Dear Partner,
In the fourth quarter of 2023, Woodbridge Capital Partners I, LP (the “Partnership”) returned 19.22%, bringing its total return for 2023 to 30.81% while the S&P 500 returned 11.69% and 26.29% for the quarter and year, respectively (with dividends reinvested). Since its inception in April 2020, the Partnership has returned 167.6% compared to the S&P 500’s 96.0%.1
The health of the American economy remained strong in 2023, defying expectations. Despite the Federal Reserve’s ongoing fight against inflation, a mini banking crisis, and heightened geopolitical tensions, real GDP grew 2.6% and unemployment remained below 4%.2 In addition, inflation as measured by 12-month change in core CPI, fell from 5.7% to 3.9%.3 Stocks and bonds also did well, with the S&P 500 and Bloomberg US aggregate bond indexes rising 26.3% and 5.6%, respectively.4
For our companies on average, business performance improved moderately in 2023, compared with a decline in 2022, but on nowhere near a level that would be implied by the changes in their valuations. To quote billionaire investor Howard Marks, in the business world, things generally range between pretty good and not so hot. Investor sentiment, however, can quickly go from flawless to hopeless. Just because we try to avoid caprice with respect to our thinking and behavior does not mean that our stocks are immune. Our returns over the past three years (summarized in the table below) demonstrate the considerable volatility that equity investors face. We expect our returns to continue to be volatile, but we agree with Warren Buffett when he says that he would rather earn a lumpy 15% return than a smooth 12%.
|
2021 |
41.2% |
|
2022 |
-30.82% |
|
2023 |
30.81% |
Despite our excellent return for 2023, we believe our investments still have a lot of room to run. The most significant contributors to our performance for the year were our two tech-related investments, which returned 90.12%, and 58.32%, respectively, following large declines in 2022. As of the end of 2023, both traded near the price at which we began to purchase them – still far below our assessment of their intrinsic values.
The price performance of our other three stocks in 2023 was relatively unspectacular, though their intrinsic values continued to increase. The company in which we have our largest investment repurchased nearly 18% of its outstanding shares in 2023 alone. Very few companies can boast of such a feat, and yet the stock ended the year down roughly 6%. At present, this company has an enterprise value (what one would pay for all the company’s stock, after assuming their debts and pocketing their cash) of approximately $4 billion. In 2023, the company generated $1.6 billion of free cash flow. So, if someone were to buy the whole company they could reasonably expect to make back all of their money in less than three years and still own the company. I’ve gone through this mental exercise before, but the figures have changed as the stock has gotten even cheaper. At this point, it is probably the most undervalued stock that we have ever come across, and we are confident that one day the stock price will be multiples of what it is now.
At this point, I would like to take a moment to discuss everyone’s favorite topic: taxes. Woodbridge is a partnership, meaning that it does not pay any taxes directly. Instead, each partner reports on their own individual tax return their proportionate share of the fund’s gains and losses each year. The price of our investments fluctuate up and down every day, but the IRS only considers a taxable event to occur when we actually sell an investment. It is not uncommon for us to show a gain for tax purposes in a year when we were down or a taxable loss in a year when we were up. The latter is what happened this year – a good thing, as it will help to lower your taxable income.
Kyosuke and I are grateful for the trust that you have placed in us to manage your money. You can be sure that your money is always invested the same way that ours is. We both have a very substantial portion of our net worth in the fund and expect it to continue that way. If you ever have any questions or concerns, whether about your investment in Woodbridge or investing in general, please don’t hesitate to reach out. We look forward to another successful year together.
Thank you,
Jesse Flowers & Kyosuke Mitsuishi
1https://finance.yahoo.com/quote/%5ESP500TR/history?p=%5ESP500TR
3https://fred.stlouisfed.org/series/CPILFESL
4https://www.bloomberg.com/quote/LBUFTRUU:IND?embedded-checkout=true