Investment Thoughts April 2023

Q1 Update – Some Winners

Two stocks that the portfolios are invested in – Nvdia (NVDA) and Salesforce (CRM) were two of the best performing stocks in Q1. We have held on to NVDA for years and built up positions and Salesforce is a recent addition since their stock was trading at a very low price and they had a lot of opportunities to run a more efficient business (cut costs) and stop making acquisitions that destroyed value (pretty much any deal in the 2020-2022 era, particularly Tableau).

Hearing their big price increases is less a cause of celebration than a cause for alarm of sorts; Nvidia seems priced for perfection and we may want to reduce our position and take some winnings off the table. Salesforce is more of a question of how long to hold it.

Rising Interest Rates and Return on Investment

Since 2008 we have essentially been in a zero interest rate policy (ZIRP) environment. Along with handing out money to banks after the last crisis, the Federal Reserve instituted ZIRP to provide a vast cushion for the financial institutions, because this meant that their investments could recover over a long period of time without the crushing pressure of higher interest rates / inflation. For a time banks in Europe were even issuing negative interest rate bonds (as in you gave them 10,000 now and get back $9700 ten years from now).

The “base” return on investment that investors expect is approximately 8% / year. The chart below comes from the expected returns of pension funds from 2001-2022. This is above the risk-free rate. In ZIRP, the risk free rate was 0%, or investors demanded 8% return each year. If the risk free rate becomes 5% (today’s interest rates), investors demand 13% return each year.

It is important to look at the impact of compounding returns. I asked GPT to tell me the difference between 5 years at 8% / year and 5 years at 13% / year and it came back at around $1450 at 8% vs $1950 at 13% for a thousand dollars’ invested. Thus investor expectations effectively DOUBLED as soon as the interest rates moved from 0% to 5% (the gain is $450 vs $950 over a 5 year horizon).


The banks have been in the news lately with the government takeover of Signature Bank and Silicon Valley Bank. Bank failures are complex but the general problem is that banks bought government debt at low interest rates and now have massive unrealized losses on those investments. We have not had positions in banks in recent years so this did not impact our porfolios significantly.

Technology Stocks

Technology stocks were characterized as high growth companies who had very high margins, since every new customer they added (for software companies) had a small incremental cost. However, these companies typically ran losses in GAAP terms and when the market pivoted to 1) demanding profits 2) and quickly, these stocks were hard hit. We still have many positions in these stocks and have moved in to add positions for some that have been hit hard (such as Salesforce, above).

Efficiency and Layoffs

Many companies are undergoing layoffs as well as taking very specific measures to increase economic returns, including reducing layers of management, support roles (executive, finance and HR) and eliminating non-core projects or those that do not appear likely to result in short term profits.

It is necessary for companies to reduce expenses for overhead (SG&A) costs because it is difficult to reduce costs elsewhere in areas such as retail labor costs, supply chain costs, and commodities. Enterprises want to reduce costs in areas that are invisible to their end customers in order to maximize profits and return on capital.