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Who Wants to Be a Millionaire?

"You make most of your money in a bear market, you just don't realize it at the time."

Let’s just jump into everything. 

My personal strategy of “I’ll just wait out this bear market and not sell anything despite knowing we’re headed lower” is really starting to hurt right now.

However, as I said here, here, here, here, here, and here — I’ve been waiting for this. We’ve been waiting for this.

I’ve been identifying companies, stacking cash, and deploying small (but meaningful) amounts of capital into illiquid alternative assets like real estate — all in anticipation of this week.

And to be honest, what will likely be the coming weeks and months.

WTF is going on?

Rewind to this post — don’t fight the Fed. The entire reason the Federal Reserve has been on a mission to increase interest rates is because inflation is out of control. But we know this.. so why is the market reacting the way it is if the stock market is truly a leading indicator?

Over the last few months the Federal Reserve has been reassuring us they have everything under control. They have a plan to increase interest rates in such a way that will create this “soft landing” for the economy — ensuring we don’t experience a recession. As explained in my post, I say that’s bullshit.

“If stocks don’t fall, the Fed will need to force them.”

And it was bullshit — which is why the markets are moving the way they are.

The entire reason the Federal Reserve is increasing interest rates at a speed we haven’t seen in 20+ years is because inflation — to manage inflation. Okay, fine. No problem, right?

Well, it didn’t work.

Inflation has consistently come in higher than estimates — which continually throws off everyone. Remember how I always talk about how “investors want predictability,” and giving a premium to that?

We don’t have that right now.

Not only are we increasing interest rates (causing stocks to naturally sell off), but we’re doing so with expectations that aren’t even coming true. Inflation came in at +8.3% for the month of April according to the CPI data, and Truflation had inflation coming in closer to +11.4%.

Regardless, what the Fed had been doing isn’t working and our expert economists still aren’t able to accurately predict what inflation will look like on a monthly / annual basis.

High inflation + uncertainty + slowing GDP + possible recession = terrible stock market.

So, what’s the update?

It’s pretty clear that tech is oversold. That’s why we saw companies like Affirm (AFRM), Upstart (UPST), and Marqeta (MQ) experience massive bounces up today — but we know this trick from late-March. 

Tech (the Nasdaq specifically) moved up nearly +17% over a two week period before falling another -22% from that “recovery.”

To quote myself from a post shared on March 15:

“If you’re a short-term investor, this is your chance to make a clean breakaway — either lock in long-term profits or cut your near-term losses before things get worse. We’re not going to see a “market bottom” until the largest, most respected and “safe” companies like the ones mentioned above have their fall from grace.”

And over the next 10 trading days the market was green, giving short-term investors the opportunity to do just that. Today, the markets are now trading down more than -22% from this warning.

A Common Theme

There has been a laundry list of companies who have reported their Q1 earnings — Amazon, Apple, Microsoft, Shopify, Square, Cloudflare, Fortinet, Coinbase, Upstart, Affirm, etc.

Here’s the common theme — “Inflation is persistent and we’re not sure what’s going to happen for the rest of the year.”

—

“The COVID-19 pandemic continues to affect most of our operating businesses. Significant government and private sector actions have been taken since 2020 and likely will continue to be taken intended to control the spread and mitigate the economic effects of the virus. Actions in the latter part of 2021 and early 2022 included temporary business closures or restrictions of business activities in various parts of the world in response to the emergence of variants of the virus. Notwithstanding these efforts, significant disruptions of supply chains and higher costs have persisted in 2022. Further, the development of geopolitical conflicts in 2022 have contributed to disruptions of supply chains, resulting in cost increases for commodities, goods, and services in many parts of the world. The economic effects from these events over longer terms cannot be reasonably estimated at this time.”

— Berkshire Hathaway Q1 Earnings Release

—

“The externally driven costs are a result of intensifying inflationary pressures throughout Q1. We do expect the effects of these fixed cost leverage to persist for the next several quarters as we grow into this capacity. When you combine the impacts of the externally driven costs and the internally controllable costs, you get approximately $6 billion in incremental costs for the quarter.”

— Amazon Q1 Earnings Release

—

Back to what I mentioned just a bit ago about investor uncertainty… this “theme” is causing a lot of it. Companies like Apple completely pulling their full-year guidance, and other companies like Upstart lowering their guidance given record interest rate hikes.

Companies are being taken out left and right by investors — selling off by some -60% in one day in Upstart’s case.

Is It Really That Bad?

Yes and no.

On one side you have a company like Coinbase — pretty much admitting that they’re going to be experiencing heightened volatility given their close correlation to the crypto markets (lower monthly active users, lower trading volume, etc.)

Then on the other side you have companies like Affirm who are reporting higher profitability, revenue, and GMV than expected — as well as confirming they’ll be operationally profitable by July 1, 2023.

It really comes down to the principles discussed in this post surrounding free cash flow per share.

My game plan remains the same

Let me remind you all of what I shared last week:

“I don’t think we’re at the bottom yet.

Here’s my rationale:

There’s still a lot of uncertainty around how long the Fed will be raising rates and at what speed — specifically how these two factors coincide with each other. Too fast and there’s certainly no “soft landing” and the markets dive. Too slow and we experience high inflation for another few years which is not good for consumers or the markets.

However, that “BUY” button is starting to look incredibly attractive for a handful of companies — specifically those who are free cash flow positive or flipping free cash flow positive within the next 18 months.

Before we talk through them, I think it’s important to note the following — this is not “I’m buying these stocks in one sweep,” but instead “time to start deploying 10% of my cash now that the markets are down -15% just like we expected.”

Please notice how I’m only focused on free cash flowing companies. The first companies to sell-off during uncertainty are the incredibly unprofitable, high-octane ones. I’m not after them just yet.

I’ll be expanding my positions into these companies over the coming days — wanted to run the names by you all first.”

Now that the CPI data is live and I have a better understanding of how little the Fed is actually impacting inflation (alluding to the ‘inflation has peaked’ narrative), I’m going to begin my buying process in the following names:

  • Airbnb (ABNB)

  • Upstart (UPST)

  • Cloudflare (NET)

  • Dutch Bros (BROS)

  • Palo Alto Networks (PANW)

  • Affirm (AFRM)

  • Tesla (TSLA)

  • Nvidia (NVDA)

  • Unity Software (U)

As the statement above says, I don’t want to deploy more than ~10% of my cash into these names at this time. Considering I’m sitting on ~$40K in cash, this means about $4K across 10 companies, or ~$400 per company.

This is not a race. 

Remember this photo from the post shared ~1 month ago? I drew a red line to update you as to where the price stands today. If history repeats itself, we’re in for a bumpy ride. Please be patient, we’re just getting started.

Be greedy this year

I want to remind you of a quote by Shelby Cullom Davis, and the reason the title of this post is what it is:

“You make most of your money in a bear market, you just don’t realize it yet.”

You ever look back on a stock chart and think..

“Damn! I wish I was smart enough in 2008 to buy Apple stock at $2.94 (split-adjusted)!” or “Those people who bought Nvidia stock at $1.87 (split-adjusted) sure were smart. It’s over $300 / share now!”

It’s your time. Well, it’s approaching at least.

Those people had an 18-month window in 2008 to buy Apple for way less than its previous all-time-high before the stock began making new all-time-highs again in late-2009. Once that happened their “generational buying opportunity” was gone.

I’m going to buy Upstart at $30 / share and then in 7 years when it’s back above $400 / share be feeling great about myself. Sure, I’ll be the first to admit I probably should have tried to time the market better. However, I saw this bear market coming and I knew I was going to take advantage of it.

Please take advantage of this, especially for your retirement accounts.

Prioritize maxing out your Roth IRA this year. Prioritize contributing to your 401k this year. Prioritize making a plan to do this not just this year but also next year!

2022 and 2023 could be buying opportunities like 2001 and 2002 were.

The (TACK) ETF

If greed isn’t your thing, in my next post I’ll be sharing a deep dive analysis of the ETF “TACK” which uses risk-on and risk-off momentum indicators to rebalance in and out of cash on your behalf on a monthly basis.

Since its launch in late-March, the ETF has been risk-off with 50% of it’s “holdings” being “cash.” Because of this, the ETF is only down -3.5% YTD compared to the S&P 500’s YTD return of -11.6%.

This is particularly interesting because TACK holds all of the same sector weightings as the S&P 500 — so theoretically TACK will experience similar upside returns with limited downside returns given their risk-off stance.

Really excited to dive deeper — more to come this weekend.

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.

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