Full year 2020 performance update

“If you realize that all things change, there is nothing you will try to hold on to”- Lao Tzu, Tao Te Ching ~600 BC. 

“Change is the only constant” - Heraclitus of Ephesus ~500 BC. 

“Everybody talks as if they know what is going to change, but they are all just guessing”- i-Cthru ~2021 AC

Deep Transitions

Are your senses also dulled by the ever-increasing waterfall of data, the polarization of a platitude of opinions, the ever-increasing number of known possible political/economic scenarios that manifests itself in an expected-outcome tree that is too large to comprehend, the investment successes of your family and friends and the long list of outsized winners in the stock market that of course, you did not own and lastly the pressure to fall for the beautiful sirens of young disruptive startups promising to become the next trillion-dollar success story?

Breathe!

We, at i-Cthru, are hard at work to protect and grow your assets. i-Cthru is also changing; it is inevitable. As you may have noticed, we split your assets between two distinct strategies into separate accounts: Quantitative and Qualitative. We started our Qualitative strategy in 2018 when we saw two deep transitions forming with very long-term growth potential, something we strongly wanted to be part of and could not be covered by our Quantitative fundamental strategy. More on this later.

Quantitative Strategy i-Cthru

Our Quantitative strategy is an Artificial Intelligence (AI) driven strategy where our algorithms select companies based on fundamental factors and primarily invests in companies that generate a net return after taxes on invested capital of 15% or more. A strategy dubbed as “Quality at a reasonable price.” We combine every position with protection against capital destruction or drawdown of approximately 15%.

Our Quantitative strategy is agnostic to sectors, growth, or value styles and is immune to human biases like panic selling or fear-of-missing-out buying. It did exactly what it needed to do when the markets dropped sharply in March 2020. Our options kicked into the money and acted like huge shock-dampers, limiting losses while the market dropped 35%. Positions without options were protected by a stop-loss. We prefer options over stop-loss despite the cost difference. When markets recover quickly, the stop-loss sale is permanent, whereby the options transfer their value back to our equity holdings in a rising market. We are eagerly waiting for the re-introduction of equity mini-options to cover smaller positions because one option contract requires owning 100 shares.

When equity valuations become too high or when the perceived market risk is too significant, our model will refrain from buying and automatically increase our cash positions, which happened after March 2020 until November 2020. During this period, it was impossible to predict how the pandemic was going to play out. The systemic market risk was very high until November 2020, when Pfizer announced a highly effective vaccine.

Our Quantitative strategy works very well. We can sleep soundly knowing we are protected and will largely shield our capital from permanent destruction, something we try to avoid at all costs and is much more important than maximizing our gains.

Qualitative strategy i-Cthru

We started with our Qualitative strategy back in 2018, when we realized we wanted to invest in two profound transitions taking place in our world, which were not captured by our quantitative approach. We also realized that this required a very long-term commitment from us as investors and accepted much larger volatility in our short-term performances. We also had to accept that the companies we bought were more like options on massive future growth. We were likely to overpay grossly for what those companies were worth today. In other words, we would practice a strategy dubbed as “Growth at an unreasonable price.”

Digital Transformation

One deep transition we see is “Digital Transformation,” which is accelerating all around us and profoundly changes how we live, work, handle, and analyze data. We wrote about this trend in detail in our last blog. We think we have created a concentrated portfolio with a few companies, which we guestimate to be rare winners, scaling their business fast, exponentially, and for a long time, due to their massive market opportunities.

We acknowledge that these rare companies might not survive or even possess the best technology. Still, we guestimate that these companies will have an excellent chance to win by executing their processes as best in class and managing their growth exceptionally well. We expect to own these companies for the next five to ten years or longer, as long as we think the long-term wave is intact. Unfortunately, there is only one way to find out if we are right, so let’s be patient and enjoy this wave called the 4th Revolution for as long as possible.

Transformation of China

The second deep transition is “The transformation of China” from an export-driven economy to a consumer-driven economy. The growing number of affluent households in China continues to grow at a rapid pace. China counts 400 million households (1.4 billion people) against 122 million households in the USA (328 million people) and 167 million households in the EU (380 million people). We concentrate on households because these are the units that buy cars, houses, phones, etc. China’s transformation was set in motion by Deng Xiao Ping more than 40 years ago, and its progress has been stunning. There is no other country that comes close to its economic and technical progress in such a short time, and none have such a sizeable homogenous consumer market.

We pay close attention to political changes and legislation abroad and at home, but we think the trends we have seen are here to stay regardless of politics. A new world order is shaping with profound long-term economic impacts for all. We foresee that many of the world’s biggest tech companies’ competitive battles will be fought in Asia, but we think growth in China’s domestic market is the key to win. We strongly feel we needed to ride this huge wave and believe it has a long crest to surf.