The Culling

I’m known as a hyper-concentrated investor. I take my best ideas, bet them big, and ignore the volatility along the way. While it’s usually my top 5 or so positions that effectively determine my performance results for the year, I also tend to have lots of other positions on the books. These enter the books for a variety of reasons; interesting ‘tracking ideas,’ stocks that moved before I could get a full position, Event-Driven ideas where the event hasn’t yet played out, and all sorts of other assorted tickers. I also end up with a healthy collection of inflection ideas where the inflection always seems to be postponed another quarter, or the strength of the inflection is feeble, but it may accelerate in the future.

For some reason, these things seem to accumulate like cobwebs in the attic. While the positions are individually rarely more than a few hundred basis points, in aggregate, they end up tying up a lot of capital. More importantly, they clutter my mind and take up time. Why is this thing not inflecting yet?? When will this Event-Driven setup finally play out?? Let’s get that CEO back on the phone and ask him a third time about a 50bps position. Then, there is always that stock that’s up a few hundred percent, but I only got a starter position, since I was too greedy to pay up 5% when we were buying it—those are the winners that just sit there, mocking me.

Eventually, the clutter becomes overwhelming, and I have a culling. I know I need to be ruthless. If I wouldn’t buy more today, then it needs to go. If it’s been there for more than a few quarters, and it’s not playing out, then it needs to go. If the trend has been pushed back by yet another quarter, then it needs to go. It doesn’t matter if it’s cheap, or if I like the CEO. Nothing matters, except freeing up capital and freeing up mental bandwidth. I want to be focused on positions with raging tailwinds, not the dregs of the book.

Mistakes are super easy to deal with, as there’s only one rule—when the thesis changes, I sell. It’s the ones that never seem to play out—those are the hard ones. Those are the reasons for the cull, and rather than only selling one or two names, I like to get it all done at once. I clean house—all the non-core positions—I don’t leave any stragglers. Then I go on vacation for a re-boot. Trust me, it feels so amazing to come back with a bunch of capacity on my balance sheet—ready to swing hard at the next great idea. Otherwise, I’d be coming back to a quagmire of stagnating and irrelevant positions that I need to catch up on.

This time, the culling has been deeper and wider than normal. You see, ever since the COVID bottom, I’ve had this view that obscene amounts of fiscal stimulus would trump everything else, and lead to explosive nominal GDP growth. At the time, that was a very contrarian view. Even in 2022, when everyone panicked that we’d roll over into a recession, I remained steadfast that the magnitude of the fiscal spending would overwhelm the normal business cycle. It was contrarian to say that then, it’s become consensus now. Oddly, as the herd moves to this viewpoint, I’m increasingly worried that the economy is actually starting to stall out—just when everyone thinks that’s impossible.

I have no hard data to prove this, just a gut feeling. However, inflation does seem to be biting the bottom third of consumers, and those who aren’t experiencing asset inflation. I see this in scattered retail data, I hear it when speaking with businesses, I intuitively know that they’re getting squeezed. I don’t care what the CPI says, I cannot think of many things I buy regularly that are only up 3%. I really wish things were only up 3%, but they’re up a whole lot more. The squeeze is intensifying, as wages are stalling. Anything tied to rates seems to be slowing as well. Additionally, there’s a squeeze on existing borrowers, and the refinancing wall is approaching. None of this matters yet, but I worry that it soon will. This isn’t the sort of thing that a few rate cuts will fix, and drastic action only comes during a crisis—not at the peak in markets. Besides, inflation remains persistent and increasingly entrenched—can they even cut??

I’ve had a macro thesis in my head for the better part of four years, a thesis where fiscal trumps everything, and now, suddenly, the data is starting to challenge that idea. There’s a dissonance out there. I’m not sure why, but I’ve had anxiety about my book for the past month—I literally couldn’t sleep. When I can’t sleep, I sell stuff. If I start to sleep better, then I know I need to sell more. My subconscious always knows.

The market has had an incredible run since the lows during COVID. From the very bottom, to what may be the top, I’ve been pressing my long. Now, when I come to work, I just want to make sales. It’s time for the culling, a culling that needs to happen every year or two anyway. I’m purging businesses with sensitivity to consumers or GDP. I’m eliminating anything that hasn’t yet run—laggards always need to get sold. I’m freeing up capital. I’m freeing up my mind.  

I like to say that making money is easy—the hard part is holding onto it. Since the lows during COVID, we’ve had one of the strongest rallies in the history of US markets. It’s feeling crowded out there. I’m not finding many trends that interest me. I’m not finding many cheap stocks. I’m finding a lot of mediocre businesses that keep leaking lower. The markets are not dumb. The popular narrative is that people are selling their CUSIPs, so they can afford more NVDA—what if the larger truth is that it’s simply a good time to be making sales?? Maybe, others see a slowdown coming as well??

I plan to leave for summer vacation next week. Given the cross-currents, given the election and geopolitical chaos, given the chance that we’ve hit an economic stall, I’m stepping away for longer than normal. It’s been an amazingly lucrative run since the lows of COVID, but honestly, I’m sort of exhausted. I’ve spent four years slamming the accelerator, and I feel like I’ve taken this economic cycle as far as it can go. Now, it’s time for the markets to re-set and give me new opportunities. I want to step away and clear my mind. I want to come back fresh, and not have to stare at the cobwebs of old positions, trying to justify why we own them. I want to come back, and look at the world with a new macro lens. I know I can’t do that, with last-cycle’s detritus.

I think the next cycle will be The Great Macro Dreamscape, and the chimes may finally be playing on the intermission. I want to be liquid and flexible. I don’t want to be arguing with the market about the appropriate EBIT multiple of some shitco —those things won’t matter if we go where I think we are.

If you haven’t had a real culling, one where you’re ruthless to 2^nd tier positions, there’s no better time than when the market is making highs and you have unrealized gains. It becomes so much harder when you’re realizing losses.

Please don’t ask what I’m selling. I’m keeping the core positions. Those are the ones I’m confident in. Those are the ones that I should have been focused on. Instead, I’m selling all the things you’ve probably never even heard of. Honestly, I wish I had never heard of them either.

After each culling, I promise myself that I won’t do small positions again. Then, after a few quarters, they slowly seem to drift back into the book. I’m more than half-way through the culling. It feels good. I’m sleeping better—I’m liberated.

Maybe Klaus Schwab is right…