How To Invest $1000 – 6 Rules For Investing Your First 1000 Dollars

Before discussing the 7 rules to follow when investing $1000 and an example of where I am investing my $1000s, I first want to ask you a question that is extremely important when it comes to making the first steps in the stock market, a question that many stock market beginners overlook.

Do you just want to make a little money on stocks or do you want to create long lasting wealth, become rich?

Let me explain the difference. Making a little money on stocks means buying Tesla’s stock (TSLA) at $178 and selling it a month later at $215.

1 tesla stock

That would give you $200 on your $1000 investment which is a 20% return. Not bad, but that’s not investing, that’s betting. Many did the same in December of 2018 hoping to make 20% on TSLA.

2 tesla stock price

Their loss, as I am writing this, is 43%. If you want to make money trading stocks, I can’t help you as I don’t have a crystal ball. Trading can make you some money, but it is unlikely it will make you rich in the long term.

If you want to invest your first $1000, in a way to develop an investing mindset that is going to create long lasting wealth for you, then I can help as there are some simple rules to follow.

A great book about how to become wealthy, financially independent, live where you want to live and how you wish to live, is the Millionaire next door. The book describes how the real millionaires are not those with flashy cars, expensive clothes, living in Belair etc. The millionaires are those that save their money, let it work for them over time, invest their time and energy to make what they know, own or manage, more efficient, avoid crazy risks and build their wealth over a lifetime.

3 millionaire next door

Source: Millionaire next door

Similar rules can be applied to investing and I am going to share 7 rules that are going to help you create a long-term, wealth-building investing mindset.

7 Rules To Become A Stock Market Millionaire Starting With $1000

These 7 rules will help you on how to invest your first $1000 to develop a long-term wealth building mindset.

  • Make your $1000 work for you

When investing, the key question to ask is what do I get as a return on my investment? Investing is not about buying a stock that goes up and down in value. Investing is about owning a business that creates some kind of value. Over the last 20 years, investors putting their money into Amazon (AMZN), have in return received the best e-commerce ecosystem in the world. Some other businesses pay large dividends like Coca-Cola (KO) has been doing for Buffett over the past 30 years. His dividend now is above 60% per year on what he invested in 1988.

Focus on what are you getting back on your $1000, it could be dividends, buybacks or it could be some new value that is being created. Then, when you know what is the return, you let it compound.

  • Let it compound

When you find something that creates value, you have to let it compound over time. The key when it comes to investing for the long-term to become rich is compound interest.

4 compound interest

Compound interest is extremely powerful, you just need the patience and right mindset to take advantage of it.

$1,000 invested at 15% per year over 40-years becomes $267,863. That is the power of compounding. Now you are going to say that it is hard to get 15% per year and I agree with you. But you will hopefully invest $1000 many times over in your lifetime and some of those $1000 investments might even hit 20% per year, some will hit 5%, but some will definitely do amazingly. Just 4 investments that compound at 20% per year, something Buffett did over 50 years, thus $4,000, would become $5,879,086 in 40 years. And let’s say you invest $1000 one hundred times in a period, 4 of those 100 investments might give you 20% per year or even more. I invest 1000 per month and I must say how I really enjoy the compounding created over time in the form of business development, higher dividends, reinvested dividends.

This is just to show the power of compounding. And I’ll also tell you the only thing that is certain, if you don’t invest you will surely not take advantage of any kind of compounding. Therefore, invest and let compounding interest do the work for you.

  • Even more important than investing is saving, so add up

5 saving money

Source: AZ Quotes

Charlie Munges is a person that says it clearly. Save, thus spend less than you make, invest it and you have nothing to worry. Invest the money in something offering a return, possibly exponential over the long term and that is it. How to find such investments? This is a bit controversial, but I’ll say go into depth.

  • Go in depth versus width

Most financial advisers and talking heads tell you to diversify. They tell you that so that they can make you listen to that talk show for longer as there is more to talk about. However, too much diversification is actually diworsification.

If you understand the risks of an investment, i.e. what can go wrong where the best thing is to think about worst case scenarios, and understand the rewards you will likely get. The rewards in the form of dividends, growth, reinvested earnings, a business model that will compound over time, then it is better to go in depth rather than width.

The key is to specialize in a few areas, I am currently researching REITs (Real Estate Investment Trusts) and if I find something interesting to follow, I’ll start learning more about the specifics of the business over the next few years. I might invest only once in 10 years in a REIT stock, but I’ll probably know it very well before investing. Knowing something very well allows you to understand the risks and rewards of an investment. This makes it much easier to invest the $1000 you have.

Give yourself time and learn about 5 or 10 things to invest in over the next decade. This is mastering only one thing, sector or investment vehicle per year. I can guarantee that when you become an expert, you will be able to find those 15% investments that others might overlook. This can be in real estate, stocks, commodities, businesses…

Over time I have built my specialism in emerging markets, commodities as from time to time Wall Street doesn’t like commodities nor emerging markets. When Wall Street doesn’t like something, prices are usually cheap. For example, something that is going to be developed over the next 3 years is usually extremely under-priced. Most investors are so focused on stock prices that they omit long-term business developments, something we can take advantage of.

  • Buy businesses, not stocks – a quick example from my portfolio, a stock to buy

The key when it comes to investing is to be a business owner. Let’s say you own a nice hotel in Paris.

6 paris hotel

As an owner, would you constantly watch real estate prices to see whether you made something? Or, as a real owner investors do, you would not have any intention of selling such a property and the only thing you would care about is how to increase prices or occupancy rates and manage costs.

The downside to buying stocks is that there is a price that changes every second. However, what you are buying is a business that develops and grows over time.

Let me give you an example. I am a happy owner of a company called Lundin Mining (TSX: LUN, OTC: LUNMF) because of the following reasons:

  • I am bullish on copper as I see demand for it rising due to all the electrification that awaits us, due to all the Teslas, a growing global population, especially in emerging markets.
  • The company is family owned and the owners are conservative. This means that debt levels are carefully assessed and the goal is to create a vehicle that will grow and increase dividends over time. The current yield is low at 1.78% but a buyback has been announced and they are investing in growth.
  • Large investments in the future is what Wall Street rarely focuses on until those investments start to produce cash. They have invested a lot in 2018 and will invest another $745 million in 2019.

7 2019 investments

Source: Lundin Mining

Plus, they have recently invested another billion into a newly acquired mine.

8 chapada

Source: Lundin Mining

All of the investments will likely significantly increase production over the next few years, increase cash flows and probably lead to higher dividends.

9 production profile

Source: Lundin Mining

Given the 30% expected increase in production over the next few years, I expect a similar increase in the value of the investment, be it through higher dividends or through a higher stock price. Their cash dedicated to investments will significantly decline and therefore there could be much more for dividends or more acquisitions.

I like the management and their style and therefore I am happy holding this for the very long term. My expectations on current prices is for a 12% yearly long-term investing return. I am happy with that and over the past year I have invested $1000 in Lundin twice in my portfolio where I add $1000 on a monthly basis. That is also my plan, I’ll keep buying businesses that I like

  • Invest for the long-term

Lundin Mining, the company discussed above had a market capitalization of $14.5 million in the early 2000s and now has one of $3.7 billion. Both Amazon’s and Apple’s market capitalizations were below $100 billion in 2009 with AMZN’s being below $25 billion.

10 market capitalization

Source: MarketWatch

Their current market capitalizations are around $900 billion and might surpass the trillion for good in the future. This is a perfect example of how Wall Street focuses on what will happen in the next quarter, the longest term analysts might look a few quarters or a year ahead, but few think about how will the business they own look in 10 or more years.

By thinking about how will your investment look like in 10 years, investing becomes easy. You don’t waste time on noise like the current trade war discussions that were about tax breaks a year ago or about going to war with North Korea two years ago. You focus on what is important, the acquisition the management just made, the small but constant increases in dividends, the new facility that is being build etc or you see big structural risks like declining demographics in some countries, piling government debt or trends that take of market share like e-commerce is doing for retail.

By using a long-term common sense perspective, you can eliminate the short term bets from your portfolio and concentrate it on long-term businesses with positive tailwinds. Just think about what will the worlds and the business you own look like in 10 years.

  • Compare the investments you own with the rest of your finances

Do you have credit card debt of 11% or student debt of 8%? Pay that because it is an immediate return of 8% risk free. Investing in stocks, be it just $1000 requires a clean personal balance sheet. By clean personal balance sheet, I mean:

  • You don’t need the money, ever. If you need the money in a few years or something, you might behave irrationally and sell at the wrong moment in time. Unfortunately, most investors sell in fear of seeing their investments decline further. If you know you don’t need the money and you can weather storms, you can let the investments compound over the long term for you.
  • If you have any kind of debt with a high interest rate, pay that first and invest the monthly costs you save in stocks. This gives you an immediate return and gives you also piece of mind.
  • You know your life, income etc. doesn’t depend on your investments. If it does, you are again not able to make rational decisions when investing as there are outside, or better to say personal influences that unable you to buy when others are selling for example.

Summary

If you wish to develop a long-term wealth building investing mindset please subscribe to my channel. In this article I have given you the 7 key mindset tools to use long term and an example of how I do it.

The key is to have a long-term orientation even if investing just $1000 because your long-term financial success depends on the mindset you have. A correct mindset means focusing on investing in various good businesses of which I have given you an example of a business I am invested in and finally, the key is to have your stock market investments detached from your personal finances. Sounds easy when written like this but very few adhere to that. The result of not following such simple rules are terrible investment returns.

The average investor did 1.9% per year over the last 10 years even if all other classes did much better. If you have $1000 to invest, start building a vehicle that will make you rich in the long term by having the correct mindset.

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Stock Market Crash, Economic Recession – My Plan, Portfolio, Cash and Stock Market Investment Strategy for Return Maximization

Contents:

  • Stock Market Crash Plan
  • My portfolios
  • Lump sum portfolio – 100k – crash strategy
  • 3 Stock Market Crash Investing Factors
  • Margin of safety
  • Focus on the business return
  • Don’t forget the dividends and takeovers
  • Model portfolio Stock Market Crash Strategy
  • Portfolio Strategy
  • Stock Market Crash Scenarios
  • Non-Linear Markets
  • Stocks crash all the time
  • Market timing
  • A crash can be inflationary + currency collapse
  • Conclusion

Stock Market Crash Plan

Whenever I do a video related to stock market crashes, views explode. This means investors worry about crashes and recessions. I think I can help with that.

The best thing if and when a stock market crash, economic collapse or recession come, is to have a strong plan. In this article I’ll share my plan and perhaps you will find good tips for your investment strategy so that you can increase your long term returns and lower your risks. 

I’ve been investing since 2002 when I took advantage of the post dot-com period and I also took advantage of the 2008 financial crisis. That experience is embodied in my plan but things are not that easy.

Let me:

  • Show you my portfolios and their crash/recession preparation
  • Discuss the most important things when it comes to recession proof investing
  • Show how crashes happen all the time and how take advantage of that

By the end of this article you should know enough to maximize your long-term investment returns by actually taking advantage of stock market crashes. It is extremely important to know ahead what might happen in order to act decisively when others sell in panic. 

My portfolios 

I have two portfolios that I manage that make things official as things are done publicly. On my Stock market research platform, I have a 100k lump sum portfolio launched in January 2019 and a model portfolio started with 10k plus 1k added every month launched in May 2018 when I also launched my research platform. I’ll discuss the strategies for each portfolio as those differ because one is a lump sum portfolio, thus no money will be added while the other is a portfolio with constant additions that makes risk management easier.

Lump sum portfolio – 100k – crash strategy

With 100k as a start and no additional investments, the key is to always manage your risks and have enough cash to take advantage of the opportunities arising when a stock or the whole market crashes. 

I am comfortable with a max of 8 positions because it is enough to eliminate individual catastrophic risk but it still leads to long term return maximization. 

However, on the cash position, I am currently 75% invested with 7 positions and 25% is in cash. 

The cash is 30% of the initial invested amount of 100k where the portfolio is now already at 111k but that I attribute mostly to short term volatility as the portfolio was launched just 5 months ago. 

Long-term I will be comfortable with a 20% cash balance with this portfolio. However, stocks are so volatile, especially individual stocks, that my cash balance will also be volatile. The most important thing is that you need to have a strategy when it comes to crashes and my strategy is the following:

  • 80% invested when I can find investments that will lead to 15% long-term average yearly business returns, have a margin of safety and are generally good value investments. 
  • I’ll increase my exposure to 90% when there are businesses that offer 20% yearly long-term business returns at acceptable risk.
  • I’ll increase my exposure to 100% when there are businesses that offer 25% yearly long-term business returns at acceptable risk.
  • I’ll increase my exposure to 120% through margin where there are businesses that offer 30% and higher yearly long-term business returns at acceptable risk, the dividend is more than enough to pay for the margin interest and there is no way to get a margin call.

The point of this all is not that I’ll do something because stocks crash, there is a risk of a recession or something. The point is that I’ll simply buy things when I can get value on the cheap, when the average cycle adjusted business return is high. The cheaper you can get value and returns, the better protected you are in case of a crash.

Plus, having a clear plan makes you unemotional when it comes to stock price movements, a crucial factor when it comes to investing.

Let me show you the business value I own because I think it will be extremely educational.

pastedGraphic.png

I own a lot of the energy, mining, food sector because it is something I can understand well and I feel it is something that will do well over the next decade. Plus, it is cheap at the moment as you can see from the 3rd column the average PE ratios around 10. 

If you look at dividends, price to book ratios and debt to equity, you will see that there is no fixed level as I mostly invest in the long-term business outlooks and those things are not reflected into fundamentals yet.

Price to book values are all over the place but that depends what you are buying and whether the value is tangible or future oriented in the form of future cash flows. However, I believe all of the businesses I own currently trade below intrinsic value. This gives me a margin of safety. 

3 Stock Market Crash Investing Factors

I have three things that I believe make investing easy, no matter the economy or stock market:

  • A margin of safety
  • The business yield
  • Dividends and takeovers

Margin of safety

As said, I believe all of my positions offer a margin of safety in a form or another. This means that if those stocks fall, I’ll be happy to buy more. A real investor is happy when stocks decline because he can simply buy more of the things he owns.

All my businesses have high cash flows or strong balance sheets which means it is unlikely those will ever go bust that gives me another margin of safety.

Focus on the business return

As said earlier, what makes investing easy is to focus on the business yield and not on the stock price. I try to find businesses that offer long term returns of 15% and above. This involves a lot of work to find such investments, understand them across the cycle and then buy when the risk is low and reward high.

I’ll explain what I mean by using the S&P 500. The current earnings/business yield of the S&P 500 is 4.72%. At the current level of 2,856 points for the S&P 500, the business earnings are134.8 points. 

pastedGraphic_1.png

Source: Multpl

An earnings yield of 4.7% also means that expected long-term investment returns will be around that number, likely a bit higher due to inflation and economic growth. So, if you wish for safety and are happy with a 5% return, buy the S&P 500. 

If you know stocks are volatile and there could be a crash coming, they you can manage your lump sum portfolio by putting portfolio exposure thresholds depending on the yield you require.

pastedGraphic_2.png

Such a strategy will allow you to be happy if stocks crash as you will be able to buy more of what you already like at a lower price. The portfolio exposure allocation depends on your personal preferences, required long term investment returns and also investing knowledge.

The most important thing when having such a strategy is that you buy more when stocks become cheaper. Thus, you will do the opposite of what most do. Stock prices will be all over the place over time, but if you know what your goal is, what are your capabilities, having such a simple plan will make investing easy and no matter what happens you will be happy.

Don’t forget the dividends and takeovers

As dividends don’t come often in most cases, dividends often seem irrelevant when compared to the daily stock market volatility of a few percentage points up or down, many disregard them. However, dividends are crucial for long term investors. If we look again at my portfolio, you can see that the yield on the whole portfolio even with the cash exposure will be around 4%.

pastedGraphic_3.png 

This means that every year I’ll get at least 4% to reinvest. If stocks crash, that 4% reinvested will be of incredible importance as the returns on that will be huge. Compound that long term and you will be amazed.

Takeovers happen often and you might suddenly have 15 to 20% of your portfolio in cash. Don’t rush it, wait for good businesses to offer you the required business yield and invest when that happens.

Model portfolio Stock Market Crash Strategy

On top of the above discussed lump sum portfolio, I have a model portfolio that I started with 10k in May 2018 where I add 1k per month. 

pastedGraphic_4.png

The monthly additions cumulate over time, which means the portfolio will grow and grow no matter what happens in the market. You will also see that the cash position is much smaller at just 7%. This is because I’ll be adding 1k per month for the next 19 years and that is all the risk management I need.

pastedGraphic_5.png

When I discount all the future additions to the portfolio with a 10% discount rate for the next 19 years, the actual present value of the cash to be added is 100k. This means that the current portfolio allocation is just 20%. Therefore, if you are an investor that will still be adding money to one’s stock market portfolio, you should actually beg for a crash because your money additions, alongside the reinvested dividends, will allow you to buy more and consequently increase your long-term returns. 

Portfolio Strategy

So, my strategy is simple, with the lump sum portfolio, I own assets where I am happy with the business yield and if the business yield increases, i.e. stocks crash, I’ll simply increase my exposure. I’ll talk about timing the markets in a moment.

On the portfolio with monthly additions, as long as you still add cash to your investments, you should not worry about a crash, but simply add money and take advantage of crashes.

Stock Market Crash Scenarios

Extremely important topics related to stock market crashes are the following:

  • The markets are not linear
  • Stocks crash all the time
  • Market timing
  • A crash can be inflationary + currency collapse

Non-Linear Markets

Stock market crashes are not linear, something crashes while other things go up. It is enough to compare the Shanghai Composite Index with the S&P 500 Index over the last 5 years.

pastedGraphic_6.png

Source: Bloomberg

Over the last 5 years the Chinese stock market has experienced two bear and three bull markets while the S&P 500 was constantly in a bull market. The message is simple, stock market crashes happen all the time. Therefore, if you are diversified you can take advantage of them by buying where and when others panic. 

What is also important is that not everything crashes at the same time. The S&P 500 has been down 2.6% over the last month but some stocks have jumped 26% at the same time. 

pastedGraphic_7.png

Source: Bloomberg

So, don’t focus on the general picture, focus on the individual positions, something will go up, something will go down, just be prepared and if something is a much better bargain, buy more of the bargain.

Stocks crash all the time

If I look at my portfolio, the average decline from 5-year peaks is 41%. I would call that a crash.

pastedGraphic_8.png

Crashes constantly create opportunities and crashes are always around us. I wish I could time the market but all I can do is focus on the business. Market timing is dangerous.

Market timing

I’ve been listening to stock market crash scenarios since 2002. “You are crazy to buy stocks now” is the sentence I mostly heard in 2002, 2009 and 2012 (European crisis) when I was buying stocks heavily. However, those that stayed away from the markets, lost a lot of money on opportunity costs.

My message is that if you focus on businesses, and on the business returns and keep a strategy like we discussed where whatever happens you are fine, you don’t have to worry about stock market crashes. This is because, let’s say you own a business that has a 15% earnings yield and the stock growth at 15% when things are going good.

pastedGraphic_9.png

Even if a recession happens every 5 years and the stock drops 30%, you will still be well ahead over 10 years. Plus, no stock will behave so linearly and you would sell when others are greedy and buy when others are fearful. Thus, your returns would be even higher. If I would have listened to recession predictions in 2018:

pastedGraphic_10.png

Source: Time 2018

I would have never bought a copper miner in 2018 because copper prices are very sensitive for economic development. However, I though that a miner was of great value and that even waiting 5 years for that value to unlock itself was a good deal. A recession didn’t happen, the stock got bought out and I did ok, despite all the doom and gloom around me.

pastedGraphic_11.png

A crash can be inflationary + currency collapse

A risk few discuss is an inflationary crash. Something not unlikely given the huge budget deficits most governments run. So, it is possible that we have an Argentina stock market scenario in the future. Something you can be prepared against only if you own value.

The Argentinian Merval index is up 34 times over the last 10 years while the peso is down about 93% against the dollar over the same period. So, $1,000 invested would now be around $2,450, something better than the S&P 500 did since 2008.

pastedGraphic_12.png

Conclusion

For me it is very simple as it has been rewarding me for the past 18 years. Simply buy value, good businesses, great assets and enjoy the returns while being patient.

I’ll keep looking, learning and constantly comparing in order to create the best maximizing return portfolio within my circle of competence.

The more I work, the more I am confident things will be ok. Any kind of crash would actually improve long-term returns even if it might look bad on my relative performance. However, I have no boss that can fire me based on a quarterly or yearly performance so I don’t have to fear that like most money managers have.

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How to quickly exclude stocks from further research

Welcome to Value Investing School, article 1 – How to quickly exclude stocks from further research.

With this article I wish to show how investing is mostly a game of exclusion if you are a bottom up value investor and you know what to look for. I’ll analyse L’Occitane en Provence as an example.

Things to learn are:

  • Investing is a game of mostly exclusion.
  • Focusing on the business yield, current or future, makes things easy.
  • Don’t be a relative investor, be an absolute investor.

locicitane

Source: L’Occitane

During the week I look at lots of stocks but what makes it easy for me to separate the interesting investments from the other, is the business return or the future potential business return. I look for current or even better, future double-digit yearly business returns and if a business doesn’t show that potential it is quickly skipped.  This makes me an absolute value investor and not a relative investor, a very costly and risky mistake many investors currently make. As would Buffett say, we invest in businesses and not a stock that goes up and down during a day.

I am currently researching a stock list from an Asian Value investing fund with some very interesting names but also some strange decisions like the L’Occitane en Provence stock. On this stock, I wish to explain:

  • 1) the risks of not focusing on the business yield
  • 2) the risks of relative versus absolute investing and,
  • 3) how easy it is to say no to an investment.

The business yield

If you are an investor in businesses, not stocks, all you care about is the yield of the business, the earnings and how the same earnings are reinvested or distributed at the end of the year. The higher the return on equity, your equity, the better. When buying stocks, your equity is the price you pay for the stock and the yield is derived by comparing the price you pay with the earnings. For example, L’Occitane is a growing company with revenues (1) tripling over the last 10 years (FY (fiscal year) 2019 revenue reached 1.42 billion EUR) and net income (2) almost doubling.

2 revenue

Source: Morningstar

However, when I look at the net income, I see that the average over the last 5 years is around 100 million EUR. I compare it to the current market capitalization (the value of all the stocks outstanding) is 20.6 billion HKD or 2.6 billion EUR. This means that the business yield the company currently provides is at 3.84% given the price earnings ratio of 26 (100/26 = 3.84%).

3 stock

That is far too low for me but then I must look at the growth the company promises. I look at the growth and see that same store growth is actually very low at 2%.

4 growth

Source: L’Occitane

And that all of the growth the management hopes for comes from acquisitions and emerging markets. From reading a bit about the company there is a new management, the company is restructuring and it is something Warren Buffett despises, a turnaround. From the conference call transcript:

5 trust

Source: L’Occitane

When you find words like ‘new management, new strategy, build trust’ it could be truth, but it could be also lots of baloney. Not what a value investor gets in to. So, when I see that I am already at ohhhhh.

Just another one for the record. On top of the new management, the company that made about a billion in profits over the last decade, suddenly decides to make an acquisition of a cosmetics brand and pays $900 million for a company with $40 million in EBITDA.

6 acquisition

Source: Elemis acquisition announcement

All of the above is simply too risky, it might work, I hope it works for them, but it might also backfire as that kind of corporate actions often do. The plan is to scale the brand, a totally new brand, in China.

7 skincare

Source: Elemis acquisition announcement

It could happen it might not, too much risk and the actual business yield is below 4%. Enough for a value investor. So, let me finish this with why are other investors investing in this? Well, they do so because they are relative and not absolute investors.

Relative vs. absolute investors

This is a concept well described in Seth Klarman’s book Margin of Safety and L’Occitane is a great example. A relative investor looks at the company and says:

“I have a great global brand growing at double digit rates that just made a potentially transformational acquisition trading at a PE ratio of just 26. A fair valuation in this market should be 40, thus the stock is undervalued by 30%.”

This might be true and the market might revalue the stock, or re-rate it as the lingo goes,  in case it shows faster growth in the future and improving margins. However, as a value investor you want both future growth and good earnings or value already there, not in some future promise. Also, the fact that the stock was much higher in the past, means absolutely nothing. Actually, it confirms that it was overvalued in the past and the market is slowly but surely re-rating it.

Conclusion

That is it, this is how I mostly spend my time, looking at companies that are not that interesting but from time to time, there is something interesting. To finish with a nice quote that summarizes this:

“Whatever you do, do it with all your might. Work at it, early and late, in season and out of season, not leaving a stone unturned, and never deferring for a single hour that which can be done just as well now.”

That is how bottom up value investing is done. You exclude more than 99% of businesses you look at and with time it becomes a fast process. Buffett says how it takes him 5 minutes to read through a business. Therefore, the more stones you turn, the better are the investments you will find.

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Stock market news – the FED, interest rates and global economic slowdown

Today we are going to talk about the economy and how it affects us investors and what to expect in the next 20 years! The news of the week was that the FED that will keep interest rates low:

1 FOMC

And the second very important news is that the global economy is slowing down and the growth is lowest since the financial crisis!

global economy, what will you focus on

Source: Bloomberg

How does that affect our investing? Is it important at all?

Let’s start with the FED, some think the current interest rate is close to the neutral rate and that should be it.

2 neutral rate

Source: Oxford Economic

Plus, that last interest rate hikes, have slowed down economic growth in the United states but have brought it to what is expected to be normal long term.

3 us growth

Source: Trading Economics

What does it all mean for investors?

Well, the FED will protect you as much as it can and as in Europe, they will do whatever it takes to keep the situation calm. As long as we don’t have inflation things will be good. Plus, it is hard to have inflation when there is so much supply of everything due to the same low interest rates.

However, lower interest rates just postpone the inevitable, which is that the economy is always cyclical and after all it all boils down to productivity. Policy can influence growth in the short term, prevent crises, which also means you can’t time a crisis. Nobody knows what kind of recession will come next and when it will strike.

Postponing means that you might make 20% per year for 5 years and then lose just 20% in one year when there is a recession. The point is that even if it all looks terrible in the form of high debt, low interest rates, it might go on for a decade, or inflation might change things. Therefore, try to find both good investments and protection in case of inflation. The best investments will always be quality.

Global economic situation

On a possible global recession, and something to keep in mind also when watching the specific country growth rates, on one side we will have the slowest global growth since the financial crisis but on the other hand, global growth has been 3% compounded over the last 10 years.

The average since 2000 is probably 4%. This means that over the last 20 years, despite the global financial crisis in 2009, the global economy more than doubled. It will probably double again in the next 20 years and there will probably be one or two recessions. Keep that in mind when investing.

What did stocks do over the last 20 years? Stock doubled!

4 doubled

Source: Macrotrends

Given that the current PE ratio, in the lowest tax environment I expect we are going to see going forward.

6 corporate tax

Source: Wiki

But even if taxes go up, the difference in return will be 1% or something per year, not significant and something not to worry even if the media has already started talking about it.

5 pe ratio

Source: Multpl

I would say, passive investors should expect their money to double over the next 20 years, perhaps a bit more than that with significant ups and downs during the period.

How to invest for the long term?

If you want higher returns, from these levels I think one can easily beat the S&P 500 and other indexes because it was a hard thing to do from 1982 when the PE ratio was 7, thus the return 15%. Now that the return is around 5%, by looking at businesses that offer more, you can do that over the next 20 years. What is the difference?

$100 * 1.05^20 = $265

$100 * 1.1^20 = $672

$100 * 1.15^20 = $1636

My mission is to help those who want more than 5% per year.

The message is simple and I will never get tired of repeating it because it is so important:

Invest in value that will give you a good return over the long time, that will benefit from the fact that the global economy will probably double over the next 20 years and that gives you a margin of safety.

You might buy an airport, fertilizer stocks that we will discuss on Sunday or who knows what. But keep those things in mind. The global economy will double in the next 20 years, no matter the news. Some businesses with quadruple, some will go bust, looking long term, you have a chance to find those that will quadruple.

Long term investing is the most important advantage we have. It allows us to take advantage of the irrationalities that emerge from Wall Street’s and everyone’s focus on the short term.

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Thor Industries Stock Analysis

Over the past months I have received more than 10 emails from various investors about how Thor Industries is a great, cheap, value investment.

1 stock price tho

Source: CNN Money – THO

The first emails started coming in when the stock price fell from above $150 to around $120. Since then, the stock fell another 50% to the current $60. Ouch.

In this article I want to talk about this because it is an excellent example of how many value investors get trapped.

How value investors get trapped?

We have:

  • An extremely cyclical industry that makes the fundamentals look amazing at cycle peak

You would look and see amazing growth selling for a PE ratio of just 15 or lower as it was the case during 2018 when the earnings were $8.14 and the stock price was between $150 and $100.

2 thor fundamentals

Source: Morningstar

However, then reality struck. Earnings halved, revenues declined and the company took a lot of debt to buy an European RV produces at cycle peak.

They did make $1.6 billion in operating cash flows in the last 10 years, but they also spent $927 billion on acquisitions not including the last acquisition.

cash flows

The acquisition and positive RV environment in the US allowed for nice growth. Investors usually look at the past and think the same story will continue, but it doesn’t have to be so. In a highly cyclical industry things change fast. The company’s last quarter shows a loss and if there are more troubles or costs from the recent acquisition, the decline in sales continues, we could see negative earnings for 2019 which would not make this look like a bargain anymore.

3 second quarter

I think the same story happened with TATA Motors, when many saw it as cheap with a PE ratio of 7 and a high dividend yield.

4 tata motorst stock

The long term chart of TATA is similar to Thor’s. The only difference is that the exuberance with THO was much shorter.

5 thor stock price

On the chart, many just look at the drop from $150 to $60 and invest on the hope it will go back there. If you look at a chart when you invest, please also look that the stock was trading around $50 from 2014 to 2016 which doesn’t make it look like a bargain. I get probably 10 emails per week about how this stock is cheap because it fell 50%, nobody sees that it went up 200% prior to that. Another trap unexperienced value investors fall into.

Is Thor a good investment now?

I recently listened to an interview with Howard Marks and he put is very simply. When investing you have to look at where we are in the cycle now. Nobody can predict the future but you can see where we are now.

The first thing is to look at inventories, and those are high with dealers.

6 inventory correction

Let’s take a look at the industry.

8 industry

Even if there is no sign of a recession, just the small increase in interest rates will lower sales by 20%. If there is an economic slowdown or if interest rates increase further, I would expect sales to drop another 20% per year for a few years. Interest rates increased from 4% to 5% and already sales dropped.

7 interest rates

Source: FRED

Plus, an RV is really a luxury purchase, one that can be postponed easily and when the market contracts there is also a lot of inventory to be dealt with. RV dealers go bust, fire sales can make the environment very tough. From 2006 to 2009 sales dropped 60% for the industry. I think we are now in 2007 for the RV cycle, the peak has passed and the growth turned into a decline. Those who wanted an RV, probably bought one in the last 5 years as the conditions were perfect, long lasting economic growth, low interest rates on investments, high stock levels, a lot of money etc. It is really a discretionary purchase.

Then, they made a big acquisition in Europe at cycle peak too. The environment isn’t growing, there is a lot of competition from glamping or from mobile homes crated by the camping sites and I don’t see a positive for RV in Europe in the long term.

9 europe

For example, German tourists used to buy an RV and go to Croatia for the summer. However, now, RV space is replaced with small homes already there. It is more convenient, similar experience and you don’t have to do a thing.

10 camps

On the bigger picture you can see how more than half of the camping site has been closed with these kind of homes.

11 camsp

So, we are in a place where the trends in the industry in the US are negative but probably still above cycle average. The average in the US will be around 300k units sold, still 40% down from where we are now.

In Europe the average will be 160k and declining but we are now at 200k. Forget about growth in Europe.

In the US, the management discusses 77 million households camping and how they should all buy an RV.

12 promise

But they forget that 500k units per year sold quickly brings you to 5 million that saturates the market soon as not all campers want to own an RV.

Plus, consumer confidence is usually at its peak in the late part of the cycle. When it declines, RV sales erode.

13 consumer confidence

When RV sales erode you need to have strong financials and no debt. THO didn’t have any up till the Hymer acquisition.

14 debt

Now the company has about $3 billion in debt which should cost them $150 million in interest per year. If I take 2015 as the average cycle year, the cash flows have been $200 million which makes it just $50 million now.

15 average cycle

Conclusion

I don’t see growth in Europe as the market is changing fast. Trust me, Europe is not the place to go around with large RVs and travel.

The debt is a certainty, there is high risk of firing back and then things get ugly as those are getting now.

What would be an average cycle price value? Let’s say $3 to $5 per share in free cash flows leading to a valuation between $30 and $50 from a value perspective. Want to buy it with a margin of safety? Then we are looking at a price below $20. Am I crazy? It was trading there in 2011, 2009 and 2003.

The conclusion – look at the long term average in the cycle for the company, this will give you a good indication o the value and the investment potential with a margin of safety. Remember, where are we in the cycle now?

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To Buy or to Sell Stocks with Crash Coming? Doesn’t Matter for Value Investors – Buy Value

I received this very interesting comment from a subscriber as I bought my 5th stock for my lump sum portfolio which is now 50% invested. So, I invested 50% of my portfolio over the last 3 months that might surprise people scared of the upcoming crash or recession.

stock market crash

I have 3 points to answer this question:

  • I can’t predict the future, nobody can

Nobody knows what will happen with the market, we have the last two crashes in our mind that were close to 50%, but that doesn’t mean it will happen again. Nobody, and I mean nobody knows.

  • A recession is always around the corner

There are recession predictions for 2019 and 2020, but the same could had been said in 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011, and especially 2010 and 2009. There are many out there that have been waiting on the side-lines since 2009 or they just got in in the last few years. No need to mention the missed opportunities.

For example, my largest position in January 2018 was Nevsun Resources.

3 nevsun

In January 2018 there were fears about China slowing down leading to a copper crisis etc., fears of a recession and market crash over the next two years with Ray Dalio saying there is a 70% chance for an U.S. recession. I would have been better in cash than investing in a copper miner, right?

Well, all depends on value, if you find it, even if a recession happens, your returns are delayed by a year to 3. The point is that if you buy value, you will survive those bad years and get ahead after the crash. So, I, as a selective investor, simply buy when I see value and when I am happy owning the business. It has rewarded me very well in the past no matter the possible crashes. And yes, I lost money in 2008, but it is not comparable to what I made from 2009 onward and from 2002 to 2008.

Index fund investors

For those who invest in index funds, just invest on a monthly basis, just dollar cost average and forget about stocks, don’t even think about it, you will get your returns whatever they will be, own your home, invest in another property, diversify and you will be well off. Your wealth doesn’t depend on the market, but mostly on you and you not doing stupid things like most did, I.e. selling in 2009 march.

3) Highest possible return long-term

I know if there is a recession my portfolio will get hit, but I also know that the highest possible return I will get is when I buy value when I see it. So, in good years I will have great returns, in a bad year, I don’t know how I will do. There is a nice passage in the book Margin of safety by Seth Klarman discussing how when you buy value, real value, it often offers downside protection as it is already depressed in price and the price can’t go much lower. All my current 5 stocks trade below book value, mostly tangible book value, have high earnings yield and potential. So whatever happens, I am a happy owner, owning assets and that gives me a margin of safety.

To explain in an easy way what margin of safety investing is, I’ll make the next video article apple.

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Stock Market Crash, Economic Collapse, Rigged Markets? How to invest rationally!

Good day fellow investors,

Last week I made the news on the topic how one should focus on the businesses he invests in and not so much on the macroeconomics.

I’ve got this interesting email discussing how I am missing many points:

Underlying factors that affect the metrics you used in your article:

  1. The role of the ESF in market ‘rigging’. – U.S. Treasury’s Exchange Stabilization Fund
  2. Stock buybacks from the new tax code (fudging the numbers you are working with).
  3. The key role the central banks are playing by keeping interest rates artificially depressed, thus not exposing the true cost of debt servicing.
  4. The sheer number of Zombie companies and historic high levels of BBB bonds.

Plus, how I should contact Peter Schiff, Gregory Mannerino and I would get quickly to 100k subscribers!

All the above is all correct, if I make a business analysis, I get 2k views, if I put stock market crash in the title, I get 4 times more views.

1 views

And in this article, I really want to put the topics of market rigging, buybacks, low interest rates, zombie companies into an investing perspective because I think there is a big difference between investing and protecting yourself from something that might happen but doesn’t have to happen.

2 keynes

When it comes to investing, the key is to achieve the best risk reward return and always remain solvent, no matter how irrational the market might seem.

Contents

Stock Market Fear and Irrationality

THE MAIN QUESTION IS HOW TO INVEST?

Market rigging!

Stock buybacks from the new tax code (fudging the numbers you are working with)

Artificially depressed interest rates

Corporate credit, zombie companies, government debt

How to invest keeping the risks in mind

THE MAIN QUESTION IS HOW TO INVEST?

One should think about HOW TO GET BOTH; good returns from businesses and protection from what might happen while taking advantage of possible market rigging. That is what I focus on and the message of this article is to try to give more balance to the possibly predominant message on YouTube regarding Stock market Crashes and Economic collapses etc.

We as investors have to focus on how to get the best risk reward return to reach our financial goals. Let’s say that gold explodes in 2034, I bet you that 98% of all those invested in gold at the moment, would not have the patience to wait till then to realize profits. That is one, plus, by 2034, if you have $1k now and you get a 15% return because you understand the market;

You know it is rigged,

You know buybacks are strong,

You know interest rates will remain low, or inflationary due to the huge debt,

You stay away from zombie companies, buy those that will do even better when the competition dissolves!

Your 1k become 8k thanks to the power of compounding, earnings and dividends that you don’t get if you buy insurance. Actually, insurance is a cost.

Let me put the things into perspective!

Market rigging!

The market has been rigged since ever – it is in the interest of most politicians, policy makers and people that stocks go up, pensions go up, everybody has more money, more confidence, spends more and even wages go up a bit – so it is in the interest of the current economies that markets go up, collaterals go down, and everybody is pushing for it to go up.

Take advantage of it.

On silver markets, gold markets, there are many speculators that make it look crazy and rigged because there is no rationality there. You can’t eat gold; no dividend and it doesn’t grow. In the 1980-s the Hunt brothers tried to rig the silver market. They owned 30% of global silver but regulations broke them.

Silver price:

silver price

Stock buybacks from the new tax code (fudging the numbers you are working with)

4 smart

Source: Reuters

$940 billion of buybacks expected in 2019, that is 3% of the market.

There will be ups and downs, but some buybacks are smart if made below book value, or replacement value or intrinsic value, and those values are in the eye of the beholder.

5 bubyacks

Source: Yardeni

Try to find buybacks that increase your value, your ownership and avoid those that destroy shareholder value. Compare many stocks and you will find the difference.

Artificially depressed interest rates

As long as it works, it does good in the short term while it is uncertain for the long term – again, as an investor you have to understand the game and play it wisely. The tide could change with a big inflation, but that is why I invest in businesses that would do well if there is inflation but that also do well in this environment. I get dividends, I get growth, expansion etc.

6 rate

Source: FRED

Corporate credit, zombie companies, government debt

Governments and corporations have increased their leverage as low interest rates allowed for lower borrowing costs. US government debt quadrupled in the last 20 years.

government debt

Source: FRED

However, this situation can be solved with inflation for the government and with bailouts for corporations. Plus, when zombie corporations finally fail, the environment will be healhier for good businesses. I’ll talk more about that in the next article discussing Archer Daniel Midlands (NYSE: ADM) where the CEO actually hopes for higher rates to limit the competition.

How to invest keeping the risks in mind

Now, what I just said, doesn’t mean I completely disregard it, I’m not stupid, I am not invested in companies that would go bankrupt in case interest rates go up, I am looking for both, both good businesses, that offer business returns and protection in case of any kind of crisis.

You have three options to invest your money!

The first option is to focus on protection: gold, put options, Treasuries (if you can call them protection). The second option is to focus on businesses, growth, business returns and investments.

Your $1k becomes $8k in 15 years with a 15% yearly return. If you own gold, and the dollar loses 50% of its value, you are at $2k, no dividends, no business, a lot of stress because you depend on what others are willing to pay, not on actual value.

I must say I did a lot of research on macro, especially when I was writing articles on a daily basis three years ago as that was my job, but my conclusion is, that one should be smart and take advantage of what is going on and not bet on something happening because it is logical to happen.

The situation was crazy in 2009, and many sold what they had fearing the macro voices, I was buying businesses in 2009, nice 5 baggers for me.

2 gdx

I took a loan 4 years ago, bought a house, and it was probably the best risk reward investment in my life. Fearing a crash would have me being without huge gains over the last 10 years.

The third investing option is to have it both. For example, a company I was heavily invested in 2018 was Nevsun Resources, a copper miner with a promising project in Serbia. However, what the market disregarded was that 30% of revenue from the project were from gold, not just copper. So, you can buy investments that give you a business return but also protection just in case some of the above mentioned risks materialize. I am now exposed to silver with my portfolio, but if you would take a look at my portfolio, you would never imagine it has a silver call option in it. That is because I like it both; give me business growth and give me the insurance part for free.

Think about it, although so rational, I reiterate my question, is it and will it actually be profitable to be scared or you should simply see how to get the best out of it all?

To put things into perspective, don’t focus on what should rationally happen due to text books or chicken littles, but put probabilities onto every conclusion. What will happen in the future is probably something unknown, be ready for it by investing in both.

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Prepare For A Currency Collapse

Good day fellow investors,

in the news last Friday, we discussed the earnings of various companies and how a long-term investor should approach those, check the video out if you haven’t. As promised, today we will discuss the economic environment, the FED’s shift in gears and how one should think about long-term investing in relation to what might happen.

I’ll explain how:

  • we are most probably going for a global currency collapse, that will happen sooner or later,
  • the economy doesn’t have to collapse, and
  • how stocks might better than other things.

Just before we start, I wish to thank you all for the great reviews on Amazon, we are in the company of greatness on the Amazon best seller list, with Nobel prize winners like Shiller, legendary investors like Lynch and great trading books like Market Wizards. I thank you all for your support.

18 books

The FED’s pause

Let’s start with the news, the last two weeks were filled with crucial news that is important to systematize and put it into context.

The key piece of information is the FED’s pause and change in rhetoric.

We can say the FED capitulated! The committee will be patient with rate hikes and adjust for whatever might happen.

2 the fed

3 new territory

Source: FOMC

Prior to the FED’s change in heart, there was this expectation that we are in for a global slowdown. After the FED changed its rhetoric, said they will pause to keep the economy up, stocks rallied after the bad end of the previous year.

So, a decline of 15% in the S&P 500 and a 100 basis points increase in the cost of borrowing for the US government, led the FED to stop with raising rates.

19 5 year trasury

Source: FRED

However, the FED capitulating means that the economy isn’t doing good at all because it cannot sustain small hikes!

6 end of cycle

Source: FRED

It is simple, corporations are too leveraged. US corporate debt has almost doubled over the last 10 years. The situation is similar across the globe.

7 coprorate debt

Source: FRED

Governments are too leveraged. Budget deficits are piling all over the place.

8 budet deficit

Source: FRED

Same situation across most of the modern world.

Now, you can tighten interest rates, but that will increase the cost of borrowing for governments, that will consequently force them to borrow more as no politician is going to save money and not spend.

Given the FED, ECB, BOJ and others are ready to do whatever it takes to keep things as those are, the only thing they know how to do is to give more of the same medicine, thus more debt.

NOW, let me make this simple – Q4 2018 – people were selling because of the FED, the economic data was good!

Q1 2019, people are buying because of the FED, the economic data is not that good!

2 truck orders

Source: Wolfstreet

3 italy recession

Source: Reuters

4 germany gdp

Germany

Source: The Independent

My conclusion is that there will be no more tightening, no more normalization because, over the last 10 years, politicians and central banks have seen that interest rates can be low and they are now like junkies on low interest rates.20 trump

Source: Twitter

How to invest and what to expect

I am looking at the data, I look at the FED’s and the politicians’ behaviour and I am thinking;

1) There will be more money printing, much more

The last recession unveiled a tool that hadn’t been really used before, it unveiled the possibility to use central banks’ balance sheets to help the economy. Before 2009, Central banks’ balance sheets had been mostly flat. After 2009, an explosion of money printing is what followed.

9 balance sheet

Source: FRED

We have already seen that governments and corporations went on a borrowing spree to take advantage of the low rates. As it is normal with both governments and corporations, there is never the intention to pay back the debt, their only goal is to make money on the spread between what they are earning from the capital used and the interest rate they have to pay. For example, Apple can borrow at an interest rate of 3% on a 10 year bond, if they use that capital and make 5% on it, they make a lot of money. Debt repayment? Don’t joke, you might kill someone with unstoppable laughter.

With governments, it is even worse. US interest expenditures had been stable as interest rates had been declining and stood low. However, as the FED started tightening, US interest expenditures exploded and given the current budged deficit, higher rates would make the payments unbearable. The usual definition of a Ponzi scheme is when one has to borrow just to pay the interest on the debt.

If interest rates increase by just another 100 or 200 basis points (1 or 2%), the interest payments of the US governments would make most of the budget’s deficit and would force the government to borrow to pay interest expenses.

10 government payments trasury

Source: FRED

What does this mean for the long-term? Well, the FED can control rates until a certain moment, at some point it all breaks down like a house of cards. Interest rates go up because who wants to lend money to a government or corporation that is borrowing just to pay the interest, inflation creeps in as people want to spend their money and the FED has to hike to stop the inflation while still printing to save the economy.

2) Be a debt owner, not a debt holder

Debt holders are the suckers, thus all diversified portfolios like my friend’s portfolio with an investment bank is, will see their values erode. Do you know that in the 1970s, bonds were called certificates of confiscation as inflation would eat up most of their yield?

news portfolio

Source: $13 Million Dollar Portfolio Analysis

Or, any other pension fund in the world will be in trouble too. While working in the Netherlands I did have a pension fund, ABP, where the top investments are government bonds, of course.

11 pension funds

Source: ABP – Dutch pension fund

3) Stocks might do well

However, the situation gets tricky with stocks as those are businesses and businesses, the good ones can transfer price increases, i.e. inflation to customers. A good example is the Argentinian stock market. From February 2008 the Argentinian stock market increased 17 times.

12 argentina

And you thought the S&P 500 did well?!?

However, the Argentinian Peso did almost the opposite against the dollar.

13 peso

So, prepare for a currency collapse down the road. It might happen tomorrow, it might happen in 2029. Whenever it happens, if you are not prepared, you are the sucker and you might lose it all.

4) The world will continue spinning

People often forget that the world will go on, the currency environment might be different but emails will still be sent. The cost might be different.

A good illustrative example is a normal postal stamp in Italy. The price in 1958 was 25 lire while in 1998 was 800 lire.

16 italy 2

The current price is EUR 0.95, thus 2000 lire. So, over 60 years, the price of sending a letter in Italy increased 100 times.

17 current price

The problem is that it will not be linear, it will be explosive so that will take many by surprise most. What to do? Well invest in great businesses, we will talk about one tomorrow, Disney, you can invest in commodities, we will talk about that on Monday with zinc, Glencore, Teck, Anglo American and you can make money on inflation, or at least stay protected as we discussed in the video on inflation this week.

My focus now is on businesses we can’t live without. That will give me protection over the long term, looking at margins of safety and healthy business returns.

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InterContinental Hotels Group Stock Analysis – Overview, Valuation And Investment Approach

  • A company that has seen its ordinary dividend increase 11% CAGR over the last 15 years, must be something special and well worth watching.
  • Asset light businesses are taking over the world due to their high margins and high returns on capital.
  • However, you have to buy them at a fair price. We discuss the expected investing return in relation to the stock price.

InterContinental Hotels Group (NYSE: IHG , LSE: IHG) is a stock that did very well over the past 10 years.

IHG stock price chart

The reasons for such a good performance lie in the high levels of free cash flows the company has been able to generate, its dedication to rewarding shareholders, ordinary dividend growth, industry tailwinds and many special dividends asset sales.

Given the asset light business model and positive long term industry trends, one could assume the growth to continue in the future. The free cash flows are used not only to reward shareholders, but also reinvested with a high return on capital. This is a characteristic only great businesses have. To quote Charlie Munger:

It’s obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn’t sell books, so there’s a lot of twaddle and fuzzy concepts that have been introduced that don’t add much.

In light of the above, I have analyzed the company and summarized my findings in the video.

Video content:

1:10 Company overview – business model, strategy, debt, shareholder orientation

7:12 The industry

8:00 Investment perspective and strategy

If you like this approach to investing; focused on great businesses but patient for opportunistic entry points, please check my Stock Market Research Platform.