The goal was to create a collection of stocks that would rival the best-performing 1% of stocks on a 5-year term — called the “Mr Mimetic Fox Fund”.
The inspiration was a report by Alta Fox about the best-performing stocks between 2015 and 2020.
In January 2023 Mr Mimetic bought the first stock for the Mr Mimetic Fox Fund: serial strip club owner RCI Hospitality.
From the very beginning, mistakes were made. This is obvious from our first yearly performance update: +9,23%
As a reminder: an upside of about 300% in 5 years is the hurdle rate to become part of that 1% of best-performing stocks. About 400 stocks or so will be able to reap in that performance.
Surprisingly, this is only a 25% CAGR. Quite doable.
The mission of Mr Mimetic is to avoid as many stocks as possible that are not part of those 400 best-performing-stocks. By avoiding mistakes, the Mr Mimetic Fox Fund will automatically be filled with winners.
So, what happened?
COMMODITIES
Two commodity-producing stocks got hammered, for different reasons. In both cases Mr Mimetic was convinced the companies would outgrow any price decline in the commodity per unit - but that volume growth didn’t materialize (yet).
This is a stern reminder that commodity producers don’t have pricing power and are best only bought at a multi-year low.
In studies about portfolio management, one of the recurring themes is: sell your losers, and add to your winners. The funny thing is of course that a stock price decline isn’t necessarily an indication that the company is a loser. So a rule-of-thumb becomes: with a 30% decline in stock price a decision has to be made: sell or buy more.
Per the rules of the Mr Mimetic Fox Fund no stock can be sold, as an experimental contrarian rule. (And a stock can only be added to after the yearly results.)
One reason is to keep Mr Mimetic sharp and give an extra incentive not to make mistakes.
So, one or two mistakes have an outsized influence on the overall results. Mr Mimetic likes it that way: we’ll just have to figure out how to add more winners to the fund to compensate for the laggers.
DIRECT TO CONSUMER
Other stocks that didn’t do well were direct-to-consumer stocks.
Although they are serial acquirers, not all serial acquirers are made equal.
Suffering from inventory overhang after the post-covid boom, the acquisition pace slowed down, organic growth y-o-y fell flat and the growth that was priced in the stock was taken out of the stock price.
Obviously, one atypical year doesn’t predict a 5-year run, but Mr Mimetic did decide to add some “distance analysis” into the stock selection. There has to be a structural, easy-to-spot path towards 10x in terms of revenue.
And at least x3 in 5 years. Minimum minimorum.
Stocks that are on a path to multiply their revenue by a 100 are even more welcome. Especially when with every extra dollar of revenue, the margins ameliorate.
This was not one of the criteria in the Alta Fox report, but seems obvious now.
MISSION CRITICAL
Another thing that is missing from the Alta Fox report is any mention of return-on-capital.
Mr Mimetic likes to take it one step further and look at the return-on-incremental-invested-capital. What this means is: from the profit that is made, how much can be re-invested at what kind of returns?
Combined with companies that perform a mission-critical task for other people or firms, this might be a good predictor.
In hindsight, the criteria we came up with to select our stocks were never “negatively” tested by Alta Fox: how many of the stocks that fit their criteria in that 5-year period were NOT part of the best-performing stocks? In other words: the report suffers from survivorship bias.
THE TOP THREE
Three stocks had a return higher than 30% during our first year:
Nomura Micro Science (137% in 4 months)
Duratec (71% in 8 months)
Fonet Bigli (34% in 2 months).
Afya (27% in 6 months) just fell short.
Moving forward, Mr Mimetic hopes to find more of these results to compensate for any mistakes.
As the saying goes: “past performance is not indicative of future results” .
Let’s hope so.