Putting More Capital to Work in One of Our Long-Time Favorites
Reassuring update from Harvia + we're adding to one of our core positions
Growing Divergence
We’ve talked about it in yesterday’s article: investors’ capital is flocking to AI-driven themes.
Notwithstanding how truly exceptional Nvidia has been (and is likely to continue to be, the amount of real cash flow growth has been nothing but impressive), today’s AI enthusiasm is reminiscent of the ARK/Cathie Wood frenzy. Even today, there’s still a desperate quest for the next Big Winner, causing more reliable winners’ share prices to drop or become increasingly more volatile.
Back then, her holdings had several things in common: high-volatility/beta, low profitability or even loss-making business models (aka: unjustified adjustments for share-based compensation). Despite her basket approach (i.e. holding several positions), bidding up for highly volatile assets, chasing momentum and not knowing how common-sense valuation models work turned out to be a recipe for disaster.
But hey, the ARKK ETF is still up since inception, right? That’s just one way of looking at it. Investing is process of adding and removing capital to or from a portfolio, and it’s not surprising to conclude that many investors bought ARKK at the highs, not at the lows or pre-COVID…
It’s not uncommon for Tortoise investors to witness these behavioral aberrations. In fact, the divergence between high versus normal or lower beta stocks has widened post-COVID. People love story-telling. It’s just much more exciting to talk about (lucky) profits made on highly volatile stocks than on steady winners that you can still comfortably add to along the way.
It’s one of the reasons why we’ve been keeping more cash on the sidelines: there will always be opportunities as investors look for the next Big Thing instead of good old Otis or Linde, but no one knows how high IRRs on those defensives can go. Increasingly more boring opportunities are now popping up.
Nevertheless, because of the growing divergence, we expect valuations and subsequent IRRs on newly deployed capital will vary more than pre-COVID. On balance, this should be a net positive for any seasoned quality growth investor.
We’ve highlighted the long-term asymmetrical risk/reward profile of our portfolio companies in a previous Weekly Digest.
Buying More of One of Our Long-Time Favorites
Because of the current momentum surrounding AI, several good long-term buying opportunities are arising, and we’ve just added an absolute +/- 350 bps to our existing allocation in one of our long-time favorites.
As you know, our portfolio return is excluding the effects of our personal cash additions or withdrawals. The returns simply reflect those of an already fully invested high-quality stock portfolio and our present allocations. Overall, allocation tweaks won’t move the return picture much.
Quite logically, adding more to a position will cause the weighting of other names to drop (despite having not sold out of them); just like equity funds or ETFs don’t have a static allocation whenever they experience in and outflows. That’s why we’ll continue to share every periodic purchase with our Partners.
Buying more at higher IRRs will be accretive to one’s real-life financial performance, but taking advantage of such opportunities is a personal matter. Hence, it should not influence the way we report our portfolio performance.
Before we highlight the additional purchase, let’s take a look at Harvia’s Capital Markets Day which was held this morning. Yesterday, the stock of the Finnish leading sauna and spa manufacturer dropped 7.5% (with no new news being published). It once again highlights the intrinsically increased volatility in today’s market.