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Good morning,

I realise that many of you may be wondering why the broader equity market is behaving so poorly thus far this year, more so tech-related stocks. I am equally aware that there has been a lot of discussions surrounding bond yields.

I thought now would be an opportune moment to detail the relationship between the action of these two pockets of the market.

I am aware that I am guilty of writing lengthy pieces at times, so today, I will attempt to break down the key points in five to ten minutes.

There are a few different angles with which we can assess what is happening with respect to treasury yields, and the stock market.

US Treasuries are a form of fixed-income investment, whereby we are lending money to the US government, and in return, we are paid a coupon, which is the yield.

As of yesterday, the 18th of March, the US 10 year treasury yield had appreciated ~80 basis points from 0.917% to 1.73% for the year so far.

In the meantime, we have witnessed the Nasdaq provide negative returns, and the S&P 500, as well as the Dow, outperform.

So why is that?

If you zoom-out a touch, you will notice that 10-year treasury yields are now essentially back to pre-covid levels, which might suggest to some that the bond market is indicating the worst is now behind us.

There is a fairly tight-knit correlation between the shifts in 10-year note yields and more growth-orientated stocks at the moment.

If you observe the below chart, provided by @jaminball.

Jamin has plotted out the median cloud multiple versus the 10-year T-note yield.

The multiple here relates to cloud companies, with the metric set to reflect the Enterprise Value / NTM revenues of these companies.

The correlation currently sits at -0.93. By inverse correlation, I simply mean that there is a negative correlation between the two metrics, in that when one goes up, the other goes down. So both inputs are highly inversely correlated.

When we zoom out, going as far back as 2015, (also Jamin’s data), we can see the correlation over the period is closer to -0.5, suggesting that right now we are witnessing a greater than the average inverse correlation between the 10-year T-note yield and cloud multiples.

To me, this increase in the level of inverse correlation is a matter of short-term-ism. We have seen tech stocks, and more specifically cloud companies, run-up significantly over the last year. To a point where the valuations were stretched. Eventually, elastic bands snap back.

Then we also have to consider that the world is slowly beginning to open back up, meaning capital flows are rotating towards the re-opening trade. This says less about the company’s fundamentals and more about their common stock.

There is a big difference between a securities analyst and a business analyst after all.

So there are a lot of flavours in this boiling pot that we must consider.

Now, why would rising yields play poorly for certain stocks?

Quite simply, equities tend to be long-duration assets. This basically means that a higher interest rate results in a higher discount rate, which leads to future cash inflows becoming worth less money in today’s money.

If we experience higher rates, with some increased inflation, this will slowly eat into the power of those future earnings. In an effort to combat inflation, companies have to increase prices.

Let’s use the Capital Asset Pricing Model to explain a little differently. Don’t worry, we are not getting deep into this, more so using it as a way to explain.

E(ri) = Expected Return on a stock

Rf = Risk-Free Rate

Bi = Beta

E(rm) = Expected Market Return

[E(rm)-Rf] = Expected Market Risk Premium

The risk-free rate is a hypothetical rate of return that the investor can earn from a risk-free investment, such as a US treasury note. The Beta, is the return sensitivity of the stock in question, relative to the changes in the market return. The expected market risk premium is the premium that investors demand investing in a market portfolio at a risk-free rate, which is known as the equity risk premium.

So how this reads is as follows;

The expected return on a stock is a product of the risk-free rate, plus the beta of the stock multiplied by the expected market risk premium.

So what does this have anything to do with our discussion?

Hypothetically, if we are pricing out equities into the beyond, we are looking to find a risk-free rate that matches that duration.

So let’s use the US 10 year treasury note, over two periods, with some arbitrary figures.

Let us say that the yield on a 10Y US T-note is 0.9%, the beta is 1.5 (indicating the stock is more volatile than the market), and the expected market return is 8%.

We would then have 0.9% + 1.5 [8-0.9] = 8.83% as our expected return on the stock.

Now let us increase the T-note yield, which acts as our risk-free rate, to 1.73%.

we would then have 1.73% + 1.5 [8-1.73] = 8.00%

The expected return has declined as the risk-free rate has increased.

This is because we increased the discount rate, which is typically the interest rate used to determine the present value of future cash flows.

If we are discounting those future returns more then our are present valuation will be less.

So as interest rates rise the expected return falls under the CAPM assumptions.

Then we also have to consider that if fixed-income investments are now yielding a greater return on investor capital, institutions will reallocate capital away from equities, and into fixed income.

Institutions are often ruled by mandates, and fixed-income exposure, and/or yield generation are often part of those mandates.

During the onset of the corona, the interest rates were slashed by central banks across the country, and the risk-free rate an investor could earn, also fell. This demand for return amongst institutional investors does not dissipate, however, and so many searched for returns in equities. This is what is known as ‘equity risk premium compression.

Now the tides are changing, capital flows are reflecting that shift in sentiment.

So, this may be a case of capital flows dictating the market action, more so than anything else.

So what do we know about future inflation and interest rates?

The Fed announced projections for GDP to increase by 6.5%, 3.3% and 2.2% across 2021, 2022, and 2023 respectively.

The unemployment rate is also expected to fall sequentially over the same period with December projections declining to 5.0%, 4.2% and 3.7% over 2021, 2022, and 2023, with longer run aspirations of 4.0%.

Inflation is expected to climb to above the 2% target in the interim but expected to remain closer to 2% in the long-run.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well-anchored at 2 percent.” - Federal Reserve Press Release, Dated 18th March

With respect to interest rates, the Federal Reserve portray their sentiment via the Fed dot plot, which they to signal their outlook for the path of interest rates.

What we can see from the recent dot plot is that officials expect no change in the policy rate for 2021, as well as an indication that borrowing costs will remain close to zero as far out as 2023. The Fed’s benchmark rate was held steady for an 8th consecutive meeting yesterday.

So we know borrowing costs will remain almost at zero for the foreseeable future.

It is my opinion that the extent of pain we are witnessing in the tech sector is more so a reflection of capital flows, stemming from higher fixed-income yields, and the eventual re-opening of the economy.

To use a few fintwit darlings as an example, the multiples on these companies exploded after the initial commotion of coronavirus, with this idea that these companies will flourish, or be less prone to severe ramifications from the global lockdowns.

As of late, they have consolidated somewhat, slowly releasing the tension on the elastic band so that was pulled so tightly just one year ago.

For long term investors, the mandate is to stick to your process and buy great companies at fair prices. What we are witnessing bears no impression on the fundamentals of these companies, which is why I suggested being a securities analyst is far apart from being a business analyst.

Pay fair prices for wonderful companies, and add to these names over time, perhaps more aggressively when you feel the market is discounting the company excessively.

Investing is a long-term pursuit, and the macroeconomic winds of the market, are great at disrupting the short-term. Stay focussed, and stay safe.

Conor,

Lead Analyst at Occasio Capital Ltd

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit investmenttalk.substack.com

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Good morning,

I actually wanted to break up the earnings reports routine for a day and talk about something a little more current. I know that some of you will favour the earnings season reports more than others and vis a vis. However, i wanted to break up the constant flow of earnings reports as to allow for some diversity.

On that note, we still have the following earnings report to issue, which will be coming your way over the next two weeks:

• Alphabet, Starbucks, Peloton, MGM Resorts, MGM Growth Properties, Innovative Industrial, Red Violet and Sea Limited.

Before we get started, i post content like this daily to subscribers of the newsletter, so if you would be interested to subscribe for $10 per month, you can do this using the below button:

The Vaccine

So, today i wanted to discuss some of what we saw across the broader markets yesterday on November 9th, as Pfizer announced they had some positive news on the vaccine front.

So the two firms developing the vaccine, Pfizer and BoiNTech, came out yesterday and stated that they had developed the first effective coronavirus vaccine, which can prevent more than 90% of people from getting COVID. Important to remember that this is based on their preliminary analysis.

I will leave the official announcement link here: Pfizer and BoiNTech

After discussion with the FDA (Food and Drug Administration), the companies recently elected to drop the 32-case interim analysis and conduct the first interim analysis at a minimum of 62 cases. Upon the conclusion of those discussions, the evaluable case count reached 94 and the DMC performed its first analysis on all cases. The case split between vaccinated individuals and those who received the placebo indicates a vaccine efficacy rate above 90%, at 7 days after the second dose. For reference, the FDA typically requires an efficacy rate of 50%.

This means that protection is achieved 28 days after the initiation of the vaccination, which consists of a 2-dose schedule. As the study continues, the final vaccine efficacy percentage may vary. The DMC has not reported any serious safety concerns and recommends that the study continue to collect additional safety and efficacy data as planned. The data will be discussed with regulatory authorities worldwide.

The vaccine was tested on 43,538 participants across a range of different backgrounds and nationalities, and the companies now plan to apply for an emergency approval to use the vaccine as soon as this month.

So a few things on this.

This vaccine is an RNA vaccine, which contains ribonucleic acid (RNA) which is a polymeric molecule essential in various biological roles relates to the coding, decoding, regulation and expression of genes. RNA vaccines are a fairly new form of vaccine for providing acquired immunity through an RNA containing vector. Just like a regular vaccine, an RNA vaccine is intended to include the production of antibodies which will bind to potential pathogens (ie, the organisms creating the disease) and activate T-cells within the body, which is one of the something that plays a central role in our immune systems.

I have provided a visual for how the RNA vaccine would work below.

Source: Nature (BBC)

Now, i won’t pretend i am an expert on biology or vaccine production, so this is about the extent of my understanding.

Albert Bourla, CEO of Pfizer, stated that:

“Today is a great day for science and humanity. The first set of results from our Phase 3 COVID-19 vaccine trial provides the initial evidence of our vaccine’s ability to prevent COVID-19”

“We are reaching this critical milestone in our vaccine development program at a time when the world needs it most with infection rates setting new records, hospitals nearing over-capacity and economies struggling to reopen. With today’s news, we are a significant step closer to providing people around the world with a much-needed breakthrough to help bring an end to this global health crisis. We look forward to sharing additional efficacy and safety data generated from thousands of participants in the coming weeks.”

This leads to a wide array of questions.

How often will we have to be vaccinated?

Will the vaccine be a one-time cure?

Will there be long lasting side effects?

When will the vaccine be available?

Who would get it?

A lot of these will go unanswered for now, but there are reports that 10 million doses will be available in the UK for 2020, as well as Pfizer stating they are able to provide 50 million doses year end, and around 1.3 billion by the end of 2021. They do state that under this vaccine, people would need two doses.

The Voting Machine

So this news created some obvious turbulence yesterday in the marketplace, and we witnessed a sort-of rotation amongst the overstretched tech names, and the more ‘value’ centric names. To look at it another way, those who will benefit from lockdowns being removed and normal economy function were up, and those ‘stay-at-home’ stocks such as Zoom, Peloton and the likes, were all hit fairly hard. We will touch on that shortly.

Yesterday alone, we saw small cap value (here i am using Vanguard’s VBR) advance 5.8% on the day, with the Dow Jones advancing 2.66%, S&P 500 1.17% and the tech-heavy Nasdaq slump -1.53%.

Typically, at the beginning of a recovery, small cap value has shown to be an attractive place to be for an investor. Now when i saw recovery i am more so relating to a recovery where the impetus is removing the thing that caused the recession. Once that road block has been removed, then the recovery typically can begin. I am not relating this to the “recovery” in the stock market.

If you recall from September when i discussed the nature of recessions and corrections, i stated the following:

Traditional Recession

“A traditional recession stems from the build up of some issue, or multiple issues, during bull periods that accumulate and eventually expose some form of weakness in the capital markets. When these recessions occur, it is mostly society that picks up the tab. This can manifest in several different ways from investing losses through to the corrective actions that small and large businesses make during the recessionary period of hardship. Moreover, the economic consequences that follow on from a recession are another way in which society will be the ones who compensate the market.

During a traditional recession, the market will typically spend a lengthy period languishing, whilst the issues have been resolved, in order to build a base for the next expansion.

The 2007/08 real estate bubble for instance, took a mighty 5 years for the S&P 500 to recover.

What i am basically saying here is that the system needs time to flush out the issues that caused the market collapse in the first place.

During 2008 the gear in the engine was the real estate bubble, which eventually lead to some severe illiquidity in the banking system. Before the market could advance, these issues had to be resolved in full so that the problems, now built-in to the system would no longer be an issue.

The market crash in 2020, was perhaps less severe because the banking sector was a great deal more robust and strong than it was back in 2008.”

Okay so this is what i stated back in September. So whilst we may have seen a retracement of the lows in March, the niggling issue that was preventing a full economic recovery was the virus. With hopes of a vaccine now here, that gets the ball rolling on that economic recovery, and this is typically the period when small cap value does best.

If we are inclined to believe that March was the low point, then it should be a roaring broad recovery from the point of vaccination. I still think that is a long way off. However, that does not stop the market pricing this reality in.

One thing to consider is that the S&P 500 is ~25% technology weighted. Thus, if the rotation continues, there are going to be some structural headwinds in the index.

Coming back to yesterday for a moment. You can see below, an array of sector ETFs and their respective returns yesterday. What you can observe is that the more downtrodden and ‘value’ sectors saw a significant reversal yesterday. Energy up 13.96% and financials up 8.05%, far outpacing the rest of the sectors.

You know, this is just one day however, but it reflects what the market is thinking and/or pricing in. Here we have a vaccine, or rather some positive vaccine news. Therefore, we begin to think about what companies benefit from lockdown restrictions being lifted. Starbucks, Coca Cola, Banks, Casinos. Then we think about what companies might see some demand decline, Zoom, Peloton, and those richly valued SAAS companies like Crowdstrike and PayPal.

This is the voting machine in full effect.

Recall that Graham states that markets are voting machine in the short term, and weighing machines in the long term.

Will the need for Crowdstrike’s cyber security services now dwindle? It is not likely. There are certain trends that have taken place, or even existing trends that have accelerated this year, that will not likely revert. Cyber security is one of them. However, you have to understand that a 10% decline in Crowdstrike’s share price does not mean investors think the company will struggle from now on, or under the assumption that the Pfizer vaccine is successful and we are out of lockdown in a few months.

The valuations of a lot of these SAAS names has been bid up to frothy levels due to the uncertainty surrounding the future cash flows of a number of other businesses that, for the most part, rely on physical consumers. You know, Starbucks showed some nice recovery in their Q3 filings, but there was still uncertainty around lower foot traffic in their stores plaguing the company, and subsequently the stock.

In a more dramatic sense, the same can be said for Casinos. Ignoring the online betting units, these casino’s bread and butter is in physical custom. The rooms they allow customers to use, the food they serve them, the casinos they operate which require physical consumers, and so on. With uncertainty surrounding when these consumers will return, investors are more reluctant to buy the stock.

For me personally, i built my MGM Resorts position months ago, as i am confident consumers will return, and i am happy to wait a few years to see out the recovery.

Take a look at the daily price movement, labeled as ‘% day’ in the below visual. Each of these are the positions i currently hold.

American Express up 21%, MGM Resorts up 15%, Bank of America 14%, Starbucks and Coca Cola up over 5.5% on the day too.

Then on the flip side, we have Peloton down 20%, Crowdstrike down 10%, Sea Limited, PayPal, Square, all taking a beating.

This is a classic rotation from the popular to the new-popular, in line with the voting machine thesis. Capital flows out from one, and into another.

This is also part of the reason i chose to adopt a hybrid security selection, in that i own some boring larger cap companies, and some more volatile companies that are younger, and growing at a faster clip.

I witnessed a lot of portfolios being down double digits yesterday, for those who operate a full-tilt growth basket. For me, i was up on the day. This comes with downsides however. During most of the mania this year, my portfolio has certainly underperformed compared to someone with a concentrated SAAS portfolio. However, it has outperformed someone operating a value-orientated portfolio.

I am hopeless at timing market cycles, and so i like to own a little slice of companies i think are super strong like Facebook, Starbucks or Alphabet. However, i also like to own disruptors like PayPal, Square and Crowdstrike.

This satisfies my needs as an investor, and is in line with my own risk tolerance whilst still managing to beat the market, i am aware its not for everyone.

But the point i wanted to make today is that if you are feeling emotional, step away from the screen. This is true both on down days and up days. This being if you are long term orientated. For traders, i can’t help you.

I often repeat myself when discussing the market’s pricing tendencies. The market is a pre-pricing machine. It will typically price out 3 to 30 months into the future at any given time.

As i have said before, during a period where some large event takes place, whether that be a vaccine or an outbreak, the market will typically draw-in the pricing range towards the closer end of the timescale, pricing the near-term future more heavily.

We saw this in March. Okay, so in March the pandemic was broken out. For a week or so, the market sold off in a manic fashion. We know that eventually the pandemic will be over and normality will resume, but the market stopped pricing out 30 months, and started pricing in 1,2,3 months ahead, albeit overzealously.

Then after the dust settles, we saw a huge retracement of the lows. In this way, the pendulum of the pricing mechanism swung outwards towards the later-term future and began pricing in a future whereby the crisis is over. This always leads to confusion, when we have an economy in tatters and an advancing market.

I discuss this market pricing behavior in this article:

• Why Bear Markets Should Not Concern Long Term Investors

Back to today. So yesterday, the vaccine news broke out, and the market then immediately swings that pre-pricing machine into action and heavily prices in the vaccine news, by allocating to companies that stand to benefit the most from that vaccine news.

If a casino is trading at 8 times earnings with no vaccine in sight, then investors are willing to pay $8 per $1 in earnings.

If the reality of a vaccine then becomes a reality, and the future of that outcome becomes; A) more certain and B) appears closer, then investors might be more likely to pay more dollars per dollar of earnings for a casino.

It is interesting to speculate and try and rationalize why a market moves in a given way, on a given day, but it is likely an activity that will drive you insane if you are attempting to invest accordingly.

It is important to remember that the market is a voting machine in the short run, and whilst the trend can be your friend, it can also be hard to time when that pivot will take place.

Let us say that the vaccine undergoes further testing and turns out to be a failure, how do you think the markets will react to that? We could assume that the same stocks that benefitted from the positive vaccine news, will give back some of those gains, if not all of them.

I just think if you are investing longer term, you should be focusing on the business fundamentals, and the thesis for investing, and be largely concerned with that.

Back in May when i acquired a position in MGM, i liked the discount it was trading at, at around 60 cents per $1 in sales, it was trading below book value, it had great liquidity, and i believed once consumers were back, the business would be back in full swing and perhaps even reinstate the dividend.

My thesis is still unchanged on that investment today. So for me, it really doesn’t matter that the stock increased 15% yesterday, i am more so interested in where it will be in 2 years.

It can be tempting to get caught up in the hysteria. For those of you holding Peloton, you might have saw the news, assumed gyms would be open sooner than we thought, and then been tempted to sell Peloton as it was down 20%. This is how the brain typically processes that kind of scenario.

It can help to take a step back and do nothing, as sometimes the best activity in no activity. Peloton were growing pre-covid, and they will continue to grow post-covid. They experienced excess demand this year due to lockdowns, that is certainly true. Their valuation inflated far past their intrinsic value, that is also true. This is why valuation matters. Buying Peloton at $130 per share, because the share price keeps rising, in the short term, seemed like a bad idea. For me, my cost basis is about 40% lower than the market price, so a 20% down day doesn’t hurt.

It is not normal for a stock to advance 100% per year, nor is it normal for your entire portfolio to do the same. Many impressive long term returns, are filled with 20%, 30%, or even 40% + pullbacks throughout their trajectory. Volatility is the price of admission.

Buy great companies, and try to buy them at reasonable prices. I am not an advocate of ‘buy it at any price’. I think that looks great in hindsight, but as humans we can’t venture that far into the future.

To sum up, great news on the potential for a vaccine, but just be aware its not finalized. It is better to make investing decisions based on the company, rather than the environment specifically.

If you have any questions, feel free to leave them below. This concludes today’s newsletter, and i hope you don’t mind that i wanted to voice some insights i was pondering over this morning.

Until next day,

IT

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit investmenttalk.substack.com

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Good morning,

Today I wanted to discuss bear markets, and some of the mentality problems we may face as investors. Moreover, I want to discuss how we can overcome them, and benefit from bear and bull market cycles.

You will recall that a few weeks back, I discussed the Templeton Curve . Feel free to check that out before moving forward, as I feel it will benefit the discussion today.

Bear markets are daunting for all investors, and perhaps especially newer investors who have not yet faced one before. But they do not have to significantly impact your long term investing goals.

Recall that I have previously stated that a bear market is defined as a decline of more than 20% from the highs. In March the S&P 500 index declined 31%, which was an entry into a bear market.

Image from Investco

Bear markets do not last forever. Whilst it may be hard to remember this during the depths of a severe market decline or a long stretch of market volatility, you should try to acknowledge that a bull market will follow the bear. This is all part of the market cycle that we discussed in the Templeton Curve article.

When bull markets follow on from bear markets, they usually wipe out the declines from the bear market a great deal faster than most investor’s first anticipate. To add to that, bull markets tend to stick around a great deal longer than bear markets.

Take a look at the chart below, provided by Investco’s historical trends research paper.

The chart depicts the S&P 500’s historical performance during bull and bear market cycles. What is clear to see, is that bull markets last a great deal longer than the average bear market, and the returns from bull markets typically always erase the losses from the bear market.

Investco reported in 2020 that the average bull market cycle is 1,742 days.

Whilst the average bear market cycle is just 363 days.

You will see a few notable exceptions in the chart, in the year 2000 for example, but the fact of the matter is, for long term investors, the bear markets are simply blips. Of course it would be more beneficial to avoid the bear market completely, but we will discuss that shortly.

One common mistake a large number of investors make is that during the volatility of an intense market decline, they feel the urge to act. This urge often translates into selling your investments, with the intention of protecting downside or further losses. This is a fairly understandable response. Investors will sell their positions and tell themselves they will buy back into the market when it feels safer.

Succumbing to this ideology will likely dent your long term returns.

In my view, adopting the rationale that you should sell your holdings during a bear market decline, will result in your realizing and locking in losses. This also raises the risk that you will get inferior entry prices once the bear market snaps back into a bull market. The period when a bear market revolves into a bull market tends to be sharp and rigorous.

This could lead you into a circumstance where you sell into the lows, and miss the rebound once the the bull market sprouts from the ashes of the previous bear market. .

Take a look at the above chart illustrating the shortest ever bear market in the S&P 500. Rebounds are not usually so fast. If you look at the year 2000, after the tech bubble popped, you will see that it took a number of years before the S&P rose above the previous high.

The principle is the same however. Bull markets always start with explosive growth.

People often jestingly state that “stocks only go up”.

Stocks are designed to go up.

Long term, equities will continue to ascend due to the nature of human emotion and the impact of ‘profit motive’.

Profit motive, will inspire future entrepreneurs to innovate, which in turn, leads to superior product offering, greater efficiency, and new industries and corporations to populate those industries.

As long as these factors remain in place, we can expect bulls to follow bears.

In the capitalist environment we occupy ( for most of the world ) , it has demonstrated it’s resilience to external shocks.

Just take a look at the chart below, which is a logarithmic depiction of the S&P 500 over the last 60 years. The grey lines are recessions, and the market overcomes each and every one, through innovation.

These recessions have included large scale shocks with regards to macro factors like low or high interest rate environments, hyperinflation, inflation and currency crisis. What’s more, the markets have also survived world wars, trade wars, pandemics, regulations, natural disasters, financial crashes, social conflicts, and an endless list of further examples.

Even during all these events, when we take a zoomed out view, the market continues the uptrend.

Why?

Simply because capitalism will always incentivise the development of new innovations, improved productivity as well as the demand for increased standards of life.

Who among us can predict the future?

It is most certainly impossible.

You have to understand that bear markets are unpleasant, but also that being in a bear market is not an event that will destroy what you have created thus far, nor will it severely impact your goals. This statement is especially true if your time horizon is longer.

Here is the largest take-away from today:

Capturing the FULL extent of the bull market returns is critical

This can only be done, if you are in the market for the entire duration of the bull market.

It is understandable that most investors would seek to avoid a bear market in entirety

This is certainly a task that is somewhat accomplish-able, but proves to be very difficult.

The reason being, that for most everyday investors, a bear market is incredibly hard to identify and time to perfection.

That being said, it is certainly possible to identify the bear early and re-allocate your portfolio into one that is defensive. A defensive allocation may help you suffer less losses, but the same still goes, you must then be able to time the subsequent bull market and re-allocate to the appropriate portfolio weighting. This proves difficult in practice.

Timing the bears is very hard.

Instead, it may be useful to simply avoid some of these detrimental behaviors that we have discussed today and stay invested.

If we aggregate the returns on the S&P 500 over the last 50 or so years, we will see that on average, the market returns 8% per year. This is including all of the bear markets.

For long term investors, this means that avoiding bears is not an essential component to long term wealth creation.

Bull markets will typically erase all bear market losses, given time. As discussed, you need to be involved in the entirety of the bull to capture the entirety of the returns.

For me personally, the bear market in March was a period where i utilized capital heavily. As chance happened, i had been saving a large amount of cash, not in anticipation for a bear market, merely just out of fortunate chance. It is fair to say that i likely invested a larger amount that i have for the previous two years, over the course of 3-5 months this year.

• There may be questions that you have after reading or listening to this newsletter today. It is true that certain industries and firms will be crushed in bear markets and may take decades to recover. This is part of your due diligence as an investor. During bear markets, strong firms with liquid and bolstered balance sheets should survive any storm and make it out the other side. For firms that are highly leveraged, or have poor cash flow, they will be placed in a tight spot if they are not strong enough to survive a bear market to the fullest.

So this is always something to bear in mind when you are selecting companies for your portfolio.

The main point to take-away from this piece today is that, it is often the case that time in the market is superior to timing the market.

That does it for today’s podcast

I will see you tomorrow for Crowdstrike’s Q2 earnings report.

IT

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit investmenttalk.substack.com

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Good morning, I want to create a quick voice note, purely because i’ve been having a lot of questions directed to me related to the Apple stock split.

So I understand maybe a lot of new investors with maybe not went through a stock split before. So kind of break it down and give you a bit the rationale and kind of push away any misconceptions that you may have.

So firstly, if you're basing your decision to buy or not buy Apple shares, purely on the fact there is a stock split coming, then I would stop what you're doing and think to yourself, are you being rational? So in a stock split, I always say it doesn't really change anything, especially nowadays. It doesn't have any material impact on the valuation of the business or the underlying fundamentals. It's basically just restructuring the outstanding shares and altering the share price and the dividend and stuff like that. So Apple is splitting four to one. So for every one share you in Apple that you hold before the date, I think it's effective on August 31, and the split maybe happens a few days before that, I'm not super sure but essentially, for every one share your hold, Apple will give you three more, and then the price will be divided by four.

So let's just say the price is 400 right now, dollars, then after the split, it will be 100. And you have four times as many shares. So you need to kind of think about this rationally, nothing changes in the business just because you have more shares, you don't own any more or larger portion of the business.

If you had 0.01% stake in the business, that's not going to change just because the splitting shares, they're actually increasing the share amount by a number of multiples for and then dividing the share price by four, you won't get paid any more dividends, the dividend right now is, I believe 82 cents per share, they'll get divided by four as well be something in the 20s.

The only impact I could imagine that stock split may have is a psychological one. So you have people that maybe don't have as much capital that would like to buy a whole share an apple for four hundred dollars, maybe quite expensive, so you might get smaller retail investors buying shares.

But with fractional shares nowadays, and with retail traders, mainly being the investors that use fractional shares, I don't see that being that significant and impact of this kind of effect.

Prior to fractional shares, retail investors couldn't buy a stock if it was too expensive.

I know a lot of people that have have less than 1000 pounds but hold a tiny piece of Amazon.

Yeah, I'm not going to debate fractional shares.

But basically, the liquidity is usually a factor. Usually sometimes there's a bit more liquidity in the stock for the first few days of the split, with people buying it now that it's more accessible, but I feel like apple, for one was somewhat accessible anyway.

And for retail traders that wanted a slice of Apple, they could just buy into an ETF or they could just buy into fractional shares and own a little piece.

There's been a lot of misconceptions, someone reached out to me and said, basically, I hold $8,000 worth of apple. When the split happens. Do you think it will rise up to $200 per share like it did last time during the last split? And I never really know what to say to that.

Basically what you're asking me is: “I hold $8,000 an apple, do you think the market cap can double for no reason just because of the stock split?”

That's not gonna happen.

It may happen eventually further down the line as the business grows, and they continue to improve earnings and the market attributes a higher valuation. But in the meantime, because there's a stock split, the share price isn't gonna split to 100, and then rapidly inclined to 200 has the same as asking me if I think the share price is going to go to 800 based on the current price in a short period of time.

So it's best to think about stock splits is really not having any impact.

If you assume there's going to be some impact and try and make a play from that then, yeah.

You might get hurt in the longer run.

In terms of Apple valuation right now, I'm hesitant to say.

It feels like they're being priced more like software, as opposed to hardware. If you look at 2016 services were maybe 14% of their revenue composition. Now, I believe in this quarter. It's just over 20. And for the whole year, it's about 18%. Which is nice. I'm not purchasing any more Apple right now, I do have a small stake in Apple. I would like to own more, but not at this not at this price.

Either way, I thought I just wanted to create a quick voice note to cover a few things and misconceptions about stock splits. Have a great day.

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Good morning,

Today’s newsletter will cover the impact of Confirmation Bias and the impact this may have on your investing, without realizing it yourself.

As always, feel free to listen along or read the transcript below:

Just as a side note for the week, this is how the earnings calendar looks for the week ahead:

You may notice that I hold 5 of the companies in the above table; Pfizer, Starbucks, PayPal, Apple and MGM Resorts.

You may also notice that Starbucks, PayPal, Apple and MGM report after market close. US market close for me, is 9PM UK time, and typically the earnings are not released for an hour after that, give or take.

As a result, i will be compiling the earnings reviews of those companies the following morning/day.

Therefore you can expect the following timetable of earnings, if you are a paid subscriber:

Tuesday: PFizer

Wednesday: Starbucks

Thursday: PayPal

Friday: Apple and MGM

Have a great day

IT

Transcript:

Good morning,

So, I state fairly often that investing is as much about mentality as it is about the more quantitative skills like fundamental analysis.

This is true, and always has been.

A weak mentality will cause the investor to miss opportunities and make mistakes.

Confirmation bias is the tendency to search for, interpret, favour, and recall information that confirms or supports one's prior personal beliefs or values. It is an important type of cognitive bias that has a significant effect on the functioning of investment related decision by distorting evidence-based decision-making in a way that favors your own opinion.

We would essentially be blinding yourself to contradictory evidence.

This could be as simple as only reading the bullish sentiment for your position in Starbucks and ignoring all the potential bearish sentiment.

So here is how this can cause issues.

Let’s say I explain some new information related to your stock of choice, and this is not an opinion, it’s a fact. Let’s say Starbucks are opening 1,000 new stores across China. This fact would be consistent with your beliefs that Starbucks is going to continue growing and eventually dominate China. As a result, you will absorb that information, because it reinforces your sentiment, and makes you feel pretty good too.

On the other side of the coin, if the fact I provided you was contradictory to your prior beliefs, say Starbucks are closing 1,000 stores in China, what most people suffering from cognitive bias would do is simply disregard the fact because it does not line up with their view.

Humans don’t enjoy the feeling of a loss of confidence, so what often happens is the investor suffering from cognitive bias, will disregard the negative fact and select some piece of information that aligns with their view to provide reason for why the contradictory fact is not important. Fundamentally, humans tend to be overconfident. Which is dangerous as this can lead to us making decisions with the cloud of confidence, when in fact we may not have the entire picture.

What you need to do in regard to the beliefs you currently hold, is acknowledge that you may be entirely wrong, and be comfortable with that fact. 100% conviction in yourself being right is a dangerous assumption to make. Challenge yourself and try to remain as objective as possible when reading new information for the first time.

A lot of newer investors will read over an annual report, but in the back of their mind they know that they already wanted to invest in this company before the fundamental analysis. This will taint your view, and everything will appear through the lenses of rose-tinted glasses. Do not fall victim to that.

Investing, if we can boil it down to a sentence, can be said to simply be about being right than you are wrong. Only through experience, learning, and acceptance that you may be wrong can we get to that stage where we are more often right than we are wrong.

The aim of the game is not to eliminate risks or mistakes, it is to minimize them. Risk and mistakes will always be there. We take no risk; we get no reward. We take no risk, there are few chances we make a mistake.

To summarize my point, if you ever find yourself dismissing contradictory information or data that are facts (as opposed to opinion) then you may be partaking in confirmation bias.

I hope that has brought some insight into your day

Have a great afternoon

IT

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Good morning!

Another voice note for your ears, and now a transcript for your eyes :)

Today, i am giving a quick overview of WHY the stock market appears so disjointed to the overall economy.

In short, the stock market is a ‘leading’ indicator and most macroeconomic data are ‘lagging’ indicators.

Here is my two cents,

Have an awesome day,

IT

Awesome New Feature

I have teamed up with Otter.ai to provide transcripts of each of my voicenotes. I was kindly notified by an annual subscriber to the newsletter that he was deaf and could not access the voicenotes true value. He even kindly told me it was not an issue and to continue issuing the voicenotes as i was previously doing so.

Thats not how we roll here at IT. After a little research, i have found a suitable AI program to transcribe my audio files into text!

• So, listeners and readers, for now bear with me for now, as this is the first time i have used the AI. THis voicenote originally had an audio backtrack (music) which i think decreased the quality of it’s ability to transcribe the file. So be patient in the short term whilst i iron out the kinks and get the transcripts working better!

I am going to remove the backing music from future voicenotes so that the AI software can pick up my voice better.

Transcript:

Hey everyone, there's been a lot of talk about the fact we have very high unemployment right now, GDP is sinking into the negative, historic lows of GDP growth, I want to kind of cover a few things about the macro economic element of that. So, these are what are known as economic indicators. And these are variables that provide some kind of information on the state of the overall economy. So economic indicators are quite often classified according to whether they lead or kind of coincide with the changes in the economy's growth. So leading economic indicators are going to have turning points that usually precede those of the overall economy.

Coinciding economic factors are turning points that are usually close to the overall economy. So happening somewhat simultaneously.

And then the lagging indicators are going to have turning points that take place after overall economy has moved on. So this is going to be behind the times, maybe a few months, maybe as much as one year. So you've probably heard of a few of them. So we're going to go over a few.

So a few leading ones, the s&p 500 index. So the stock market is actually a leading indicator because they are forward looking. And stock prices anticipate economic turning points both up and down. So their movements usually offer early signals on economic cycles. So where they're going.

There's a lot of other ones such as the manufacturers new orders for consumer goods and materials, because businesses cannot wait too long to meet the demand.

Have consumer goods or materials without ordering new products, these gauges tend to lead at the upturns and downturns. So when you see more manufacturing new orders for consumer goods, the economy is typically on the way up.

If you coinciding indicator there, if we look at aggregate real personal income. By measuring the income flow from non corporate profits and wages, this measure kind of captures the current state of the economy. Same with manufacturing and trade sales, in the same way as aggregate personal income and industrial production index. This aggregate offers a measure of the current state of business activity.

So ones that are cited very often are lagging indicators. So this can be something like GDP, GDP is collected from historic data, maybe three months.

Prior, if it's q1 GDP, it will come out maybe a month or so after the period that it's discussing. So this is historic data. So it's lagging. So it's not representative of where the economy is right now at this moment in time.

So we may have unemployment coming out, unemployment as a lagging indicator.

So unemployment comes out,

and the stock market is up. A lot of people get confused about this. But the stock market is looking forward and what it expects to happen is already discounted. The fact that unemployment is high, and then unemployment comes out based on historic information. And that's why you can have a booming stock market and a terrible GDP and unemployment rate. So the average duration of unemployment is a good lagging indicator, because businesses typically wait until downturns and then they look to

layoff staff. And they typically wait until recoveries

as an indicator of when they're going to start rehiring. So basing your investments on

the unemployment rates, not a very good policy there.

We also look at changes in consumer price indexes. So inflation, this is a lagging indicator, inflation generally adjust to the cycle quite late, especially the more stable services. So you don't want to really be making investment decisions based on lagging economic indicators, because that's not going to help you going forward in the long term. So I hope that kind of gives you a bit of insight as to why the stock market is booming, whilst unemployment and GDP is soaring. Have a great day, guys.

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Hey team,

As you know, i will be using voicenotes to address some questions from time to time, and one i am asked a lot relates to gold, and it’s place in the retail investors portfolio.

I don’t believe i have ever provided much insight into this question. So here, i will provide some of my thoughts.

I have attached a historic price chart for gold below.

Have a great day!

IT

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Hey everyone,

Diversification is a huge deal when it comes to investing, but there is a lot of discussion regarding this concept:

How many companies is ‘too many’?

How can i diversify?

I only have equities, is that diverse enough?

I am going to seek to answer a few of these questions in this short voicenote

Have a great day,

IT

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Hey everyone,

Asset bubbles are something that have plagued man kind for a number of centuries, but what are they?

Better yet, how can we tell if we are IN a bubble?

Here is my two cents on asset bubbles

Have a great day

IT

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Good morning,

I wanted to take some time here and address a topic that is debated fairly often.

Can we compare this market crash to the ones that we faced in 2007/08 or the Great Depression?

These are some of my opinions on this topic.

Whilst severe, i do not view this crisis as being, in anyway, similar to the previous two mentioned.

For anyone wishing to hear a different opinion, or even just to understand the issue more, sit back and enjoy.

Thanks IT

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