Project $1M: 2017 Review And 2018 Outlook

by: Integrator


Project $1M returned 33% in 2017.

I discuss key components of performance and lessons learnt.

I detail my outlook for 2018, and portfolio strategy.

2017 was overall a very good year for Project $1M. I recently provided some context about the fund's overall returns for 2017, clocking in at over 30%. However, I thought it may be helpful to provide some additional granularity on what worked well and what didn't work well over 2017.


I have significant holdings in market-based indexes such as the S&P 500. Project $1M was born from the idea that there are 20-30 of those businesses in the S&P 500 that are truly outstanding businesses that will outperform the rest of the components that make up the S&P 500. I started by identifying those businesses that I believed were superior. I factored in good growth records, strong underlying secular trends and ability to provide superior returns on invested capital.

My filter unearthed roughly 30 of these businesses that I felt warranted extensive consideration. The next phase of compiling Project $1M was to look at buying in at prices that were attractive. I started to implement this strategy in November 2015.

2017 Detailed Positions


It was a very strong year across the portfolio as a whole, with a solid majority of positions achieving a 20%+ return. In many instances, returns in key positions such as MercadoLibre (NASDAQ:MELI), Alibaba (NYSE:BABA), Atlassian (NASDAQ:TEAM) and Tencent (OTCPK:TCEHY) were well in excess of 50%. Some comments in brief on key contributors to performance:

Alibaba & Tencent

2017 was arguably the year of the Chinese e-commerce platform. Both Alibaba and Tencent benefitted handsomely from posting dominant financial results, which provided evidence of the strengthening network effects that have been accruing to both of these platforms. That was reflected in a sharp reappraisal of the prospects for both of these businesses by investors. Alibaba was up close to 100% on the year, with Tencent up in excess of 100%.

In my mind, there is no sign that the torrid business growth which both of these businesses are experiencing will slow down anytime soon. Alibaba in particular is experiencing a flywheel effect from its network effects. Alibaba reported revenue growth of over 60% in mid-2017, its highest rate of growth since its IPO.

The big risks to Alibaba and Tencent, like several of the other large-cap tech stocks that I own in my portfolio (such as Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) (NASDAQ:GOOGL)) is regulation. The market dominance of Alibaba and Tencent hasn't been lost on the Chinese government. There have been reports that the government is looking to take equity positions in both of these businesses, which arguably heightens the regulatory risk of both of these names. I don't think that the Chinese government will be motivated to kill their 'golden goose,' but it’s a development that I will be watching closely.

For any serious investor interested in building a growth-oriented portfolio that has the ability to earn market-beating returns, it is hard to look past these two names.


MercadoLibre was another position that was up handsomely over 2017, and increased over 100%. The LATAM e-commerce portal provider benefitted from enhanced investor recognition as it also posted solid growth numbers. Core metrics of business health such as registered user numbers and gross merchandise value (GMV) were both up in excess of 20% year on year. MELI's share price has certainly been highly volatile through 2017, with swings of 30-40% through the year. The threat of going head to head with Amazon (NASDAQ:AMZN) was the latest factor that caused investors to panic.

I actually topped up my MELI holding through the year. Unlike BABA and even Tencent, I believe MELI has run too hard and is now well above my estimates of fair value. This is however a very high quality, if not very volatile, business and it is one that will be in my bottom drawer for the duration of Project $1M. Needless to say, I don't anticipate topping this up anytime soon.

Visa (V) & Mastercard (MA)

The credit card processors were my first investments in Project $1M, and if I had to do it again, I wouldn't do anything different here. These businesses will probably need to be pried from my hand, which is likely the only way I'll get rid of these. Given the significant weighting that each now represents in Project $1M, and the overall position size, I'll only look to opportunistically top these positions up, but that would require prices that are 20-30% below current market levels.

It is an indication of the market riches that were showered on Project $1M that these businesses were up almost 50% for the year, and yet they were still some way down on the Project $1M Leader Board.


Always a controversial name that confounds a lot of dyed-in-the-wool value investors, Amazon was another star performer. The position was up almost 55% in 2017. Some of the investor angst about Amazon seems to be that it runs at a marginal profit, and always appears overvalued. What is lost in that debate is that the company is substantially reinvesting cash flow back into the business and spending heavily on marketing and R&D. If you are able to do that and grow top line at 20%+ per year, that represents a very tax-efficient way to grow one's business.

I have a high conviction that Amazon will be a $1T + business within 3-5 years. At that point, it will be more of an infrastructure platform for merchants looking to have e-commerce offerings, as well as a global cloud infrastructure leader.

Portfolio Lessons

Doing Nothing was the best move that I made in 2017

One of the constant struggles that I have had to contend with as an investor is to just sit on my hands and do nothing. 2017 was a good step in the right direction as far as that was concerned. Churn-in positions within the portfolio were only 10% of portfolio value from end of Q1. That's not bad, but I hope to do a bit better in 2018. I really just held whatever I had in 2016 and extended those positions in 2017. As markets inexorably rose, it was tempting to cash in some chips or trim some positions along the way, but I resisted the urge to do so and that was reflected in a satisfactory end-of-year performance.

You don't need to hit everything out of the park to have good performance

I had my share of underperforming positions. Celgene (CELG), Ctrip (CTRP), and Sirtex (OTC:SRXTY) all had sub-par years, with all of them actually going backwards. In spite of the poor performance of these positions, I was still pretty pleased with overall portfolio performance. You don't need to hit everything out of the park to have satisfactory performance. Conversely, I didn't feel compelled to send my 2017 dogs into exile, because the rest of the portfolio was humming along so well.

The best investments may be in positions that you already have

I generously topped up some of my holdings in early 2017 (conversely, I largely sat out the markets in 2H 2017). Alibaba, Visa and MercadoLibre all got some extra investment from me in the early part of the year. Each of those decisions looks vindicated based on where those names finished up at the end of 2017, and my longer term outlook for all of these businesses.

Diversification hasn't added any value in 2017

I currently hold 18 positions in the Project $1M portfolio. However, that’s a little misleading because 80%+ of the portfolio value is held in just 10 names. I believe it was the fact that I am running such a concentrated portfolio that I was able to have a fairly good result in 2017. What was surprising to me about 2017 results was that I hold many large-caps, and my alpha didn't come from small-cap, speculative positions. Google, Amazon, Facebook, Alibaba and Tencent are as large as they come. This concentration likely also means that I will see significantly more volatility in the future years. It will be interesting to see whether that higher volatility will come with market-beating performance.

2018 Outlook

In spite of the superior performance of Project $1M in 2017, I really don't see any real reason why the portfolio can't continue to deliver good performance over the next 24-36 months. Accordingly, I believe 2018 is likely to continue to be a solid year for portfolio performance. Valuations of Facebook, Google, Priceline (PCLN), Alibaba and Tencent are all very fairly valued (I'd even suggest undervalued). Even Amazon looks attractively valued on an operating cash flow multiple to me!

Of course, I don't expect a ~33% return in 2018, but I don't see any real obstacle to achieving a low double-digit return.

While I will be opportunistically looking to add to positions in my existing businesses, I really can't see them getting to levels at which I'd be happy to add to, unless we had falls of ~20%.

In the interests of sharing how I am looking at the market and market valuations, I have sold out of the money puts on Facebook and Alibaba at $130 with a 2020 expiry, which should provide some indication around where I would expect to be active again in the market.

I'm not actively looking to expand the range of positions that I hold in 2018, as I am fairly happy with the concentration that I have in my portfolio at this time. With that said, there are 2 positions that I am actively watching for Project $1M which I look forward to introducing in 2018.

Happy New Year and Happy investing to all.

Disclosure: I am/we are long ALL POSITIONS MENTIONED.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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