Portfolio Update: Cutting Through the Noise
Update with recent moves and perspective on the markets
There are three topics I write about, to share, with investors:
1.) Individual stocks
2.) Macro economics
3.) The psychology of portfolio management
Each topic serves its own unique, important, fundamental purpose. For example; I have heard feedback and do prefer to just talk stocks. It’s fun throwing businesses on your radar and sharing my research. I do often wish we didn’t have to focus so much on the other two aspects of investing and we could just discuss businesses. However, this isn’t realistic because of how important it is to know/understand where markets are going and what moves them. More importantly, it’s crucial to conceptualize, digest and embrace the unshakable mindset of a long term investor. This business is 80% mindset and 20% skill.
In this weeks newsletter, I want to focus on the psychology of the market today to recognize what’s real and what’s not. The reason why; I have never been in a market cycle where the herd is right, ever, over an extended period of time. Everything comes to an end. The noise is typically distracting and can throw you off your game, your plan and your strategy because the truth is, there are no such thing as guru’s, just market cycles. Awareness of what market cycle you’re in, the emotions of experiencing it, and understanding the long term implications on the structural forces within our world will allow you to identify and exploit the opportunity that lays ahead of us for years to come.
On a side note, I will be sharing my portfolio update in this publication as well.
Identifying What’s Real and What’s Not
If you have been keeping up on many of my NewsLetters I recently posted this:
I definitely recommend reading it if you haven’t yet. It goes into what the past 50 years of stock market history has taught us and exactly when markets bottom. When doing this research, I couldn’t believe my findings. The markets truly are (I’m not sure if I want to say manipulated) heavily influenced by the Federal Reserve monetary policy. I mean, why not? Since 1913, when the Fed was founded, they have been a contributor to every major market boom and bust throughout history.
Long story short, the odds of bottoming on or near an FOMC meeting are very high
This means that, as we continue to see the news flow, there’s going to be a lot of noise and different interpretations of when, or how, markets will bottom. We often hear, “retail hasn’t capitulated yet, therefore the markets haven’t bottomed”, or “the VIX hasn’t spiked yet”, etc. Although these omens are partially true, the research is above in the attached SubStack detailing exactly how equity markets perform during Federal Reserve accommodative and tightening cycles.
Realistically, the S&P 500 can decline 40%+ if they continue to, or have to, keep their foot on the breaks from a monetary policy stand point. At a similar probability, a pivot can be notified at the June FOMC meeting where they could guide for backing off additional rate hikes. This will certainly put in a bottom.
The Rewards of What Comes Next
It’s human nature to want something to happen right now. We want inflation to end right now, we want our portfolios to go up right now, we want to make money right now. This type of mindset is an instant gratification mindset and what’s most unique is that stock picking, much like life, does work in a series of principles.
This is nearly impossible to convince anyone who lives and dies by what happens today, or tomorrow, or within the next few days. But, the truth is, real reward is a component of doing the right thing over time. Over, and over, we can back test this through history. We can back test it just as much in our personal lives as the financial decisions we are making with our stocks. On a numerical perspective, breaking down the math and calculated returns, by just picking a few mega winners your portfolio will lead to YEARS of out performance. But the emotional discipline it takes to get there is the most important component of these riches and rewards.
If You’re Just Beginning to Invest for the Next Few Decades, Like Me, There’s Enormous Opportunity Today
The one thing we can’t have today is an ending to the “bleeding” in many stocks. We can’t have what we want, right now, that will make us feel better, turn our portfolio’s green or make the the Fed pivot away from what they are doing to control inflation. However, what we do have today is enormous opportunity and the largest transfer of wealth since 2008. When it comes to today’s secular compounders, I believe that the baby is being thrown out with the bath water.
The best way to think about it is that there are cyclical and secular components to every market, and every economy. Let’s define cyclical as lasting under 5 years and secular lasting 5+ years.
Cyclical Factors Today:
Inflation
Fed policy tightening
Russia/Ukraine War
Oil prices/production
Secular Factors Today:
Deflation driven by population growth and high debt levels
Technology driven innovation
Data usage as a key component to the enterprise
Artificial intelligence
Renewable energy
Decline of the U.S. Dollar
Cyber security and cloud infrastructure
Digitization/decentralization of financial services
Today, as I am sure you’re aware, all secular forces have been completely thrown away and over taken by cyclical factors. The market, today, cannot look much further past the next 3-6 months and with due cause. During Fed tightening cycles, this disrupts economic and business conditions. This means that there will be a lot of difficulties for many different businesses in the coming months, as the “excess” is trimmed from the economy via an economic recession.
It will be our job, as investors, to do the DD necessary to identify the absolute best opportunity we can. There is incredible R/R at today’s prices and they continue to improve as the underlying business (the asset) beneath the ticker symbol continues to grow.
My focus is on finding the businesses that fall under the secular category, with strong balance sheets, growing revenues/demand, and growing/improving cashflows.
What I am Doing
Back in 1999 - 2003, we had a similar market to this one. We entered an economic recession after a massive bubble took place. Although, I don’t expect price action to be identical but the findings during that time are interesting. Remember, the stock market as a whole didn’t bottom till September 2002.
Apple Bottomed in December 2000
Amazon Bottomed on April 2001
NVDIA Bottomed in August 2002
Microsoft Bottomed in December 2000
Cisco Began Basing in April 2001
The reason why I am showing you these charts is that I am strongly under the impression that we are grinding out a base right now in growth stocks making now the opportune time to accumulate business equity of tomorrows businesses.
My Portfolio & Updates
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