Swendstone

🚩🚩🚩 YOU CAN'T SAVE YOUR WAY TO FINANCIAL FREEDOM!
🚩🚩 Saving money and investing the savings into a passive income, financial instrument guarantees financial wealth & freedom.

Don't Save Money But Invest Money.

Charlie Munger is capable of turning down investment ideas very quickly.

In his broad mind, he recognises patterns.

Let's explore qualities that we DO NOT want in our companies:

1) Heavy Customer Concentration

If a customer is responsible for >30% of your company's revenue, it's hard to stay invested.

Ontrak's stock crashed when a core customer left.

Semler Scientific's stock crashed when some customers changed their testing frequency.

2) Huge Debts and Razor-Thin Margins

In bad times, razor-thin margins will be eroded and profits would turn into losses. When a company has no means to service its debt, the risk of bankruptcy is there.

That's how US Airways went bankrupt.

3) High levels of stock-based compensation (SBC)

SBCs are great to create loyalty and build a solid culture. When abused, shareholders are left with nothing.

Peloton's 1Q 2022 SBC was 72.3m against a gross profit of $184.2m.

4) A Management That Overpromises and Underdelivers

If done too many times, the management loses credibility and investors might penalise the company by assigning a lower multiple.

Once trust is lost, it's hard to gain back.

5) Stagnant revenue / profit growth for > 2 years

It's all about having a track record. If a company hasn't been growing under the same leadership for the past 2 years or so, what makes us think it will grow for the next few years?

A leopard never changes its spots.

These days, whenever I buy lunch, I'm seeing higher prices.

A bowl of noodles is costing me at least $6 now. 😅

The world is hurting because the prices of everything are going up.

Just to speak of a few... transportation, food, housing and travelling. This is caused by a huge spike in the prices of wheat, oil, lumber, copper, shipping, and oil.

It's been half a year since Chairman Jerome Powell said inflation is no longer transitory.

When inflation goes higher, the Federal Reserve in the USA will be forced to raise interest rates. Higher interest rates are bad for stocks in general. It pushes down the valuations of all financial assets.

This is why, not just stocks, the prices of Bitcoin and Ethereum are being halved.

So what progress have we made? Are things improving?

1. The prices of wheat dropped near the price before Russia invaded Ukraine.
2. The WTI Crude price is below US$100 now.
3. The price of lumber is now at $648.40, it's almost 50% down from its highs
4. According to Zillow, the rise in mortgage rates is causing home/rental prices to drop.

In short, the previous interest hikes by the Fed are working. Should these trends continue, we're likely to see lower inflation in the second half of this year.

This means the Fed does not need to raise interest rates further and the economy will be stabilised. Once certainty is restored, growth stocks will likely see a positive rebound.

Here's something else which could hurt us. A recession.

Some of you may wonder, why did oil prices come down? The supply issue is still unresolved. The answer is... the markets are pricing in a recession. During a recession, consumer and industrial demand for oil go down. This is why oil dropped last night.

A recession, although undesirable, could be the pill for the economy to swallow in order to be back on firmer fundamentals.

During these trying times, there are many companies that are able to grow and their valuations are slowly becoming more attractive. Do your due diligence and space out your purchases.

Looking at the history of the USA stock market, there has been no event which prevented its stock market from recovering and making subsequent highs.

With patience, all of us will do fine in the long run.

While stocks might go down once in a while, good stocks will go up eventually, whereas cash is sure to keep losing value over time.