Club Report Q1-2023: Continuing To Outperform

The year started well with the ASX market gaining almost 5% in January, but it soon fell back to a semi-zombified state with most junior ASX stocks falling back in the frustrating malaise to record an overall gain of 3.1% in Q1 2023.

However, our now more reduced portfolio of 10 bagger calls again managed to outperform the market — by 12 and 27 times in Q1 — as we recorded a healthy average mark-to-market gain of 38.2% and an average highest gain of 84.5%.

The club is now three years old, and we have called 14 10 Baggers in that time. However we have not caught a 10 Bagger for 20 months now, because the markets have been rubbish for that long – but we have continued to massively outperform all other funds and stock-picking groups we know of.

It’s Been A Rollercoaster Three Years

The chart below of M2 (circulating money supply) shows pretty simply what we have been through since we started this club. In 2020 and H1 2021, governments created and sprayed money all around, driving up the markets in a huge sugar-hit party, which made picking 10 baggers very easy and so that was a time to spread our money around in stocks as the fast-rising money tide was lifting all boats.

But then along came global inflation, of course, and since mid-2021 we’ve endured one of the most severe global tightenings of monetary policy ever which made 2022 the worst-performing year ever on record in the capital markets.

Global liquidity is now falling, as measures to cool the economies intensify.

So yes, picking 10 baggers has become extremely hard when the tide is going out. However, as the chart above shows, we now seem to be much closer to the end of the tightening than the beginning – in fact on a global basis (not just in the US) it seems we are getting an increasing money supply again so markets should soon start to reflect that.

So over this last quarter, we have cut back our number of 10 bagger calls and we worked to get members set in some very interesting new deals right at the bottom. We now believe we sit well placed for another year of massive outperformance, and should hopefully be able to record some more successful 10 baggers calls again this year.

In 2022 the ASX market fell 5% overall - but the average small and medium-cap fund in Oz was down 8%. It’s a well-known fact that most Australian funds underperform the market overall. For example, S&P Australia (SPIVA), which measures managed Australian funds against their benchmarks, reported that roughly 75% of all small and midcap equity Australian funds have underperformed the market year to date, as have 57.6% of all Australian managed funds.*

*Source: S&P global - https://www.spglobal.com/spdji/en/spiva/article/spiva-australia/

At the end of Q1 2023, the ASX market is still down 3.46% YTD, so we imagine the average Australian fund will still be down around 5% YTD. Plus bear in mind that the ASX performance over the last year has been far better than most other global markets for example, the S&P is down almost 20 per cent and the Nasdaq is down 30% YTD. Depending on the data used, it appears the average global equity fund and stock-picking group is still down over 18% YTD.

But our 10 bagger portfolio is up nicely again. Indeed in just the first three months of 2023, our 10 bagger calls portfolio has made more than most all other Australian (and global) managed equity funds have made over the last five years!

Below Investsmart Australia list the average return for a range of 463 managed Australian equity funds. Over the last five years, they have only made an average return of just 2.96% p.a. (and that’s before fees – which would wipe out much of those pitiful gains for the client.)

Average of 462 Australian Equity Funds: YTD to 31 March 2023

Source: https://www.investsmart.com.au/

So while the average Australian equity fund has made an average of 3.1% p.a. over the last three years (9.3% in total) - our 10-bagger portfolio has made an average return of 628% each call* – and that’s on a mark-to-market basis (ie: simply buying when we call a buy and selling when we call a sell) – that’s 201x better!

Our average highest gain performance over three years and 39 calls has been 1258% each call* – that’s 405x better!

*See our full 10 bagger performance of 43 calls over three years on our website at https://10baggerclub.com

Our Real Outperformance Measured

1. Average Aussie Fund

if you had invested A$100,000 in your average Aussie equity fund three years ago it would be worth A$109,300 today (less fees).

2. 10 Bagger Club

However, if you had invested the same A$100,000 in all the 10 bagger calls we made when we made them and sold them when we uncalled them, your A$100,000 would now be worth A$728,000 (less fees).

And this is not just made-up Monday-morning-quarterback stuff that some cynics and disbelievers accuse us of – our performance has been watched (wins, losses and warts and all) on a daily basis for the last three years by our hundreds of paying members.

Plus despite underperforming us horribly in the good times, most of these more standard funds and stock picker groups then spout off their usual drivel about being safe, diversified and less risky. But, as we can see, they also lost more than us in the bad times.

Don’t Forget Rule Number 1

Warren Buffet famously stated that in investing:

“Rule number 1 is never lose money. Rule number 2 is never forget rule number 1.” But, as he further explained “This does not mean that investors should never incur the risk of any loss at all, but the avoidance of loss is the surest way to ensure a profitable outcome longer term.”

In the business of hunting 10 baggers, it is vital to always watch your downside, stay nimble and be ready to run like a rabbit and keep your powder dry, because new opportunities and deals always come along. and that’s what we do. So yes we got grumbled at by some members recently for suddenly un-calling certain previous favourite stocks- year, including our whole uranium portfolio, but while many of our stocks lost last year and we cut and ran from some deals just a few good winners like Lindian (LIN.ax) and Industrial Minerals (IND.ax) made our average overall return stay in the green.

As George Soros says:

“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong… I’m only rich because I know when I’m wrong… I have survived by recognizing my mistakes.”

Jack Bogle, the billionaire investor and business magnat, notes that:

“The idea that a bell rings to signal when to get into or out of the stock market is not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully.I don’t even know anybody who knows anybody who has. “

Peter Lynch, who managed Fidelity’s biggest Magellan fund for 20 years and averaged 29.87% returns per year — and who is also the guy who coined the name a “10 bagger”, stated:

“You get recessions, you have market declines if you don’t understand what’s going to happen, then you’re not ready, you won’t do well in the markets. As an investor, you should never expect only success. Losses are bound to come your way. If you’re good, you’re right six times out of ten. You are never going to be right nine times out of ten.

Stan Drukenmiller, probably one of the most successful hedge fund investors in recent history, said:

“One of the best parts about this game is that as long as you stay alive (protect your capital) you can always make another trade… the wonderful thing about our business is that it’s liquid, you can wipe the slate clean any day.”

What Is Our Strategy Now?

Your committee has found that in times such as now in poor and boring markets the best strategy is to concentrate on fewer ideas — which is exactly what we are now doing.

Therefore we have cut back the number of investments we hold, increased our cash levels and we have been concentrating on finding new early-stage investments to go into big, so we can be well set when the market eventually recovers – which it always does. We believe the new deals we have introduced members to are very promising - and where we are close to the management and can understand the business better than the general market, giving us an advantage.

In normal markets, it’s very hard to get ten baggers or outperform by spreading your investments around. The more you spread your investments - the closer to the average return you will get - and the less well you can understand and follow each company you are invested in.

We did not form the 10 bagger club to preserve our wealth - other people can do that better than us. We formed it to find a few winners that can set members financially free. We can do that best in market periods like now by:

1. Finding just a few good promising deals - where the potential upside massively outweighs the potential downside- and then investing in them early.
2. Understanding those investments intimately.- so we have an advantage over the general market, and can hold some conviction about them (or not - and get out pronto).

As Charlie Monger, Warren Buffet’s long-time partner states:

“Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.” and that is precisely what we are trying to do now with these new pre-IPO investments we have been bringing to members- if they chose to invest.

Concentration Builds Wealth

Warren Buffet couldn’t agree more also - he has also stated:

“Diversification may preserve wealth, but concentration builds wealth” Indeed he goes further … “Wide investment diversification is only required when the investors do not understand what they are doing… Diversification is protection against ignorance, it makes very little sense for those who know what they are doing.”

Stan Drukenmiller arrived at the same realisation over time:

“The first thing I heard when I got in the business was “bulls make money, bears make money, and pigs get slaughtered.” I’m here to tell you I was a pig. I now strongly believe the only way to make superior returns is by being a pig. I think diversification and all the stuff they’re teaching at business schools today is probably the most misguided concept everywhere. If you look at all the great investors - as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to make very, very concentrated bets. They see something they like and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was – only maybe one or two times a year do you see something that really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, then put all your eggs in one basket …and watch the basket very carefully!.

He also stated about his friend George Soros from the Quantum fund:

“I learned many things from him, but perhaps most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong..”

George Soros, now considered as the world’s most successful prop trader, noted:

“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong”. His average win rate during his heyday was only around 30%. In other words, one of the greatest traders ever has lost 70% of his investments and trades and still made a multi-billion dollar fortune.”

Pick Investments With Huge Upside and Limited Downside

Jeff Bezos, the world’s second richest man, says exactly the same

“Given a 10% chance of a 100 times payoff, you should take that bet every time.”

Naved Abdali the successful Canadian Investor and commentator notes:

“It’s not a calculated risk if you haven’t calculated it. Don’t be fearful of risks. Understand them, manage and minimise them to an acceptable level… if you had invested an equal amount in Apple and 1,000 other companies at their inception, and all the other companies went bankrupt, you are still in profit. This is the power of unlimited gain possibilities and limited loss.

The top US hedge fund manager Mellody Hobson notes:

“The biggest risk of all is not taking one” and that “investing in what is comfortable is rarely profitable.“**

Now Is The Right Time To Act

There are a lot of companies out there now looking for new capital - and capital is getting harder to find, so this is the time we should be putting our money in at or near this cycle bottom. We have already arranged four pre-IPO or cheap financings, and more and more good deals come our way most weeks- which we can offer to members if we feel excited by the possibilities - this is the benefit of our investing together in this club.

Indeed we are all feeling a bit tapped out by these direct investments we have been doing, and it is now time for us to concentrate on making sure our existing potential 10 bagger investments work this next two years cycle. However, there is possibly one more interesting potential investment that we may offer to members we are working on.

In the meantime we continue to do our research around the investments we have gone into, to understand well the investments we are in to hold with more conviction.

Ian Cassel, the founder of the US Microcap Club, explains a bit about conviction investing:

“Conviction is when you feel you know a business/stock better than the average investor in that business/stock. Conviction investors normally manage a concentrated portfolio so they can focus on accumulating knowledge on their best ideas. The ultimate edge for conviction investors is their ongoing maintenance of due diligence and keeping an accurate pulse on the company. True conviction can only be obtained by trusting your own research over that of others. They do independent research to form independent convictions. They do the work, so they know when to buy. They do the work, so they know when to hold. They do the work, so they know when to sell.”

But at the same time, we need to remember to hold our convictions lightly – and don’t ever get married to a stock – if things change we need to be able to cut losses and run. Don’t just obsess over the potential upside – always keep an eye on the potential downside – and always be ready to cut and run if things are not going as planned or hoped for… never forget rule number 1.

Disclaimer

Please be aware that past performance is no guarantee of future performance. No financial advice given. You are encouraged to do your own research (DYOR) on the above mentioned companies and their strategy/progress and make your own financial decisions.