NOTW #15: There's Always Something To Worry About
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Hi reader,
The indices were flat this week, but it was not an uneventful week (it never is). It remains astonishing how there’s always something in the market aiming to distract investors from long-term investing. Incentives are very powerful, and the media and the investment industry benefit materially from short-term volatility, so they have no incentive whatsoever to behave like long-term investors.
Without further ado, let’s get on with it.
My podcast at Value Hunt
I participated in a podcast this week with David Barbato, host of the ValueHunt podcast. I had a great time and thought it was a great conversation that I believe is worth sharing. It’s available on Spotify:
And Youtube…
Articles of the week and a new feature
I published one article this week, explaining how an individual investor can differentiate from the S&P 500. Most market-cap-weighted indices have a “flaw” that not many people are aware of that can be exploited by individual investors.
I also released a new feature for paid subscribers and, based on the feedback I received, I believe it’s worth sharing. The rationale behind this new feature is that many subscribers, when getting access to my portfolio for the first time, tend to ask the following…
Which one of your portfolio companies would you say offers the best risk-adjusted returns going forward?
This is a fair question as a company’s stock might have significantly increased since I added it to my portfolio without this price increase saying much about the valuation per se. Averaging up is something I also tend to struggle with, so I thought it would be a good idea to come up with a document that includes all the prices at which I would be willing to add to my positions next to the current price. I called this document the ‘Decision Spreadsheet.’ There’s obviously much more detail available for paid subscribers, but here’s how it looks like:
With the Decision Spreadsheet now it’s…
Much easier for me to average up because I always think in terms of valuation and the process is now much more automated (which allows me to be more disciplined)
Easier for paid subscribers to understand what companies I believe offer the best opportunities
If you want to have access to the Decision Spreadsheet as well as all the analysis and my portfolio, you can sign up using the button below:
Market Overview
Both indices were slightly down this week, albeit practically flat:
As evident in the graph above, it was yet another volatile week, and for “good” reason, because there was plenty of noise. Unless you live under a rock (which is a good place to live if you are a long-term investor), you’d know that Iran attacked Israel in what many geopolitical “experts” started to coin as the “start of World War III.” I don’t have a view on whether we are close to the Third World War, but I do know that my portfolio is unlikely to matter much if the largest countries in the world go into a war (i.e., I am not looking to hedge against such a scenario).
What happened this week is just proof that there will always be something to distract market participants from long-term investing and sticking to their strategy. A month ago, it was interest rates; this month it's China and increasing geopolitical tensions, and who knows what it will be next month (I am sure there will be something). It always helps to think how much of your current portfolio returns have been driven by the inflation number we got more than a year ago (for example)…the answer will probably be “not much.”
China is also a topic that has been in the news for over a week. The story is longer than this (not really), but Chinese markets have reacted very positively to the stimulus measures announced by the government some weeks ago. To say that “markets have reacted positively” is possibly an understatement. The Chinese Internet ETF (KWEB) is up a whopping 50% since September 16th (of this year, in case the clarification is necessary):
What’s interesting is that the same “value guys” who have been claiming that “compounder bros” have derived pretty much all their returns over the past decade from fiscal stimulus are the first ones to claim that they have been right on China all along despite the recent rise coming from (yep, you guessed it) stimulus. I’ve also seen people claim they have gone “all-in” on China due to Tepper’s words, who claimed that China is the next generational opportunity. This will not end well for those people regardless of whether China is indeed the next generational opportunity.
Other than this, I have absolutely no opinion on the situation in China and prefer to stay away. I will also say that many people should look more closely at what drives investment returns over a very long period (I’ve talked about this plenty of times). Sure, multiple expansion and contraction matters, but if you get the company right then this is unlikely to be what’s going to determine your long-term returns (not focusing here on extreme examples). Interestingly, people spend a lot more time thinking about whether they should pay 15 or 17 times earnings than thinking about the company per se. If you get the company right, you’ll be fine staying at the top of that multiple range. What’s also interesting is that people spend a lot of time looking at whether earnings will be higher/lower in 5 years rather than the durability of a business when it’s the second that matters the most for the multiple (I wrote an article about the P/E ratio and what it implies a while ago, you can read it here).
The industry map was mixed despite the flat performance from the indices:
The fear and greed index almost jumped into greed territory, which I honestly can’t understand unless it also takes into account China:
This is all the free content for this week, HAGW!