Dear Partner,
In the fourth quarter of 2024, Woodbridge Capital Partners I, LP (the “Partnership”) returned 3.94%, bringing our return for the year to 7.50% while the S&P 500 returned 2.41% and 25.02% (with dividends reinvested) for the quarter and year, respectively. Since its inception in April 2020, the Partnership has returned 187.63% compared to the S&P 500’s 138.07%.
A buyer of a share of stock must be one of two things: an investor or a speculator. An investor evaluates a business, assesses its prospects, and determines whether the price that they are paying is justified relative to the dividends they could expect to receive over time. A speculator, on the other hand, isn’t interested in all that. They simply want to buy something that they think will go up in price and then sell it to someone else.
When a stock begins to appreciate rapidly, speculators are drawn like moths to a flame. As speculators buy in, the share price is pushed up even further, attracting a new wave of speculators and serving as validation to the first. A virtuous cycle prevails. Everyone is getting rich. The easy money becomes seductive, and even conservative investors begin to think to themselves, “Do I really want to be the one who misses out?” Eventually, they throw in the towel too and buy.
But buying with the sole intent of selling dearer to another isn’t called the “Greater Fool” strategy for nothing. It relies on an endless pool of buyers who will pay even more than the last guy. Obviously, the stock price can not rise forever, and someone must be the “Greatest Fool.” In essence, it becomes a high stakes game of musical chairs where everyone thinks they won’t be the one left standing.
It’s important to remember that the whole game is zero-sum: no wealth is actually created from the process of a stock’s price being pushed way up past intrinsic value and then falling back down – it simply gets moved from some people’s pockets to others’. And the redistribution is not even. It may even be the case that most people make money. But there will inevitably be at least a few who are utterly ruined.
The stock market is one of the greatest financial innovations in history. It facilitates the direction of capital toward those enterprises that can use it most effectively, and it allows individuals to grow their savings. But unfortunately, it is also the world’s largest casino, and the gambling element has pervaded it from its very inception. If you choose to gamble, that’s fine. But don’t confuse investing with speculation. There’s an easy test: if you don’t know the intrinsic value of what you’re buying (or don’t care), it’s the latter. It’s that simple.
In 2020 and 2021, as people found themselves stuck at home, often with excess money from stimulus and unemployment, they turned to the markets for entertainment. The prices of speculative assets surged (remember NFTs?). In 2022, these sorts of assets were hammered. 2023 saw some recovery. But 2024 was the year that the speculative drive really came back, climaxing with Donald Trump’s election victory in November. Perhaps the best way to illustrate this is with an example.
One of the best performing stocks of 2024 is a company called MicroStrategy (NASDAQ: MSTR). If you follow financial news, you’ve probably heard of it, especially in the last few months. In 2024, MSTR was up an astounding 467%.
Technically, MSTR is a software company, but nobody really cares about that. MSTR’s primary asset is a huge hoard of Bitcoin that they began accumulating in 2020, the augmentation of which has, over the last several years, become the company’s main strategic focus. And in that regard, MSTR has been very successful. In 2024 alone, the company grew its stockpile from 189,150 Bitcoins to 446,400, an impressive 136% increase. How did they do this? By purchasing it on the open market with funds raised through the issuance of large amounts of debt and equity – something anyone could do. What makes MSTR special is that their stock trades at a substantial premium to the underlying value of its assets. At year end 2024, MSTR had a market capitalization of ~$80B vs. ~$42B of assets (almost entirely Bitcoin). Imagine you could sell dollar bills for $2, then sell each of those two dollar bills for $2 and so on. Some might call this a virtuous cycle; some might call it a Ponzi scheme.
Why would anyone be willing to buy a stock that’s clearly overvalued? Because they think it will become even more overvalued, that’s why! I cite this example to illustrate the point that speculators care only about price, not value. They will buy anything if they think the price might go up, regardless of what it’s actually worth. And while MSTR is one of the more egregious examples we saw of speculative fervor returning to the markets in 2024, it was not the only one.
In the fourth quarter of 2024, there were no changes to the portfolio, although technically we do now have one additional investment due to the completion in November of the spinoff that we mentioned in previous letters. However, from an economic standpoint, nothing changed. For the time being, we are holding on to some of the new shares we received in the spinoff because we believe they are undervalued. Based on the share price at year end, the company had a dividend yield of 8.55% (which we view as very stable and well covered) while interest rates in Switzerland are at 0.50% and quite possibly headed lower. We believe that investors will gradually be attracted by this dividend yield, which is practically unheard of among Swiss-listed companies.
Subsequent to quarter-end, another notable development occurred when it was leaked that our life insurance company was planning to sell itself, either in part or, preferably, whole, and that the most likely buyers would be private equity or private credit. This news sent the shares up significantly, but we still believe they are significantly undervalued relative to what a private buyer would pay for them and expect our thesis to be validated if and when bids are announced.
I’d also like to take a moment to talk about tariffs, which have been much in the public discourse of late. Most of our companies are unlikely to be much affected by tariffs, with one exception. With respect to our US semiconductor company, the recently proposed tariffs on Taiwanese chips would be a significantly positive development. We also think that it would be a good thing for America. Though it might temporarily raise the cost of electronics, it would help to reduce the U.S.’ perilous overdependence on Taiwan for advanced semiconductors.
Over the last 5 years, the S&P 500 has returned (with dividends reinvested) ~14%, or about 10% after inflation. It is important to recognize that this is significantly above the long-term average and there is no chance such a rate can be sustained over a long period of time. Given current valuations, investors in the largest publicly traded American companies should keep their expectations for the next 5-10 years relatively low.
We believe the prospects are brighter for investors in smaller companies. Over the last 5 years the Russell 2000 has returned a pathetic 3% annually after inflation. It is our opinion that the divergence in returns between the largest companies and the rest of the market is attributable to the rise of passive investment and the corresponding decline in active management. It stands to reason that the less brain cells there are devoted to analysis, the better should be the expected return on brain power as applied to investing in common stocks. And we continue to see this when we look around us as there are bargains aplenty if one only looks beyond the Wall Street darlings.
So, while we are not satisfied with our performance over the last few years, we continue to be excited for the future. Also, in the fourth quarter of 2024, the Partnership’s assets surpassed $1 million. It took a bit longer than we expected, but we are happy to share our reaching of this milestone. I want to thank you again for entrusting Kyosuke and I with your savings. It is a charge that we take very seriously. As long as the Partnership exists, we will always keep the majority of our net worths invested in it because we believe it’s best, as Andrew Carnegie advised, to “Put all your eggs in one basket and then watch that basket.”
Thank you,
Jesse Flowers & Kyosuke Mitsuishi