Please Be Patient..

Navigating Uncertainty

As I shared with my Founding Members during our weekly livestream on February 20th — this is only the beginning of volatility, unfortunately.

As I’m sure all of you know, Russian troops have entered Ukraine. This is adding an unmeasurable amount of uncertainty for investors — specifically as it relates to inflation, supply chain constraints, and fiscal policy.

All of this is happening as we’re entering a stint of quantitative tightening, which is expected to cause valuation compression. This becomes worse as investors now have to focus on what could turn into World War 3.

Before I jump into anything to do with investing and economic implications, let’s remember what matters more than anything here — the senseless loss of innocent lives. Thoughts and prayers for all those in Ukraine and any of you with ties to the country.

In this post, we’ll cover:

• How we got here

• Where we potentially are in this market cycle

• What I’m doing with my money

If you haven’t yet read the post below — It shares everything I might unintentionally skip over in this post.

How We Got Here:

Let’s rewind almost 2 years ago now to when the pandemic first began in March of 2020. The Federal Reserve lowered interest rates down to 0% and launched a massive $700 billion quantitative easing program. By lowering interest rates, the Fed was doing its part in trying to encourage consumers to borrow more money — and consequently spend more money.

As you all remember, no one was spending money at the onset of the pandemic. There was immense uncertainty and everyone was hoarding their cash in anticipation of layoffs, bulk food purchases, etc.

By lowering interest rates, the Federal Reserve was pretty much saying “go take out debt and spend spend spend!”

Lowering interest rates is sort of a complicated process, but essentially through open market operations, the Fed was able to lower rates.

With these lower rates, everyday people were able to borrow money more cheaply and companies like Amazon, Apple, etc. began making more money than ever — considering that’s where people spend their money.

People are spending money — corporations are making that money — and the stock market is trading higher and higher because corporations are making more and more / people have free government money to invest.

Pair this increased consumer liquidity with supply chain constraints and now you have a perfect recipe for higher priced goods — more demand, less supply. This is a major reason why we saw inflation hit a 40-year high in 2021, as well as increase even more in 2022.

Where We Potentially Are In This Market Cycle:

After some incredible thrills, we have certainly bursted out of this stock market bubble and have headed deeper into a bear market (as outlined here).

To put this in perspective, here’s an image that overlays:

• Cathie Wood’s ARKK ETF (assumed to be a great gauge of the US tech bubble)

• Japan’s Nikkei Index during its late-1980s bubble

• Cisco’s stock during the Dot Com bubble

Despite the “boom” and “bust” timelines shifting around a bit due to increased retail investor involvement — there’s a clear correlation to be seen.

There are a few actionable observations we can make at the moment, with the most important being where we are in this market cycle. To me, we have more downside — this is practically a “given” as the Fed raises interest rates.

By the looks of the volatility we’ve experienced this week (and beyond), I’d argue we’re anywhere between the “Denial” and “Panic” zones in the labeled chart shown above — which means we’re going to see a lot of movement both up and down in the coming weeks.

It’s also interesting to see how the market is continually shifting as it relates to company valuations.

Before the COVID bubble, 10-15X forward revenue is typically as expensive as you’d see a company get (below). As of this last week, the top 5 median multiples are still above 31X (despite a healthy drop-off over the past couple of months).

This number shifts around (as it should) depending on the expected growth of a company (below). However, we’re still above historical norms.

Many companies are still trading higher than they should be.

A couple I shared with the Founding Members over the weekend were HashiCorp (HCP) and GitLab (GTLB). It would make a lot of sense if these companies continued to fall in share price, alongside ARKK.

Be patient. If we look at how long the Dot Com bubble “burst” lasted, we’re somewhere around 2.5-years from peak to trough (Nasdaq). Considering ARKK’s peak was February 2021, we’re around the 1-year mark currently. By the looks of those charts above, we’ll like be moving around a lot — with the general direction being lower.

I cannot emphasize enough the importance of patience. There’s no reason to begin pounding the “buy” button — investor sentiment is low, the Fed is raising rates, and we just witnessed war break out overseas.

There’s going to be a lot of uncertainty to navigate in the coming 9-18 months, so be prepared.

What I’m Doing With My Money:

Before I share, I want to highlight a section from this post.

It’s so important to keep everything in perspective as we violently move through green and red days in the market.

As mentioned in this portfolio update, I sold my Intuit (INTU) position in fear of a continued sell-off of their stock given they were / are a high growth tech company — something the market is not keen to at this time. They also guided to lower-than-expected tax revenue in 2022.

I opened a position in BRK.B — Warren Buffett’s Berkshire Hathaway. The main reason for this trade is because I believe in the second half of 2022 we’ll begin to see investors (and therefore the market) return to the fundamentals. Earnings per share, operating margins, sales growth, etc. — all factors Warren and Charlie take into account when picking stocks.

Real estate is still something I’m moving money into.

Funny enough, I just found a website that allows you in fractionally invest in Airbnb properties around the US. It’s pretty new, so they only have one property — but the IRR is projected to be around ~20% with a cash-on-cash return of around ~8%.

Beyond that, I’m on the sidelines. I’m not going to pretend like I have any idea exactly when this correction is going to finish. There hasn’t been a time in recent history when so many names within the S&P 500 are down -25% or more while the index itself is only down -10%.

In short, this correction looks incomplete to me in the longer-term.

Sure, we’ll see green days like we did on Thursday as markets bounce from being “technically oversold,” but I stand firm in my belief that we’ve entered a bear market that will likely last another 9-18 months.

Come March, the Fed will actually begin to tighten policy as opposed to just talking about it. This will come in as several growth companies will be reporting their earnings and growth forecasts for the year.

Stack cash and be patient. That’s not to say that every single stock is going lower and there are zero plays to be made. Some will be fine. Oil will likely continue to appreciate. Commodity stocks — specifically from the materials sector — could see serious price increases if there are Russian export disruptions.

Before you go, consider reading this deep dive of the recent earnings releases from both Amplitude (AMPL) and Affirm (AFRM).

I also pitch Aritzia (ATZAF) here and shared an update on cloud businesses here.

Finally, if you’re curious as to what the next major asset class to invest toward might be — watch this interview I conducted with Sima Gandhi, the CEO of Creative Juice.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.