Investor Navigates 2024 Market, Unveils 2025 US Stock Picks
While the calendar year 2024 has long passed, a detailed review of investment performance is finally emerging. The investor behind the ‘Patreon portfolio,’ which mirrors their personal holdings accounting for 95% of their capital, reported a 14.9% pre-tax return for 2024, after accounting for transaction costs. This figure, while respectable in isolation, fell short of the broader market’s performance, prompting a deeper analysis of the year’s investment landscape and a strategic shift for the upcoming year.
The investor’s own historical average annual return since August 2013, spanning approximately 11.5 years, stands at a robust 17.8%. While the 2024 result is slightly below this long-term average, it’s not considered a drastic underperformance. However, the concept of opportunity cost looms large in the investment world. In 2024, the S&P 500, a benchmark index tracking 500 of the largest U.S. companies, delivered a substantial 25.3% return. This significant divergence highlights a key challenge faced by many investors: the allure of seemingly higher-returning alternatives.
“The stock market is a game of opportunity costs and during 2024 there were some truly mouthwatering Alternatives out there.”
The investor acknowledges the potential for ‘envy,’ a sentiment that can arise when comparing one’s performance to market benchmarks or other investors. Drawing wisdom from Warren Buffett, the article suggests that focusing on relative gains can lead to dissatisfaction, emphasizing the importance of internal benchmarks and long-term objectives over short-term comparisons.
Global Disparities and a US-Centric Approach
A primary reason cited for the Patreon portfolio’s underperformance relative to the S&P 500 is the stark divergence between U.S. market strength and the performance of international markets in 2024. While the S&P 500 surged by 25.3%, other major global indices lagged significantly. The UK’s FTSE 100 saw a modest gain of 9.5%, France’s CAC 40 eked out only 0.6%, and Sweden’s OMX Stockholm 30 reported 8.6%. This global disparity impacted the investor, whose portfolio includes significant equity exposure to Nordic countries and Europe, thus not fully capitalizing on the U.S. market’s exceptional run.
This observation led to a strategic decision for 2024: a 100% U.S.-based portfolio. This concentrated approach was also driven by a desire for analytical consistency, avoiding the added complexity of valuing mixed U.S. and international companies. A separate $3,000 investment was allocated evenly across 10 U.S. companies. This dedicated U.S. portfolio achieved an impressive 38.6% return over the year, even outperforming the S&P 500. It’s important to note that this figure includes a nearly 10% positive currency exchange effect, which boosted the nominal return.
Small Caps Lag, Large Caps Lead
Another significant factor influencing the 2024 results was the performance differential between large-cap and small-cap stocks. Globally, large-cap equities outperformed small-cap equities by a considerable margin, with the MSCI World Index showing a 19.2% gain for large caps compared to just 8.7% for small caps. The investor’s strategy, which often favors smaller companies due to the potential for higher mispricing and greater investment opportunities in smaller market capitalizations, was thus structurally disadvantaged. The significant weighting of ‘Magnificent 7’ stocks, which constitute about 23% of the large-cap index, played a crucial role in this trend.
The investor acknowledges that while a smaller company focus can offer advantages, such as increased opportunities when managing smaller sums of capital, it presented a structural disadvantage of over 10% in 2024. This underperformance of the small-cap strategy in a single year does not invalidate its long-term potential, as even seasoned investors like Warren Buffett have experienced periods of underperformance relative to benchmarks.
Benchmarking and Self-Reflection
To provide a fairer comparison, the investor devised a method to neutralize the U.S. and large-cap biases present in the 2024 market. By using a stock screener on Ticker to identify approximately 7,500 potential investment candidates, and then simulating 100,000 portfolios of 22 randomly selected stocks (akin to a ‘blindfolded dot-throwing monkey’ approach), a benchmark was established. The median performance of these simulated portfolios was a mere 8.9%. Compared to this figure, the Patreon portfolio’s 14.9% return appears more favorable, leading to renewed appreciation for the market’s inherent volatility.
Beyond market dynamics, the investor engaged in self-critique, identifying several behavioral mistakes that may have impacted performance. These include:
- Getting attached to purchase prices.
- Focusing too narrowly on individual stock details (‘missing the forest for the trees’).
- Attempting overly ambitious trades (‘jumping over 7-foot bars’).
- Excessive monitoring of stock prices leading to an emotional rollercoaster.
- Confirmation bias, particularly in discussions with colleagues.
These self-identified errors are areas targeted for improvement in 2025.
Introducing the 2025 US Portfolio
Looking ahead, the investor unveiled their 2025 U.S. stock portfolio, comprising 10 companies with an approximate 10% capital allocation to each. These selections were made around the New Year, with current market movements presenting opportunities to acquire them at slightly lower prices than initially paid. The selection process involved a rigorous filtering criteria designed to identify companies with:
- Limited annual sales decline (max 5%).
- Insider purchases.
- Low short interest.
- Reliable earnings and stable profit margins (e.g., max 8%, not below 6%).
- Reasonable debt levels (max 5x EBIT).
- Absence of major regulatory or competitive issues.
- Valuation below historical averages.
The 10 selected companies for the 2025 portfolio are:
- Gerdau S.A. (GGB): A steel producer with potential for sales growth and stable margins.
- Hydrick Company (HRI): A cyclical but growing hiring and consulting firm with strong returns on invested capital.
- Keurig Dr Pepper Inc. (KDP): A beverage company with a solid market position in a slow-moving industry.
- Ryder System, Inc. (R): A transportation and logistics company facing some competitive pressures but trading at depressed valuations.
- Lee Enterprises, Incorporated (LEE): A media company potentially benefiting from a reversion to the mean after recent margin declines.
- Leo Holdings Corp. III (LHC): An IT services and consulting firm with stable operations and attractive valuation.
- LKQ Corporation (LKQ): An automotive replacement parts distributor with strong growth and a competitive distribution network.
- ManpowerGroup Inc. (MAN): A global workforce solutions company facing competitive pressure but trading at a low valuation relative to historical margins.
- Resources Connection, Inc. (RGP): A consulting firm that, despite being a weaker player competitively, offers significant upside potential at its current low valuation.
- United Parcel Service, Inc. (UPS): A logistics giant with a strong competitive moat, expected to return to historical margin averages.
The investor highlights specific valuation metrics for some of these companies, such as Gerdau Parts at an EV/EBIT of 15 and P/E of 19, and Hydrick International at an EV/EBIT of approximately 7. The rationale for inclusion often centers on potential mean reversion, strong competitive advantages, or attractive valuations relative to historical performance and future potential. The article concludes by referencing the utility of financial analysis tools like Ticker for such detailed stock research.
Market Impact
The 2024 results underscore the significant outperformance of U.S. large-cap stocks, particularly the ‘Magnificent 7,’ compared to global markets and U.S. small-cap stocks. This trend presented a challenge for diversified global investors and those with a small-cap bias. The detailed breakdown of the 2025 portfolio selection criteria provides insight into a disciplined, value-oriented approach focused on U.S. equities, emphasizing fundamental analysis, reasonable valuations, and competitive advantages.
What Investors Should Know
Investors should recognize that market performance can vary significantly across geographies and market capitalizations. While the S&P 500 delivered strong returns in 2024, this was not universally replicated globally. Furthermore, the outperformance of large caps over small caps in 2024 suggests that strategies focused on smaller companies, while potentially rewarding long-term, can face periods of underperformance. The investor’s self-reflection on behavioral biases serves as a critical reminder for all market participants to guard against emotional decision-making and confirmation bias. The 2025 portfolio selection process highlights the importance of a rigorous screening process and a focus on companies with solid fundamentals and attractive valuations, even in a potentially frothy market environment.
Source: My 2024 Stock Market Results & 2025 US Stock Portfolio (YouTube)
