To The Moon

Summary

• This article provides a review of all three of our investment accounts for 2022.
• Two of our accounts outperformed the S&P 500, and the third one essentially tied with it. We will compile some Q&As that we exchanged with our members during 2022.
• After the review, we will summarize (or reiterate) some key lessons learned together with an outlook for 2023.
• Overall, we are not seeing the signals to activate our “bottom-fishingallocation model” yet.
• And we will share our thoughts on these signals (and youwill be the first one to know when we see those signals).

Dear tiger readers:

This is a repost of an article that we wrote for our investment marketplace service. We are reposting it here in case some of ideas are of interest to you. You can check out our other articles and our blog on SeekingAlpha.com. We provide real time trade alerts, watchlist update, and portfolio adjustments on our sites.

https://seekingalpha.com/checkout?service_id=mp_1400

2022 review

For new members, on a global level, we use a barbell strategy to clearly isolate short-term survival risks and long-term growth risks. And that is why almost all our investable are divided into two portfolios - the SWP (survival-withdrawal portfolio) for our short-term needs (e.g., a visit to the ER next month) and the AGP (aggressive growth portfolio) for our long-term needs (e.g., take care of things when we are 90 years).

On the side, we are also maintaining a relatively small UTMA (Uniform Transfers To Minors) account for our son. It provides some tax advantages, a good educational tool for our kid, and serves as a good vehicle to build inter-generational wealth.

As older members already know, we have been providing regular and detailed updates on these accounts. These regular updates serve several purposes. First, you can track our allocation changes and verify the performance. Second and more fundamentally, we use these updates to communicate our outlook. We find its rather abstract and not practically useful to discuss investing ideas and economic outlook. We find it more actionable to blend our outlook with actual transactions. You can see how our thoughts are reflected in our actions. We are a firm believer in “Do not tell me your thesis. Tell me what you actually hold first.”.

All told, all three of our accounts held out OK in an extremely turbulent 2022, a year during which the S&P 500 index lost almost 20% and the worst year since 2008. Our detailed holdings and performances are in the appendix. Two of our accounts (SWP and UTMA) outperformed the S&P 500 by a good margin. And the AGP account is essentially tied with it (beating it by 0.1%, within noise level).

During such a turbulent year, the key lesson we learned again is to not panic with the rest of the herd. As communicated several times, based on the key market parameters (more on this in a later section), we kept making gradual adjustments ourselves based on our “business-as-usual model” despite all the fear. We do have a “bottom-fishing allocation model”. But we are not seeing the signals to activate that model yet. You will be the first one to know when we see those signals.

With this, now let me detail a few more key lessons learned in 2022. And I will blend these lessons with some of the Q&A exchange we had with our members in 2022.

Good ideas vs. New ideas

You have certainly noticed that we name some of our holdings “permanent holdings” and even our “tactical holdings” do not change that often. And as such, some readers asked if we will be adding more/new holdings to our portfolios.

The short answer is yes. We have been and will be recommending new ideas as we go.

And here is the long answer. First, we WILL maintain a concentrated portfolio. If we add a holding, most likely, it is because we see the new idea to be substantially better than an existing holding – after all risk, reward, and tax considerations. And we will replace the existing holding with the new holding. So that the total number of holdings stays around 1 dozen.

In investing, we do not need “new” ideas, we need "good" ideas. Finding “new” ideas are easy. But they are not automatically “good” or “better” ideas. The secret of successful investing is to stick to the VERY GOOD ideas, and not be bothered at all by the other good ideas. This leads me to the shameless point that our current holdings are already very good ideas as you can see from the performance during a very tough 2022. They are not only good as individual stocks, they also represent our best ideas also in terms of holistic considerations – safety, growth potential, valuation, and diversification (in terms of business sectors, geography, et al).

Although, from time to time, we do see a better idea. A total of 5 only during the whole of 2022 (and one of them, Apple, is the addition to an existing position). We have provided order and trade alerts for all of them as listed below. And as you can see, thanks to good research and a LOT of patience, all of them are winners (at least so far).

[Order Alert] TSN Buy Order At $60

[Trade Alert] BRK Bought At $261

Rio Tinto: Trade Alert at $70

GS at $290

[AGP Oct Update] – Apple Added at $140

Diversification

Then do we worry about diversification risks? After all, Traditional wisdom is to hold at least 20 holdings to properly diversify. A good question. And here are our two cents. First, when the traditional wisdom mentions 20 holdings, it means 20 STOCKS, not 20 funds. Many of us inevitably hold a good bit of market funds either out of choice or out of no choice (like some retirement funds only let you buy market funds). And each fund is well diversified (more than necessary in my view) already. Second, diversification among stocks hits a wall because after ~10 or so because stocks are correlated to each other. And finally, diversification for the sake can easily become deworsificaiton or even just plain worsification – which leads me back to the points made in the section above.

2023 Outlook

For 2023, I see good reasons to be concerned about the possibility of a recession. We are seeing some of the textbook earlier warning signs - yield curve inversion, bellwether stocks reporting profitability pressures and layoff plans, overlayed with inflation and also ongoing geopolitical tensions.

However, we are still following our “business as usual” model as you can tell from our recent portfolio updates because of the following key parameters that we are observing:

First, another key signal (that is, besides the yield curve inversion signal ) that we monitor closely is the yield spread between BAA bonds and risk-free interest rates. And as you can see from the following chart, at about 2% currently, it is more or less within a normal range. It is much thicker than the pre-2008 level and thinner than the 4% level during recessions.

And secondly, as communicated earlier, we see the bond rates reaching long-term stability, removing/reducing macroscopic uncertainties substantially. With Long Term treasury rates hovering around 4% now, I do not believe it can go much higher anymore. We firmly believe that long-term treasury rates cannot exceed inflation or real GDP growth - that is the only way our government can handle its debt.

To wrap up, our action plan is to keep adjusting our allocations among different asset classes GRADUALLY based on the above parameters we are seeing – until/unless we see a clear signal to act more dramatically. In particular, for our tactical holdings, we see value stocks as especially attractive (one example is the TSN shares we bought at $60 recently). As you can see from the following chart, currently the valuation gap between value stocks (represented by SCHD) and the total market (represented by VTI) is at a secular peak. The dividend yield spread started around 0.6% about 10 years ago. And the gap has gradually widened to a peak of ~2.0% during 2020 and currently, the spread is close to a secular peak.

With this, I will stop. Thx for reading and for your support during 2022. Do not hesitate to reach out with questions and best wishes for a successful 2023!

Appendix: detailed holdings and performance of our accounts during 2022

Source: Author, our Aggressive GrowthPortfolio (“AGP”) returns

Source: Author, our current Aggressive GrowthPortfolio allocations

Source: Author, our Survival-WithdrawalPortfolio (“SWP”) returns

Source: Author, our Survival-WithdrawalPortfolio (“SWP”) current holdings

Source: Author, our Son’s UTMA current holdings

Source: Author, our Son’s UTMA current holdings

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