2023 - Q1 - Letter to Investors
Dear Investor,
Q1 of 2023 demonstrated why we avoid trying to time market fluctuations. The quarter began on a grim note following the worst year for US markets since The Great Recession. It ended in fear as investors waited to see what would follow the rapid failure of Silicon Valley Bank. However, despite the pervasive pessimism, the S&P 500 rose approximately 7%, and our fund appreciated 11.8%.
The outstanding performance of our fund was primarily driven by significant gains in our technology holdings, specifically those related to AI development. One of our largest and longest-held positions, NVIDIA, saw its share price surge by 90% in Q1 alone. Although some may consider these gains as excessive in the short term, we maintain our positions because we believe they represent only a small part of the long-term growth we anticipate.
While we expect our fund to outperform the broader markets over the long run, it's important to acknowledge that high-performing portfolios often experience intermittent periods of exceptional growth interspersed with more moderate performance. These growth spurts are unpredictable, and extensive academic research suggests that successfully capitalizing on them requires either remarkable luck or unwavering commitment.
Our AI holdings vividly exemplify the unpredictability of growth. As recently as February 2019, AI was poised to revolutionize professional-grade communications. This trajectory made it evident that businesses involved in AI, particularly hardware manufacturers, would soon experience significant growth. However, throughout 2022, the share prices of AI-related businesses plummeted due to expectations for reduced IT spending in anticipation of a recession. Yet, just as the projected cutbacks materialized, the valuations of AI-related businesses skyrocketed, fueled by the popularity of ChatGPT.
Essentially, the fundamental trajectory of AI commercialization remained unchanged. However, the commercial potential of AI became so vivid in the popular imagination that the higher valuations of related businesses became widely accepted. Similar to many emerging and exciting technologies, expectations for AI's capabilities are already outpacing the actual state of commercialization. As expectations meet reality and reality catches up with expectations, business values will fluctuate above the newly elevated baseline.
Sudden stock movements, like those experienced by AI businesses in Q1, often occur without warning and only after several false starts. Nevertheless, they play a crucial role in overall stock performance. Investing in businesses that benefit from long-term trends such as AI commercialization is at the core of the Horizon Fund's strategy. While it can be frustrating to wait for other investors to recognize these trends, periods like Q1 serve as a reminder of the immensely rewarding nature of patience.
Nicholas Carpenter,
Manager, NJC Capital Management LLC