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Firefly Capital Update - 2024 Q4
2024 Q4 results
October 1st
December 31st
$ change
% change
Firefly Capital
$674,717.37
$689,360.85 *
$14,643.48
2.17%
S&P 500
$5,762.48
$5,881.63
$119.15
2.07%
Difference
0.1%
Year-over-year results
January 1st, 2024
December 31st, 2024
$ change
% change
Firefly Capital (Normalized)
$163.60
$204.19
$40.59
24.81%
S&P 500
$4,742.83
$5,881.63
$1,138.80
24.01%
Difference
0.8%
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* We are currently at $136,626.7 in cash.
In the , I made a (pleasant) mistake, where I incorrectly doubled the gains the S&P 500 had achieved in 2024 Q3. In the updated link (above), it shows we actually doubled their percentage (9.9% vs 4.4%) which gave us a 5.5% surplus over the S&P 500.
We achieved ~25% returns this year, outperforming the S&P 500 by 0.8%.
However, I'm making a strategic shift: I expect us to lag the market in the coming year as I increase our cash position to 30-40%. I expect to lag the S&P 500 for the coming year. I plan on keeping this up until the recessionary storm clouds have lifted. This could be twice as much cash as we currently have, and the more we have in cash the harder it is to keep up with the rapid surges of the S&P 500. If you want to keep up with the potential gains (and losses) of the S&P 500, I suggest you withdraw your money and put it into an index fund such as the SPX.
Going to cash: why I expect to lag the S&P 500
The thesis of focused value investing that I follow is based on a few fundamental principles. The most important one is to not lose money, and the second one is to have cash available to buy companies at steep discounts when they “go on sale” (sold below their fair value).
There are three primary reasons why companies “go on sale”:
1) The specific company in question has an “event” that temporarily lowers its market price. For example, in 2015 Chipotle had E. coli outbreaks and the stock dived steeply and then recovered.
2) An entire industry has a crisis. For example, at the beginning of last year Silicon Valley Bank, Signature Bank, First Republic Bank, and some others closed and the government had to back up a lot of banks to prevent bank runs (and all bank stocks lowered, even if they were not at risk of any sort of default).
3) The entire market enters a recession or dives. When this happens, companies can drop by 30-60%, and you often get a good pick of companies you want to own.
When any of these happen, you want to have cash, and a lot of it available. When all of them happen, Charlie Munger, Warren Buffett’s late partner, calls it the . Essentially, a convergence of many things happening at once.
This last year I took a dangerous path, at least in my eyes, and decided to stay fairly heavily in the market. Most of the time I was around 85-90%+ in the market and only 10% or less in cash. This means that had the market crashed, there would have been little cash to buy into, and a large proportion of our fund would have dropped with the index.
Last year I was astounded at getting 30% returns.
This year, we got 25% returns.
The market also got 24% returns.
The S&P 500’s averages 10% returns. We’re over double the average, and as mentioned previously, the implies that something has to break. Perhaps a larger (10% drop in the stock market), or perhaps a full-on recession.
This means a significant drop and a significant opportunity.
Am I the only one who is thinking this?
Buffett and his company Berkshire Hathaway are known for keeping absurd amounts of cash, for the last many years that amount has been around $100 billion and climbing. Last year, he doubled his cash holding. People attribute this to many different reasons, but one of the common threads is his long-standing mantra to have cash ready.
He increased his cash-on-hand by selling some of his favorite stocks, like Apple. This is a huge deal. Personally, many of the investors I discuss with are doing the same.
Shiller PE Ratio
Another major indicator we look at is the by Nobel Prize winner Robert Shiller, which essentially indicates how “expensive” the market is. You can see it’s one of the highest it’s ever been.
Is the stock market really doing that well?
The S&P 500, the main index I use to track, is supposed to be the top 500 largest companies. At a glance, that seems rational. However, it might be important to note the incredible disparity between the size of the top companies to the smallest companies. Right now, AI is a huge buzzword and attracting a lot of money, and almost every one of the top companies has huge bets on AI: Amazon, Meta, Apple, Nvidia, Microsoft, Tesla, and Google. Berkshire Hathaway is the outlier.
There are many mixed feelings every time a new president comes in. Last time the stock market did particularly well under Trump’s reign, but there is also the belief that he’s pushing the market towards an edge with his strong pushes to “lower the Fed rate” without understanding the nuances of what they’re doing. . I personally expect initial excitement to give a boost to the stock market and then as some realities set in, I fear some change will be the straw that breaks the camel’s back.
Do I sound like a broken record?
I certainly think I do. This time, however, I’ve committed to action and have much more cash available as I scout for underpriced companies to purchase. I don’t need a recession to happen, but I do need the companies to be on sale. When we see multiples like Nvidia 12xing in 1-2 years, NFLX doubling, or the stock market increasing by 50%. It scares me. I can’t help see parallels to 2000 and 2008. The thing is, it could actually be the equivalent of 1998 or 2006, we could be years away from the actual crash. We’re in one of the longest bull runs (increase in stock market value without a recession) in history.
I give you this warning now because if you want to do something else with your money, now is the time.
We’ll be fairly flush in cash, I can return it easily now. Your returns will almost certainly be lagging that of the S&P 500 for some amount of time (unless I’ve timed the market perfectly, something I will never, ever profess to be able to do).
The choice is yours: stick with our conservative cash strategy that may lag the market but position us for major opportunities, or seek higher short-term returns elsewhere. Whatever you decide, transparency about our strategy remains my priority.
Happy New Year!
It’s been great investing this last quarter, and as always, please send me any questions or comments you may have.
Cheers,
Kerry
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