Grounding Myself in this Market Cycle
Concise Update - Up North Hunting this Weekend
At the moment of writing this, it’s 2:30 pm on a Sunday and I am in a ground blind. Every year at about this time of the year I take a few days off of work to unplug, have a few drinks with other family members and run off to the middle of the woods. I get some of my best thinking done out here while I wait for a White Tail Buck to come by. It’s blissful.
Regardless of where I am or what I am doing, I am and always have been committed to maintaining my transparency, my thoughts and my investing story/process to all of you. Today’s update will have to be a clear and concise update due to how little internet connection I have. In the middle of the week, when I get back, I will provide an update about my analysis (charts, data points I am watching, company earnings) about the markets from a data driven perspective. I am writing this offline at the moment and will have to go to a spot out in the road (where I have a little, tiny bit, of connection) to send this e-mail.
The importance of what I have to share today is crucial, in my opinion. The message is about taking a step back and understanding fully what is happening. It’s about the understanding of the market cycle, what it means, and what’s happening. There are three points that I’d like to make:
I am not fighting the Fed, I am actually trusting them
Business fundamentals DO matter
I can’t control what other investors do with their stocks during bubbles or bear markets
*It’s pretty cold out here. I could go for a warm cup of Coffee with a little bourbon in it. Haha that’ll be for later.*
I am Not Fighting the Fed by Buying Stocks When They Go Down in Price
The Federal Reserve was established in 1913 after a series of banking crisis that happened in the 1800’s. We had a banking system but the problem was that, economically, we would have these crazy swings in the economy. Before the Fed, the banking system was more or less established and run by “trust”. For example; infamously in the 1930’s, we had “bank runs” where people would literally RUN to their local bank to withdraw their money all at the same time. During the 1800’s this was the norm.
Essentially, the Federal Reserve always served to be the “last stop” of an economic system by providing liquidity when liquidity was needed. Banks, essentially, need capital to run (go figure) and they need other peoples capital to lend out to create more money which in turn stimulates economic growth. It is this process of deposits, borrowing and lending that moves our economy forward.
Proponents who want to “end the Fed” don’t quite understand or have studied the time prior to the Federal reserve. In fact, when we put everything into perspective, financial markets and the Federal Reserve have existed in a very, very, very short period of time in the thousands of years humanity has existed. We are still learning so much. We are improving so much.
This “last stop” role of the Federal Reserve has evolved over the past 100 years. Now, the Federal Reserve controls how much or how little money there is in the economy at any given point in time. The 1930’s is an example of when the Fed did too little, today (2022) is an example of when the Fed did too much. They are effectively in control of the economic cycle and they are supposed to adjust monetary conditions for a stable economic environment that can support economic growth as well as business innovation.
Holy crap! A massive tree just broke and crashed from today’s chilling wind. This makes me think of the analogy “does a tree make a sound in the woods when it falls and nobody is around”. Lol, yes, it does, it’s very loud. Also, kinda scary. I don’t want one of those suckers falling on me.*
Alright, Back to the Fed
Simply Put, The Federal Reserve is in Control
This concept of the Fed not “having any credibility” is just not true. Look at today for example, does anyone remember when the bears said in 2021, “The Fed has no credibility!” Yea, right, look at how the NASDAQ is down 40% on Fed policy fears and interest rates alone. Recession hasn’t even started yet and investors are pricing it in.
Knowing, understanding and respecting this power that the Central Bank has is exactly why I am buying stocks when the bulk of investors are running for the hills. Does anyone remember Buffet saying, “bet on America”, or something along those lines. There are countless investors who are DUMPING their stocks today because they think that this market cycle will never end, inflation is out of control and we will have higher interest rates forever. I would be led to assume that they don’t believe better times are ahead. I am also led to believe investors have just had “enough” of the volatility and they want no part of it any more. It’s capitulation.
Taking a step back and really thinking of this, I can’t quite understand this mentality. Of course the Fed will get it under control and JPow staying firm in this action brings me even more confidence in buying businesses that are still performing exceptionally well despite the macro back drop. This tells me that, although it often feels like I am the last bull standing, my optimism will likely pay off exponentially in time. I think that everything will be just fine like it always has and America will find a way through this.
Business Fundamentals Do Matter
Of course the Federal Reserve matters, so do interest rates, valuations, QE, QT or anything else that investors have conjured up in 2022. Perhaps the most important characteristic of a good stock is that the business fundamentals continued to improve regardless of what the stock price did. The stock price is NOT the company but stocks only go up (and stay up) because of the company.
Specifically, in this case, I am talking about how DataDog and Confluent (two stocks I own) reported great numbers this last week (and even saw a rise in stock price after earnings) BUT sold off on Friday because of Atlassian, Twilio and CloudFlare reported bad numbers? Are you kidding me? In what world does this make sense? This sort of investor behavior is irrational and only happens in the depths of a bear market. Much like how EV Spac’s were running 100 - 300% in days because Tesla was going to the moon in late 2020, early 2021. Everything was “the next Tesla”. This was a part of the market cycle.
On Friday, I heard it all: “software is dead”, “valuation matters (of course it does)”, “IT Budgets will be reduced to nothing”, “interest rates are too high”. We are officially at the point in the market cycle where investors believe it’s different this time and the noise is loud, very loud. If you look under the hood, these businesses are growing cash flows, moving toward profitability (in some cases are already profitable) and are growing extremely fast in the face of a recession! On their earnings calls, Confluent, DataDog and Stem all said roughly the same thing, “we expect continued strong demand”.
If you’re familiar with the business life cycle (I wish I could include an image here), this delayed gratification toward earnings but improving cash flow metrics is exactly what we want to see in “growth businesses”. The purpose of growth investing is to invest into a business in the anticipation that we will see GAAP profitability in the future at a wider margin than if they chose to be profitable today. It’s thinking long term, not short term.
Investor time horizon has shrunk dramatically to days/weeks rather than months/years. This time horizon shift has put an immense amount of pressure on fund managers (even me) to put up results NOW, which essentially puts pressure on businesses to produce earnings NOW. I have literally had people take snap shots of my portfolio, tag me in a post and say that I don’t know what I am talking about when they couldn’t tell anyone the first thing about the businesses that I own. This is ok, it comes with the territory of being open and honest with people but it’s a testament to the market cycle we are in today.
*I just saw a deer walk by… Hold on*
*Ok, no Buck, back to it*
*I told my Wife no Doe’s this year. I’ll honor that.*
I Cannot Control What People do With Their Stocks
When stocks are red or green, especially in the short term, the only explanation for why this happens is that other people are buying more than they are selling. Or, selling more than they are buying. They will buy stocks based on technicals (for a trade), perceived macro outlook or if the company does well or does bad. Lol, or in today’s case if a different company reports bad numbers than that’s justification to torpedo a stock that just reported good numbers lol.
I cannot control what other people do but what I CAN do is work my ass off, hit Presidents club in my sales job, short the markets (raising capital on the way down), control my frivolous spending and buy more stocks. If fund managers or individual investors want to capitulate DataDog, Confluent, Stem or ZScaler at cheap prices because of a different companies earnings, I will gladly buy those shares.
The only thing I care about, when it comes to managing risk, is making sure I don’t blow up on my short trades, buying the right companies that are improving in a tough economic environment and not letting my mindset get swept up in the current market cycle.
I Will Continue to Accumulate Shares
For those of you who like my content or those of you who hate my investment philosophy, I invite you to follow along. To those who dislike what I do and don’t believe in my process, watch me fail. To those of you who like what I post and believe in a long term mindset, let’s make some serious money together. The time is now to sink, or to swim, in this bear market.
Stay Tuned, Stay Classy
Dillon
*Note*
SubStack is not letting me update any files due to my flakey network connection. I will post my portfolio on Tuesday or Wednesday when I am back to civilization.
In the meantime, cheers to all of you. I’ll have a glass of whiskey, tonight, a toast to the BluSuit community. Also, because I can’t feel my hands anymore and I heard alcohol warms you up when it’s cold outside? That’s a thing, right?
Lol, cheers all, talk soon.