Review of recent years (2020-2024)
It is also crucial to remain uncorrelated with the market when it is overvalued.
It's essential to understand that the stock market, in its volatile nature, goes through phases of overvaluation and undervaluation. We are currently in a period where valuations seem to have peaked, reminiscent of the excesses of past bubbles. It is therefore imperative to be cautious and discerning in our investment decisions.
When share prices are significantly higher than their intrinsic values, it means that the market is overvalued. This situation is often fuelled by excessive investor optimism, low interest rates and abundant liquidity. In such environments, it's easy to get caught up in the frenzy and lose sight of investment fundamentals.
In 2021, we saw a marked increase in stock market speculation, with many investors behaving as if they were at the casino. Encouraged by accessible trading platforms and social networks where investment advice proliferates unfiltered, these investors were betting on stocks and cryptocurrencies with the hope of making quick gains. This "betting" mentality led to excessive valuations and increased volatility, creating speculative bubbles that could burst at any moment.
In 2022, the stock market experienced a major correction after a period of strong gains. Rising interest rates by central banks, in the face of persistent inflation, increased the cost of credit and reduced the valuation of risky assets. Geopolitical tensions in Eastern Europe and supply chain disruptions exacerbated economic uncertainty. The high valuations of technology companies fell as expectations of future growth moderated. This correction, while disruptive, also brought several investment opportunities for savvy investors.
By 2023, we hope that investors have learned from the previous correction and have begun to invest in quality companies. By focusing on companies with solid fundamentals, sustainable business models and skilled management teams, investors can better navigate market uncertainties. For value investors, it's been a very good year.
In 2024, investors quickly forgot their excesses of 2021 and started speculating again, paying excessive valuations. Abundant liquidity once again fuelled a buying frenzy, with little regard for underlying company fundamentals. This reckless behavior led to the formation of new speculative bubbles in several sectors, notably technology and cryptocurrencies.
As savvy investors, we must remember that our goal is not to follow the crowd, but to make informed decisions based on rigorous analysis. Prudent investing means focusing on solid companies with sustainable business models, competent management teams and long-term growth prospects.
It is also crucial to remain uncorrelated with the market when it is overvalued. This means focusing on special situations or companies with a short-term catalyst, capable of generating value even in the event of a market correction. These strategic investments enable us to cope with uncertainties, reduce our risk and stay the course even when market conditions are unfavorable.
In conclusion, navigating an overvalued market requires focus, extra caution and a well-thought-out investment strategy. Let's stay true to our principles, prioritize quality over quantity, and be ready to seize opportunities when the market returns to more reasonable valuation levels.
SP500 performance is adjustable in Canadian dollars. This is why you can see that the SP500 has more than 17.45% in 2024 performance while currently it is 12%.
The pie chart shows a diverse distribution, with the largest segments being:
Grail1 (Green) : ~17%
Value & Net-Net (Blue) : ~28%
Special Situation (Orange) : ~50%
Spin-off
Arbitration
Turnaround
Cash ~5%
I started the year 2024 with zero special situations. But with the increase in the market I made the choice to be uncorrelated with the market. I sold a position in my Grail that I never thought I would sell.
Extraordinary returns require extraordinary efforts.
Max
Grail (Holy Grail) type investments are investments of extraordinary quality with several years of compounding.