This is our end of the calendar year wrap-up post. We thoroughly enjoy putting it together and hope you get something out of it, too. For your holiday investment conversations take a look at the Charts, Graphs and Tables Megapost for 2H 2024.
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THE RELATIVELY EXTRAORDINARY MOMENT WE ARE IN
Since the U.S. election, nearly all asset classes are up. And up big. Among equities, the Russell 2000 index was up 8%, Nasdaq 100 7%, and S&P 500 6% over just the first 30 days. These are huge moves in these broad indices.
Under the surface, some assets are up much more, though. The table below shows the 15 assets we are long that are up the most since the election.
I can’t emphasize this enough. This is over 30 days. Thirty! The most recent comparable market may have been March 2020 off of the Covid-19 lows.
While the focus is on a few assets that get an abundance of the attention, e.g., bitcoin, there was a real opportunity to make money around the U.S. election.1
It’s been quite a run sine November 5th. To put it simply, our portfolio has likely never had such massive returns over a 30 day period. Relatively extraordinary. 2
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CONTEXT
Similar to last year, I’d like to lay out some personal context as a portfolio manager here at this “family office“. But if you prefer to skip ahead to hear a bitcoin rant, click here, or if you just want to see how the portfolio did in 2024, click here.
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My background is somewhere between working class to lower middle class. That means there are a lot of people that grew up poorer than me. But also, certainly, a lot that grew up richer. What’s unique is being lower middle class is super uncommon in the circles I frequent today.
My family’s income was below the median in the state in which I grew up. To put a finer point on it; my family’s income was well-below the median income of the county I grew up in because it was solidly middle- to upper middle class, on average.
I was relatively poor, compared to those most immediately around me.
While I was relatively poor, on the flip side, being around richer families meant the neighborhood I grew up in was very safe, and the school system I attended was solid. Supremely important things.3
I can explain my financial lot in life through the lens my childhood friends’ parents. One childhood friend had a father that was a franchisee of a well-known restaurant chain. That path stuck out as different from the other fathers in that circle, which were the more typical doctors and lawyers. Still, all of them had their McMansion.
The crucial element that is the same among these professions — doctor, lawyer, franchisee — is that they are careers. Not jobs.
My parents had jobs. When you are driving around in a roll-off truck, for example, you aren’t think about your next promotion. With a career comes the potential for upward mobility and, through that progress, the ability to not just save but invest. Saving was certainly within my family’s reach. Investing was thought not to be. Right or wrong. This is the background that informs my interest in investing.4
Back to the present, and backing away from the personal context.
I started putting fingers to keys on this post in mid-November not long after the U.S. elections. I have to start with the asset that has been most impacted by the election, and that everyone seems to have an opinion on.
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BITCOIN & CRYPTO
I’ve started to get the messages again. They would say something like, “So, bitcoin, huh.” Or, “You’re a crypto guy…”5
I am note sure whether I should be insulted or thrilled.
Either way, the interesting backdrop is that when these started, bitcoin was not much more than 10% above it’s prior all-time high.6
What about when the price was around $40,000 to start the year? There was no interest. No text messages. Limited media coverage. When it traded in a tight range (~$50,000 to $60,000) for 7 months? Simply no interest.
It really is the asset that sees interest from all types of people. In addition to interest for some reason it also brings with it vocal opinions.
While the average person hasn’t a clue how to value a stock, they understand there is an underlying business that probably has some value. Amazon trades at what? $210 per share? $230 per share? What’s the difference? They do not know. But they know they do not know.
With bitcoin, the average person again hasn’t a clue how to value the asset. But with bitcoin, it brings out any and all opinions.
I have a theory that the per unit price creates some sort of derangement. A bitcoin valuation derangement. How so? Unlike with the typical stock, it’s a huge dollar value per unit. $20,000 per unit? $60,000?! Wait, $100,000?! People think, “That’s more than I paid for my car! What’s going on here?!”
While I never hear about the “narrative or numbers” behind Amazon’s $230 stock price from the average retail investor, we all have to suffer through bitcoin commentary each bull market. And, of course, only in bull markets.
If you don’t know how to value any asset, it may be inadvisable to start with bitcoin.
This is a perfect jumping off point to look at more traditional asset valuations.
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VALUATIONS & TIME HORIZONS
The chart below shows the massive spread between the S&P 500’s valuation and its equal-weight counterpart earlier in 2024 (using price-earnings multiple).7
What is this showing really? The largest companies in the S&P 500 have been much more richly valued. This is of course driven by the vaunted Magnificent 7.
I covered the Mag 7 in some detail in last year’s end of the year wrap.8 The reason I bring this small group of stocks up again is because, among the richly valued companies, we find a number of the companies in our portfolio, including some of the Mag 7 names.
The valuations of some of our holdings are frankly hitting nosebleed levels compared to their historical prices. The table below shows each of the 9 holdings which we’ve begun to sell due partly to valuation.
There are a number of additional current holdings, which we have not yet sold a share, but are monitoring for the same reason.
Similar to how I discussed my family’s income as a child, by showing the percentile ranks, I’ve presented these data in the context of their historical valuation. It’s all relative.
All 17 of these companies are trading at least at the 75th percentile, i.e., the stock has been more expensive just 25% of the time. Several are trading at their 99th or 100th percentile valuation, i.e., the stock has never been more expensive on a forward earnings basis.
The relatively expensive nature of these stocks is not reassuring. This, I believe, feeds into why Goldman Sachs issued an outlook that called for muted future returns from here, with their base case at a 3% annual return over the next 10 years.
3%?! How can this be?
One explanation is pretty simple. When you start from a high valuation, it takes extraordinary underlying performance to create positive future returns.
This is an opinion counter to some. Well, in the surface at least. Schwab’s Chief Investment Strategist Liz Ann Sonders wrote in a 2025 outlook.
…the stretched valuation environment is a product of enthusiasm around equities. Yet, it’s hard to argue that high multiples in and of themselves represent a risk to the market’s near-term performance. Multiples can continue to move higher (as was the case in the late-1990s) and there isn’t a strong historical relationship between valuation and forward performance.”
“There isn’t a strong historical relationship between valuation and forward performance” — but if you recall Sonder’s timeframe is 2025 — one year, this is more or less true based on the data, which they show in the report.
The graph above shows no correlation between valuation and 1-year returns.
However, if you are focused on the longterm, valuation is a rather tremendous way to predict forward returns (dark blue dots) as shown in the historical analysis below.
This plays into why I say I am not super excited about, for example, Apple at 30x forward earnings, which reflects a price level that has only been more expensive 10% of the time over the last decade. If our time horizon is long, this is a predictive indicator, on average.
But what rich valuations do not mean is that a particular company’s stock price is inevitably going to crater (see lack of 1-year return correlation). It simply means the risk-to-reward calculation is far less favorable today then when we last added to the position.
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2024 IN REVIEW
On the backs of these rich valuations, 2024 has been one for the record books. Through December 15th, the publicly-traded equities in the portfolio returned 61% compared to the S&P 500’s 27% appreciation.
We could not be more proud of this result.
| % OF PORTFOLIO | 2024 RETURN | |
| EQUITIES | ~50% | 61% |
| CRYPTO | ~25% | 122% |
| CASH | ~15% | 4% |
| FIXED INCOME | ~10% | 4% |
Overall, the weighted-average return is 66% for 2024 year-to-date.
The secret sauce is not so secret. While just about everything is working well right now, if you were to choose a handful of themes to be long — large-cap tech, semi-conductor companies, financials, bitcoin, and other crypto/crypto adjacent companies would all be high on that list.
Here’s the thing that is somewhat more novel. While we report year-to-date returns here, 2024 returns are really a product of good purchases in 2022, 2021, and so on. It’s uber-hard to be right in any one quarter, or even one year. Taking this longterm perspective is something we need to keep front of mind constantly.
One additional thing to cover off on for the past year. As for shorter to mid-term trades, I advertised four at the end of 2023.
These types of things are more useful to keep an eye on important broader trends versus actually moving the one-year return profile. With three of them ultimately being profitable, they were certainly worthwhile in 2024.
In addition to the trades above, we do have a way of finding interesting big, broad trends here. A few of these really started to be “priced in” and hit the mainstream in 2024.
- The narrative around the growing importance of semiconductors reflected in our portfolio at the end of 2021 –> hit Wall Street in 2024 with Nvidia and Broadcom reaching the trillion dollar market capitalization club and bringing the rest of the gang along for the ride
- The rise of prediction markets in 2022 –> which hit the mainstream during the 2024 U.S. election via the amzing story of Theo’s $85M profit on Polymarket
- Short comings in the U.S. electric grid in 2021 and the potential for reintroduction of nuclear energy in 2022 –> which has now started in 2024 with new investments from start-ups to, believe it or not, Three-Mile Island
With that, let’s look at 2025.
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2025 THINGS TO WATCH / PLAYBOOK IDEAS
I wrote at the end of 2023:
Whether or not there is a recession seems to be the key piece of information. At this time last year, there was a full consensus on Wall Street; a recession would materialize in 2023. That did not happen.
Being too early in investing is often the same as being wrong. As is so often the case, the consensus predictions of recession have been back assward for multiple years now.
The following graph shows why this remains a key piece of information, though. And one we will continue keeping an eye on.
Even in a “richly” valued market (i.e., Late Cycle), P/E multiples can continue to expand. It’s typically only when there is a recession for P/E multiples contract.9
Whether expanding multiples in 2025 is rationale or not is debatable. But we know the market can stay irrational far longer than you might think. This Nasdaq 1995 – 2000 analog shows this well.
That analog makes this market, or at least portions of it, feel totally fine. It makes using the “b-word” look crazy.10
The data show that everyone loves U.S. equities. And why wouldn’t we? They’ve worked. That’s how we get to a record high allocation among fund managers.
With that U.S. equity allocation comes an underweighting to other asset classes. Pictured above is cash, for example, which is at a record low.
It’s everything that is underweighted versus U.S. equities, though. Within equities no one wants to own European equities or emerging market equities. Even within the U.S., it’s really the large-cap companies and above (right up to the Mag 7) that are overweight. No one wants to own small caps.11
There is no formula that works in every market. For example, this is why a P/E ratio must be taken in the context of the broader market.
The market can make you look foolish. It wants to, even. By definition the only way to take a profitable position is to have a contrarian opinion. At the same time, trying to be too cute can be a great way to end up missing out on the party. Even if the market may be at a somewhat risky point in the cycle, as long as not downright reckless, it might make sense to be exposed to that market.12
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Merry Christmas, happy holidays, and best wishes in the new year!
EDITOR’S NOTE: Reach out to us if you have our personal contact or head to the contact page — would love to hear from you.