Investor Letters

Japan: Anchoring Bias Writ Large

10/1/2024

Japan is the world's fourth largest economy. It is a stable liberal democracy, is firmly aligned with the West, and is a founding member of the G7. It scores high on indexes of human capital and economic freedom, and low on indexes of corruption. The people of Japan are (in)famously hard-working and prosocial. Japan is home to many high-tech companies that form critical parts of the global supply chain in modern secular growth industries like semiconductors and robotics.

With these characteristics, one would think that investors would find Japanese equities among the most attractive in the world to own. Yet Japan offers the largest selection of cheap stocks available anywhere in the world.

May 2024 Investor Letter

6/21/2024

In the first five months of 2024, Fundamental Value returned -10.9% net of fees, significantly underperforming the S&P 500's return of 11.3%. FV is now up 388.0% net since inception in 2016 vs the S&P at 190.7%, an annual outperformance of 7.7%.¹ For monthly performance see our tearsheet.

Our 2024 returns thus far have been extremely disappointing. However, despite this underperformance – in fact, because of it – we are feeling increasingly encouraged about the prospect of strong relative returns in the future. We have doubled down on our strategy of differentiating ourselves from the S&P. We have increased the scale of our investments outside the US, and added to our short book inside the US. Much more below.

December 2023 Investor Letter

1/31/2024

Fundamental Value finished the year up 21.3% net of fees, underperforming the S&P 500’s 26.2% performance. FV is now up 448% net since inception in 2016 vs the S&P at 161%, an annual outperformance of 11.7%.¹ For monthly performance see our tearsheet.

May 2023 Investor Letter

6/27/2023

Fundamental Value returned 8.0% net of fees in the first five months of 2023, slightly trailing the S&P 500's 9.7% return. The strategy has compounded at 25.5% net annualized in the seven years since inception, besting the market by 13% a year.¹ For monthly performance see our tearsheet.

Programming note: We have traditionally written investor letters on a strict quarterly basis, but our publishing schedule has become increasingly aperiodic over the past several years. Quarters are 90 days, but perceived time in the financial markets can vary considerably. Sometimes half a year goes by and not much has changed since our last letter; sometimes two weeks go by and it feels like a lifetime. We've decided to lean into that and publish investor letters when we have something new to say. This letter covers the first five months of 2023.

Lessons from the Pandemic: A new book from Bireme

2/17/2023

As the year 2022 drew to a close, we wanted to take some time to reflect on our experience investing through the unprecedented turbulence of the pandemic era. We’ve produced a booklet with that goal in mind.

Over the past three years, financial time compressed by an order of magnitude. Crashes came and bubbles went – and then crashes came again. We had a full round-trip cycle in monetary policy, with record easy conditions followed by record tightening. We saw oil trade hands at negative prices, only to see energy prices spike to records across Europe two years later. We watched retail investors worship at the altar of SPAC snake-oil salesmen, and watched cryptocurrency devotees condescendingly tell the rest of us to have fun staying poor, only to see their castles in the sky crumble around them.

You can find a PDF of our writing at the link below. If you have a strong preference for a physical copy, we do have a few on hand; please reach out to us directly at [email protected].

Investing through the Pandemic: Letters from Bireme Capital

4Q22 FV Quarterly Letter

2/17/2023

Fundamental Value had one of its best quarters to date, returning 34.7% net of fees vs 7.6% for the S&P 500. The strategy has now compounded at 27.4% annualized, besting the market by nearly 16% a year. While it will be almost impossible to maintain this level of absolute or relative performance, we are still very optimistic about the composition of the portfolio relative to the index today.¹

Market commentary

When the year 2022 began, we had just finished our “Everything Bubble” series, and the path ahead seemed remarkably clear to us.

The path forward today is less clear.

Pounding the table on META

11/23/2022

At current prices around $110 per share, we think Meta Platforms is one of the best investment opportunities we have seen in our careers.

Meta, the parent of Facebook, Instagram, WhatsApp and Reality Labs, is down about 75% YTD. It has gotten cut in half since the small initial investment we made in Q1 which we blogged about here. As a result of this precipitous fall, the enterprise value is less than $300 billion today, meaning that the company trades at a record-low valuation. While earnings have been disappointing since Q1, our core thesis remains unchanged, and the valuation is now significantly more attractive. We’ve aggressively added to our position, resulting in an average price around $130.

In our Fundamental Value strategy, we generate alpha by identifying scenarios where investors are buying or selling securities for non-economic reasons. We think there are two non-economic reasons investors are overly pessimistic on Meta – one structural, and one behavioral.

3Q22 FV Quarterly Letter

11/3/2022

In Q3, Fundamental Value outperformed the market significantly, up 2.5% net of fees versus -4.9% for the S&P 500. On a YTD basis, this puts the strategy up 1.0% net versus the market at -23.9%. Since inception, FV has returned 22.7% net annually, outperforming the S&P by 12.0% a year.¹

Market commentary

Forty years of the infamous “Fed put” has left a legacy of moral hazard. Investors assume their risk is limited because they believe the Fed has provided them free insurance: the Fed will always step in to bail out investors should the market decline steeply, cutting rates to juice the economy, corporate earnings and stock prices.

But the Fed put is now a Fed call: rather than a limit to how much investors can lose, there is a limit to how much they can make.

Twitter Update

9/1/2022

Over the weekend, we were the lede in a Fortune feature on the Twitter v Musk case. We were honored to be quoted along luminaries including Professors Eric Talley and Ann Lipton (see either the paywalled article, or a PDF version). We are overdue for an update on our biggest position as significant news has come out since we last wrote about Twitter in May.

2Q22 FV Quarterly Letter

8/5/2022

Fundamental Value dramatically outperformed the market in Q2, returning -1.4% net of fees versus -16.1% for the S&P 500. This outperformance was due primarily to the gains provided on our short positions, which declined on average -38.4% during the quarter and made a +16.9% contribution to the portfolio.¹

Market commentary

We expect bringing underlying inflation down to the Fed's 2% target will be much harder than currently anticipated – occurring more slowly, requiring much tighter financial conditions, and causing more damage to the economy. Thus, the famous “Fed put” is no more. Since the late 1980s, the Fed has loosened policy in response to every bear market, providing a jolt of energy when most needed. No more. Instead of alleviating investors’ pain, the Fed will be exacerbating it. Despite a terrible first half to the year, we believe further pain is likely for investors in stocks, bonds, cryptocurrencies, and more.

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