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Firefly Capital Update - 2024 Q1

2024 Q1 results

January 1st

March 31st

$ change

% change

Firefly Capital

$562,456.93

$606,084.33 *

$43,627.40

7.76%

S&P500

$4,769.83

$5,254.35

$511.52

10.79%

Difference

-3.03%

2023 yearly results

April 1st, 2023

March 31st, 2024

$ change

% change

Firefly Capital (Normalized)

$140.00

$176.29

$36.29

25.92%

S&P500

$4,109.31

$5,254.35

$1,145.04

27.86%

Difference

-1.95%

Total results

April 1st, 2020

March 31st, 2024

$ change

% change

Firefly Capital (Normalized)

$100

$176.29

$76.29

76.29%

S&P500

$2,470.50

$5,254.35

$2,783.85

112.68%

Difference

-36.4%

There are no rows in this table

⁠

* We are currently at $120,810.72 in cash.

As we close another chapter and mark the fourth year of our investment journey, it's a time of introspection and acknowledgement of the challenges we've faced. We've seen a compounded growth of 15%, impressive by most standards, even as we acknowledge the S&P's 20% compound growth over the same period. This has been a mixed bag of strategic wins, missed opportunities (more on this later), and invaluable lessons.

Sometimes, I find myself at a crossroads, contemplating the simplicity of joining the S&P and reclaiming the hours spent poring over markets. Sometimes that seems very appealing, but I’ve concluded I plan on continuing for the following reasons.

I still absolutely love spending time doing investing research and learning how a capitalistic economy functions. This is what I would do if I didn’t need to pay the bills... and apparently I’m not the only one. Buffett has reported that he

“tap dances to work”⁠

and his good friend wrote a book by that same title.

I very much consider losses as learning opportunities. The fund’s biggest loss was in

2022 Q2⁠

, and I adjusted the strategy going forward. If I consider that new strategy the “starting” point, the fund has increased 59% vs the S&P500’s 39% over the same period of time. Each setback has been a stepping stone, refining our approach and growing my conviction in our strategy.

The market feels

irrationally exuberant⁠

. It is very atypical for the stock market to jump 10% in one quarter. It’s absolutely impossible to maintain. Amidst this, our cautious stance, maintaining 20% in cash and a readiness for market “

corrections⁠

” (10% drop). It’s another way to say we have very good downside protection, something that is core to our investing strategy.

Limiting the upside: potential mistake

I am currently evaluating whether I’ve made a mistake. On the surface, I definitely have. Last year I managed to enter Nvidia at around $95/share, and rode it up until $550 (5x return is great). Unfortunately for us, I decided at that time that it was unlikely for it to continue to ride to new heights. This was bolstered by my own valuations on Nvidia — that they were likely worth around $350/share, meaning they were highly overvalued at their current $480/share price.

In addition, Ashwath Damodaran, known as the dean of value investing, shared his optimistic

Nvidia valuation at around $436/share⁠

or so. In addition, Nvidia’s meteoric rise had slowed and seemed to be hanging around $480/share for a while.

I essentially made a bet that the stock price wouldn’t go over $550, and I got paid for thats bet. Almost immediately after I placed the beter, it continued it’s rise and nearly doubled to around $900. I knew it was a possibility, but it certainly hurts in retrospect.

That said, it’s not over. The “contract” of this bet can be renogiated over periods of months, which I absolutely plan on doing (and I have successfully done with other companies) that allow us to recapture the lost gains.

While it seems like this was an obvious mistake (and I am learning from it), there are many who have also said it was a good move. It’s hard to know “when to exit” when a company is shooting astronomically above any reasonable valuation. As a parallel example one point in time, Yahoo! was valued at 2,500 times it’s yearly earnings (15x is the stock market average), right before It crashed in the Dot Com crash. It’s hard to know for sure.

Irrational markets: reminisicing the end of the century

Speaking of irrationally high prices, it seems like anything that has the word “AI” Is being significantly over valued. A few years ago it was “metaverse”. I think AI has more value than the metaverse and is here to stay, but I still think it’s very overvalued. Let’s just look at the “magifnicent 7 companies” (and Berkshire Hathaway, the 8th) and their performance in the last 6 months:

Company

Percent

Apple

-1.31%

Microsoft

30.74%

Amazon

39.33%

Nvidia

101.77%

Google

12.6%

Tesla

-30.13%

Annual reckoning, as promised: reevaluating the benchmark

As you likely know I don’t consider price to be a good estimation of value, and in the

2022 Q1 Report⁠

I introduced the idea of Owner Earnings Benchmark (also called a yardstick). The basic idea is calculating how the companies have down in terms of their actual earnings, as opposed to what people decide to pay for the earnings (which can be incredibly fickle). The basic concept is that price will reflect owner earnings in the long run. If you’re curious about this calculation, I go through the details of this calcuation in a

blog post⁠

Name

2023

2022

2021

Fund Owner Earnings Growth

+116.36%

+0.41%

+24.67%

There are no rows in this table

⁠

Our fund’s price grew by around 29% in 2023, which indicates there is a lot of unrealized gains still sitting in the fund. Some of the positions we had in 2023 have ended, and so I am looking for new places to place the capital to maintain a high rate of owner earnings. I can only meaningfully do this calculation once a year, and it’s very refreshing to see such incredible results.

Fund update: a smaller pie

Another quick update, one of our limited partners decided to use his capital to help fund his new house. I’ve sent a separate email with updated owner percentages (everyone’s ownership increased. The main reason to note this is that beginning next cycle the total amount of capital in the fund will be different (this is why I use the “normalized” metric to account for adding and removing capital).

This quarter’s excitement: in the news

Electrical vehicles have taken a back seat to the AI rush with a number of setbacks, including

Hertz selling many of their electrical vehicle fleet⁠

⁠

Layoffs have continued in the tech sector⁠

: “More than 120 tech companies have already laid off a combined total of more than 32,000 employees during the first five weeks of

2024⁠

, according to Layoffs.fyi. In 2023, tech companies laid off about 260,000 according to the tracker.”

Many people were surpised when Warren Buffett started buying up mass amounts of shares in Occidental Petroleum a few years ago. People said oil was dead. His argument was that it would take decades for nations to actually move away from oil, and we would actually need more oil sooner. It looks like the Oracle of Omaha was correct once again.

⁠

If you haven’t been hit by cybercrime (as most haven’t), it might go as a surpise to see just how large it’s becoming, and how rapidly. This is a

hockey stick curve⁠

if I’ve ever seen one.

⁠

The

SEC approved Bitcoin ETFs⁠

, and that’s a big deal. In

2022 Q1⁠

I talked about the importance of protecting the US Dollar and maintaining it as the world’s reserve currency. Bitcoin has largely gained popularity as being a decentralized economy that can compete with the US Dollar, Euro, Chinese Yuan, and the like. So why would the SEC approve it, lending legitimacy to its “competitor.”

One hot take⁠

is because they figured out how to control it. There’s a good deal of evidence that leads this line of thinking, though it’s likely we’ll never know.

Until next time

It’s been great investing this last quarter, looking forward to the coming months, and as always, please send me any questions or comments you may have.

Cheers, Kerry

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