Part 1 / 2: Update and context, approach going forward

Portfolio going into 2025 revealed in my next post

Update and context:

After spending now over five years trawling the Twitter feeds and Substacks of the many, many talented investors present on the Fintwitosphere, one of my New Year resolutions is to post more frequently vs. posting sporadically.

I admire the clarity of thought, and speed of iteration that can be seen in those that write and publish frequently. WEB is obviously the archetype in this regard.

Thus it feels appropriate to provide a quick shout-out to some: Jeremy Raper (https://x.com/puppyeh1), Hkuppy (https://x.com/hkuppy), Brooklyn Investor (https://x.com/brklninvestor), Zeljko Obrenovic (https://x.com/ObrenovicZeljko), and many others !

Since beginning to invest in a professional capacity from 2017, it has been fascinating to see just how much the market structure has changed over this period. One particularly interesting insight is observing of how information literally moves at the speed of light (aka bits) – a good piece of research published digitally can lead to rapid price discovery in a security.

Additionally, the increasing presence of passive flows and pod fund participation has killed some formerly successful stock-picking strategies (primarily deep value without a catalyst – price discovery simply doesn’t work as effectively anymore), whilst giving birth to some new ones.

Unfortunately, I’ve have been late to the party in noticing it is simply not good enough for a stock be “high quality and cheap”. If there is no inflection occurring – whether that be related to sentiment, revenue or profit – it will simply stay cheap.

Change, and the “rate of change” is what the market is interested in. Price discovery will not occur without these, or until there is a take-over bid. There are simply not enough active investors left - especially in the smaller end of the market.

Regarding my personal situation, I am running an eight-figure portfolio with an unrestricted mandate. My focus will continue to be on global equities, solving for 15% IRR’s over a three-to-five year period.

Geographic thoughts

Whilst I am not a fan of huge top-down prognostications – after being a European mid-cap focused professional investor for seven plus years – I will be significantly decreasing my exposure to this region henceforth.

My explanation for this - besides the obvious points like increasing over-regulation, bad demographics and continued deadlocked political situations – is that the cultural differences as it pertains to maximising shareholder value is simply too different to the US, with no sign of any major change.

Besides the existence of a communication barrier, European businesses simply do not understand capital allocation like US-based businesses. This is partly from a lack of understanding, partly from a cultural focus on prioritizing other stakeholders over shareholders, but IMO it is primarily due to a lack of incentivisation linked directly to the share price increasing - there is less SBC, and a lack of executive STI / LTI’s linked to per share value accretion.

To purchase stakes in European-based businesses going forward, the IRR hurdle rate I require to invest must be above >20% vs. the 15% I typically seek.

Regarding the US, one risk I am very cognizant is what could happen as a result of either spike or prolonged uplift in the 10-year T-bill yield. JD Vance spoke in the lead-up to the election of how a rapid increase here is the #1 fear this incoming administration has in terms of what could de-rail them. Developments here are something I will be monitoring closely.

Nevertheless, the US seems still coiled for further upside despite the significant run it has had already. Whilst short-term pain may emanate from the beginning of deportations + spending cuts, I believe that lower interest rates, de-regulation, lower corporate / personal tax and an extremely pro-business government could unleash a growth shock here.

Additionally, I am currently, like many others, finding interesting value in Japan . Others have written deeply ad naseum regarding why Japan represents a compelling market to search for opportunities, but the best piece I have read on why this is the case can be found here: https://www.biremecapital.com/blog/japan-anchoring-bias-writ-large

Opportunities going forward

Over the past seven years, I have increasingly moved from focusing on micro / small / mid caps towards the larger end of town. My personal observation has been that the benefit of the inherent resilience of larger companies, better capital allocation frameworks, reduced dependence of great management, higher liquidity and avoiding selection bias (i.e. smaller companies are small for a reason) has outweighed the benefits of investing in smaller companies, which primarily comes in the form of “informational edge”.

My investing hit rate has also been higher (>70% vs. 50% for the entire portfolio) when focusing on Consumer Web and Enterprise Software.

Regarding the thematic I am most excited about - surprise, surprise - it is AI. Although, my “variant” thought here is that the market is still not adequately pricing in the Prisoner’s Dilemma which every company in the world now finds themselves in - even if a business does not yet believe that investment into AI will generate a satisfactory RoI, they are still forced to invest in experimental uses given the existential threat of a competitor making a breakthrough here. This is playing out in every business and industry around the world.

Famous last words, but I believe AI is an “innovative” vs. “disruptive” technology (Clay Christenson’s Innovator’s Dilemma terminology) implying that tech company incumbents will see the most benefit from this given they have the distribution, data and financial resources to invest in the cutting edge here.

Thus, I believe the incumbents in Web and Enterprise Software (i.e. META 0.00%↑ and CRM 0.00%↑) that are already reporting revenue acceleration from this are the likeliest to continue winning here.

Picks and shovels to the seismic AI data-centre build-out also represent compelling opportunities, but these have already re-rated significantly.

An interesting angle here is that as enterprises adopt commercial uses of AI, those that will see the most benefit are those that have an entrenched competitive position with no alternatives, heavy switching costs or peers that are unable to invest.

This is because these companies will be able to extract and maintain the excess margin from AI cost savings without having to immediately pass this on to customers in price, whereas others that lack this will be forced to pass this through as customers demand the margin surplus for themselves. I am still searching for good opportunities in this bucket.

Thank you for reading & I would appreciate any thoughts on the above.

Have a great start to the new year !

Amadeus