Embracing Stock Market Stoicism

This probably sounds straightforward, but there’s a twist that makes it harder for you, the client, to see how this all plays out in real time. You can easily check the portfolio’s value—my decisions, not so much. In theory, I could make subpar investments and hide behind fancy Stoic talk.

That’s exactly the why of these very detailed letters: to show you our thinking, walk you through our individual decisions. I write, you read—that’s our agreement. You’re the judge of whether my process makes sense. But I can’t do that part for you.

2024

Our final returns in 2024 ranged from “okay” to “mediocre,” depending on the vintage of the portfolio. This isn’t the most exciting news to share, but it’s a perfect example of how Stoicism applies. Early in the year, we were beating the market—despite the market’s gains being driven mostly by a few large-cap tech names. Then, in late June, it was as if someone flipped a switch. Even though nothing in our holdings had fundamentally changed, the stocks in our portfolio started giving back earlier gains month after month while the market surged ahead.

A couple of our companies hit temporary snags, which shaved a point or two off our returns, but others had some good news. In the big picture, it was just the market’s focus shifting. My IQ didn’t drop in the second half of the year (at least I hope not!). The short-term sentiment did.

This is what Stoicism looks like in practice. We stay grounded in the things we can do—solid research, thoughtful decisions, transparent communication—and accept that we don’t control how the market prices those decisions in the short run. When I say “accept,” I don’t mean “ignore”; I mean we don’t get caught up in the daily drama of stock prices. We keep refining our process, making the best decisions we can, and communicating openly to you.

I’ve been doing this for more than a quarter century, and I’m certain this won’t be the last time the market teaches us to embrace Stoicism and reminds us what we can and cannot control.

What Can You Expect Going Forward?

As a firm, we’re obsessed with the Japanese principle of kaizen—constant, slow improvement. Our operations folks are fanatical about improving internal processes and our service to you.

I love investing. I’m obsessed with getting better at it. There are many reasons for that: It’s one of my core identities. I want to feel good about myself, and helping you achieve your goals while moderating the volatility of your blood pressure gives me great satisfaction. I have skin in the game—IMA, my firm, manages the bulk of my, my family’s, and our employees’ liquid net worth.

Thus, kaizen are we.

Our decision-making and investment process have gotten better over time. We’ve made several important improvements—we’ve enhanced our focus on quality, with our latest emphasis on the management quality of the companies we research. This is our analyst Max’s obsession. I’m obsessed with it too, but next to Max’s fixation on it, mine is just a “hobby.”

We’ve expanded the ponds where we fish for stocks. As I wrote in my late-December letter, while the US pond has lots of great fish, they’ve become insanely expensive and thus offer low future returns. Though we still own plenty of American fish, we’ve expanded to foreign ponds where we can find wonderful fish at a fraction of the cost. This international fishing actually hurt our returns in 2024, as the market remained obsessed with “made in the USA” fish.

We’re in an environment where market participants only care about quality and growth and are indifferent to the price paid. Valuations won’t matter until they do, and then years of gains vanish in days or weeks.

We’ll discuss the market next, but let me conclude this section with one more thought: I smile when Apple says, “This is our best iPhone yet.” You’d expect a company to keep making a better product if they want people to keep buying their stuff. You can’t see this in our numbers for 2024, but I think we’re making a better product.

Clients asked, what can you expect going forward?

I am going to answer this question the best I can. When buying new stocks, we target 15-20% annualized returns based on middle-of-the-road scenarios, not optimistic ones. We’ll have upside surprises to conservative fundamental estimates—like McKesson’s performance exceeding expectations. But we’ll also have disappointments. We maintain models for every company, updating them when we learn new information to stay grounded in fundamentals: revenues, margins, cash flows, and earnings.

Based on these models, we project fair value four to five years out to calculate expected annual rate of return (including dividends) for each stock we own. Currently, our top 20 holdings show about a 16% expected annual rate of return, with our top 10 stocks, which have higher weight, around an 18% annual rate of return.

Remember, these are our best estimates, not guarantees. Fundamentally, our portfolio did absolutely fine in 2024, as earnings growth outpaced our returns.

The Market

It seems like there are several tiers in the US market. There are ten wonderful, awesome, unbelievable, incredible (I am running out of adjectives) US tech companies, which represent about 40% of the value of the S&P 500, and then there are 490 shmucks (and everything else).

A lot of these shmucks are not cheap (we’ll discuss one), but most of the returns in 2024 came from the 10 stocks with great adjectives. I wrote about them here and here, so I won’t waste your time reviewing.

Let me just touch on one of those infinite-adjective companies—Apple—which will also shed light on its brethren. Apple is very close to me, literally—I’m typing this on a MacBook Air.

Since the launch of iPhone and iPad, Apple has always seemed one product away from creating another iPhone-like success. But other than services, the company hasn’t released a major successful product category since AirPods and the Apple Watch, almost a decade ago. The Apple Car is a no-go.

Then there’s Vision Pro. As much as I admired the commercials for it and the early reviews—and I buy almost everything Apple makes— my Vision Pro went back to the store after two weeks of giant headaches. Aside from the confusing interface, it literally gave me migraines. So far, it’s been a major market disappointment, too (though there’s a lot of great technology for Apple to use in future products).

Apple is late to the AI party. Its AI integration in the iPhone is a joke. Siri’s IQ has remained at a well-trained cat level for years, while its competitors are approaching human intelligence. (I use the ChatGPT app instead of Siri.) Apple will solve a lot of these problems. It has cash to buy its way out of many of them. It has a strong ecosystem and loyal customers (though this loyalty isn’t infinite).

Maybe the market sees Apple as an AI play, but AI is becoming crowded with companies that didn’t even exist a decade ago. And for Apple, AI mostly means that people will keep upgrading their iPhones—which they’re doing anyway.

Apple’s revenues haven’t increased in three years, nor have its earnings, which have steadily hung around $6 per share. This is why I’m writing—nothing in January 2024, or since, indicated Apple’s valuation should go up.

If I told you in early 2024 that you could buy Apple stock at 30 times earnings, a reasonable person would have said “No thank you.” That’s what Buffett did—he sold a good chunk of Berkshire Hathaway’s Apple holdings. But if you had followed this reasoning, you would have missed out on a 33% return. Today, you can buy this wonderful Apple stock for “only” 40 times earnings.

If over the next ten years Apple’s earnings double (a big if), and it trades at 20 times earnings in 2035 (a generous assumption), current investors will make no money if they own Apple stock today.

This describes 2024 and the bulk of the market.

Let me highlight one of the “shmucks,” as an example of the rest of the market.

Walmart—another wonderful “made in America” company. Its revenues basically grow with GDP, maybe slightly faster at times. It has already conquered the US retail market. It has already failed and succeeded in international markets—that might have been a story of optimism three decades ago. Its international growth story was spotty. But that chapter is behind the company. It is now at 2-3% real earnings growth plus inflation.

Its earnings were around $1.60–1.90 for a few years. In 2024, you could have owned this American icon for “only” $52. You would have paid 27 times earnings (in the best case) or 32 times (in the worst). Walmart is a retailer fighting with Amazon for consumers’ wallets that have been shrunk by higher interest rates and inflation.

Again, a great company—but severely overvalued. Probably a decade of no or little return ahead of it, or even worse, if you ask me.

That is what I would have told you in January 2024. And I would have been wrong! Today, you can pick up Walmart shares for LVMH-like prices of $90 at “only” 45 times earnings.

If you’d listened to my sound but wrong advice in 2024, you would have left 73% on the table. This market is filled with schmucky stocks like this. It’s a good thing we don’t own the market.

A Brief (and Smelly) Case Study

You want to hear how “not rational” the market is? We’re all adults here, so I try hard not to use childish vocabulary, but this market stretches my ability.

One of the best-performing investments in 2024—of course we didn’t own it—was a digital cryptocurrency called Fart Coin. If you wanted to buy its full (airy) supply, it would only cost you a billion dollars. Yes, the value of Fart Coin is a billion American-with-a-capital-B dollars. A gift!

Its utility is unknown (it has no earnings or use) other than being a vehicle for greater fools selling to even greater fools, with everyone supposedly becoming rich in the process. (This is not how wealth creation works.).

I didn’t subject you to hearing about this juvenile nonsense for nothing, because Fart Coin’s slogan perfectly describes today’s market: “Hot air goes up.”

Physics was not something I excelled at, but I know this much: At some point, the holders of this magic coin (and the rest of the airy market) will discover that hot air doesn’t stay hot forever, and when its temperature drops (even just relative to its recent high), it goes down—and then goes down fast.

Here’s the irony: If my money manager had bought Apple, Walmart, or especially Fart Coin, I would have questioned his investment process, because the risk reward of these decisions made no sense. But this is what worked in 2024.

Our Message for 2025 and Beyond

Our message to you is as follows. If 2025 is going to be like 2024, I’ll just send you a copy of this letter in January 2026. In the meantime, we are going to continue to buy high-quality companies, run by awesome (shareholder-friendly) management, and we are going to buy them at a significant margin of safety. This strategy should work; we just don’t know when the air cools.

The market may be reaching crazy valuations and doing crazy things (that is what markets often do). We are playing a very different game – the only game we know how to play. Our goal is to grow and preserve your wealth.

One thing we can control is how we react to the market. So, we’re going to keep our heads down and keep doing what didn’t work in 2024—until it does work. Yes, that may mean sticking to unpopular decisions, especially when things like “Fart Coin” are suddenly worth a billion dollars and already-overvalued stocks have surged another 70%. It might not look brilliant at the moment, but it’s the only rational path.

Remember: Rational investing doesn’t always pay every single year. That’s both the feature and the bug of the stock market. For those currently enjoying big gains, I’d point you to Mark Twain’s advice: “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”

Not too long ago, when the market was tanking, our portfolios were headed in the opposite direction—up. I told you back then to bottle that “I’m a genius” feeling, because eventually I’d look less than smart again. Well, that time has arrived. Let’s uncork that bottle and remind ourselves that just because it isn’t working now doesn’t mean it won’t work later. In the long run, hot air or cold air, none of those things matter. All that matters is intrinsic value – what companies are truly worth. That is what we focus on and will continue to focus on.

The Question of AI

A few clients asked if we’re concerned about AI.

As one long-term client, who has become a close friend, proudly (and appropriately) described me to his acquaintance: “My money manager is a paranoid Russian Jew.” Paranoid I am, but also excited. We’ve already integrated AI into our investment process. Artificial Intelligence is a terrific tool, that allows us to dig deeper and wider, but it is not a replacement for human intelligence.

AI is definitely going to change the world. We’re learning as much as we can about it and assessing its likely impact on our portfolio, both good and bad.

A few months ago, my daughter Hannah, a freshman at the University of Denver, participated in a mock version of an AI science fair. Her freshman class was divided into a hundred groups of four, and they had to create a product using the latest sensor technology and AI. The top 15 groups presented their products at the science fair, and then six finalists presented their ideas. Hannah’s team was in the top six—but that is not why I am writing this.

I was blown away by what AI and sensors will be able to do. To make sure that I’m not caught flat-footed by AI, I’m going to CES (the Consumer Electronics Show) in Las Vegas—and that’s not exactly my favorite place in the US, but I am really excited about what I’ll learn.

(I wrote this before attending CES. You can read my thoughts about the event here.)

Key takeaways

• Stock Market Stoicism isn’t just philosophy – it’s a practical approach to investing where we focus on what we can control (research quality, disciplined decisions, and our reactions) while accepting what we can’t (market whims and short-term sentiment shifts).
• Our “okay to mediocre” 2024 returns perfectly demonstrate this Stoic principle in action – the market’s second-half shift away from our holdings wasn’t a reflection of deteriorating fundamentals or my suddenly dropping IQ, just changing sentiment.
• The current U.S. market has basically split into two tiers: ten “wonderful, awesome, unbelievable, incredible” tech companies making up 40% of the S&P 500, and 490 “shmucks” – with both groups showing concerning valuations (just look at Apple at 40x earnings or Walmart at 45x).
• Looking forward, our portfolio’s top holdings show about 16-18% expected annual returns based on middle-of-the-road scenarios, but we’ll stay disciplined in buying high-quality companies with solid management at a significant margin of safety, even if that means sticking to unpopular decisions while things like “Fart Coin” surge.
• Fundamentally, our 2024 portfolio did fine with earnings growth outpacing returns – and while this strategy might not look brilliant when overvalued stocks surge 70%, it’s the only rational path for growing and preserving wealth in a market where “hot air” won’t stay hot forever.

Please read the following important disclosure here.

Vitaliy Katsenelson is the CEO at IMA, a value investing firm in Denver. He has written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. Soul in the Game: The Art of a Meaningful Life (Harriman House, 2022) is his first non-investing book. You can get unpublished bonus chapters by forwarding your purchase receipt to [email protected].

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