Diversified Bullish

Musings About Investing (Not Financial Advice)

May 25, 2024

Three Examples of Hedge Trades That Can Balance Your Portfolio

Don't put all your eggs in one basket. We can avoid this scenario by taking positions that act as a hedge against one another. Here are some examples of hedge pair trades that I've taken in my portfolio:

1) Nvidia vs. Emerging Semiconductors

Right now the most common argument against buying Nvidia stock is that they may not be able to maintain their 95% market share only forever.

I'm holding an Nvidia long position but realized when I buy other semiconductors it's a hedge against their dominant position eroding over time.

Here are the top 10 holdings of the SOXX Semiconductor ETF:

NVDA NVIDIA Corporation (9.74%)
AVGO Broadcom Inc. (7.95%)
QCOM QUALCOMM Incorporated (7.41%)
AMD Advanced Micro Devices, Inc. (6.18%)
MU Micron Technology, Inc. (5.18%)
ADI Analog Devices, Inc. (4.54%)
TXN Texas Instruments Incorporated (4.38%)
MCHP Microchip Technology Incorporated (4.33%)
TSM Taiwan Semiconductor Manufacturing (4.17%)
KLAC Kla Corp (4.16%)

source: https://www.ishares.com/us/products/239705/ishares-phlx-semiconductor-etf

Other notable holdings include Intel, Marvell, Lam Research and a basket of 30+ semiconductor related companies. If you're bullish on semiconductors, why not play the field? You're still buying Nvidia, but spreading your bet amongst a bunch of promising companies. If you believe a rising tide lifts all boats and there will be many winners in our AI future... why not own some Nvidia and something like the SOXX ETF?

2) Tesla + EVs + China Automakers (Future Automobiles) Vs. Toyota + Ford (Legacy Automobiles)

Tesla boomed in the early 2020s by riding the EV wave and a low interest rate environment to payday. However, now the reality of 2024 is setting in for the electric vehicle market. Our EV future is somewhat postponed at the moment, or maybe it will take longer than we thought.

Where we are in the EV timeline depends on where you live. Countries like Ethiopia are preventing the import of internal combustion engines!

In China, the EV future is progressing faster than anywhere else in the world. China automakers are showing a new wave of affordable, tech forward electric vehicles are possible. Tesla is not the only one who can win at electric vehicles anymore. The rest of the world's automakers know a sleeping giant looms with Chinese automakers. Companies like BYD, Xpeng, Li Auto and Nio will play a significant role in the world's automotive landscape of the future.

Hybrid vehicles have emerged as the most sought after type of vehicle after Tesla rode the EV boom into 2021. Toyota is notably the biggest winner in the resurgence of hybrids and the purest play to fade our electric vehicle future. Toyota has been vocal in their opposition against the feasibility of electric vehicles. Ford is also losing money on its electric vehicle program but has remained committed to a profitable electric vehicle in the future, so they are less of a direct play against Tesla.

Holding both Tesla and legacy auto is a way to play both sides of the transition to electric vehicles. If consumer tastes move towards hybrids in the short term, Tesla will have a tougher environment to sell cars and Toyota will reap rewards from selling more hybrids. If electric vehicles gain traction quicker than expected, fade legacy auto if they fail to adapt to what kind of car people want to buy in the future. According to Llama 3 AI, we have an estimated 50-60 years of gasoline fossil fuels left on the planet. Someday, we'll need EVs and it won't be a choice. Who knows when that will actually happen. Play both sides of the trade by holding Tesla or Chinese electric vehicle makers against legacy automakers.

3) Bitcoin vs. Ethereum + Alt-Coins

Bitcoin was the first mover in the crypto world. Ethereum has solidified as #2 in the crypto space. Most likely both will be important in cryptocurrency's future, but you could see better returns in some alt-coins in the short term. Crypto has a feel like there will be "many winners" in the long run, but who knows how many and for which use cases. Or maybe it will be like big tech, with only an oligarchy of coins reaching elite status. It's too early to tell how this space will shake out in the long run, so I'm holding some smaller cap coins along with a heavy weighting of the blue-chip coins.

Wrapping Up

It's important to identify when an industry has "many winners" versus possibly only a few elite companies that emerge in the long run. It's possible to have the right industry, but not the right execution by the company you own. We can mitigate risk by making trades that hedge each other. This might limit gains on a higher conviction play, but it also caps your losses if the play doesn't pan out.

Apr 20, 2024

Plausible Reasons to Take a Loss on a Stock

I am an advocate for long term buy and hold investing. However, this post will play devil's advocate from my normal stance. Most times, we should wait for our investments to recover their value before selling. Here are some reasons that can justify selling out for less than you invested.

You Feel Like You Overpaid

The market tends to swing from bull to bear in a span of weeks or days. Sometimes the market collectively peaks and then drops off big. If you buy the top of a stock and then it deflates, there's no guarantee you'll ever recover your losses. For example in 2020, I bought 5 shares of PayPal at $196. Currently the price sits at $62 and I'm down 68% on those first 5 shares. The difference in the price I entered the position and the current price is a wide margin. I have dollar cost averaged down, now holding 25 shares and will break even at $91. But the buy on the 1st 5 shares will likely be under water for a long time. In this case, I sold two of the original 5 shares at a loss last year. By doing this, I'm mitigating risk and converting a bad buy into tax loss credits. Now, if I was more bullish I'd hold. PayPal has underwhelmed in recent years and the stock has a lot of bad juju. Not to mention, the payments space is very crowded with Apple Pay and Google Pay possibly set to poach PayPal's business. So I wouldn't recommend it to anyone. However, after its 3 year slump, maybe it will make a comeback. I felt like I overpaid when I opened the position, so this is an example where I divested some by taking a loss on some of the shares I bought for 3x the current market price.

Taking Losses Off the Books

When you buy a stock and it goes underwater, those buys will weigh down your portfolio's returns. By selling at a loss, you're taking that loss off your books and using it to lower your taxable income. Divesting limits your exposure if it never recovers.

"Cutting the Fat"

This is a common phrase you hear when people talk about investing and managing their portfolio. The "fat" is your bad positions. By removing it, you leave the leaner, quality "meat", aka the stocks that actually perform well. In a sense, this is a good habit to apply to your portfolio in order to rebalance and mitigate risk.

Selling Businesses That Fail to Execute

Everyone talks about fundamentals in investing. When investors talk about fundamentals, it basically means, is the business executing? Are they making money and executing their strategy? Yeti is an example of a business with a strong brand in drinkware and outdoor coolers that has lacked in execution recently. In 2023, they had to recall a soft cooler product, one of their top selling lines of business. The company has not sparked much excitement, despite their new partnership to sell in Tractor Supply Company stores. They could turn it around, but after opening the position in 2021 and adding over the past few years I chose to divest part of the position at breakeven. So I didn't take a loss in this case, but after reading their earnings call transcripts and reports in 2023, I decided that there are better opportunities than this company. I haven't sold out completely but I would consider selling at a loss if Yeti's woes continue.

Selling Your Weakest Holdings Instead of Your Winners

If you need to sell, let your winners run. If life requires that you sell stocks for money, selling your worst performing stocks is more justifiable than selling your best performers in some cases.

Reducing the Size of a Bet

Taking a little money off the table is a way to manage your risk and exposure to the turbulence of stocks. This is more applicable to taking profits in my opinion. Selling at a loss is another way to achieve reducing the amount of your free cash you have invested in any single stock. If it's not working, I'm more likely to take a small chunk of the position elsewhere, either at breakeven or taking a loss.

Better Opportunities

Even if you are in the red on a stock, it might be a better move to sell out half or all of the position. Then you can take that cash and rotate it into a stock that has better fundamentals and momentum. This is somewhat risky but is a way that you can shift an underperforming stock into a stock that has a better chance of making actual returns on equity.

Conclusion

Buy and hold for a long time should be the default setting for most investors. Most times, we should do nothing. Nonetheless, it's not always the right move. On rare occasions, we should cut our losses and run to a better stock.

Disclosure: not financial advice. The author holds the stocks mentioned.

Apr 03, 2024

Why is it Hard to Let Your Winners Run?

Something I've been meditating on lately is the concept of "letting my winners run". This is a common trope in investing. In a nutshell, the idea is hang on to your best stocks and sell the bad ones if you need to sell something. Of course, it's not so cut and dried. How do you know which ones are the good stocks?

Additionally, at what point do you harvest gains on an investment? The hang-up is that you could sell a stock too early. This is a solid reason for long term investing, holding a stock for many years, regardless of what the price of the asset is. In theory, this should be easy. Just hold onto your shares. In practice, it's much more difficult to let your winners keep winning. Why?

Sometimes we need money to live or pay for things. A lot of times, stocks are a source of money that provides a means to an end. I can't fault anyone who sells for this reason, I've done it many times.

Diversification is another valid reason to take profits. When a stock increases in value more rapidly than the rest of your portfolio, it begins to have an outsized impact on its trajectory. However, be cautious of selling too early in the name of reducing risk.

Conviction to hold a stock comes from the prospects of the business it represents to make money. The stability of a business can fluctuate wildly in a chaotic world. If for some reason you lost your conviction to hold a company, I understand that as well. Investing is not "forever", it's only as long as you believe the company has positive cash flow and will continue to reap profits.

Many times a stock can shoot up in a short period of time, and then it's flat or negative for years at a time. It's impossible to know when a stock is about to run. In those years of consolidation, it's easy to look at the hot stock of the moment that's blowing up. It's easy to start thinking, "Why am I holding stock A when stock B is about to take off?" So you rotate into stock B just in time for its period of consolidation.

Price can also become disconnected from the fundamentals of a business. It's easy to start second-guessing what could happen to a stock's price if a black swan event were to hit its industry. Nvidia comes to mind as a company whose stock price rocketed up so fast above $400, that many people started screaming sell. Time will tell if it was too early to sell Nvidia. Currently the price hovers around $900/share, and some people are still selling because the price went up. The price of an asset rising is not always a good reason to sell.

Additionally, humans are wired to appreciate making money but to fear with more intensity losing what we've gained. This can cloud our vision. When we start thinking about preserving our unrealized gains, we're no longer investing in a sense. In that moment, we are more like a trader speculating on short-term price movements. This is why, in my opinion, it's so hard to let your winners run. We want to preserve our wins.

We need to shed our instinctual preservation tendencies in order to really win big in the stock market. Most of the time, you need play the game for 10, 20 or 30 years to win at stocks. Hold for a long time and ignore your fears of losing your wins.

As is often said of stocks, "no one ever went broke taking a profit." My response is: no one ever made it big selling early.

Disclosure: as with all writings on this blog, it is not financial advice. Without risk, we cannot reap rewards. Good luck and happy investing.

Feb 19, 2024

How to Automate Stock and Crypto Prices in Google Sheets

I recently discovered two great functions for tracking stocks and crypto. The GOOGLEFINANCE() function can be used to import stocks and crypto prices. Additionally, the IMPORTDATA() function is able to import cryptocurrency prices from cryptoprices.cc.

Here is the syntax that the Google Finance function expects:

=GOOGLEFINANCE("{Exchange_Ticker}:{Stock_Ticker}")

Note that you can pass other attributes and dates to specify a time frame if required. Refer to the Google documentation links above for more advanced usage.

Import Microsoft's Nasdaq Exchange Stock Price to Google Sheets

=GOOGLEFINANCE("NASDAQ:MSFT")

Import Snowflake's NYSE Exchange Stock Price to Google Sheets

You'll want to make sure the ticker is the correct exchange the stock trades on:

=GOOGLEFINANCE("NYSE:SNOW")

Import Charles Schwab's S&P 500 Mutual Fund Price to Google Sheets

=GOOGLEFINANCE("MUTF:SWPPX")

Google Finance also has the ability to fetch crypto prices for assets like Bitcoin and Ethereum. However, these prices seemed to update less reliably than stocks. I then found the IMPORTDATA() function, which updates crypto prices more reliably in my experience. The website cryptoprices.cc has made the prices available via their website and this function.

Import Bitcoin's Crypto Price to Google Sheets

=IMPORTDATA("https://cryptoprices.cc/BTC")

Import Ethereum's Crypto Price to Google Sheets

=IMPORTDATA("https://cryptoprices.cc/ETH")

If you're interested in other crypto prices, check out the cryptoprices.cc sitemap for all cryptocurrencies available.

Calculating Market Value, Profit and Return on Equity

Once you have the prices of your assets auto-updating in Google Sheets, you can calculate the market value of your holdings by multiplying the price by the number of units, shares or coins you hold of an asset.

(Price x Quantity = Market Value)
=GOOGLEFINANCE("NASDAQ:MSFT") * {# Shares} = Market Value

Once you have your Market Value of your holding, you can subtract the cost basis to see your total profit or gain/loss:

Market Value - Cost Basis = Profit

Once you calculate the profit, you can calculate the return on equity %:

Profit / Cost Basis = ROE %

I am now tracking all my stocks, crypto and index funds in a single Google sheet with these functions. The prices tend to update at minimum every hour, but usually quicker. I'm impressed that Google has this functionality built-in, it's very useful!

Feb 13, 2024

Earnings Report Catalysts

Predicting the way a stock will move on earnings is a dark art. It can be frustrating because a company turns in a clean report, only to have the stock dump after they report. So what drives a stock to move on earnings?

To borrow a line from the movie "My Cousin Vinny", an earnings report is like a house of cards, built by management to communicate how they are a healthy, functioning business. There are several metrics on which the company must perform well, or the house (stock price) might collapse.

Aggressive Revenue Growth

When a company grows its quarterly revenue up unexpectedly, it gets investors' attention. A recent example is Nvidia, which was beating on all metrics to fuel its post earnings report runs. However, its impressive revenue growth grabbed headlines and stoked the excitement around its earnings. Another common metric to monitor is a stock's "average revenue per user" or ARPU.

Earnings Per Share Beat

Earnings per share is one of the most common metrics that gets scrutinized, hand in hand with revenue. It is a cornerstone of the "house" built by management.

Reinvesting to Grow Future Profits

It's bullish when a company announces investments in itself to set up for future growth. For example, while Toyota is dominating the hybrid vehicle market, they're making plans for the future by building factories to address the electric vehicle market. By diversifying into different segments, they're setting up for more growth in the future. A loosely related metric is CAGR, or compound annual growth rate tracks a company's ability to compound growth. A company that reinvests in itself will likely have a stronger CAGR, which investors love.

Impressive Free Cash Flow

Investors love to talk about a company's free cash flow. This is how much cash a business has after accounting for operating expenses, capital expenditures, and taxes. This is the cash leftover that a business can use for dividends, paying debt or reinvesting in the business.

Declaring a Dividend

When a company declares a dividend unexpectedly or has an ongoing reputation as a "dividend aristocrat" they tend to hold more favor with investors. However, be aware of the trade-off the business is making between dividends and reinvesting the money in the business itself. Ultimately, the purpose of any business is to return value to shareholders and this is one way to explicitly achieve it.

Stock Buybacks

Similarly, stock buybacks are another way to return value to shareholders. A large stock buyback can appease investors because it is capital the company allocates directly to raising the stock price. This is money the company could be using elsewhere but it is common practice to buy back your own stock occasionally to return value to shareholders.

Growing Sales Rapidly

The profits of most companies can be traced back to its ability to sell its products. Sales is another metric that investors keep an eye on to see the health of the business. When sales are exploding, so does the stock price. However, sales are only a piece of the house. Growing sales is less impressive if the COGS (Cost of Goods Sold) is offsetting those gains.

Profit Margin

Tesla is an example of a company that has emphasis on its margin on each car it sells. The higher margin they can achieve on each vehicle produced, the more money they're making per car. Higher profit margin means more profit for the company's output.

Profitable Business

In a bull market, investors have a higher risk appetite for companies that are unprofitable. Spotify is an example of a company teetering on the edge of profitability. In Q3 2023, they reported a profitable quarter for the first time in a year. After earnings, the stock ran up +10%. It's looking promising for them to reach profitability but there is more risk waiting for that to happen than to own a business that's already profitable. However, if you get in before a business turns profitable and they succeed, you'll reap more gains.

Partnerships

Disney recently announced an unexpected partnership with Epic Games. They are investing $1.5 billion for a stake in Epic. It could be a source of growth down the road that is not yet baked into the stock price. Epic has Fortnite, the most popular video game in recent years and a strong community behind it that could spur growth for Disney. Likewise, Microsoft gained extra wind in its sails due to its partnership investing $10 billion in OpenAI. On top of that, they can integrate OpenAI's ChatGPT into their product suite and Bing search engine. This shows how strategic partnerships can give a company a shot in the arm.

Forward Guidance Raised for Key Metrics

Guidance can sway the sentiment of investors. Beating the guidance for earnings per share and revenue is generally seen as positive. The context of the guidance from the company management is important. Did they give soft guidance becuase of unseen supply chain issues or macroeconomic conditions? If so, beating the guidance means less. When the guidance is strong and the company "beats and raises" guidance, it's bullish for a stock. Giving soft guidance in order to smash future reports is also known as "sandbagging". You need to be vigilant to make sure the company you own is not sandbagging its guidance.

Industry Key Performance Indicator

In Q3 2023, Google turned in a seemingly solid report. However, the stock went -10% after earnings. Why? From reading sentiment online, the stock went down because the company missed their guidance on cloud growth. The cloud growth metric has an outsized impact on Google's earnings. In that quarter, they were penalized for missing. For social media or gaming platforms, monthly active users (MAUs) have outsized importance.

Management Shake-up

This catalyst can be positive or negative, depending on the perceived state of the current management. Positions like the CEO, Chief Executive Officer, have outsized importance in the management of the company. If investors think the CEO is valuable to the company, the news that they are stepping down can drive the stock down. Conversely, if a CEO is perceived as weak, bringing in a new CEO can be a positive catalyst.

Catalysts Already Priced Into the Stock

Sometimes, all the good news is priced in. Stocks with momentum tend to run up heading into an earnings report in anticipation. If the report underwhelms and doesn't show any new catalysts, the stock price may deflate after earnings.

Conclusion

With some luck and skill, the "houses" you own will have strong foundations that will sustain growing income for many years. These are some things to watch for when a company you own reports earnings. It is seemingly impossible to understand why a stock moons or tanks after earnings, good luck!

Disclosure: Not financial advice. The author holds stock in the companies mentioned.

Dec 16, 2023

Trading Time for Money

In this life, there are essentially 3 ways to earn a living:

1. run a business or sell something and reap profits
2. own assets that appreciate in value (real estate, land, bonds, fixed income or stocks)
3. become employed, trade your time for money

Trading your time for money is part of the human experience. Since the dawn of modern civilization, humans have collaborated in an economy of goods and services. The industries and technologies deployed have changed, but employment is still a trade of human time or assets for money in the capitalist world.

We should be selective of when we trade our time. It is probably our most valuable asset, more valuable than large sums of money. A lot of money without time is less than some money with time to enjoy it.

Time is Money, Generated With Bing

Generated with Bing Image Creator

Employment is the application of your time resource. When searching for your next trade, taking more time to consider different options is worth it. We don't always have the luxury to pass on a job offer. The best outcome is a job that fits you better, challenges you, provides new opportunities, improves your skills and sets you up for success. Be selective but as the saying goes, "don't let great get in the way of good". Sometimes a mediocre or undesirable job can give you momentum, new contacts, short term cash flow, skills or a resume booster.

If you're getting paid well but not challenged by the work or demotivated and burnt out from it, is that a good trade? Is the job also draining a lot of your energy? With a job, extra stresses and baggage tend to pile up over time. Is the trade worth the mental strain of holding the job? There could be a better opportunity that accelerates you in the direction you want rather than stagnating it.

Time in the City, Generated With Bing

Generated with Bing Image Creator

Your labor is an exchange of your time for money or other resources. You have a set of skills and competencies to deliver outcomes to a company. Your "career" is the trades you'll make with businesses or directly with people over the course of your lifetime. Some trades will work out really well and last many years. Others will only be shorter stints that merely set you up for the next gig or keep you afloat for awhile. A good trade returns stability, opportunities, education and money at a lower cost to your hours worked and sanity. Make good trades and go smoothly in life.

Oct 30, 2023

The Effect of Business Cyclicality on Stock Prices

Ask 10 people if a stock is a good investment. You'll probably get some stories of why they wouldn't invest, past trades, losses, small gains or just indifference. Someone will probably be holding the stock if it's one of the popular blue chips. What you hear might also depend where the stock stands in the macroeconomic environment and how well they've been running the business lately.

For example, if you asked someone about Anheuser-Busch InBev (BUD) earlier this year, you'd probably hear about their recent marketing fiascos which led to boycotts of their best-selling beer.

If you asked a shareholder about Tesla (TSLA) last year, they'd probably have mentioned Elon Musk is selling shares to buy Twitter. If they did their research, they'd know in 2022 that Tesla was crushing its vehicle delivery targets.

Last year, the story around Netflix (NFLX) shifted. They reported a decrease in subscribers in their quarterly results for the first time in years.

Facebook dba Meta (META) was bloated with costs a year ago and the stock price showed the pain. The company overextended itself and had too many employees and diverging ambitions spreading it too thin. In times of perceived economic weakness, companies' ad budgets are often slashed.

Fast forward a year later and most of these stocks are doing fine. In late 2022, the prices of each of these companies contracted, due to market conditions but also based on their perceived strength in their ability to meet investors' expectations. Of course, the bear narratives were blasted across the internet. So what changed since then for these companies?

Meta (META), lead by Mark Zuckerburg, successfully embraced cost cutting measures like laying off employees and limiting investment in the Metaverse. In 2023 quarterly earnings reports, the bottom line showed better and leaner earnings. It bottomed below $100 in 2022. Wall Street bought the stock hand over fist after seeing the company's stronger earnings and renewed focus. Still kicking myself for not recognizing this opportunity.

To combat its growth woes, Netflix introduced a new subscription tier with ads. In the following quarters, the stock price rebounded from under $200 and now sits above $400 after its most recent earnings report. I regrettably sold a few shares at a loss near the bottom. However, the lesson learned is valuable. Companies will have bad quarters. They will miss expectations sometimes. If it's a good stock, it won't derail the overall narrative around the company. In the end, I profited about $400 on my Netflix trade despite selling a few shares for a loss. But I could still be sitting on a few shares if I hadn't begun to doubt the growth narrative.

Anheuser-Busch is still trying to shake off its poor Marketing moves after a misguided campaign that invoked negative political discourse. I don't think it changes the business fundamentals although the damage to its Bud Light beer brand seems irreparable. Or maybe people will move on eventually. Regardless, it hasn't moved the stock price. Maybe people will always reach for that light beer, who cares what kind?

Tesla has rebounded this year also from the overhang of Musk's Twitter purchase. This year, the stock is up 100% but it's not all roses. The company is now in the midst of a slowdown since buying a new car usually requires a loan. Thanks to the Fed and its ongoing assault against inflation, the monthly payments for new cars are much more expensive than 2-3 years ago. Until macro conditions improve, it's going to be tough sledding for us investors. The cycles of business worked in Tesla's favor up until 2022. Tesla has lowered the prices of its cars to increase its sales, a tactic that boosted demand in the past year. This is another example of the levers a company can pull to meet its goals. By changing prices, or extending their product offering a company controls its destiny. Tesla also is extending its product offering with the roll-out of Cybertruck. Deliveries are promised to begin next month, but Musk mentioned on the most recent earnings call it won't contribute to their bottom line meaningfully until 12-18 months down the road.

The Fed's interest rate increase is also weighing on my investments in solar energy, an industry which finds itself in a similar situation as Tesla's automotive loans. I believe in the long term story for solar energy. In the short term, if someone wants to install a solar system on their roof or property, it's more expensive to take out the loan. Such is the cyclicality of business. From quarter to quarter, unexpected problems or geopolitical and macroeconomic conditions can surface that challenge a company's ability to hit its targets. As an investor, we need to clearly assess, "Given the recent turbulence, what are the implications for this stock's future success?"

One bad quarter won't sink a company. A few bad quarters won't either. A few bad years won't either, just look at Microsoft (MSFT) from 1999 to 2016. Its price bounced around $50 in this span. During this time it gained a reputation for being dead money to investors because it had done poorly for so long. However, Microsoft rapidly improved its ability to generate cash and innovated on its products. Today, it is one of the world's greatest tech companies. You would have a multi-bagger on your hands if you jumped into Microsoft 10 years ago when it was left for dead by Wall Street. Wall Street's loss has now become my gain. Although I didn't get in until 2020, I am now happily long a bag of Microsoft shares with a broad knowledge of their business and hands on experience with many of their products. But even the strongest of companies will succumb to the inevitable up and down cycles of business.

These past few years have been loaded with investing lessons. Don't get spooked out of an investment when a company reports a rough quarter or two. In the case of Netflix, of course they changed their product offering to boost their subscribers after I sold. The stock's price fundamentals were based on growth and they took measures to restore their subscriber growth to beat Wall Street's expectations. I never imagined they would roll out an ads-based subscription tier. This is an example where the short term speculation for a stock was based on outdated information. Netflix extended its product offering to boost its subscribers.

Additionally, the cost of borrowing money affects many goods and services. If a loan is required for someone to buy a company's product, it will thrive in times when money is cheap and stagnate when money becomes expensive. When the fed jacked up interest rates to 5-7%, they shifted the flow of money in the economy. They do this in the name of battling inflation. I wish I had learned this earlier. I had only seen the economy churning in a low interest rate environment for all of my adult life. I've been learning the hard way what an impact these rates can have on investing outcomes and business sales.

In conclusion, cyclicality is not the enemy. It will influence the price of all stocks. Sometimes it will work in your favor. However, sometimes demand can be pulled forward due to external conditions and create "boom or bust" quarters. The pandemic is a perfect example. In 2020 and 2021, we enjoyed the boom times. The quarters since then have been tough on investors, but in general earnings reports seem to be improving. Some companies were doing record business during the pandemic, short-term phenomena. When it happens to be a good quarter, don't always assume the good times will continue rolling. When it goes the other direction, don't panic. It's easier said than done. Above all, trust your conviction. Read the signs for the company's long term health. If you don't have conviction to hold, that's your decision and one we all can understand. None of us know what will happen anyways.

Stocks trade on momentum and the market reacts to their earnings from quarter to quarter. A company that misses earnings estimates or key metrics will cause concern among investors. Sometimes there is simply nothing that can be done to avoid the cycles of business. My suggestion is to develop a thicker skin to hold on and clear thinking to assess if things are really going bad, or if it's just the cyclicality of the business and economy.

Disclaimer: This blog is not financial advice. Some companies mentioned are held by the author.

Oct 19, 2023

The Tension Between Growth and Dividend Stocks

Lately there has been a discourse online about the problems with dividend stocks. In the past, dividend stocks have held more favor with investors. I find it interesting that recently they've been cast as questionable investment for the long term investor. So what's wrong with getting a cash dividend back from your investments? The market seemed to be selling off these assets in the summer months of 2023. I think this is proof that all the critics come out of the woodwork when a stock's price is trending down.

The thinking is that when a company returns money to its owners, it's a last resort. The company is saying, "We have nothing better to do with this cash pile, so let's give it back it to our shareholders." It's a win-win situation, right? Kind of. Growth stock zealots are quick to point out that the money returned to the company's owners will deflate the stock price in the long run. I guess this is true. Instead of a dividend, a company can also choose to "buy back" its own stock instead, raising the price for shareholders without incurring any taxes. They could also invest in their business to increase future profits. Dividends are seen as characteristic of a business that is in its "declining corporation" phase, rather than its "wait until you see what we're going to do in the future" phase.

life cycle of a business

source, Corporate Finance Institute: https://corporatefinanceinstitute.com/resources/valuation/business-life-cycle/

At the moment, 22% of my savings is allocated into dividend-paying ETFs, mutual funds or stocks. According to Google Finance, my taxable portfolio and self-contributed IRA contain 8% medium dividend investments and 31% high P/E (price to earnings) investments. A stock's higher price to earnings ratio indicates it is trading at a multiple of its current earnings and is more likely associated with traditional growth stocks. You have to pay a higher multiple to gain the income streams of these high P/E businesses. I want to invest more into dividend stocks to raise my passive income level. Currently I earn around $50/month from my investments. Most of this is automatically reinvested.

You get to choose if you want to reinvest your dividends or take them as cash in your pocket. If you take it in cash, you'll need to pay a tax. If you use it to buy more shares automatically, you'll still need to pay a tax. So either way, part of your dividends are going to the government. If you hold foreign assets that pay dividends, the tax gets taken out of your payment before you receive it.

Not all dividends are the same. Yahoo Finance is great for researching dividend yields. It lists the forward dividend & yield of every stock if it pays a dividend. For example, Ford (4.98% yield) and Coca-Cola (3.40%) each yield a larger dividend so I've been scooping up shares. I believe these businesses are rock solid. Thanks to the dividend stock summer sale, they have pulled back from their all-time highs. I'm betting they will still be thriving 30 years from now. Hopefully, their yield will boost my passive income along the way if needed. I like having the option to turn off drip investing and flip them to cash if I need some extra money. Their prices also tend to be more stable. Whereas a growth stock needs to continue its trajectory of growth in order to justify its price to earnings multiples. If the economy slows down, they might suffer.

A 3-6% dividend yield is seen as a "goldlocks zone" of dividends. Anything higher than that might be a "value trap", luring in yield chasers to a owning a business with questionable fundamentals. If you are paid a whopping dividend but the price of your shares is decreasing, it offsets your returns. It may not be the best move to invest, despite reaping these giant yields.

Age is a factor to consider how much you want to commit to dividend versus growth stocks. I'm 33 years old, so I likely have an easy 20-30 years before I'd want to use my invested money, barring emergencies or large purchases where I need to raise cash. If you're younger, the growth stock enthusiasts say you should be more oriented for long term growth.

There's also the concept of a hybrid "dividend growth" stock. Microsoft (0.90%), Apple (0.54%) and Nvidia (0.04%) are examples of companies with higher P/E ratios that are rapidly growing their business and pay a smaller dividend than Coke or Ford. These types of companies are a happy medium between dividend and growth in my opinion.

In conclusion, I propose that a mix of dividend and growth stocks is the best approach to investing. Like most things in life, it's not all-or-nothing. Your allocation depends on your financial goals, risk tolerance, salary and age. If your salary is comfortable, you may not need to worry about passive income and can re-invest your cash payouts. If you're unemployed, you can use dividends to spell your expenses. Later in life, you might be lucky enough to live off your dividends. I hope to get there someday!

Oct 09, 2023

The Waiting Game

One of the hardest parts of investing is not doing anything at all. You need to wait for your investments to compound over time. The problem is the narratives that surround your investments. Adding more uncertainty, unexpected "black swan" events like wars and COVID can scare investors into thinking they know what's going to happen next.

I am not against actively managing your portfolio. Sometimes, we need to consider new information that changes our theory for why something will be a solid investment. For example, if a company is hemorrhaging money and not showing any signs they will turn it around. But there's still a chance they might figure it out some years down the road.

There is a gray area of investing where risk meets reward. You can choose to stick with an underperformer. If the company eventually dominates their sector and takes market share, leading to profits then you'll be rewarded. More risk, more reward. I personally like to include a few speculative plays in my portfolio, but honestly it doesn't ease your nerves to watch a company you own struggle to reach profitability.

My most profitable investment that I'm still holding, Tesla, falls into this category. I thought the world was destined to have an electric vehicle future before many saw the writing on the wall. Before the company turned profitable, I bought a bag of shares with intent to hold for a long time. Luckily, they turned their first annual profit in 2020 and continue to improve their results.

So far, the EV theory has paid well and the electric vehicle movement shows no signs of stopping. This story is an example of how you can invest on what you think the world will look like in the future, even if the situation is questionable in the present moment. Just know that it might take longer than you think to play out, or you could be wrong and it never plays out. The friction of this uncertainty in the outcome is what makes investing hard. Sometimes, there are simply better options to reallocate your losses into another more promising company that already has established a sound balance sheet.

I propose that many times, but not always, the best action is not to make any moves. You've got a large unrealized loss, but how do you know that market volatility won't swing the other way on your position? If you believe the company will be important in the future, hold.

Investing is tough because it's easy to be convinced by a stranger or talking head online that they know what's going to happen. More often than not, it's best to play the waiting game. Extend your holding period and the likelihood you'll profit increases.

Aug 09, 2023

Make Small Bets

Small bets can have outsized returns. If it goes south, you've also got less on the line. Have conviction? Make a larger bet. Not sure about an investment? That's a solid candidate for a small bet. You find out the company's outlook is now questionable or management is not meeting the mark? You could always sell half. However, the largest gains come from letting asset value compound over time.

The size of your bankroll determines your range. Consider making some small bets in stocks, real estate or even starting a business. There is less stress in a small bet. For me, it's $50-$500 up to $1,000 that I consider a "small bet" in my taxable investor brokerage account. Anything greater than that and it's no longer a "small bet" to me.

I even have some $50 or $100 positions that I might add to someday. This is the magic of stocks. Value tends to go up over time. You could have bought almost any stock at the end of 2022 and would riding gains. At the time, no one knew what would happen.

Now, the general outlook for stocks seems favorable, with consensus that the recession is cancelled. Year to date, the market is mostly reacting in a way that suggests we were in the "oversold" range at the end of last year. Are we now overbought? I doubt it, but we'll see! My theory is that now is a still a decent time to open some small bets to gain exposure to exceptional asset value growth.

My portfolio is tech heavy with some strategic industries like electric vehicles, solar energy and cloud computing. I also reaped some of the sudden 2023 AI buzz in Tesla, Microsoft and Nvidia with tech prices getting a lift pretty much across the board.

Microsoft is a core position in my portfolio. Nvidia was a medium sized bet that resulted in a 3x bagger gain. It's now a small bet again after I took some profits. Even on a small bet, booking 3x your money is a pleasant payday. After making the original bet in 2020, I'm letting my $1000 cost basis ride in this stock.

It's hard to encourage anyone to get into a high multiple valuation. I say that knowing this semiconductor company is a one of my best small bets currently. Risky or frothy prices might be right for a tiny bet with the possiblity of adding more later on a dip. Sometimes it pays to buy a company on such a trajectory but it honestly scares me to buy it now. So I'm holding my small Nvidia bet for a long time.

Afterword

This is not financial advice nor all writing on this blog. Learn to assess the health of a business. It is an art based on valuation, cash flow, profits, management, margins, market share, strategy, reinvesting assets for compounding growth and so on. Investing is unpredictable and risky, sure, but make some small bets.

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