THIS WEEK: S&P 500's best week of 2023
Weekly recap, circle of competence and investing, earnings and economic data
GRIT
05 Nov
Hi Everyone 👋,
Welcome to the latest edition of your GRIT weekly free newsletter! Here’s what we’re covering this week:
GRIT’s BIG 3 of the Week:
Genevieve’s Corner 👉 S&P 500’S BEST WEEK OF 2023
Matt Allen’s Corner 👉 CIRCLE OF COMPETENCE & INVESTING
Comin’ Up 👉 EARNINGS AND ECONOMIC DATA
1. Genevieve’s Corner
BEST WEEK Of 2023:
S&P 500's outstanding performance 💪🏻
Hi Everyone!
Let’s recap! 👇
MARKET UPDATE:
FED pauses interest rate hikes
S&P rallies +5.3% BEST week in 2023
U.S. unemployment rate rises to 3.9% vs. 3.8%
Canada enters a technical recession. GDP contracts -0.1% in Q3
Apple beats on revenue and earnings
U.S. bankruptcies rose 30% in the past 12 months
McDonald’s beats earnings. EPS +19% YoY on price hikes
UAW reaches a tentative deal with automakers. +25% wage increases over 4.5 years. THIS IS MORE THAN TOTAL INCREASE IN THE PAST 22 YEARS
Billionaire Stan Druckenmiller blasts Janet Yellen – the U.S. should have sold more long-term bonds with near-zero interest rates when it had the chance
SBF was found guilty on all seven charges of fraud
Charles Schwab has started to lay off thousands of employees and close offices to cut costs
Billionaire Bill Gross is bullish on regional banks. He is buying TFC, CFG, KEY, and FHN
U.S. manufacturing had the most significant monthly decline in over a year
WeWork is preparing to file for bankruptcy. Stock down -98% YTD
Walmart shares hit an all-time high, up +16% YTD
🎯 Genevieve’s Take:
So, what happened in my portfolio this week? Upgrade to GRIT VIP to find out!
Have a great weekend,
Genevieve Roch-Decter
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2. Matt Allen’s Corner
CIRCLE OF COMPETENCE AND INVESTING
This week, I will talk about how vital investing within your circle of competence is.
Warren Buffett coined the term “circle of competence,” which means investing in what you understand. This seems like a straightforward concept, right?
However, individual and institutional investors invest in stocks they do not understand daily.
What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
Warren Buffett sums up this entire corner in a much more eloquent and straightforward way than me. He urges any investor to understand a business before you invest in it fully. Before you invest in a stock, you should have a total understanding of how a business makes money, how it spends its money, and what variables impact its operation.
He goes on to say that it doesn’t matter the size of your circle. The important part is knowing your circle’s boundaries and never crossing these boundaries. Therefore, you should always know which companies you can understand and which ones you are not.
If you are a pharmacist, most biotech companies will fall in your circle of competence. If you are a banker, you should understand how bank stocks make money. My family has been in the funeral industry since 1947. Therefore, I have a great understanding of Death Care companies. When explaining the circle of competence, it is best to break it into three categories.
Source: CNBC
The Outer Circle
The “outside circle” is comprised of the companies you do not understand.
If you ever invest in a company in your outer circle, it is usually because you got a stock tip from your Uber driver or friend who recently started investing.
Many people have no clue how most pharmaceutical, energy, or genomics companies operate. Therefore, they should never invest seriously in these companies.
Middle Circle
The “middle circle” is when you invest in a company you think you understand but do not.
This is the circle that gets every investor in trouble. I personally have fallen into the trap of the middle circle, and it is never fun.
Just because you read an article on Seeking Alpha or heard about the company from your favorite Twitter influencer or a friend does not mean you understand the company.
When you fall into this trap, you need not understand the business and its industry by analyzing its financials or trying to value the company.
You need to understand every aspect of the business, from their financials to their management team, competitors, and the industry outlook.
Therefore, even if the company I'm analyzing has excellent financials and forecast growth, I would still hesitate to invest in the business if I needed help understanding the company and its industry thoroughly.
In short, if you want to be successful at investing over the long run, you should avoid investing in the middle circle. You might have short-term success, but this will not hold up over the long haul.
Inner Circle
The “inner circle” is your circle of competence, which includes the companies you can understand thoroughly.
It does not matter the size of your circle, but it does always help to keep expanding the size of your inner circle.
If you have worked in a specific industry for years, these companies will likely be in your circle of competence.
I have a great understanding of geopolitics and most technologies, so I will look for companies in these sectors.
Here are some questions that you can ask yourself to determine whether you fully understand a company or not:
What products/services does the company sell? Who is their target market? What makes them profitable?
Is the company growing? If so, why?
What is their team like? Are they competent? Are they buying the stock or selling the stock?
Who are the competitors? Are they the leader in the sector?
What are the company’s costs? How do they keep these low?
What are the risks of investing in this company? Why would this company fail?
You can find all these answers by reading the company’s 10-K annual report.
🎯 GRIT TAKE:
The best way to grow your circle of competence is by… Sign up for GRIT VIP to read our complete GRIT Takes!
Cheers,
Matt Allen
3. Comin’ Up
EARNINGS AND ECONOMIC DATA
💰 Earnings:
Monday: Realty Income, Diamondback Energy
Tuesday: Uber, Occidental, D.R. Horton, Devon Energy
Wednesday: Disney, Honda, Warner Brothers, Hubspot
Thursday: Take-Two Interactive, Roblox
Friday: Polestar
📈 Major Economic Events:
Monday: Fed Gov. Cook speaks
Tuesday: US trade deficit
Wednesday: Fed Chair Jerome Powell speaks
Thursday: Initial jobless claims
Friday: Veterans Day
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Should the Federal Reserve cut rates in December? |
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The author of this newsletter owns ETF’s (exchange traded funds) that may hold ownership interests in the companies discussed in this newsletter as of the published date of this newsletter. An insider to GRIT Capital Corporation currently holds an ownership interest in Enbridge (ENB-T), Apple (AAPL), and Surge (SGY-T) as of the published date of this newsletter. The insider to GRIT Capital Corporation does not guarantee that they will maintain their ownership interest in Enbridge (ENB-T), Apple (AAPL), or Surge (SGY-T)and may increase or sell such interest at any time.
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