Portfolio Highlights, Lowlights, and Reflections
After a solid 2022 that saw the portfolio rally 11.7% while markets fell sharply, the return in 2023 was miserable. At year end, the portfolio was up a meager 3.1%. To a considerable extent, the portfolio’s good performances were offset by bad ones. On the plus side, Bird Construction soared 77.3%, and Yamana, Shaw Communications, and Computer Task Group were taken over at healthy premiums. On the other hand, Credit Suisse was absorbed by UBS Group on the brink of bankruptcy, and Caesarstone, Largo, Enerflex, and SSR Mining all fell by more than 25%.
Looking back, a few things went wrong. In 2022, I sold winners like Cameco and Bel Fuse too soon. These former holdings went on to enjoy an excellent 2023, and having at least some funds still in these positions would have helped this year. The lesson here is to let winners run and conduct better analysis — especially when business conditions fundamentally change. Next up, Credit Suisse should have been jettisoned far sooner; again, the fundamentals deteriorated and better valuation work was needed. Additionally, I did not pivot and diversify into tech. This time last year, many tech giants, including Microsoft, Meta, and Amazon were contrary and well off their highs. I should have been mentally flexible enough to tilt the portfolio in that direction. Finally, I was holding too much cash. At the beginning of the year, the cash balance was 13.4%, and there is an argument that it should have been under 10%, given 2022’s declines.
A quick note on how the return is calculated: it takes the dollar value of the portfolio at year end and compares it to the beginning of the year. In this case, the numbers were $1,340,936 on December 31, 2023, and $1,300,000 on the same date in 2022. The figures are pulled directly from my discount brokerage account. To keep things straightforward, no funds have been, or will be, added or withdrawn. This means that the return includes the influence of holding cash, as well as paying withholding taxes on US dividends, trading costs, and other fees. The methodology differs slightly from the former VPP, in which withholding taxes were not tabulated, and the former PP, which used a time-weighted internal rate of return. This methodological change will give subscribers an accurate sense of how the value of the portfolio changes over time after accounting for pesky real-world costs.
North American Benchmarks
In 2023, equities climbed the “wall of worry.” Warnings of a recession were sounded loud and clear in the first half of the year, despite solid growth in the United States and modest expansion in Canada. Governments continued to dish out huge deficits, inflation remained above central banker’s targets, and unions secured some big contract wins after many years in the shadows. Social and political divisions on both sides of the border drag on, and in the world of geopolitics, conflict is on the rise. The war in Ukraine grinds on; the Hamas-Israel War risks spilling over into a wider conflict with Iran, Lebanon, and Yemen; and even Venezuela and North Korea thought (or are thinking about) joining the hostilities. Even so, benchmarks surmounted these factors and kept climbing.
When all was said and done, the total return indices—my preferred yardstick, given that they include the influence of dividends—were all in the green. The TSX 60 was up 11.4%, the TSX Composite rose 10.8%, the Dow rallied 16.2% and hit a record high, and the S&P gained 26.3%. The Nasdaq was the real winner, though: leaping 44.7%, its best year since 2003. The more popular price-only indexes referenced on home pages of websites like Yahoo, CNBC, Trading Economics, etc. were also higher, but no matter your preferred benchmark, the picture in 2023 was positive.
Global Equity Markets
Looking across the pond, or ponds, the year was also good for equity investors. According to MSCI, the biggest winners in developed markets were Italy, Denmark, and Spain, which grew 31.7%, 29.7%, and 28.2% respectively. Indexes that fell included Hong Kong and Finland, down 17.83% and 8.2%.
Among emerging economies, Greece, Hungary, and Poland were all up better than 40%. After many years in the doghouse, Greece is finally returning to form. Mainland China mirrored the weakness in Hong Kong and was off 13.4%. The only other two developing countries that were down by double digits were Thailand and Kuwait.
Non-Equity Returns
Bonds performed better than they did in 2022, which is not saying much, given that it was the worst year for bonds in decades. Yields have fallen, especially in the past few months, and closely watched bonds like the US 2- and 10-year were basically flat. This said, bonds are still trading in a totally different range than they did during the low inflation / easy money era between 2008 and 2021.
The favourite asset class of Canadians, real estate, was lacklustre, but certain markets were hot, and affordability remains a challenge across much of the country. In an attempt to “address” the affordability issue, banks, regulators, and the infinitely wise federal government have started playing an epic game of extend and pretend. Many of the country’s largest lenders have increased mortgage amortization windows from 30 years to 40 or 50, or in some cases an infinite amount via interest-only payments. I guess that is one way to address housing affordability.
Turning to commodities, WTI was rangebound, Brent crude decreased modestly, and natural gas fell by nearly half. Gold rallied from about $1,850 to an all-time high around $2,100, while silver and copper were level. Many of the world’s soft commodities, including corn, soy, and wheat, were down by double digits, and yet prices at grocery stores are still high.
Between the collapse of FTX and the trial of Sam Bankman-Fried, cryptocurrencies quietly went on a tear. Bitcoin flew over 150%, Ethereum nearly doubled, and many others notched similar performances.
After lurching back and forth all year, the Canadian dollar ended 2023 at US$0.755, versus US$0.739 on December 31, 2022.
Contra’s 2024 Outlook
Pontificating about the future can be a humbling craft, and it is unclear whether expending energy on macro prognostications generates better returns over the long run. Nevertheless, almost everyone wants a forecast, and, at least in this business, showing up at a holiday party or a family gathering without one is bad for when the small talk ends.
I tend to focus on a few factors when determining whether the year ahead will be good, bad, or somewhere in between: valuations, momentum, bond market signals, investor sentiment, insider activity, and historic cycles (such as the presidential election cycle).
This time last year, bulls and bears could each point to multiple features to justify their positions. Bears could say valuations were high, momentum was poor, and the yield curve was inverted, which often signals an impending recession. Bulls could say exchanges rarely have two down years in a row, especially in double digits. They could also point to low investor sentiment and strong insider buying.
This year, bears can point to more factors to support their position than bulls can. Valuations look worse, the yield curve remains inverted across many countries—including the United States and Canada—insiders are significant net sellers, and investor sentiment is strong (which is a contrary indicator). Bulls can counter that momentum is excellent, it is not unusual to have back-to-back up years, and it is the fourth year in the presidential election cycle—which is often good for investors.
Although the bears have the edge here, it is important to remember that bull markets can get better, bear markets can get worse, and Keynes’s observation that “markets can stay irrational for longer than you can stay solvent” is as applicable now as it was in the 1930s. Ultimately, investors need to embrace the uncertainty. For me, this means avoiding big, bold macro bets, and instead tilting the portfolio modestly as conditions change. To that end, the portfolio is entering 2024 with 16.6% in cash versus 13.4% last year and it has been streamlined somewhat, with 26 names (or 27 if you include Diana Shipping’s warrants) instead of the 29 owned at the start of 2023.
2024 Top Picks
So, what are our top picks for 2024? Benj has gone with Corby Spirit and Wine for his income pick and—once again—selected Caesarstone as his growth pick. Both are contrary and fit nicely within the income and growth categories. I have selected RioCan for income and Ceragon Networks for growth. The Contra Portfolio recently added to the holdings of CRNT, REI.UN, and CSW.A. Suffice it to say, I have put extra money behind these top picks. Though portfolio management and diversification are far more important to long-term wealth preservation and creation, the top-pick selection process is a good intellectual exercise. Here is to hoping these picks excel in the year ahead.
Contra Land: Changing, but Staying the Same
Contra the Heard’s bedrock is unchanged. When it comes to selecting securities, the name of the game is to concentrate on turnaround situations or unloved stocks with reasonable odds of recovery. We are not interested in hot stocks, catching the latest trends in the hopes there will be a greater fool, or hopping into the newest IPOs and SPACs. Instead, we are focused on securities with low valuations, strong financials, and high alignment between insiders and other owners. The portfolio will typically hold between 20 and 30 positions, trading will be infrequent, and the cash balance will oscillate depending on where it appears we are in the cycle.
I may be running the day-to-day operations now, but Ben and Benj remain heavily involved in the stock selection process, business admin, Globe & Mail columns, trade shows, and interviews. Their mentorship continues as it has since 2010. Lloyd Davis is still editing each and every edition of the newsletter and Bill MacGregor is writing about the former President’s Portfolio.
Contra’s foundation is the same, but the outfit has seen considerable change over the past year. My first priorities upon assuming the helm were to rebuild the website, start accepting credit cards, and reduce the cost of two- and three-year subscriptions. Then last week, in response to popular demand, two- and three-year credit card payment options were also added to the website. Caellum Gallander has joined to help with marketing, write-ups, and business administration, too. His energy and passion have been a wonderful addition to the team.
Behind the scenes, Koyfin was added as a data provider to assist with elements of the research process; the company purchased its first subscriber list, from another investment newsletter whose principal was retiring; and a referral program was established. This program gives existing subscribers a discount on their next Contra subscription for referring someone else to the service. If this is news to you, details will be included in your next renewal letter.
Thank you as always to all our subscribers, new and old. We enjoy seeing new people discover our service, and old-timers, some of whom have been with us since the early 2000s or even 1990s, renew again. Although we would be investing regardless of how many people followed us, it is nice to have company.