2024 Annual Letter

2024 was a rare trifecta of wins in all three fronts: personal, business, and investing!

MBI Deep Dives reached almost $320k Annualized Recurring Revenue (ARR) this year, compounding at ~23% CAGR over the last four years! I would not believe if someone told me in 2020 that I would be able to build such a business, allowing me to study a business of my interest every month to gradually expand my breadth of knowledge over time. In fact, when I thought about it a little, I realized I would be a poor predictor of my own life despite knowing so much information and context around my life. In every Deep Dive, I typically mention how none of us has crystal balls and you should take all the forecasts of a business over the next 5-10 years with a grain of salt; you see I'm not saying that to "hedge" my estimates. It truly is an admission that the world is too complex and too path dependent to be married to any particular forecasts made at a point of time. My general lack of predictability for my own life has usually erred on one side; it has mostly surprised me positively. While I take encouragement from this and I'm generally an optimistic person who believes in my own agency, there are always multiple paths out there which could make my path much more challenging than it has been. Luck has largely been a dear friend to me.

Speaking of luck, my own portfolio did quite well this year. I am attributing it more towards luck primarily because any one-year performance is inherently driven by more luck than skill. Just as I discouraged myself not to self-flagellate too much after a poor 2022, it is similarly premature to gloat after a very good 2023 and 2024. In fact, given the somewhat elevated valuation multiples among stocks I have looked at, I think I wouldn't be too upset if I underperform the S&P 500 next year in case we see another >25% performance year for the index in 2025. There are times when it may make sense to underperform the index for you to be able to outperform over a longer period of time. If we do indeed experience another >+25% year for the index in 2025, the current somewhat elevated multiples may get closer to stretched valuation level which will make forward IRR unattractive for long-term investors. Given my portfolio's performance, this isn't some "sour grapes" but indeed some caution feels warranted for investors who are not evaluated based on quarterly or annual performance.

Despite a pretty good year, it is always possible that time will reveal mistakes in my portfolio. While bear markets make the errors of commission quite explicit, bull markets tend to highlight all the errors of omission. I would like to highlight one mistake from each group that I reckon I may have committed in recent years.

Since we are in a bull market, there are quite a few candidates for errors of omission. However, the one that readily comes to my mind is Spotify. I first bought the stock in late 2021 and unfortunately had the unpleasant experience to see the stock go down ~70%. Since I disagreed with how the market was evaluating Spotify, I kept averaging down which lowered my average cost to $115 and made Spotify a ~10% position in my portfolio. Unfortunately, when the market's assessment of Spotify started to change, I started trimming at ~$140 and by the time I sold my last shares early this year, the stock was trading at ~$240. When I tallied all my sales and averaged my sell price for the stock, it turned out to be ~$180. The stock has traded at $450-500/share in last one month.

Ironically, in my 2022 annual letter, I actually admitted that my assessment on Spotify's ad business may have been more optimistic than warranted. That re-assessment wasn't quite misplaced, but my mistake of selling Spotify too early emanated from primarily two sources. While I always maintained a somewhat contrarian position that market likely overestimates labels' leverage, especially directionally against Spotify, it turns out I too underappreciated Spotify's ability to drive high incremental gross margin through marketplace and other product offerings beyond music such as Audiobooks. Moreover, this underestimation compounded further when Daniel Ek channeled his inner "Zuck" and pursued his version of "Year of Efficiency" in December 2023. Instead of updating my opinions accordingly, I inferred there's not much upside left using mostly napkin math. Since then, Spotify's operating margin expanded from -2.0% in 4Q'23 to +4.6% in 1Q'24, +7.0% in 2Q'24, and +11.4% in 3Q'24. These numbers are comfortably ahead of what I would underwrite for 2024 even in my bullish scenario. While the stock today trades at ~40x NTM EBITDA and it is possible that the stock may be a bit ahead of itself, it is difficult to not be disappointed with how I squandered the opportunity here.

When I ponder about this mistake, I have noticed there is a tension between just owning good businesses and the temptation of "managing" correlated risk exposure in my portfolio which I thought was one of the primary reasons for my poor 2022 record. I am still trying to figure out how to strike a better balance between these two and perhaps acknowledging the tension is the first step towards addressing it.

While the error of omission may even seem a bit too cute to be too bothered given I did after all made money on Spotify, the error of commission inherently doesn't have that feature. After owning IAC since 2020, I am still down almost ~50% on the stock. While I at least stopped adding after October 2022, I cannot give myself much credit. You may not realize it just by looking at my portfolio as IAC has become only ~2.5% position for me now, but it actually is my second largest position on a cost basis. The reason I consider it as almost an embarrassing mistake is not only I don't quite like any of the businesses IAC currently owns, I'm not even confident that the intrinsic value of the collection of businesses IAC owns has compounded over the last few years. While I confronted this unfortunate realization to myself a few months ago, I still decided to hold the stock for now as I think the valuation is more likely than not to be too pessimistic. I still somewhat tentatively believe that but I do not see a place for IAC in my portfolio over the long-term. I say "somewhat tentatively" because IAC owns a disparate collection of businesses which is best to be valued by a Sum-Of-The-Parts (SOTP) method. While there is a time and place for SOTP to be applied (think of valuing Google when GCP was making losses while growing GCP revenue consistently at >20% quarter after quarter), I need to be more careful before using SOTP to justify holding a stock. The below meme perhaps encapsulates how I feel about my investment in IAC.

I am highlighting these mistakes because Mr. Market has been quite generous to most of my portfolio holdings over the last couple of years; perhaps I will highlight some good decisions after facing hiccups in some future years.

In 2024, MBI Deep Dives also introduced a couple of features that I believe made the service more valuable. Our WhatsApp community allowed me to share interesting pieces that I read almost on a daily basis. It helped me connect directly with my audience without a fickle algorithm in between. While email also has the feature, I do think email has a higher bar compared to messaging apps. I encourage you to join the community.

Just before the year ended, I also partnered with David Kim from Scuttleblurb to launch a podcast: "NeverSell" (Spotify, Apple, YouTube). I am always reluctant to get on a content treadmill and mostly want to do things that I would like to do anyway even if I had no audience. David has been a core inspiration for me to start MBI Deep Dives and I consider him one of the best generalists in the world. We have been mostly chatting with each other for the last couple of years almost on a daily basis. Text-based relationships, however, can have an asymptote and I always wanted to speak to him on a more regular basis. And if we are speaking, why not just record it and share with all of you too? We have recorded the first episode which is on AppFolio. Our plan is to record one episode per month; feel free to follow NeverSell wherever you listen to your podcasts.

On personal front, 2024 ended with the best possible news I can ever think of. MBI household is ecstatic to have a new member in our family. Following in his mother's footsteps, we chose a name inspired by a river. And what better choice than the mighty Nile, the longest river in the world?

The week before Nile was born I was wondering that he will be part of a generation that will grow up with AI assistants that patiently answer every curious 'why.' I was plenty curious as a child and while there were teachers who were very much willing to quench my inquisitive nature, I also knew there were plenty more who would get annoyed sooner than I could get all my answers. The ability to keep asking "whys" from early childhood may have profoundly positive implications in children across the world. In fact, I think it is certainly possible that by the time my son turns 16, he may have a more profound grasp of the world than I'll have at 50.

You may wonder wouldn't I too get back to asking my "whys" now that I have incredibly smart AIs ready to have conversation with me. Remember, for people in my (and older) generation, we need to unlearn our learned inhibition of asking "whys". I am reminded what Sridhar Ramaswamy said on number of queries:

"It turns out that persuading people to query more is next to impossible. All of us have a certain propensity to use search, and it varies from person to person."

As the medium of query is evolving, I am sure this may be a little outdated but just by observing people around my age, I can tell there is still truth to this observation for the average person in my generation. We are mostly still not asking enough "why". I am optimistic that the generation of my children will not shy away from asking questions, and hence may develop a much better understanding about the world.

My family and I are deeply appreciative of your support. Happy New Year!

I will publish my Deep Dive on IDEXX Laboratories (Ticker: IDXX) by the end of January.

Past Annual Letters

2021, 2022, and 2023

Disclaimer: All posts on “MBI Deep Dives” are for informational purposes only. This is NOT a recommendation to buy or sell securities discussed. Please do your own work before investing your money.