentrate on the nearer term alpha generation from buying dislocated assets relative to my assessment of how the market views their prospects.

Long term my alpha will come from the Compounders. But over the shorter term, my more active investing balances out the general lack of movement that can occur in the base holdings and enables me to hopefully outperform on a monthly/quarterly basis as well.

Concentration

When I see a Compounder that is dislocated I concentrate in a massive way. I want to own as much of that business as possible. In March of this year for example, 100% of my portfolio was in Alphabet because it was such an egregious example of a misvalued quality company trading at a bargain price. I’m not afraid to sell my favorite positions (and yes I do have favorites) and incur taxes if the opportunity is that big. They don’t come around often (usually 1-3 times a year) and so I need to make the most of them when they hit.

Right now based on how the market and the valuations of the quality businesses I want to own are priced, I have broadened out my portfolio allocation significantly. Alphabet is down from a 27% position in Q3 to a 17% position (mainly from selling but also some appreciation from others in the quarter). My portfolio has gone from 8-10 positions to 20.

Stylistically based on market conditions I’ll go from a Valley Forge or Abdiel extreme concentration to a Coatue, WCM, Polen diversification.

Alphabet, Atlassian, Kneat, Braze, and Nvidia were big ones for me this year that significantly contributed to my alpha generation. The power law is real and portfolio construction as always is the biggest driver of maximizing the outcomes when you’ve done the hard work to spot them.

Escaping the Filter Bubble

I recently wrote a blog post/rant on the pros of Silicon Valley and the negatives of the filter bubble when it comes to investing and building companies. You can read it in its entirety here.

The main point I want to drive home is polarization is always something to bet against. We’ve seen it in politics where both sides believe they’re the only ones that are right and can’t communicate with each other. It’s really dangerous when it comes to investing because it causes us to discount amazing management teams, moats, and execution.

Alphabet was the classic example this year. From the minute SV decided that Alphabet’s culture was “too woke”, Gemini’s early failure gave everyone the confirmation bias. Never mind that Alphabet has had decades plus of leading AI research from the front and actually applying it to drive business performance. Never mind that Sergey the multi-billionaire founder had returned from funemployment to code, write research papers, and work on AI. Never mind that Perplexity raising at $1B with double digit ARR growing remarkably fast was broadening out the TAM not actually killing Google search volumes.

That same thing happened with Atlassian where people doubted the cloud transition even though AI enabled search over Jira and Confluence is literally the perfect use case for GenAI in a B2B setting and that those updates could only be accessed on the Cloud product.

We are now seeing the exact same thing happen with Adobe $ADBE. People believe Adobe is an AI loser while creators are literally spending more time in Adobe tooling in order to explore the amazing video generation capabilities of the foundational models. SV is more focused on OpenAI, Runway, HeyGen, etc and it makes sense to talk about the death of Adobe on Twitter given that. However, this bearishness comes in the midst of the end of a tech budget recession whereby marketing and sales budgets always come back the quickest. Also, the Chief Product Officer happens to be invested in nearly every successful AI startup to date and clearly understands where Adobe’s potential innovator’s dilemma may rise.

One could argue we’re seeing it with Micron $MU too (although this is less a SV Filter Bubble and more a Wall Street Filter Bubble saying “memory is always cyclical”). Investors are focused on memory weakness elsewhere while literally everyone from Nvidia to $ASML is yelling about how HBM is the biggest market shift that memory has ever seen and Samsung the former #2 has completely missed the boat. We’ve literally seen the parallels between #1 and #2 in Nvidia and $AMD just this year in GPUs. Now you have the same thing happening in memory with SK Hynix and Micron.

Whenever you observe deep polarization, it’s a pretty safe bet to take the other side. Things are never as bad as they seem, disruption is never as quick as we would all like to believe, and companies themselves are dynamic complex adaptive systems that constantly are shifting. 

Cheers to 2025

Animal spirits are back and 2025 should be a fun year filled with wild swings of unconstrained optimism followed by drastic mood swings on every pullback. There will assuredly be a few dislocations that emerge and I hope all of us have the foresight to be able to swing big when we see them.

From here on out, I hope to do a deep dive into a business that either I own or am studying in each letter. I had one queued up for Kelly Partners Group but will address that in a future letter (and perhaps on a podcast episode in Q1). 

Please reach out over twitter @shomikghosh21 or LinkedIn if you’d like to get in touch and chat more!

Monthly Performance