200 followers! Thank you everyone! Thanks CS!
Interview, Edmund Simms at Valuabl
Today I am thrilled to share a discussion I had with Edmund Simms @valuabl, the author of the Little Book of Big Bubbles, a fund manager, and owner of the Valuabl newsletter. Having spent time across multiple corners of the market (hedge funds, mutual funds, and VC) Edmund now runs his own fund, which opened its doors in 2016.
We talk about how that journey played out, what “value” really means, correlation and standard deviation, luck & skill, the delivery business, bubbles, and a lot more. Much like the writing style I have come to adore in Valuabl, Edmund offers up an array of witty analogies and imagery in his responses to today’s questions. I hope you will enjoy this as much as I did.
Conor: Hello Edmund, thanks for taking time out of your day to answer some questions for Investment Talk readers. You are a fund manager, you have authored a book, and you also write the Valuabl newsletter. So, there’s a lot to pick through today, but for the benefit of the reader, I thought it would be great to hear about your backstory. I know you’ve spent time across hedge funds, mutual funds, and VC, and later opened up a long-only fund in 2016, so it would be awesome to hear about that journey, and what incentivised you to open a fund.
Edmund Simms: It’s my pleasure, Conor. I hope to give stimulating answers and avoid boring your discerning readers.
I will start at the beginning. I grew up in the middle of Australia. My father was a drover and my mother was a jillaroo. We moved to a small town just south of Sydney when I was seven. By adolescence, I had decided against becoming a fireman and set my mind on golf, becoming respectable but not good enough for the American professional tour. I had a keen interest in maths throughout school, so I enrolled in a mathematics degree at the University of Sydney.
The friends I made at university mainly studied business, economics and finance—it fascinated me. I added these courses and a concurrent second degree in finance. Struggling to figure out my style and approach, I decided to work in as many roles and read as many books as possible until I figured myself out and found a congruent approach. By cold-emailing hundreds of people in the industry, offering to shout them a coffee and not poach more than 20 minutes of their time, I got information on how they thought about their role and where they thought I would fit.
I first took a position at a boutique quant-fund run by two brilliant American fellas. The work was fascinating, and they were patient with me. They spent a profligate amount of time debating with and teaching me. In the end, though, I decided the quant world wasn’t for me so went to work for a capital placement agent, for a venture capitalist, for a startup, and then finally in the value team of an international mutual fund. This one struck a cord, but I was still restless.
Australia is beautiful but geographically and culturally isolated. I wanted to see the world. Further, the desire to start a fund and do it my way was percolating in the back of my mind. I tossed up between moving to London or New York with the mutual fund and settled on London. After a year there, I left that team to strike out on my own. And here we are.
Conor: Before we dive into your investing style, I’d be curious to hear you riff on how you found each of those environments (HF, MF, VC, and operating your own fund) and the different skill sets required for each. I ask this, because I know we have a lot of younger readers, who might not be sure which direction they want to head.
Edmund Simms: I am lucky. I was in small teams at small shops. My mentors were operators and deep thinkers who were generous with their time and knowledge. I cannot speak to the general environment, if there is one, of each stream. My advice is to think about the problem in reverse: what would you most regret doing when you look back from your deathbed? I am yet to meet anyone who says, "I wish I spent more time working for the boss I didn't respect," or, "I wish I spent more time on busywork."
It's natural to want to find the optimal path. But there are so many roads that it makes looking at the map overwhelming. Instead of trying to make every shot a miracle one, to use a golf metaphor, look for the water hazards and avoid them. Sure, the fat bloke in the cart on the adjacent hole might not be impressed, but who cares. In his own words, Jack Nicklaus was a lousy bunker player but an excellent lag putter—so he aimed away from bunkers and to the fat part of the green. Figure out what turns you on or off, and play the game in a way congruent to that.
Conor: You have stated in the past that you simply buy “value”, in the order of anywhere between 5 to 15 uncorrelated positions.
Can you talk to us about what “value” means to you, why correlation (or lack thereof) is so important, and how you tend to think about positioning/discovering that balance of non-correlation?
Edmund Simms: Value is the gap between what something is worth and the sale price. Value is a duffle bag stuffed with a half-million in cash that I can buy for $100,000. We intuit this every day but seem to forget it apropos stocks. The squiggly lines gyrating seductively across our screens seem to reach out from the pixels and enchant us like the lights on a casino floor.
If I offered to sell you a suitcase of money, you wouldn't go to your Bloomberg, look for the price of money bags, and consider whether you could sell it to someone for more in the future. You would ask, "how much cash is in there, when will you deliver it to me, how can I be sure, and what are my other options?"
If you accept my offer, many things can go wrong: what if I'm a shyster, or something happens to me on the way to make the drop, or there is less cash than you expect? You want protection by risking as little money as possible and ensuring a large gap between what you expect and pay. Moreover, you wouldn't want to put all your eggs in my one basket; you would diversify. If I'm a crook, my partners probably are too. If I am caught in an inferno, so are the others in my building. You would look for deals on other bags in faraway places that can make the drop regardless of what happens to me. Correlation and value are about protection.
You want protection if your assessment of me and my promise to make the drop is wrong. If I tell you there's a million in there, but I lie, and there's only half, you'd still have made a satisfactory return paying a quarter—the value side of the equation. But if something happens, and all the people delivering bags of cash to you are on the same bus as it explodes, your business is toast—the correlation side of the equation. The calculus of this cash-dropping empire you're building becomes more nuanced as the overlap between bag-droppers and potential return increases. Where do you draw the line between diversifying and increasing returns? If some friends of mine can give you large bags of cash at hefty discounts, you have to weigh that opportunity against how likely we are to be in cahoots to rip you off.
I demand new opportunities for my portfolio to meet two criteria: First, they must be substantially undervalued. Second, they must either increase the portfolio's expected excess return, the expected annual rate of return above the risk-free rate, or decrease its volatility. The opportunity for return must be better than what I already have, or it must reduce the total amount of risk I face. There are mathematical approaches you can take here. I use a quarter-Kelly ratio. But the underlying reasoning is more important.
Conor: In an interview with Commonstock, you were once asked what uncommon investing views you hold. To which you responded:
“I don’t care about business quality. Your assessment of the business’s intrinsic value should include your quality assessment insofar as it affects value. If I am paying less for the same future cash flows on a risk-adjusted basis, I don’t care whether the business is a superstar or a stinker. If investors generally believe that a particular company is excellent, then it’s unlikely you’ll ever be able to buy it with a significant margin of safety.”
I was hoping you could possibly expand on this somewhat for us, maybe throwing in some specific examples of when you found this to be true?
Edmund Simms: Money doesn’t have a memory. It doesn’t know whether it came from a business with stout competitive advantages or you found it in a puddle on the side of the road. The crucial thing is how much a company is worth and how much you pay. Imagine, if you will, that your great-aunt Hortense has died. In her will, she proclaims that you can buy her house from her estate for a dollar on the condition that you never sell it. The house is rundown, haunted, sits on the edge of a cliff, and a grotesque older man with hooks for hands is the manager. Thrillseekers rent the house occasionally, and there is a small profit leftover which gets paid out to you each year.
Many analysts wouldn’t even consider looking at this asset. There’s no growth. There’s no price action because you can’t sell it. The manager is ugly. Climate change might accelerate the erosion of the cliff edge and collapse the house into the ocean. The asset is a stinker: “Buzz! Your business, woof!”
But you got it for a buck, and your return is enormous.
Of course, a better business is a better business. But that’s not where the puzzle ends. The second half of the equation is how much you pay. Many people are looking exclusively at companies they think are high quality. Because of this, these businesses tend to cost too much, while crummy ones get overlooked. A recent example is Frasers Group PLC (LON: FRAS, £3.2bn market cap). Formerly known as Sports Direct, it’s a British clothing and sporting goods retailer. It was run by its pudgy and incorrigible founder, operating in a declining industry in a country written off by many because of a rapidly shifting geopolitical landscape. By my estimate, in 2019, it was worth at least £6 per share but was trading below £2.50.
Conor: In that same interview, you remarked that the ability to recognise when one is the benefactor of luck, and not skill, is an underrated competence in investing. Sometimes we have a thesis, it doesn’t play out like we planned, but the stock market rewards us anyway. The foolish thing to do, would be to ascribe that reward to one’s own insight.
Obviously, sometimes we don’t get so lucky. I would love to hear about your process for identifying instances when you might be wrong, and the steps you take once you believe that might be true.
Edmund Simms: It’s impossible to separate luck from skill in the short term and with a small sample. My approach is to do the best job I can at playing a good hand, betting when the odds are in my favour, and assuming that every outcome over the short term is luck.
A wrong decision leading to a profitable outcome can be worse than a good decision that leads to loss. It conditions you to believe you know more than you do and are in control of more than you are. Overconfidence is a killer. It is the cognitive bias that Daniel Kahneman, a titan of psychology and behavioural finance, says he would most like to eliminate. “It leads governments to believe that wars are quickly winnable and capital projects will come in on budget despite statistics predicting exactly the opposite,” he says, before adding, “but it is built so deeply into the structure of the mind that you couldn’t change it without changing many other things.”
I worked as a croupier for a year when I was at university. For this job, all the blackjack dealers learnt to play statistically perfectly. Seeing people make the wrong call but win and attribute it to their brilliance, my moustache, the colour of their socks, or anything else unrelated was a sign they were going to lose it all. Routinely, these people doubled down again and again until it was all gone. Overconfidence is expensive.
We’re all dumber and less in control of the world than we think. Accept and embrace it.
I use a few unusual strategies: First, before I look at a stock, I commit to buying or selling it if it meets or misses my value and diversification criteria. Second, I only check the portfolio once a month unless specifically buying or selling something. Third, I value everything in my portfolio quarterly and from the ground up. Like using a stencil, you always trace off the original, never the copy. If a bias or a mistake crept into my previous work, I don’t want to build off and magnify it.
Conor: Whilst we are on the subject, my mind draws to diversification and downside protection. You spoke about owning a fairly concentrated basket of un-correlated companies. Some investors view their portfolio as a plethora of small bets, oft ignoring correlation. Others, like yourself I assume, view their portfolio with more of a risk-adjusted tint. The standard deviation of a portfolio doesn’t decline all too much if an investor continuously stuffs highly correlated stocks into their basket. As such, you could have someone with 50 stocks, enduring more volatility than someone with, say, 10 stocks, but with a greater focus on non-correlation.
What is your view of managing the standard deviation of your portfolio and diversification more broadly?
Edmund Simms: Investors need to ask themselves what their goal and time horizon is? Are you trying to beat the market, copy it, or have fun? If you’re trying to copy the market, buy an index and move on. If you’re trying to beat the market, the more stocks you own, the harder it is to do. By definition, you cannot outperform a basket of all the stocks by holding all the stocks.
Investors will want to consider how to diversify their bets best while giving weight to the best opportunities. As I outlined above, you can do this mathematically or intuitively. Modern Portfolio Theory (MPT), and mathematical derivations of it, get a bad wrap. It’s fun to parrot your inner Buffett or Munger and dunk on these approaches. But they work. Some have argued that Buffett has used an intuited version of MPT.
There is statistical evidence that adding assets with similar expected excess returns but little correlation or covariance to your portfolio improves your overall risk-adjusted expected return. A paper from the University of Cagliari, Italy, in 2020 demonstrated that the Kelly and Tangent Portfolios both dramatically outperform the Minimum Variance and Equal Weighting portfolios. Other studies show that marginal diversification benefits, the additional benefit of adding another asset, drop logarithmically. You get a considerable advantage going from one investment to two. But going from two to three, the marginal benefit drops. Additional research suggests that following a purely Kelly approach can be ruinous if the position sizes are too large because of overconfidence. The evidence suggests using a partial Kelly ratio is the best way to combat this.
Conor: Taking a step back for a moment, you share a lot of research outside of managing the fund. One avenue for that is the Valuabl Newsletter, to which I am a happy subscriber. You’ve been writing this since mid-2020, and I personally feel it’s one of the most underrated newsletters out there, with a lot of great valuation and macro work. I don’t say that lightly either.
Tell us about why you decided to create Valuabl, and maybe what your aspirations for the newsletter are?
Edmund Simms: Thank you, Conor. That is a stunning and humbling compliment.
I deeply admire great thinkers and crisp, persuasive writers. I want to be like them. I am not, but I will keep trying. Clarity of prose follows clarity of thought. Writing helps me to think, and thinking helps me to write. I get immense pleasure and satisfaction from it.
My hope for Valuabl is for it to become a financial and business-focused version of The Economist, brimming with deep analysis and investment ideas presented engagingly. On only two scores can Valuabl hope to outdo its rivals consistently: the quality of analysis, and the quality of writing. Both will always need to improve. I want Valuabl to educate, challenge and entertain investors long after I'm gone and one day become a pillar of the financial world.
Conor: Back in April, you shared a great write-up on Deliveroo, one of the UK’s food delivery competitors. For the Americans reading, think UberEats, Postmates, or DoorDash.
Delivery businesses like this are cumbersome. My view is that it’s a race to the bottom, the unit economics are not great, and to be successful one has to be the outright leader. At times, I feel that even 4-5 players in the market are far too many. With these businesses relying so much on external liquidity, liquidity which is now drying up, and evident consolidation already taking place, what are your thoughts on this space and what needs to happen before a clear, profitable leader is established, either in the EU or US markets?
Edmund Simms: For the last decade, capital has been abundant, increasingly cheap, and easy to get. At the same time, the short-haul delivery app market has had few barriers to entry. A small group can get together, build an app, and connect porters, customers, and restaurants. Thanks to these conditions, many delivery startups have spawned and expanded rapidly.
There are localised network effects that will drive the industry towards native oligopoly. It's no skin off the customer's nose to have four or five food delivery apps and switch between them. Still, that proposition is much more difficult for restaurants where even two or three concurrent systems become cumbersome. Deliverers, similarly, will struggle to manage more than two or three simultaneous roles. As a couple of companies take hold of a region, the efficient scale of that market becomes unattractive for new entrants to go after. It's a gangland turf war. Get your area and hold it.
Once the incumbents have taken control of the region, it's a race to the bottom. Price and convenience matter and excess profits will be difficult to generate. For the last few years, these companies have subsidised delivery costs with investor capital—this will stop as capital markets discriminate and costs to the consumer and restaurant will rise. These companies' economics and potential profitability are closer to typical delivery and logistics businesses than software as a service than many hope. These are labour intensive delivery business models applied to an adjacent market with a shiny app.
Conor: You also authored the book ‘The Little Book of Big Bubbles’, where you cover every bubble from the Romand Land Collapse in 33AD, to the Tulip Mania in 1637, the Japanese asset bubble of 1986, and even the beanie babies bubble in the mid-1990s.
Firstly, I am curious what motivated you to write that, and if you could boil down the world’s history of financial bubbles into one paragraph, what would be your core takeaway?
Edmund Simms: In early 2020, I had the early stages of a working hypothesis that there was a large and global residential land price bubble building. I decided to study past bubbles to figure out their similarities, build a framework for identifying bubbles that would have worked in the past, and see if my hypothesis held up against that.
My notes became a series of articles in Valuabl, but I wanted to share the lessons of history more accessibly and with a broader audience. So I decided to publish them as a short, easy to read recount and analysis of the main ten financial bubbles of the last 2,000 years. The core lesson is that human nature doesn’t change. Bubbles form, and we find ways to deceive ourselves that this time is different. Every bubble I studied followed the same arc: a fundamental shift caused a movement, speculators got involved and the pricing mechanism became a positive feedback loop driving prices up until it collapsed unexpectedly. Then the cycle rinses and repeats.
There are two conditions for a bubble: first, the pricing mechanism must be a positive feedback loop. People are buying because they expect the price to go up; and second, the expectations of the future implied by the price must be highly unlikely or impossible.
Conor: The book naturally concludes with the housing bubble of 2008. At the time of publishing, the events of 2020-2022 were (and are) still unfolding.
In a relative sense, these last two years might not have been as crazy as prior events, but there are pockets of the market that took aggressive elevators up in 2020 only to topple down the stairs violently in 2021/22. What have you made of these last two years, and do you think there were/are signs of a bubble in particular industries or asset classes?
Edmund Simms: The last few years have been dramatic for financial markets. Low-interest rates set off a chain reaction of rising prices and declarations of a new paradigm. Some of these pockets of the market were bubbles as they met the criteria and followed the bubble arc to a tee, but in aggregate, we didn't see an all-encompassing stock market bubble as big as some. The inflexion point was a rise in the price of money. Stock prices haven't come down; instead, the cost of money has gone up. This reversal has made many investors question what it is they own.
It is ghoulish to say, but the good thing about equity and stock market bubbles is that they inflate and deflate rapidly compared to others. In contrast, land price and credit bubbles are like great oil tankers on the ocean: they're huge, slow turning, and when they sink, everything gets slicked.
We are at the moribund of the largest, by my reckoning, global land price bubble ever. It's been building for a quarter-century in some places, which is in line with how long past land price bubbles have expanded, and a sustained rise in the rate of interest could pop it. I have penned ten pieces on the topic over the last 18 months for Valuabl and am comfortable letting those writings stand as my will and testament on the subject.
Conor: The last official question now, and I ask this one selfishly, as I do with all guests who are from, or reside, in the UK. The culture of investing in the UK is odd. There are over 10M residents funding a cash ISA account in the UK, compared to fewer than 2.5M funding stocks and share ISAs. For those unaware, a cash ISA is essentially a tax-exempt interest account on cash, whilst stocks and shares ISAs are an account that allows for up to £20K (~$26K) to be invested in stocks each year, with income and gains exempt from tax.
This alone blows my mind, but the UK generally has low participation rates. What are your thoughts on why this might be?
Edmund Simms: I will highlight two of my unusual views on this that your readers might find intriguing:
First, the average American is less risk-averse. Entrepreneurialism and optimism are abundant in the United States. That attitude, combined with deep capital markets and a myriad of opportunities, makes every part of the equity investment lifecycle across the pond attractive.
Second, like Antipodeans and Canadians, Brits have enjoyed a longer-running residential land price bubble in countries with a distinct cultural focus on homeownership. Why would you put money into stocks when houses earn more than the average wage, have outperformed equities, can be lived in, and are, in living memory, a no-loss proposal backed by the government and banking sector?
Conor: Lastly, where can readers find you and your work, and do you have any concluding items you’d like to say?
Edmund Simms: Readers can connect with me on Twitter (@valuablofficial), on Commonstock (commonstock.com/valuabl), and by subscribing to Valuabl (valuabl.substack.com), my fortnightly journal of the financial markets.
It’s been a pleasure sharing my thoughts and ideas with you. I hope you found them intriguing at the very least. I will leave you with the words of the great man, Leonardo da Vinci: “The noblest pleasure is the joy of understanding.”
Author of Investment Talk
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Breaks over and I’m only at question 5; but my response for question 4 is: FINALLY, someone educated has my back. People act like you can only invest in 5-10 companies in the universe, that if there’s ANY negative news, you shouldn’t touch it, etc. Nice to see someone else who realizes that money can be made all over the place, and money doesn’t care how you made it🤙
Not a good start to my ad tech heavy portfolio…
Is the $SNAP miss a reflection of the economy, or just poor management?
They guided for 20% growth, and missed by half. They could have guided to a modest 5% growth and beat by double.
What some people are missing is that they still had 10% growth. So did online advertising slow down, or did management just miss the guide? Oh yeah, and the CEO sold $400M at the top. 🤔
Also, a lot of companies getting sold off with SNAP have already reported. This seems like a bit of an over reaction. But then I’m definitely biased.
It feels like everything short of nuclear war has been priced into growth. Likely not true, but it sure feels that way.
I think this sell off in ad tech will be short lived. I’m staying the course.
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I’ve always thought $SNAP was B-tier social media. Tik-Tok and Instagram have more reach with video and since Snap added all that content the app has just become messy. Barely anyone I know uses it anymore - and this was an app we used a lot 6-7 years ago when it was just a way to quickly send pictures. It feels like a trend that is running its course. Plus I find it hard to believe that Snap is some kind of leading indicator when all these Ad Techs beat and maintained guidance just 2 weeks ago.
My Twitter feed has never been more negative than it is this morning.
Seriously every post is about downgrades, recession, and the market crashing.
After a week of wild swings I finished slightly positive last week.
With all the negative sentiment, maybe it’s time for a real rally? 🤔
What do you guys think? 👇
Hope y’all have a great week!
Snap tumbles 30%
Snap shares fell 30% in after-hours trading Monday after the company warned investors of slowed growth in the months ahead.
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$SNAP has had a history of violent earnings reactions. Perhaps they wanted to get ahead of this one by lowering guidance and soften the blow amidst all the other front-burner stories the market is focused on. Unfortunately, it does not appear that strategy worked too well (if this were the case). This has been yet another disastrous bag I've held onto from highs now into the abyss..
Break room is just down the hall
The Real Reason The Stock Market Is Down
- On average over the past century, according to an analysis conducted by Ned Davis Research, the S&P 500 has performed better when its EPS was lower than a year previously — not higher.
- Over the past year, the U.S. stock market’s P/E multiple (based on trailing 12 months’ GAAP EPS) has fallen to below 20 from more than 30. Had the multiple remained constant, the S&P 500 today would be 28% higher than a year ago. In fact, it is 6% lower.
- So if earnings aren’t going down, then the P/E multiple is to blame which means there are some companies out there with strong earnings that you could pick up at a real bargain in this environment.
To read more on this, click through the link below and make sure to play the audio. This week isn't ma read aloud but provides more context and data in the episode.
If you like what you read/hear, be sure to like and subscribe to never miss out on a post!
The Weekend Edition # 42
Hi all, I hope everyone had a lovely weekend. A short write up this week on retail earnings and inventory buildup.
Here's wishing you a good week ahead!
The time has come.
Not to be overly dramatic, but my portfolio today looks like an absolute cesspool of fluctuating garbage. I began a near total rebalance this morning and I gotta say, it feels great.
Call it the investing version of spring cleaning. Prior, I had >15 positions, some of which were companies I knew nothing about besides the fact that they’re stocks were off ~20-70% when I bought. For a long term investor, that’s no good.
Unfortunately, I have no charts or complex models to back this feeling up, but I think this current moment, for me, is a great time to rebalance and prepare for the long term. I view my brokerage account as a heavily risk-on, essentially venture portion of my investments. I want the risky-ass names that might just hit $100bn or $1tn someday.
Call me crazy, but we’re all about keeping it simple over here. My theses are little more than this: these companies have unbelievably solid management teams, strong financials, large TAMs, compelling narratives, and are heavily discounted in my view.
A few names I entered (in the interest of transparency):
Other names I’m considering:
What names are you looking at? Are you holding off on buying the dip? For what reasons? As always, let me know where I’m wrong.
Leading indicator of a recession?
Yesterday, I went to the supermarket close to my house and they told me that days of inventory are 100 days now and they would prefer to have 90 days. A recession is upon us.
Of course, the above is false, but everything gets treated as a leading indicator of a recession nowadays, $SNAP is a clear example. I think it's fair to say that it was a clear missmanagement. How can a company guide 20% above the street only to guide down one month later? Too much ego?
It's also pretty amazing that a 20 billion company can bring the market down, but that's just a reflection of the current market.
Btw, I have no clue if a recession is upon us, and I don't plan on spending my time on predicting it. If a recession comes, other variables to predict are the timing, the impact and how much it will last. Not an easy game.
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I was just telling someone at work today, every time this happens, people want to focus on interest rates, recession indicators, inflation, and whatever else can distract them from INVESTING. My plan as an investor was to buy wonderful companies at fair prices; bear markets/recessions just give me an opportunity to do that at even better prices.
People tell me Lynch and Buffet over simplify investing; I think everyone else just over complicates it🤷♂️
For your consideration, my interview with Conor of Investment Talk
I had the great privilege of being interviewed by Conor of @investmenttalk this week. I am grateful to have had the opportunity to share some of my thoughts, ideas and background with him and his discerning readers.
I'm sure readers will disagree with some of my ideas while agreeing with others. But at the least, I hope you find it interesting and entertaining.
Airbnb is closing its domestic business in China $ABNB
Airbnb is closing its domestic business in China, it only represents 1% of revenue for the last few years.
Recent 10-K filings filings state “We will continue to incur significant expenses to operate our business in China, and we may never achieve profitability or sizable supply penetration in that market.”
Seems like a smart move
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Sounds like the smart move to me as well. A small price to pay (if 1% revenue) to better allocate resources and man power to grow where it has traction and momentum internationally elsewhere
Cash is king?
Something I've been hearing a lot lately.
"I wish I had more cash right now"
- Many retail investors are fully invested right and have no cash to add/average down. Which might be why we've seen so many red weeks.
- Inflation, recession preparation -- sell at a loss and raise cash to live. This goes against rule #1, which is never invest money you will need in the near future.
- At the moment, those that do have cash or can add to their cash pile have the advantage. Many great COMPANIES trade at a very reasonable multiple and as most legendary investors have said, "invest in great companies and focus less on headlines" (something along those lines).
- Long term investors have all the time in the world. Inflation? ok. Recession? ok. Those are bad but a LT investor should take advantage from these situations. 10-20 years from now, do you think your holdings will be up or down?
- Lastly, stop reading commentary about marco events and start reading what your company is telling you. Again, you invest in companies, not in macroeco. (this is not me saying macro doesn't matter but it's less essential to your thesis).
- A recession does not mean that all companies will struggle. Companies will still need SaaS, Cybersecurity, logistics, cloud, data centers, etc...
To end, as WB (not Warner Bros lol) said "Be fearful when others are greedy, and greedy when others are fearful."
Black Rifle Coffee Sued for Stock Manipulation
Three months ago I wrote critically about $BRCC. I zoned in on its CFO, whose last role ended with him being sued for stock manipulation and lying to investors about the health of the business, as well as the CEO and co-founder for his role in propagating a toxic workplace environment for those on the content side of the business.
While the stock is down 50% since my short report detailing a $9.5 price target was published, the stock first soared to over $34 per share at its peak in March and April. According to an open letter and lawsuit from 1791 Management, this rise in the stock was done illegally and orchestrated by the company with ill intent for shareholders to line the pockets of insiders. The open letter specifically cites Iverson as potentially coming up with the idea:
"We would not be surprised if the original idea came from your CFO, Greg Iverson, who was the subject of a securities fraud class action lawsuit alleging he participated in "artificially inflating" Overstock's price while he was their CFO."
To those who did not research the company deeply, this would come as a surprise considering the sell-side analysts who initiated coverage around the de-SPAC claimed that the management team was "uncharacteristically seasoned for a new public company" as claimed by Roth Capital.
The management team may be uncharacteristically seasoned, but it seems to be in regards to ripping off investors rather than running a successful business.
You can read 1791 Management's open letter in full here:https://www.prnewswire.com/news-releases/1791-management-sends-letter-to-black-rifle-coffee-company-brcc-demanding-they-brew-up-an-action-plan-to-address-serious-allegations-of-corporate-governance-failures-and-code-of-conduct-violations-301549388.html
You can read my original short report highlighting major issues here: https://dueyourdiligence.substack.com
Curated Research and Articles
Market Talk is a bi-weekly Sunday issue, where I curate the best things I have consumed during the last two weeks.
Every second Sunday I will share:
• The greatest articles I have read during the last two weeks
I wanted to first kick off Market Talk with the first-ever occurrence of a sponsored issue of Investment Talk. The team over at Stratosphere are building a pretty snazzy financial data tool to service investors’ analytics needs.
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Comments from Me
This marks the 50th edition of Market Talk, and to celebrate, I’ll write 50 more editions. In other news, I have just wrapped up my first week off from all work in ~3 years. I make the effort to have a lot of fun in my life, but wow did I forget how much more there is to life than work and weekends. I spent most of the time being a tourist in my home country (Scotland), exploring the cities and areas I had not been to yet, as well as acquiring an Indian tourist visa. I feel refreshed, and thankfully the weather was superb for the duration of my time away.
General: Next week I should have one new write-up, and one new interview with an excellent guest who has spent time in hedge funds, mutual funds, VC, has authored a book, and now runs a fund.
UK Stocks: This year, I have been increasing my exposure to UK-domiciled stocks. I have had readers express interest in write-ups of this nature in the past, so you may be pleased to know there are some coming down the line.
Sponsors: Readers will know, that back in February, after nearly two years of writing Investment Talk, I removed the paywall. To help with the running costs of this newsletter, I figured Market Talk, which has always been free, would be a suitable place to allow sponsorships from time to time. No garbage, only brands I think are genuinely useful or of interest to readers. I hope you can understand that this allows me to keep grinding on Investment Talk and, candidly, it incentivises me too.
Recent Publications: Memos I have shared since the last Market Talk.
Here is a shortlist of a few interesting pieces that I have read over the course of the last two weeks, to feed your mind.
Note, that these articles are not listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) The Makings of a Multibagger
Length: Dense Read
Source: (Alta Fox Capital)
Okay, so first things first, this thing is 645 pages long. Certainly not a report you can consume in one sitting unless you are Warren Buffett. But it is a great resource to be tucked away and nibbled on over a period of time. Back in 2020, Alta Fox put together this monster report to discover the makings of a multi-bagger, by shining the torch on some of the best-performing stocks from the prior 5-years, identifying their common characteristics, trends, and catalysts, in an effort to identify strategies to discover the next set of high-performance stocks.
Alta Fox analyse 104 companies, each across 6 slides, outlining the quantitative and qualitative datasets including; an overview, the business model, competitive analysis, what investors missed, and key takeaways. Furthermore, the high-level and specific takeaways shared on slides 18 and 19 allow the reader to digest the findings in minutes.
A fun and insightful read, and one that may help with one’s own investment process. Naturally, there would have been a great deal of work behind each finding, more so than 6 slides can represent, but it highlights the importance of concise pitching and presentation.
2) Third Point First Quarter Letter
Length: Moderate Read
Source: (Third Point)
Dan Loeb and Third Point’s first quarterly letter of the year and the hedge fund manager details his decision to reduce exposure, giving the fund a cash position that prompts “buying power higher than at any time during the last 10 years”. Believing the best defence is a strong offence, Third Point has increased cash, reduced leverage, increased their short basket, and appears to be playing the commodities trade with large investments across energy and other cyclicals.
Pages 3 to 4, under the heading ‘Further Thoughts’ paint a particularly interesting viewpoint of regime changes, and how Loeb and Co plan to remain alert to avoid the risk of ruin, arguing that “the key, of course, is to change your framework when the environment changes”.
“Since I started Third Point 27 years ago, I have seen many investors (including myself) stumble after years of success because they did not adapt their models and frameworks quickly enough as conditions shifted. I have said before that they don’t ring a bell when the rules of the game are changing, but if you listen closely, you can hear a dog whistle. This seems to be such a time to listen for that high-pitched sound..”
3) Wealth Transfers: Redistribution of Value via Capital Allocation
Length: Moderate Read
Source: (Counterpoint Global)
A wealth transfer occurs when a company buys or sells a mispriced security. This memo by Mauboussin and Callahan explains the nuance surrounding when company purchases and sells its own stock, and the ramifications this may have on both new and existing holders of said stock.
Companies can influence the wealth of shareholders in various ways. They can reinvest into the operations of the business, hoping to generate an attractive ROI, in excess of the cost of said capital. However, this can be hard to sustain in certain market and/or competitive environments. During moments when management conducts dealings of mispriced shares, the duo find that most often, this actually results in selling high and buying low, which stands to benefit existing holders, with transacting holders (new) faring much worse.
“Astute investors focus on a management’s ability to allocate capital and tend to focus on investments in the business. This is appropriate. But investors should also be aware of the impact of management actions with regard to their own stock. The essential guide is the gap between price and value. Finally, many investors count on mispriced stocks regressing toward their value per share over time as a means to generate excess returns. Wealth transfers show that actions by management can change the value per share without any change in the underlying fundamentals of the operations”.
4) In Search of a Steady State: Inflation, Interest Rates and Value
Length: Moderate Read
Source: (Musings on Markets)
In true Damodaran style, Aswath shared the academic overview of inflation, complete with the historical backdrop, how inflation impacts financial asset pricing, the economic consequences and what this could mean for the investors amongst us.
A must-read for those wondering how inflation might impact their portfolio today, and across the next few years. As hard as it might be to predict macro, it doesn’t hurt to be well informed. He posted a follow-up to this memo yesterday morning, for those interested.
“The inflation genie is out of the bottle, and if history is any guide, getting it back in is going to take time and create significant pain. It is the lesson that the US learned in the 1970s, and that other countries have learned or chosen to not learn from their own encounters with inflation. It is the reason that when inflation made itself visible in the early part of 2021, I argued that the Fed should take it seriously, and respond quickly, even if there existed the possibility that it was transient. Needless to say, the Fed and the administration chose a different path, one that can be described as whistling past the graveyard, not just ignoring the danger with happy talk, but also actively taking decisions that only exacerbated the danger. Needless to say, they now find themselves between a rock (more inflation) and a hard place (a recession), and while you may be tempted to say "I told you so", the truth is that we will all feel the pain.”
5) 10-K Navigation Guide
Length: Dense Read
Source: (Wolfe Research)
Of the nearly 8,000 people that read Investment Talk, there are investors on all points of the experience spectrum, and one should never be too proud to revisit the basics. This comprehensive, 229, report from Wolfe Research walks the reader through the ins and outs of navigating the 10-K filing.
A great resource for younger investors, or those looking to polish up their old skills.
“Graham and Dodd’s seminal book, Security Analysis, popularized financial statement analysis as a critical component of investing. It fostered the notion that a thorough reading and understanding of a company’s annual report would lead Wo identifying overlooked investment opportunities and potential risk exposures. In short, reading an annual report increased the odds of producing alpha. Perhaps even more so in a current environment dominated by ‘one’ decision momentum stocks, quantitative strategies, and passive investment flows. 10-K are larger than ever before with complicated accounting principles underlying the figures and footnotes. To assist investors in navigating through these lengthy documents, this report explains and interprets essential financial statement disclosures and GAAP accounting. We’ve arranged this report by key sections, following the typical 10-K progression, and wrote each section in such a way as each topic may be read individually.”
6) Hold Fast: Tips for 100 Baggers
Length: Light Read
Source: (Woodlock House)
No, the irony of sharing a “100 bagger” type memo at this moment in time is not lost on me. But the memo is good, and I like to read the works of all manner of investors. Discussing investors’ instincts to focus more on stock prices than LT fundamental health, Mayer highlights how this view can taint one’s narrative, and lead to suboptimal returns, whilst offering up a potential solution to help stay focussed on what really matters.
“And then he asks “Would a businessman seeing only those figures have been jumping in and out of the stock?” And he answers: “I doubt it.” I agree. Just look at those financials. That’s a healthy business. And if you held on for the whole 20 years, you were up something like 25x, excluding dividends. But how many people held on for that 25-bagger? Probably not many. As Phelps writes, the industry won’t let you. The industry conditions you to measure performance using quarterly or annual stock prices. You almost never see anyone print the results of their portfolio by showing you anything like this table. You don’t see anyone in their quarterly letter show you financial snapshots of the businesses in the portfolio, or track their progress for you like this. No, you see them write about stock prices being up this or down that. So people focus on stock prices.
Other Items I Read
Note: ($) indicates there is a paywall on this content.
• A Wealth of Common Sense: Some Things I’m Not Going to Regret in 20 Years
• A Wealth of Common Sense: The 2 Types of Bear Markets
• Neuro Athletics: Tools for Managing Burnout
• Morningstar: The Four Horsemen of Investing
• Stratechery: Cable’s Last Laugh
• Baillie Gifford: The Long View, Investing in the Future
• Ensemble Capital: The Disconnect Between Corporate Fundamentals & Stock Prices
• Net Interest: Dotcom 2.0
• Saga Partners: Q1 Shareholder Letter
• GivnerLawPC: Social Media Market Manipulation 101
• 🕵️ Company Related 🕵️
• Young Money Capital (FB): Instagram Write-up
• Enlightened Capital (APO): Apollo Global Write-up
• Bronte Capital (SWMA): Commentary on Swedish Match
• Holland Advisors (JDW): JD Wetherspoons Write-up
• Punch Card (NVDA): Nvidia Write-up, Part 2, Data Centers
• Cedar Grove Capital (WOOF): Petco Write-Up
• Semi Analysis (INTC): Intel Write-Up
• Meta (FB): Conversations 2022, Messaging Conference
The old saying, “history does not repeat itself, but it often rhymes” is something I wanted to touch on today. If readers remember edition 46 of Market Talk I shared some thoughts on the “Information Highway” narrative that later just became “The Internet”. Back in 2003, during this same period of ‘early internet’, the people at San Fran-based studio, Linden Lab, created a game titled “Second Life”. Launched three years after the ‘Sims’ game, another game that pioneered this passive living social experience game mechanic, Second Life marketed itself to be more than just a game, with founders proclaiming “There is no manufactured conflict, no set objective".
The project was created in 1999, with founder Phillip Rosedale seeking to create hardware that would allow users to become engulfed in a virtual world. With weak demand for the prototype, he later shifted course and settled for a software adaptation. Second Life promised escapism, avatars, its own currency, its own economy, and the ability to be whoever you wished to be in this new… second…life. Gaining popularity in 2005, the world soon had 1M users, before dwindling into the abyss. We could go down the wormhole here, but the point I wanted to make is that it’s eerily similar to what Facebook is attempting to do with their Reality Labs division. More specifically, Horizon Worlds.
Second Life (Left) and Horizon Worlds (Right)
The difference is that now we have the technology, the awareness and the demand to allow hardware to be a larger part of the equation. Since Second Life was born, the mobile phone became ‘the’ screen, and immersive experiences have slowly begun to migrate towards AR and VR, with some suspecting they could supplant the mobile as the new screen. The idea of ‘the metaverse’ is something which has existed for decades, in my opinion. We lead digital lives simply by presenting an alternate version of ourselves on Social Media. We build communities and meet friends on Reddit, on Twitter, through gaming, and even through apps like Tinder and Hinge. Meta’s vision simply accentuates that with VR, bringing the connectivity and interaction to a new, oft richer, level.
Is that good for humanity? Like the initial explosion of Facebook blue, and Instagram it’s easy to find flaws and consequences. But it’s also easy to underappreciate just how seismic of an impact it had on humans and their ability to connect, communicate, and form communities across the world. I feel that, if VR/AR ever does amount to a similarly explosive S-Curve of adoption, then it comes with its own unique set of foibles and benefits.
Personally, I have been making it a habit to leave my phone at home when I leave the house, with the caveat that I use an Apple Watch for direction or if someone really needs to get a hold of me. I find it helps me remain present, and have been enjoying it thus far.
Author of Investment Talk
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I tried second life when it first came out I was probably 12 or so. Issue was the dialup internet 😂😂 that and the people going around just screaming racism and insults at others.
Not much has changed really!
The impact of Target's and Walmart's earnings on Five Below
I wrote the following article for Best Anchor Stock's subscribers a while ago but have decided to make it a public article.
Hope you enjoy it!
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I love the decision. I’ve never bought SE myself and it’s not cause I don’t like the company. Like you told me invest in companies you know and understand. I love Forest tho
A Must Follow - Edmund Simms
@investmenttalk just put out a great write up of an interview with @valuabl (Edmund) and highly recommend giving him a follow.
Additionally, Edmund has been kind enough to answer some of my own questions and every time he does his answer is thoughtful and insightful.
I have just become a new subscriber to his Substack and look forward to learning more!
Paypal CEO was quite confident last week:
$PYPL CEO on the current state of BNPL:
"The era of some of these companies using venture-based money to fund contra revenues to get placement, it's done. People have to become profitable...And by the way, if those deals were profitable, we would have wanted them"
Add a comment…
I find it amusing that a fairly robust, profitable, business like PayPal is being degraded at similar clips to more nascent, younger, non-profitable, payments companies.
Huge news. Let's wait and see if the deal will go on.
VMware's market cap is $40 billion
Broadcom's market cap is $223 billion
Big Mood Today
(apologies for the language 😄)
STOP BUYING DOWNTRENDING STOCKS
Your weekly reminder as I’m seeing lots of dip buyers and so many dip buyers have become bag holders very quickly.
You or I will never time the exact bottom, but buying downtrends is not a smart strategy as it often results in further losses unless you get lucky catching the bottom.
Be patient. I want each of you to be incredibly successful with a true strategy to buy the dip.
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I'd say if you have enough cash, buy and hold works fine and you don't have to time the market.
If you don't have cash on hand for future "dips"... be careful catching these knifes, they might be sharper than they look.
Publicly writing is a great way to improve your thinking. Right now I’m reading what I was writing in Early 2021.
“In markets, as in life, so much hinges on our ability to survive the dips”.
The Mess of $BRCC
One of the more entertaining stories this year for me has been seeing the story of Black Rifle Coffee Company unfold. From SPAC'd to being attacked for fraud.
Recently $BRCC went public via SPAC and has found itself in serious trouble less than 3 months after joining public markets.
The most recent example is the lawsuit filed by 1791 Management alleging fraud and breach of fiduciary duty.
A fun little line from the lawsuit where 1791 claims $BRCC CEO Evan Hafer is "one of the most dangerous CEOs in America."
A compelling case is made that the CEO profited massively off of keeping shareholders in the dark and not releasing their S-1.
Also, these are some of the worst financials I've seen since Manscaped put out their financials a few months ago. Not to mention the vast differences between audited and unaudited financials.
In general, it doesn't seem like a fun time for Black Rifle Coffee and an even worse time for investors who are down 2% from the initial $10 SPAC price and 70% from all-time highs.
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Very crazy story to say the least. I wrote about red flags with the company back in February, specifically noting Iverson and Hafer as concerns. Stock ripped after it because of the allegations of manipulation but is down over 50% since I published my bear report
$SBUX Exits Russian Market
“A New World of Travel”?
In Q1 FY22, the global leader in alternative travel accommodations reported the strongest quarter in the company’s history, with Nights & Experiences (N&E) booked through Airbnb crossing 100 million for the first time (+59% YoY); this reflects strength in LatAm, North America, and EMEA, offset by weakness in APAC due to subdued cross-border travel. As shown below, trailing twelve month (TTM) N&E booked were 338 million, an all-time record for Airbnb. Guidance calls for another quarter of more than 100 million N&E booked in Q2, with the TTM figure climbing to ~361 million; at current ADR’s, that’s an annual GBV of >$60 billion, up ~2x from FY18.
On top of 26% growth in N&E booked versus pre-pandemic levels (Q1 FY19), GBV and revenues both grew by >70%. That outcome is largely reflective of a nearly 40% increase in average daily rates (ADR’s), with the cost of an average night climbing from $122 in Q1 FY19 to $168 in Q1 FY22. (As noted in the letter, revenues and EBITDA are “highly sensitive” to ADR’s.)
The company reported mid-teens adjusted EBITDA margins in the first quarter, attributable to a combination of underlying business strength and the heighted cost discipline that I’ve written about previously (on a dollar basis, adjusted EBITDA in Q1 FY22 improved by nearly $500 million versus Q1 FY19). TTM adjusted EBIT margins were ~13%, a significant improvement relative to all prior reporting periods (this is my preferred metric of profitability for ABNB, which accounts for SBC and D&A). From my perspective, the financial results reported over the past 12-18 months clearly show the underlying attractiveness of Airbnb’s business. (And the balance sheet remains very strong as well, with ~$3 billion of net cash at quarter end.)
Management remains convinced that the pandemic, most notably due to the widespread adoption of remote work, has led to “a new world of travel”.
CEO Brian Chesky: “Millions of people are now more flexible about where they live and work. As a result, they’re spreading out to thousands of towns and cities, staying for weeks, months, or even entire seasons at a time. Through our adaptability and relentless innovation, we’ve been able to quickly respond to this changing world of travel. Now, two years into the pandemic, Airbnb is substantially stronger than ever before.”
As I’ve written previously, Airbnb’s customer value proposition and its differentiation from industry peers (hotels) is most evident on long-term stays; its competitive position improves as average stays lengthen (“the longer guests stay, the more we believe they value the amenities and convenience of staying in a home”). This use case became increasingly popular during the pandemic, with the shift in Airbnb’s business mix continuing to show in the Q1 results (the mix of 28+ day stays is still ~50% higher than it was in 2019). $ABNB
This is a preview of Monday's post (Airbnb: "A New World of Travel"?). To read the remainder of this post, please subscribe to the TSOH Investment Research service.
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Not an investor, but have read a lot of yours (and others) writings on the name. As an observer, it is quite fascinating to "trend watch" as Airbnb does its thing.
What are your thoughts on the cyclicality of their business versus the regular hotel & leisure industry?
Bought more $GOOGL
Now at 27% of portfolio. Who cares if ads are cyclical in planning on owning Google for a long long time.
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Me three; funny to me the companies people will buy when companies like a Google are trading at these valuations. It seems too many people look at $13 vs $2,000 and miss the point entirely.
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I think the R word has more to do with it, but yes adtech is tanking alongside $SNAP…falling consumer spending, rising capital costs, and lower overall growth expectations continue to help near term valuations compress. 🤷🏾♂️
DCF on $FB
Good morning! Has anyone here done a recent DCF on Meta? At the price today $176.88, I am getting the IV price of over 320 dollars a share.
I am not a DCF expert by any means. Can someone put what their intrinsic value is in the comments?
Stock Breakdown: Cyber Security Overview
For the full article check it out here.
The previous CPI print was 8.3% year over year for the month of April. Supply chain issues and increased fuel costs persist in the US and globally and these costs do not seem to be decreasing. The FED did raise interest 50 basis points which has made for an interesting time in the stock market. Most of the market has been relatively stagnant and somewhat stabilized. I do not see a scenario where continuing to raise interest rates will be a good thing in the short term for the market, but for the long term I believe it will benefit. As my good friend 3 aces (@notabigdeal111 on Twitter) has hammered home, it seems like it is the end of the business cycle which is usually followed by a depression.
Sector Description: What is the Cyber Security Industry?
Cyber security by definition is the practice of defending computers, servers, mobile devices, electronic systems, networks, and data from malicious attacks. Cyber security is a rapidly growing industry and is in high demand as more companies acquire data from their customers and have an online digital presence. The cyber security market was valued at $139.77 billion in 2021 and is projected to grow to $155.83 billion this year and $376.32 billion by 2029. This would lead to a 13.4% CAGR growth of the entire industry from 2022 to 2029 which is double the rate of the rise of the market from 2019 to 2020 (7.7% rise in CAGR). This industry looks to continue to grow and the growing digital environment will continue to benefit many of these cyber security companies.
Large Public Companies in the Sector
CrowdStrike Holdings (Ticker: $CRWD) - Market Cap: $65B
Zscaler (Ticker: $ZS) - Market Cap: $42B
Okta (Ticker: $OKTA) - Market Cap: $40B
Opportunities for Broad Exposure
The are many ETF options for the cyber security industry, but the one I will break down in a few weeks is the First Trust Nasdaq Cybersecurity ETF (Ticker: $CIBR). You can learn more about this ETF here.
Key Metrics and Considerations
Data Boom: It seems in almost every industry, data has become compared to gold. More and more companies are using data to help with their growth and further analyze their business and customers. Along with data, there is always some sort of digital aspect to almost every business at the moment and cybersecurity will be needed to protect businesses. It is a must for every business to have some sort of cybersecurity to help avoid malware attacks and as more businesses come along and businesses grow, the demand for cybersecurity will increase. This will look at how they protect customers and the company’s customer growth.
Both Retail and Industry Customers: Not only do cybersecurity sell the protection from attacks to major businesses, but also to retail consumers as well. If people want protection from attacks from specific bank accounts or other personal information that may lie on their at home computers. Everyone needs some sort of protection from digital attacks and cybersecurity seems to become the new car insurance and will increasingly become more of a necessity. I will look for both major clients as well as retail to ensure that these cybersecurity companies are not relying on one major client but diversified to keep their business running strong.
Chips in Everything: As mentioned in my breakdown of the semiconductor industry, there is an increasingly digital aspect to almost every industry. Semiconductor chips allow for an aspect of digitization or a “smart” aspect to seemingly every device, but that also has the potential to open up products for hacks. As more devices have an online presence, more devices as well as people will need some protection against potential hacks.
Opinion of Sector
I am bullish on the sector because everyone and everything is digital and online. Not only are more people and products getting online but cyber attacks are increasing at a rapid rate. According to the Identity Theft Resource Center, data breaches through the first 9 months of 2021 exceeded the amount of attacks in 2020 and some experts believe that the amount of attacks may have doubled year over year. Increasing attacks point to a larger need in cyber protection and that is where this entire industry will come into play. I am currently not an investor in any cyber security company but after doing a dive into some of these businesses I may consider doing so.
For the full article check it out here.
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$AVGO has been on a massive acquisition spree over the past several years.
Bought more CRWD and CROX
$CRWD @ $138.70
$CROX @ $48.50
Is this the bottom? I have no idea, and judging from sentiment, we have a ways to go.
However, I will continue to DCA on names I find attractive as I have a long investment timeframe.
The market can keep going down, but history has shown that it always returns higher
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Thanks for the transparency!
In my opinion, $CRWD should continue to fade into its gap around $86 in the future. It is also breaking down from a bearish pennant which suggests more downside is ahead.
Is the weak $SNAP guidance really an indicator for other Ad companies?
$SNAP was a beneficiary of the IDFA changes. They are more for brand marketing which imo don‘t rely that much on exact conversion figures. But now $META was able to improve their CPMs again after IDFA. So maybe now advertising dollars are getting back to companies like $META where you can better measure the success of your campaign which is probably more important in times of cost savings everywhere? 🤔
I am no expert in psychology, I defer to my friend & fellow investor @cosmocapital in that regard. However, I find one of the most fascinating aspects of investing to be one’s psychological mindset and how it impacts your performance. One of the best Twitter accounts that is a #FinTwit must-follow is @iancassel, founder of @microcapclub & @intelligentcm. I have several of his tweets posted in my office and attribute some of my personal growth and success to his wise words. As Helene Meisler says, “nothing like price to change sentiment” – and the current volatility can be trying for the psyche. Perhaps now, more than ever, we need to seriously consider our human fallibility and how we plan to approach the days ahead.
Humour & Empathy Welcome
Beyond the wealth of information available to users on Twitter & Commonstock, I have found the shared human experience to be among the most valuable. There have been many days where I have taken a loss and been left feeling down, only to find myself laughing at a meme someone has posted or taking comfort in the fact that someone else shares my pain. Commiseration has proven to be a ‘social glue’ that increases bonding and cooperation, as well as resilience, which in turn will likely increase your portfolio’s performance. Sharing your failures or challenges and having others empathize can be a powerful part of the community.
It’s remarkable the difference a dose of laughter can make when you’ve had a stressful day. Scientifically proven to decrease stress, it can lower your heart rate & blood pressure. A calm trader is a more effective trader. Make sure you follow a few accounts that bring you joy.
Some personal favourites of mine:
Choose Contradiction over Comfort
I have witnessed many disagreements during my Twitter tenure, and at times been profoundly irritated myself when someone presents a contradictory viewpoint to mine. I know all too well how tempting it can be to take the easy route and use the block button, but you’re likely only harming yourself. As https://www.entrepreneur.com/article/346101 states, “when you insulate yourself from opposing viewpoints, you are potentially depriving yourself of information needed to make a more informed decision.” It takes humility to acknowledge there may be holes in your thesis, but if someone else is able to point them out, we should be grateful. On the contrary, you may find your own argument to be reinforced and your conviction grows. I have added to positions following a debate, as my points were difficult for another to disprove. Living in an echo chamber can be dangerously comforting; evaluate evidence without emotion, and you will find opposing views to be surprisingly informative and beneficial.
Dr. Phil has said “no matter how flat the pancake, it always has two sides.” The vast amount of information from across the globe, as well as the number of differing viewpoints, can leave one feeling dazed and confused. There are more than two sides to the market pancake. It can be quite frustrating to read one expert’s view of macro, then turn around and see another pundit’s completely opposite take. It’s our job as investors to put in the hard work, seek out multiple sources of information, verify accuracy, and come to our own determination. Processing all the datapoints and expert opinions to form your own viewpoint is challenging; sometimes it can be beneficial to drown out much of the noise. In the end, successful investing usually amounts to the old adage “buy right, sit tight”. If you invest in companies with strong fundamentals, they are more likely to withstand market pressures and perform well in the long-term.
Patience is a Virtue
Warren Buffett lists patience as one of the six traits required to be a successful investor. It’s a virtue, and one of my greatest personal struggles. In a collapse or bear market, patience is your ultimate ally.
‘Instead of acting rationally during severe bear markets, many people tend to overreact and make matters worse. However, while many people panicked or were forced to sell assets at low prices, a small group of patient, methodical investors saw the stock market collapse as an opportunity.’
'Due diligence and quality research should inform your decisions about when to get in and out of trades, and allowing the price to catch up with the fundamentals can take some time.'
- Volatility & losses are opportunities for personal growth and will ultimately strengthen your skills as an investor.
- Twitter & Commonstock offer more than information, they offer a sense of community that can provide comfort. Don’t be afraid to seek solace here.
- Make sure you laugh. Hard & often. Your quality of life, as well as your trading, will significantly improve.
- Macro is mucho, don’t be overwhelmed by it and you won’t be confused. Buy based on strong fundamentals and in the long term, you’ll come out a winner.
- Patience is one of the most difficult skills to learn as a trader/investor, master that and you’ve won half the battle in trying times.
Regardless of market dynamics, everyone is facing their own private struggle. Life can be hard. If we choose our words carefully and engage in respectful discussion, the benefits to this shared experience are boundless.
Economic Update 🔥
Stocks are higher to begin the week and are looking to recover from the recent sell-off.
Last week, the DJIA had its first 8-week losing streak since 1923 and both the S&P 500 and Nasdaq had their first 7-week losing streak since 2001.
There are no economic data releases today, but the calendar picks up starting tomorrow.
U.S. Treasury yields are higher this morning, with the 2-year Treasury yield up 1.9 basis points to 2.60%, the 5-year Treasury yield up 2.4 basis points to 2.83%, and the 10-year Treasury yield up 3.2 basis points to 2.82%. Long-term advance rates are slightly lower today.
Signs of a Bottom: Daily Contrarian, May 23
Good morning contrarians! The financial news was filled with doom and gloom stories this weekend and the type of headlines you expect to see at bottoms.
- “Stock market bottom remains elusive…things are just going to keep getting worse” —WSJ
- “The sell-off isn’t over” —Barron’s
- “Conditions are ripe for a deep bear market” —WSJ
- “Simple tips for surviving the bear market” —Yahoo Finance
More in today’s briefing and podcast, now live here:
Add a comment…
So true, I just posted a similar thought. I'm not sure sentiment was this bearish during the 2020 crash. doom and gloom everywhere... time for a rally. :)
"If they could only have sat idle the other four hours..."
"Even business is harmed by the disposition to heedless action. The source of every speculative mania, besides corruptingly low interest rates, is the drive to do too much with too little. Investing one's own capital may occupy four hours a day. Trying to fill the other four, and to operate on a grander scale, restless people incur debt; it ruins them. If they could only have sat idle the other four hours, they would have been rich men."
–Bagehot, Collected Works, 7:125
M&A - $VMW and others…
I guess it paid off holding onto $VMW for a while. A nice “return of capital” dividend in q4 2021, and now an acknowledgement of value by the market ($AVGO ) as networking companies try to beef up their offering.
With lower valuations and an outlook for a slower economy, I wonder which areas will be ripe for takeovers… I listened to a podcast this morning that put companies that burn FCF but have high customer retention(eg $WIX ; no position) ripe for takeover at 60-80% off their highs….thought? comment ⬇️
This week's watch list
I will be looking to add new positions or increase existing positions that fall within the 10% MoS of my buy under price, and have a Zacks rank of 1 or 2. The list doesn't include any Financials as I am still over-committed there.
Tickers in blue are contrarian and don't follow my usual dividend growth principles. Stocks in black are based on my dividend growth principles.
$WEN Good News
Largest Shareholder Trian expands stake in Wendy's to nearly 20%.
Also exploring deals for merger/acquisition for the company.
Wendy's was a company I talked about and thought was quite interesting but I definitely
agree with Trian's comment about how the company has "lost its way after the founder died."
As I get closer to adding cash to my portfolio, I find myself starting to cheer for red days
I don’t try to buy the dip, but if I’m making my routine buys and can stretch my dollar a little further, I’ll take it!
$ABBV is currently at the top of my list - hoping to add another share at the start of next week
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SB - you know I am short $ABBV - you better not allocate too much and make me red on this swing trade lol - just kidding.
Patriot Battery Metals Scores Again
Quite a day for PMET.CN as yet another set of spectacular drill results were released. If you haven't checked out lithium spodumene plays in eastern Canada, what are you waiting for?
$PMET.CN $FL.V $BRW.V
Ackman took it to Twitter again
hell is coming
whatever it takes
The Change in Investors dealing with Volatility with Nikki Dunn, CFP - SSST ep. 15
A strengthening dollar has been a pain in the neck for global firms -- on top of all of the other pains in the necks they've had to deal with over the last several months.
Companies with hefty non-dollar-denominated businesses were hit by the soaring dollar making exchanges from foreign currency to greenbacks ultimately worth less on an apples to apples basis. For a company like $MTCH specifically, this was set to shave 5% off of their Q2 revenue growth rates while just a few months ago, the impact was neutral. It's a big deal.
The recently weakening dollar would be extremely welcomed news from Match and countless other companies, and it's beginning to (long way to go) fortunately cool off. We'll take all of the macro tailwinds we can get this year.
Fatigue may threaten long-term growth of ecommerce subscriptions
The onset of the pandemic drove many consumers to adopt subscription ecommerce for essential items—like meal kits and pet food—as well as beauty and hobby boxes for self-care and entertainment. That dramatically propelled US subscription ecommerce sales growth in 2020 and 2021.
- US subscription ecommerce sales will grow by 15.0% year over year (YoY) in 2022, totaling $33.48 billion.
- Sales growth will remain steady through 2024, but subscriptions will account for just 3.2% of total retail ecommerce sales during that time.
Digital subscription buyer growth will slow to 3.3% this year, and hover around 3% through 2024.
- This means companies building subscription models will increasingly have to draw dollars from existing subscribers. As a result, we expect that the average spending per digital subscription buyer will be higher in 2022 than at any other point during the pandemic.
- The rising average spend per buyer will sustain sales growth in the short term, but subscription fatigue raises concerns. Consumers will eventually hit a ceiling with subscription spending, making long-term sales growth more difficult.
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Never understood the excitement around SNAP in the first place. From a user standpoint or an investment standpoint.
Target Corporation $TGT
1. Is the company undervalued?
Tarjay is the #1 big box retailer for middle class women across the United States. The company is also extremely durable with a 120-year history. Notwithstanding $TGT just reported a huge miss and investors are worried this could be a precursor for more pain ahead.
However Target is priced quite reasonably and returning a sizeable amount of capital back to shareholders. Additionally topline growth remains strong, so if profitability concerns abate investors could hit a bullseye by buying at today’s prices!
Link to full writeup here:
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Oooh “tarjay” - must be fancy 😂
I’m not too concerned with one bad quarter. Excited to hold this stock for many years to come
Pre-Market Mover >50%
Powell Speech, New Home Sales: Daily Contrarian, May 24
Good morning contrarians! Stocks are dropping again after disconcerting news for online advertisers after the close…
Today we look to a speech by Fed chair Jerome Powell and new home sales at 1000.
Also earnings from $BBY $RL $ANF and $JWN to perhaps provide some more intel on retailers, their margins, and the state of consumers.
What to expect from this whole smorgasbord is discussed in today’s briefing and podcast:
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If people let $SNAP performance dictate their views of $FB & $GOOGL, that demonstrates why most fail at trying to pick individual stocks.
$ZM posts impressive metrics and product launch details
I bought into Zoom video like so many others in late 2019, and then through 2020…a few investment services “promoted” (sometimes feels like another “P” word but I’d like to keep this post neutral) the stock as a great buy through its ups and downs, even near its all time highs, without actually taking into consideration it’s valuation, growth trajectory or how the alternatives were possible eating into its share.
$MSFT $GOOGL and other startups were all building great coworking and productivity tools, regardless of whether you’re remote or at the office.
Fyi - Www.teamflowhq.com was one of them we tried but it never caught on due to the habits of my team.
**UPDATE - another one www.preciate.com , great for virtual social gatherings or conferences with several tracks and breakouts.
Going forward, I’ll be more cautious in position sizing and checking valuations and euphoria (both upwards and downwards) when listening to recommendations.
$ZM has entrenched itself into enterprises, but it remains to be seen if it can be a “must have” platform of communication services. New product launches this quarter seem interesting but for the retail and SME, they don’t matter much. Here’s a recent article by zdnet that basically tells me that I don’t need a subscription…do you use Zoom, or just use the verb and use another tool?
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Since my company implemented Teams over Skype, it has been another world. I don't honestly know how people prefer Zoom to Teams... my wife uses Zoom for her online business (streaming online webinars), and I understand it's good for that. Still, for collaboration tools in the office, Teams is way better, IMO.
more business with tangible assets (but not real estate or commodities) some requirements:
•Must be low/no debt
•Have 5+ years of data
•Preferably management having some skin in the game
Anyone got any suggestions? Thanks!
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I have the filter below in finviz to extract the top of the tops. Hope this helps
- P/E : <20
- EPS growth past 5 years : Positive
- EPS growth next 5 years : Positive
- EPS growth qtr over qtr : Positive
- EPS growth this year : Positive
- EPS growth next year : Positive
- Sales growth qtr over qtr : Positive
- Gross Margin : > 40%
- Net profit margin : > 20%
- Return on Assets : > 15%
- Return on Equity : >15%
- Debt/Equity : < 0.1
It filtered out all the stocks in exchange to give 7 of them. $ZM is the new entrant ..interesting !
Here finviz parameters for the filter:
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A disappointing news release as a shareholder. Ad dollars drying up. Snap has excelled in figuring out a way to better monetize its user base through its discovery shows and competitive ad landscape, but with brands pulling back their ad spend, Snap suffers. I work in digital media and see it first hand through our usage of the platform. I remain excited about their future as they continue to have significant R&D towards AR/VR and make encouraging strides there, while also maintaining a strong grip on the younger age demos relative to other social platforms...However, holding this from $20s -> sub $10 -> >$80 and now back under $20 again has been an insanely volatile journey. $SNAP has been one of my largest holdings through the ups...and now through the downs.
Up +2.47% for the day beating the $QQQ, a nice relief rally after being down -5% last week. Big tech were all up except $AMZN which was barley down, but is still struggling as people are still are very wary retail, but I own it for AWS, and I’m definitely buying more $AMZN in June if keeps going down. The stock I’m really watching this week is $NVDA if they have another great earning on Wed then that will be my next big holding alongside $AMZN, $GOOGL, $MSFT, $AAPL .
Not an indicator
Based on today, BTC breaks the trend of leading indicator for stocks.
$ADSK drops ahead of earnings report
- Deutsche Bank analyst Bhavin Shah cut his rating to hold from buy. Price target to $225 from $275.
- Stifel Nicolaus analyst Adam Borg kept his rating at buy. Price target to $230 from $285.
- Both cited "mixed" results from conversations with "platinum-level" partners.
Added $100 to each stock in my Hood account that is copying the Brian's commonstock portfolio.
I have never owned $U and probably would still not own them if I weren't doing this. That makes it fun and interesting. If you could literally copy two incredibly smart investors and beat the market, why would you do anything else?
Please note: I am NOT judging this portfolio's returns for at least 5 years. I do NOT care what the returns are before that timeframe. This is important because this isn't a cyclical or macro portfolio. This is pure growth and buy and hold.
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Good companies, good valuations relative to where market has previously seem them at, bright futures ahead for both IMO. Hopefully they weather the storm well and come out better, and you'll be thanking yourself for entering at these levels!
They can also just continue to a slow demise to zero, which is exactly what my current portfolio looks like it's heading for LOL