I am pleased to share with you our 2023 annual review, reflecting on the past year and looking ahead to the future. This year has been one of both challenges and opportunities, and I am grateful for your continued trust and support in our family fund.

Our Partnership: 33%

S&P 500: 21%

Fund Philosophy and Strategy

Our main goal is to always protect our family money while growing it steadily. We believe in long-term thinking and harnessing the power of compound interest. As Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."

To put this into perspective, if you had invested $100 in the S&P 500 back in 1957, with its average annual return of around 10%, that $100 would have grown to about $53,941 by 2023. This shows how powerful long-term investing and compound interest can be.

We prefer a focused portfolio, much like the Walton family's approach with Walmart or Jeff Bezos with Amazon. We believe that over-diversification can dilute potential gains and prevent us from achieving outstanding returns.

We stay away from hype. While we recognize that AI is a great tool for human development and will create enormous value for society, we need to think, as investors, that it's currently in the "too hard" pile as an investment.

Looking back at history, technology and automobiles are indispensable today, but early investments in these sectors weren't always successful. Technology has undoubtedly transformed our lives, and automobiles have made us more mobile. However, these innovations also remind us of past bubbles, like the dot-com bubble and the automotive bubble.

The Dot-Com Bubble: In the late 1990s, many technology companies, especially those without viable business models, saw their stock prices soar to unsustainable levels. When the bubble burst, the NASDAQ Composite lost about 78% of its value from March 2000 to October 2002. Companies like Pets.com and Webvan went bankrupt, and even major players like Amazon saw their stock prices plummet by around 80-90%.

The Automotive Bubble: In the early 20th century, numerous car companies emerged, but overproduction and fierce competition led to many of them failing.

By understanding these historical bubbles, we are reminded of the importance of careful, disciplined investing. Our approach is to avoid the hype and focus on solid, durable businesses with strong fundamentals. This helps us uncover hidden gems and seize opportunities that others might miss.

We need to learn from the past and be careful with our decisions. For example, Amazon lost about 80% of its value during the dot-com bubble, yet it emerged as one of the best companies today. If you had invested in Pets.com instead of Amazon, you would have lost all your money. However, investing in Amazon would have made you tremendously wealthy. We don't play this game of betting on which company will succeed; instead, we focus on solid fundamentals. Amazon became interesting to us when they established strong foundations, outperformed competitors, and gained significant market share. We find these companies not early, but later, when their potential is more certain. For instance, Warren Buffett invested in Apple in 2016 and has seen significant returns since then, proving the value of disciplined investing.

What is the S&P 500 and Why Does it Matter to Us?

The S&P 500 is a well-known index that tracks the performance of 500 of the biggest companies in the U.S. across different industries. We use it as a benchmark to measure how well our fund is doing. Our goal is to outperform the S&P 500 over the long term. In good years, we aim to do better than the index, and in tough years, we strive to weather the storms more effectively than the index.

For example, if the S&P 500 has a negative return of 20%, our goal is to achieve a better result. If we manage a negative return of only 10% in such a year, that would be considered a good outcome for us. It's very important to us to keep our downside limited and protect your investments even during challenging times.

Performance Overview

2023 was a good year after a tough 2022 for many investors. Our fund achieved a 33% return, outperforming the S&P 500’s 21% gain.

As Warren Buffett said, "The stock market is designed to transfer money from the Active to the Patient." We believe in patience and sticking to our principles, even during volatile times. Investing in durable companies with strong fundamentals paid off well this year. However, it’s important to remember that past performance doesn’t guarantee future results. We are committed to constantly learning, improving, studying our mistakes, and staying in the game to enjoy the magic of compounding.

In 2023, we owned a diverse mix of six businesses, from fast-moving consumer goods to technology and retail, spread across the USA, the Mediterranean, and the Asia Pacific. This number might change in the future as we find new opportunities.

While the USA is a well-known and competitive market, holding about 42.5% of the world's equity market value, we also see a lot of potential in emerging markets like China and Turkey. These markets offer exciting opportunities that might be overlooked by others.

We have a unique approach: we love investing in what's unpopular. We seek out businesses that might be overlooked or even disliked by others but have a bright future in our eyes. This strategy helps us find hidden gems and seize opportunities that others might miss.

Market Environment

In 2023, the economic landscape was exceptionally challenging. The Federal Reserve and the European Central Bank both raised interest rates to combat inflation, significantly impacting the financial environment. The Federal Reserve's rates increased to 5-5.25%, while the ECB raised its key interest rates to 4.50% for main refinancing operations and up to 4.75% for the marginal lending facility by September 2023. These rate hikes made credit more expensive, putting pressure on various sectors.

The tech industry faced significant hurdles, including widespread layoffs, reduced R&D budgets, and a focus on efficiency. The war in Europe exacerbated oil and gas prices, intensifying inflation and economic instability. Global geopolitical tensions and supply chain disruptions, notably the chip crisis, further complicated maintaining economic stability. The devastating earthquake in Turkey added pressure, contributing to hyperinflation in the region where we have investments.

China's economy faced real challenges in 2023, particularly with the collapse of major real estate developers Evergrande and Country Garden. Evergrande, once the world's most valuable real estate company, suffered due to excessive borrowing and overbuilding. The drop in property values by around 30% eroded household wealth, especially for the middle class, since about 70% of Chinese household wealth is tied up in real estate. This led people to spend less and save more, significantly impacting consumer confidence and the broader economy 

Despite these challenges, there were notable positive developments. The U.S. economy showed resilience with strong consumer spending and market recovery. Technological advancements continued in AI.

Fund Performance Details and Mistakes

In 2023, we owned six businesses across various sectors, including FMCG, retail, and technology. We were fortunate to capitalize on the resurgence of investments in Turkey, particularly by investing in Turkish stocks. However, our significant mistake was with Anadolu Efes.

Anadolu Efes is the largest Turkish beverage company operating internationally and holds a 50% interest in Coca-Cola İçecek, a crucial part of the Coca-Cola ecosystem. Our error wasn't in purchasing these exceptional companies but in not holding onto them for the next 5-10 years. We had to exit the position earlier than planned, a lesson learned. As Charlie Munger advises, it's essential to ride long on quality investments.

"The big money is not in the buying and selling, but in the waiting." "The first rule of compounding: Never interrupt it unnecessarily."

We think the Chinese equity market offers tremendous long-term opportunities despite geopolitical, economic, and other uncertainties. China has shown immense growth potential over the decades, and we aim to expose ourselves to these technological and economic developments. With a GDP per capita of around $12,000, China is already the second-largest economy. In comparison, the USA has a GDP per capita of around $72,000, which is approximately six times higher.

Closing Remarks

Thank you for your unwavering support and confidence in our family fund. We are committed to maintaining transparent communication and delivering strong performance. Should you have any questions or concerns, please do not hesitate to reach out. 

Sincerely 

Arda Solmaz