I am pleased to write this letter, reflecting on the past year and looking ahead to the future. This year has brought both challenges and opportunities, as well as valuable lessons from our mistakes. We believe mistakes are part of business; as long as they are not fatal, we should do well over the long term. To avoid fatal mistakes, we are moving cautiously and making as few decisions as possible each year. A single great idea in a year makes for a good year in our view.


Our Philosophy

Our primary goal is to protect our capital while ensuring steady, long-term growth. We define risk as the potential for permanent capital loss, not short-term volatility. Volatility doesn’t concern us as long as we have confidence in our investment thesis. As Warren Buffett says, we prefer a bumpy 15% return over a smooth 12%.

We focus on a select group of high-quality companies with durable competitive advantages and exceptional leadership. While we may not always find such opportunities, when they arise, we want to be ready to seize them.

We don’t aim to time the market. Instead, we believe in the power of time in the market. Since 2008, the S&P 500 has had only two negative years. The cumulative return over the last decade has been approximately 303%, with an annual average return of around 15%. Considering the crises and challenges the world has faced since 2008, these are truly remarkable outcomes.


Market Environment

We generally don’t focus on the macro environment, as it’s not something we can influence. When we say macro environment, we mean countries, currencies, commodities, interest rates, and markets. Instead, we concentrate on what we excel at: identifying great businesses and securing the best possible returns among available opportunities. We try to understand companies, industries, and securities through hard work to gain an edge.

Thinking there are always opportunities is wrong. One of the most important skills in this job is patience.

That said, we remain aware of the overall market context. As you know, we entered 2024 amid discussions of a sticky inflationary environment, with credit and borrowing costs remaining high. The Federal Reserve began cutting rates in September. Meanwhile, China implemented significant economic stimulus measures, which drove security prices up following the Fed’s easing.

The Bank of Japan increased interest rates, leading to a short-term market shock as traders unwound yen-based leverage. Leverage can be very dangerous, and this short-term shock needs to be studied carefully by traders and investors.

Turkey also raised interest rates by more than 500 basis points, slowing economic activity to combat inflation. They maintained high rates throughout the year.


Fund Performance Details and Mistakes

In 2023, we owned seven businesses across various sectors, including FMCG, technology, automotive, and energy, spanning different regions of the world.

No business is worth paying an infinite price for; our returns are determined by what we pay. For context, in September 2000, the S&P 500 traded at a frothy trailing price-to-earnings ratio (P/E) of 25.6. Over the next 11+ years, it delivered near-zero returns, including reinvested dividends—a difficult period for investors. While history doesn’t repeat itself, it often rhymes.

Today, the S&P 500 trades at a trailing P/E of 28. While the S&P 500 has been an excellent vehicle for long-term compounding, buying at a P/E above 25 makes us uncomfortable. Given that margin balances are growing quickly at major brokers, it’s important to stay rational and always seek a margin of safety. By contrast, our portfolio trades at a forward EBT of less than 9.

Our portfolio also has high exposure to China, which many consider uninvestable at the moment. However, we see opportunities. We’re not ignoring downside risks, but we believe the Chinese equity market offers long-term potential despite uncertainties. China’s interconnectedness with the global economy and its ongoing efforts to stimulate domestic consumption give us confidence. The companies we’ve invested in have strong balance sheets, pay dividends, and buy back shares.

We like to hold great companies that have high returns on capital and strong management. We prefer fewer holdings in our portfolio. As Charlie Munger says, "If a thing is not worth doing at all, it’s not worth doing well." Concentration is the key to long-term success when done rationally. When the odds are in your favor, you need to bet big.

In the long term, our goal is to beat the S&P 500 by ten percentage points. This will create steady long-term wealth. Businesses are the best tools to serve society, improving lives and creating value over time. Real estate, gold, or other commodities have historically created less wealth than businesses. For us, the three most important factors are:


What Makes Great Companies

Great companies are built not only on their products and customers but also on their people. This is something we’ve historically overlooked when evaluating investments. As Charlie Munger said, “The most important thing is not to interrupt compounding unnecessarily.” This can only be achieved by investing in great companies and holding them long-term.

To invest in great companies, we need to find great valuations as well. While we’ve focused heavily on products, customers, competition, and business economics, we’ve often underestimated the importance of people. People are the ones who turn good companies into great ones—Tesla, Berkshire Hathaway, Amazon, Meta, Microsoft, and Apple.

Consider the case of deep learning. Google was a pioneer in this field, with significant resources and a head start. Yet OpenAI, a smaller organization, disrupted the space with ChatGPT. OpenAI’s achievements were driven by a group of ambitious individuals passionate about AI, proving that leadership and talent are pivotal.

I’m not arguing that OpenAI is a great company; rather, my point is that people are the most important piece of a business. Without people, you can’t have the best products or services. And even if you do, you won’t be able to keep up with the changes happening around you.


Margin of Safety

There are many variables in investing. Mistakes are part of the process, and as long as they are not fatal, that’s fine. Valuing a business requires many skills and disciplines. When we begin our process, we start from the bottom up. While the overall economy, commodities, and industry sectors are important, we focus on companies themselves and conduct our analysis from the company level upward.

This includes reading balance sheets to project future earnings over the next 3, 5, or even 10 years, understanding the competitive landscape, assessing management, and evaluating products and services to determine a business’s worth. As this process is complex and prone to miscalculations, maintaining a margin of safety is critical.


Right Attitude

Public companies are the best places to create wealth over time. Based on the metrics available today, we believe we are in the right place to create value for our fund. So why do so many investors fail despite favorable conditions?

We believe the right attitude is the key to investing success. This includes knowing your circle of competence, understanding risks, and acting decisively at the right time while staying disciplined and patient when necessary.


Should you have any questions, please don’t hesitate to reach out at info@pileainvest.com.


Arda Solmaz
1-4-25