My Toughest Quarter
is creating a terrific set-up: Q1 and beyond
It has been the “toughest” quarter returns wise: -14.6%.
I had been expecting this for a long time, and honestly I couldn’t be more fine with this.
After a +88% in 2023, a “scary” +119% in 2024, and a +24% in 2025, that’s a healthy breather.
And regardless of whether the storm continues, the set-up that is forming right now is one of the most asymmetric I’ve genuinely witnessed in a while for the portfolio.
Let me briefly show you why.
The Overall R/R of my Portfolio
If you’re new here, I typically rank equities with a risk-reward scoring system from 0 to 10.
To be investable, a new holding must score at least 7.
When a company becomes part of my portoflio, I let it run and don’t sell below the bull-case target scenario unless:
I can clearly find an alternative
A new permanent risk (I can see) has risen
I need to increase my cash position
With that being said, I keep observing how the risk-reward is changing while I’m holding and what score I’d get should I enter today.
So, I last week I took the chance to review the big picture and I’ve got to say, I like what I’m seeing!
This infographic shows the risk-reward (built with my methodology) for each of my 11 holdings, plus a blended view for the entire portfolio:
Translated:
I’ve got 7/10 companies which I’d be confident to re-enter today (they score 7 or higher, right now)
The overall reward-to-risk of the portfolio is close to 7:1
My base case scenario points to a +90% in 5 years, my bull case scenario to +160%, while the downside is limited (-23%)
I call this asymmetric.
What makes me confident about this set-up is also the fact that all scenarios are built with a conservative sentiment logic.
Concretely, all my assumptions categorically exclude exit multiples above 40x forward earnings or cash flows for all stocks.
Now, ideally I would love to always navigate the markets with a 10:1 reward-to-risk portfolio in my hands.
But that’s pretty impossible, especially because - as I mentioned - I do my best to let the winners run and become less investable on the way.
But you know what’s the real interesting fact?
One of the two Zeros there is right now the first candidate to fully exit the portfolio.
If I execute this, the overall reward-to-risk score (considering what’s left, without cash) reaches 8.3.
And what would happen if I got rid of 50% of the second R/R equalling 0?
I’d exceed my 10:1 blended reward-to-risk.
And linking this idea back to what I’ve shared in some of my recent episodes:
That’s not too far from materializing.
I genuinely don’t know if the 2-3 industrial/defensive names I’m looking to add to the portfolio will be coming from one of those episodes, but regardless I’ll make sure to stick to my rules.
The 20% Rule
Most of those 7s, 8s, and 9s won’t probably play out as I wish.
But here’s the thing: you don’t need to be always right to achieve great returns peacefully.
Hayden Capital’s Q4 2024 letter reminds us of this golden principle many seem to have forgotten: risk comes first!
My obsession is to limit the downside risk as much as possible, playing aggressively on a few names (30-40% of the portoflio), knowing one or two outliers will be enough for me.
Now this framework does carry two significant issues:
How do we lose small when we’re wrong?
Are we able to set our ego aside and accept this reality?
Being right 20-30% of the time requires a lot of humility and patience to my view.
If you let your ego, perfectionism, or emotional imbalance interface with the process, it’s going to be way harder.
This is the edge that humble independent investors don’t even realize to have!
Not having to report to anybody and being able to be right only a few times, makes a huge difference.
You only have to do a very few things right in your life so long as you don't do too many things wrong.
Warren Buffett
Arugamama
It’s the Japanese concept of “accept the harsh reality” and build from there.
In this case, I’m not escaping from volatility, I’m accepting it.
Is this always a pleasure? Of course not… and the waiting is never easy.
But so far being able to ‘suffer’ when needed was the key to superior returns.
27.8% money-weighted returns in the past 5 years and a bit - and a 7:1 reward to risk set-up from here.
I experienced a quick 5x from the 2022 lows, and +80% fast from the Q1-2025 lows.
If I had to flip a coin, we’re about to go lower this year but at the same time I know every -1% will be accumulated energy for the next rebound.
We’re going to have some fun.
Want the full rules-based system? get in touch!
If you need any help organizing your equity investments and these logics speak to you, I have a dedicated service.
From there you can book a quick chat if this speaks to you and we see fit.
That’s it for today.
📈
Happy Investing,
Francesco