As we shake off the holiday-induced “mental cobwebs'' and embrace a new year, I’m starting a new ritual – the Interconnected Annual Letter. Admittedly, this is a shameless mimicry of the ritual behind Warren Buffett’s famed Berkshire Hathaway annual letters, as well as that of other successful investors. Having read many of these letters, a similar narrative format looking back on what I’ve learned writing on and investing in Interconnected, I thought, would be a good way to “report” to you: our subscribers. (Imitation is the sincerest form of flattery, right?)
While we technically don't have “shareholders”, I treat every subscriber as a shareholder. I sincerely thank you for giving us your most valuable resource: attention and time. And even though I don’t have my own Carol Loomis, I hope the Interconnected Annual Letter will evolve into an artifact that is similarly insightful and charming over time – something worth referring to (and chuckling about) in future years.
Similar to Buffett’s and other investors’ annual letters, we begin by sharing the Interconnected Portfolio’s public market investment performance in 2022, along with a comparison to other commonly-used indices as benchmarks:
Interconnected Portfolio*: +79.33%
S&P 500: -19.44%
NASDAQ 100: -32.97%
Russell 2000: -21.56%
MSCI World: -17.73%
Wilshire 5000: -19.04%
*Some important context and caveats: I don’t manage other people’s money and don’t plan to any time soon. However, I manage the Interconnected Portfolio, which represents a significant proportion of my net worth, in the mode of a professional investor and a fiduciary of others. (If I don’t, I will go broke!) The level of responsibility is the same, minus the principal-agent problem and the allure of management fees. The performance number may look good for 2022, but it, in no way, predicts the likelihood of future performance. As Buffett wrote in his 1990 annual letter:
“Berkshire's 26-year record is meaningless in forecasting future results.”
If a (very good) track record of 26 years is meaningless in predicting future results, then a track record of one year is at least 26-times more meaningless, no matter how good. What is meaningful, I hope, are the writings, lessons, and reflections behind this single performance number. So let’s dig into those instead (sprinkled with fun, topical generative art).
Flexible Within Circle of Competence
The concept of “circle of competence” is well-known among professional investors. So are the brutal lessons of disasters when one steps out of it (e.g. when Long-Term Capital Management started doing M&A deals). The same concept should probably be applied to more writers too, so less of us become “professional opinion haver’s”, though the consequences will always be less painful no matter how far a writer’s opining strays.
Whether I’m wearing my writer hat or investor hat, I do my best to stay within my self-defined circle of competence bordered by these areas:
Open source (software and hardware)
A subset of China tech that overlaps with the three areas above
Technologies that have a strong influence on or by geopolitics and US domestic politics
This seemingly random collection of topics would make a lot more sense if you have a moment to peruse the About page. It is a rather tightly defined circle. Luckily, it has also been a quickly expanding one with surprising entrants, e.g. TSMC in Arizona.
The one big lesson I learned in 2022 about operating within one’s circle of competence is to be directionally flexible. I used to think that investing within that circle is solely about finding the winners and going long. Later on, it dawned on me that shorting the losers within that circle is an equally valid way to stress-test my competence. Furthermore, given that Fed policies have become major factors in all forms of investing, while globalization is (likely) dead, knowing how to spot “short-term losers” who are actually “long-term winners”, turns out to be a perfectly good way to invest within my circle of competence as well. One marker of competence is knowing how short is too short, how long is too long, given the circumstances.
Sadly, I did not learn this lesson until mid-2022 or our performance would have been better. That being said, I do not ever intend to be a professional short seller, even though this class of investors made out like bandits last year. From my experience, the best way to become competent (and stay competent) in any industry is to have an insatiable appetite for continuous learning that’s motivated by optimism. It is very hard to keep learning about something that you are inherently pessimistic about and don't think will work. Of course, we don’t live in fantasies and there are always things that will, in fact, not work. So we all have to choose our “circles” wisely.
Even though I shorted quite a few companies in the DevOps and cloud infrastructure realm last year, I continue to think these industries, led by a dramatic increase in developers globally, have promising years of growth ahead. However, the immediate view beyond the windshield still looks bumpy, so continuing to stay directionally flexible as the “sideways market” continues is a key lesson learned.
Widen By Writing
The nice thing about writing a weekly newsletter that’s intentionally eclectic is that it serves as both a live polling of interests and an avenue to widen my circle of competence, however slowly. (How eclectic? Last year, we wrote about topics ranging from how data center locations and reproductive rights intersect to a product overview of China’s digital currency, the e-CNY.) Writing eclectically, in conjunction with active investing, over the last three years has been a constant source of self-improvement and joy.
The “polling function” is easy enough to report on objectively. Readers and subscribers vote by their clicks and views. And the collection of posts that garnered the most clicks and views in 2022 (more than 40%) are ones focused on semiconductors. This outcome no doubt mirrors the rising general public interest in the topic, whipped up by the passage of the CHIPS Act in the US, tougher global sanctions on the Chinese semiconductor industry, and a constant fear of war over Taiwan. Semiconductors look to remain a highly relevant topic in 2023, so we will continue to focus on these tiny but mighty chips. Two dimensions I hope to dive deeper in 2023, as my circle of competence would allow, are: 1. The strategic implication of RISC-V and open source chip design; 2. The US and China’s differing talent gaps and impact on their respective pursuit of high-end semiconductor manufacturing capabilities. I wrote about the former once last year (on Valentine’s Day with a holiday appropriate title) in “Romance of the Three Kingdoms: Semiconductor Edition”; it barely scratched the surface.
The “widening function” is more subjective and harder to report on. Writing is not just a way to disseminate what you know, but also a way to explore what you don’t know in a more focused way (as opposed to just passively reading). However, when writing is done publicly via a newsletter, exploring curiosities can be risky. You may turn off some subscribers who are not here to explore with you, but only here to absorb what you already know. (On a meta level, this annual letter is in itself an encounter of this risk.) Nevertheless, the power to explore and widen one’s interests and competence is what makes writers want to write more. The risk of losing readers in the process is a necessary form of creative destruction. And since the quality of “widening” cannot be reflected in clicks and views, here are two pieces of exploration that I think are most worth sharing, for no better reason other than that they brought me the most personal satisfaction and new knowledge:
Of course, new knowledge is a far cry from a circle of competence. That’s why I have not yet invested in any EV company, battery makers, or South African telecom conglomerates. Even Tencent is a stretch for me, because I don’t have deep knowledge of social media and am not a gamer.
Oftentimes, finishing a piece on a company or an industry can give me the illusion of expertise right away. With that illusion comes a sense of unearned confidence in investing real money in a “new-acquired” circle of competence, when a new circle takes years if not decades to draw. I’ve made these mistakes before, and they are costly. I intend to avoid them in the future, while continuing to “widen by writing”, but only writing, until I’m ready.
One of the less talked about “super powers” of Warren Buffett’s success is his ability as a consummate but tasteful marketer. To his credit, Buffett was always transparent and never shy about placing his “advertisements” directly in Berkshire’s annual letters, especially when he and Charlie Munger were looking for businesses to acquire. Indeed, he was a pioneer in the “newsletter as a distribution channel” tactic, long before any of us. Here is a screenshot from his 1990 annual letter:
So in a last act of mimicry, I’m also including a “Help! Help!” section to wrap up this annual letter. However, I’m not looking for businesses to buy, but for new relationships to build and learn from, specifically with family offices. During 2022, I got to know a few family offices who reached out to me because of my writing. I learned a great deal about how they operate, what they care about, and how they see the world. It was a set of fresh perspectives I did not have before. These connections were organic, ad-hoc, and the highlights of working on Interconnected. Stealing a page (or tweet) from’s personal annual review framework, conversations with family offices created the most energy for me in 2022.
In 2023, I hope to be more intentional about connecting with and learning from family offices that are:
Managing $100 million or more in assets (can be a single family or multi-family office)
Regularly evaluate and hire outside managers to manage capital
Ideally located outside the US (or have non-US perspectives, as these are the views I’m more curious about and have more blindspots in)
If you have connections to this type of family office (or indeed are part of one yourself), I would appreciate an introduction to have a 45-minute to 1-hour Zoom call to get to know each other. I don’t have anything to sell, except my curiosity. I will have many prepared questions to ask to learn about how you operate, what you care about, and how you see the world. I am also an open book and happy to share my unvarnished points of view on any topic that resides within my circle of competence (see above).
With that, I hope everyone has a fruitful and productive 2023, full of growth in both wealth and knowledge.
Kevin S. Xu
This annual letter was a risk worth taking, thank you for the insights, flow and wisdom.
I too wish I could mimic Warren buffett's letters. I do not believe I have developed this facility.