Stock Market News – Forget About News

Stock Market News – Stocks might crash, recession ahead, so what?

Will there be a stock market crash, will there be a recession? In this article I’ll show you why it doesn’t really matter and what are the real things you should focus on!

We will discuss:

Contents

Politics and economic news vs. business news

Earnings are the key, not economics

Market valuations

Will there be a crash?

Earnings and volatility

How to take advantage of volatility

Invest when you are happy with the business earnings

 

Politics and economic news vs. business news

Over the past years, I’ve been making some macroeconomic videos, I like the mental exercise, analysing the long-term risks etc. However, I must say, all that ‘mumbo jumbo’; GDP, economy, debt, trade wars, employment, housing etc. hasn’t helped me at all when it comes to investing. I am subscribed to an economic newsletter from the Wall Street Journal and in the last 4 weeks there were two positive and two negative headlines all about the US housing market, so funny.

The fact is that companies are living beings that adapt to circumstances, grow and change over time. By looking at the business, not the economy is actually where I get my investing value. As I am really pushing on the research, more and more of it will be business specific and less macro. Although macro is fun to look at, discuss and you can talk about it for eternity, talking about it doesn’t really help your portfolio.

For example, the S&P 500 has been flat since January 2018.

news

Source: CNN Money S&P 500

The point is that nobody could have predicted where the S&P 500 could have gone, it could have been up 20% or down 30%. It is all a guess, no matter how much macro you study. The point is that we have to focus on the business, nothing else.

I’ll take this opportunity to discuss the real news and news that could be important for your portfolio.

  • Extremely important news 1: your long-term investment returns are driven by earnings

Earnings are the key, not economics

In 1999, S&P 500 earnings were 58.55 points. Today we are at 130 points. That is an increase of 122%.

2 S&P 500 earnings

Source: Multpl

How did the market do? Well, the S&P 500 was at 1282 points in 1999 and now it is at 2757 points, up 115%.

3 s&P 500

Earnings are up 122% and the market is up 115% over the last 20 years. In the mean time we have had the dot-com bubble crash, the great recession, a European crisis, Japan not growing anymore, a commodity boom and bust etc. Who knows what will we have in the next 20 years, but no matter what happens, good businesses will do well. Another thing that helps very much with determining stock market returns are valuations.

  • Keep an eye on valuations because the market is extremely differentiated

Market valuations

In 1999 the S&P 500 was at 1282 points with earnings of 58.55 that leads to a PE ratio of 22. Thus, the earnings yield is approximately 4.5%.

1282*1.045^20= 3091 points

According to the valuation, investors could have expected a return of 4.5% based on the valuation they were paying in 1999. The return was even a bit higher when you add the dividends of just below 2% per year.

4 s&P 500 dividend yield

Source: Multpl

The current market’s valuation is 21, so your expected long term investing yield should be around 4.5% as it was in the last 20 years.

5 S&P 500 pe ratio

Source: Multpl

Will there be a crash?

There will definitely be market crashes in the future but you can’t time them. Let’s say there is a crash of 30% 6 years from now but in the meantime, the S&P 500 grows at 5% per year. This would say that from the current 2757, the S&P 500 would go to 3694 points. If then it crashes 30%, we would be down to 2585 but by waiting for the crash you would have missed on the dividends so you wouldn’t be ahead. However, as we spoke that earnings are key, you can invest for higher than 4.5% returns by investing in earnings and taking advantage of the volatility.

  • The market is extremely differentiated and volatile – learn about the business

Earnings and volatility

If I look at the top 10 positions of the S&P 500, the PE ratios vary extremely and I can tell you that returns will vary extremely over the next 20 years.

6 pe ratio

Source: IVV

If we take a look at the top 10 S&P 500 holdings from 20 years ago, only two companies were there that are still in it.

7 top 10 1999

Source: ETFDB

Therefore, it is extremely important to look at try to understand where could your investment be in the next 20 years. This doesn’t mean that if a company falls out the top 10 it will be a bad investment. However, you can avoid buying companies with too stretched price to sales ratios and extremely high earnings valuations where the actual business doesn’t justify.

The point is that when you follow a company for a few years you begin to understand it much better than the media does, you understand its natural cycles and how to invest around those.

This allows you to take advantage of volatility. It is pretty simple if you have a long term view.

How to take advantage of volatility

The easiest was to take advantage of volatility is to rebalance your positions in relation to the earnings yield those offer.

8 rebalancing

The only problem is that you have to move your focus away from the news and future expected earnings and simply focus on the real current business earnings. Just 6 months ago, Apple’s stock was above $232 only to fall down to $142 in January and now rebound to $173. Apple’s earnings didn’t change that much, so if you focus on the earnings yield you can buy more when the earnings yield is higher, PE lower, and less when the yield is lower, thus the PE ratio higher.

I didn’t buy Apple, but in the summer of 2018 I invested a bit in Brazil because I did find an interesting business there.

9 brazil

Source: EWZ

I didn’t sell yet, but the increase in price gives me a nice thing to think about and see how it fits my portfolio. The point is that it is all easy when you invest in businesses. Which leads me to the most important news of all:

  • Invest in the business, be an owner

Invest when you are happy with the business earnings

By focusing on the earnings and not on the news, investing becomes easy. What is your required investment return?

4.5% – buy the S&P 500 and forget about it

7% – buy good businesses when their PE ratios are around 14

10% – same but at PE ratio of 10, or higher ratios buy with some growth

15% – look at good businesses in distressed sectors, value investments and take advantage of the market’s short term focus. This implies a lot of work but it is possible to find such opportunities.

To summarize:

  • Forget about news, focus on the business reality, the long-term reality
  • Earnings are the drivers of your investment returns, be a business owner
  • Focusing on earnings will allow you to take advantage of the market’s irrationality, or better to say volatility

News, economy, stock market crash, recession, GDP, Trump – not adding value to your investing, so focus on the business and that is what we do here, so please SUBSCRIBE!

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Stock Market News – The FED, Interest Rates and How to Invest

Good day fellow investors,

The news this week was all about the FED as the FED’s chairman made a speech and their meeting minutes came out on Wednesday. The market reacted extremely positively to the news and new rhetoric.

1 s&P 500

Up 1.55% on Monday, 2.3% on Wednesday.

Something very important it that we have to always do is to differentiate between the FED’s rhetoric and what they will actually do. As we have seen this week, what the FED says has a big impact on markets and changes the economic environment.

So, the FED must be very careful about what and when it says something. Let’s give a quick overview of what has been said and what has been done and then discuss and explain the implications of it.

The topics:

  • Powell’s dovish speech
  • FED’s meeting minutes
  • Economic data
  • Investment risk reward outlook

On October 3 2018, Powell said the following:

we’re a long way from neutral at this point, probably.

This week he said this:

interest rates are “just below” a range of estimates of the so-called neutral level

And this is very important for asset values and the economy! Let me explain:

Everything starts in the economy based on where interest rates are.

2 20 years interest rates

Source: FRED

Why is this so important for the economy and asset prices? Well, first about the economy. People have unfortunately already a lot of debt, be it student debt, mortgages, car loans or credit card loans. Now, if interest rates go up, debt becomes more expensive and consequently interest payments rise and there is less money available for spending.

For example, I have plotted the 30-year mortgage interest rate against the FED’s funds rate.

3 mortgage rate

Source: FRED

You can see how if follows the FED’s rate but what is important is that since the FED started increasing rates, the 30-years mortgage rate went from 3.5% to the current 5%. This means that the cost of a mortgage increased 42% which is huge.

The following chart shows how closely correlated those things are.

4 mortgage rate

Source: FRED

Now, why are Powell’s words so important. Because he now said the neutral rate will be closer to the current level of 2% than what was previously expected, closer to 4%. That 2% difference in the normal rate, makes the difference between a 5% mortgage and a 7% mortgage which is an enormous deal as people have more money to spend elsewhere and the economy doesn’t suffer.

Why did Powell change his rhetoric? Economic data

A look at the FED’s minutes show how they are watching what is going on and allowing for flexibility.

Concern on debt, leveraged loans.

11 debt

The last economic date has been showing weakness signals and therefore the FED changed their rhetoric not to lead the economy into a recession immediately as they usually did in the past. To say it again, when the FED increased rates, usually a recession followed.

The economic data came from various sources.

Home prices have slowed down in growth.

6 home growth

Source: WSJ

Why is this so important, because the economy is based on debt and asset prices going up, a decline in home prices would quickly lead to a 2009 situation.

But, perhaps the most significant information related to the economy is the following.

GM is cutting jobs in order to prepare for a slowdown in the cycle. You can do whatever you want but you can’t fight market cycles.

closing

Even the extremely bullish IMF downgraded its global outlook.

7 global downgrade

Source: Bloomberg

Also, something that summarizes an economy, are business equipment orders, not growing despite the tax cuts and stimulus.

8 equipment orders

Source: Bloomberg

How to invest in this environment?

Now, with everybody yelling that the FED will start the next recession, the FED is changing its policy to not be the one starting a new recession, what happen in the past will not be the next trigger, it is always something new.

Nevertheless, by lowering the normal rate, the FED is going along with the populist policies across the globe as you cannot be the only idiot tightening. So, things will be going along as they are going until they stop going and currencies go to hell. Be careful when owning bonds and business that cannot transfer price increases to customers and business that are alive just because of low interest rates.

For example, car manufacturers in Europe that can borrow at 0%:-)

I am investing in commodities, good businesses that will survive cycles and inflation.

On the economy

It is clear that it is so dependent on stimulus, both fiscal and monetary and that is how it is. One day, the FED and politicians will lose control because they are not allowing for a natural cyclical economy A recession is good as it eradicates the bad. However, bankruptcies are at historical lows.

9 us bankruptcies

Source: Trading Economics

Lower interest rates will make it easier to pay off debt, but we are just postponing the inevitable and making it harder down the road. One day, inflation will knock on our doors, be ready, be hedged and have a long-term mortgage again if the opportunity knocks with a 3.5% 30 year mortgage.

Keep reading, we will simply continue with what we do on this blog, looking for great businesses that are going to do well no matter what happens in the economy and we are going to look for value across the globe and buy when we find it but we will always keep in mind the risks out there.

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Nassim Taleb is warnings us – situation worse than in 2007

  • The US government has $21 trillion of debt, but few know and think about the $49 trillion in hidden debt.
  • The global economy is not stable because the core is cracking already, think Italy.
  • Taleb compares this debt environment with a Ponzi or Maddoff scheme.
  • The main message is to be protected (gold, real assets, puts).

In a recent Bloomberg video, Nassim Taleb, the author of Black Swan and probably one of the best estimators of risk, is warning us that the financial situation is worse than it was in 2007.

As Taleb doesn’t share much data in his interview, I have researched each of his statements and attached a few facts to them.

The topics he discusses and I dig deeper into are:

  • (0:00) Introduction
  • (1:23) The bigger debt pile that has just been transferred from housing to governments.
  • (4:16) The hidden debt few are taking into account.
  • (5:48) How the economy is already cracking in some places.
  • (6:32) The high probability of a global currency collapse.
  • (8:01) What will happen and how will it pan out? Inflation.
  • (9:36) 4 ways to protect yourself.

Enjoy the video.

ARE THE STOCK MARKET AND ECONOMY IN A BUBBLE? 7 FACTOR EXPLANATION

I recently summarized Dalio’s last book, Big DEBT CRISES and there he shares his questions, check list, to see whether the stock market or economy is in a bubble or not. In today’s article, in light of the FED’s tightening, we are going to go through his questions, to see whether we are in a bubble or not.

1 bubble questions

Source: Big Debt Crises

Good day fellow investors,

my name is Sven Carlin and I am an independent investor, independent thinker who doesn’t really like to follow the crowd, that has served me well in my life and, I have the feeling it will serve me well in the future too. Let’s go through Dalio’s questions one by one and then conclude with what to do, where Dalio’s option is to have an all-weather portfolio.

We are going to look at whether the US economy and stock market are in a bubble. As for Europe, I’ll make a special article about it due to the many economies.

  1. PRICES ARE HIGH RELATIVE TO TRADITIONAL MEASURES

The US stock market is expensive and prices are much higher than traditional measures.

2 stock market price

Source: Multpl

A look at the cyclically adjusted price to earnings ratio for the S&P 500 that takes into account 10 years of earnings, shows how stock prices were higher only during the dot-com bubble. But, let’s not focus only on stocks, let’s look at housing.

3 house price to income ratio

Source: Longtermtrends

The home price to income ratio is not higher than it was in 2007 but is getting close to it and it is much higher than it was in the past 50 years. Incomes were low in the 1950s so that isn’t really comparable.

To answer question one: yes, prices are high relative to historical measures.

2. PRICES ARE DISCOUNTING FUTURE RAPID PRICE APPRECIATION FROM THESE HIGH LEVELS

If we take a look at the S&P 500 and at S&P 500 forward expected earnings, all we can see is fast growth.

4 price and earnings

Source: FACTSET

So, huge growth is expected, S&P 500 actual earnings are at 116 points while the market expects them to be at 175 points in the next 12 months.

5 s&p 500 actual earnings

Source: Multpl

As for home prices, the huge run up in prices up to 2018 showed bubble characteristics but it has been cooling of as interest rates go up.

6 new home prices in the us

Source: FRED

So, perhaps what we have seen up to December of 2017 will again be called a bubble as higher interest rates inevitably put pressure on asset prices. Not yet on stocks as the sentiment is still strong but you can’t escape when it comes to housing.

ANSWER: YES, prices are discounting fast future price appreciation, certainly in stocks, whereas it might be over for housing.

3. THERE IS BROAD BULLISH SENTIMENT

Let’s see, Kudlow states the US economy is crushing it.

7 kudlow

Source: CNBC

While consumer confidence is close to record highs.

8 consumer confidence

Source: FRED

Answer: YES, sentiment is bullish! Even with stocks, the sentiment has been extremely greedy in 2018.

9 greed

Source: CNN

4. PURCHASES ARE BEING FINANCED BY HIGH LEVERAGE

This is not in a bubble, consumer credit is just 50% higher than where it was in 2008 and is just 10 times higher than where it was in 1980. (allow for some irony here)

10 consumer credit

Source: FRED

As for the stock market, margin debt is at historical highs. Just to mention as a comparative note, margin debt was $263 billion in February of 2010 and $314 billion in July of 2008.

11 margin debt

Source: FINRA

Answer: YES, purchases are increasingly being financed by debt.

5. BUYERS HAVE MADE EXTENDED FORWARD PURCHASES

If we look at the level of business inventories, those are 33% higher than in 2008 and I don’t think the economy grew 33% since 2008.

12 inventories

Source: FRED

Answer: a mild yes in this case.

6. NEW BUYERS HAVE ENTERED THE MARKET

Now, the percentage of Americans owning stocks didn’t really go up that much lately as millennials don’t invest that much in stocks.

13 people invested

Source: Gallup

The middle class left after 2008, typical behaviour, buying high and selling low. If we see another bump like in 2007 where the participation jumped from 61% to 65%, we will know it’s a bubble. Those aged 35 and above are investing a bit but not yet like it had been the case.

14 americans invested

Source: Gallup

However, not investing in stocks but definitely saving for a house. New buyers are rushing into the home market.

15 new mortgages

Source: Bloomberg

Answer: with stocks it is a no but with houses it is a yes. Also, it is important to note the widening wealth gap where those that have invest more and push stocks higher while those that don’t have, simply don’t have to invest.

7. STIMULATIVE MONETARY POLICY THREATENS TO INFLATE THE BUBBLE EVEN MORE (and tight policy to cause its popping)

Interest rates have been already tightening and we can expect more in December.

16 interest rate

Source: FRED

However, just take a look at historical interest rates.

17 historical interest rates

Source: FRED

On top of monetary stimulus, there is huge fiscal stimulus.

18 budged deficit

Source: FRED

On top of the already huge deficit, the deficit is expected to breach $1 trillion in 2019.

So, to summarize on the questions:

19 summary

WHAT TO DO:

Now, that depends on where you are in your life, about to retire or just starting, but in any case, an all-weather portfolio is the key as we are in the late part of the cycle.

debt dalio

Source: Big Debt Crises

We are at bubble top – so a lot of opportunities to diversify by selling what is in a bubble and buying what is in depression. In a global world you can do that today.

If you wish to check how am I building my portfolio as I cashed out of most my long investments during 2015-to 2018, the last being Nevsun – you might want to check my Stock market research platform where I am slowly building my model portfolio that should do very well in this environment.

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STOCK VALUATION

Stock valuation – do you need complex math?

The valuation of a stock

The valuation of a stock can be extremely complex or simple. The fight is between two worlds: the academic world and the stock market investing practitioners. 99% of people who invest are academics because that is what you learned at school. Only the 1% are practitioners who have constantly beaten the market over the last 5 decades.

We are going to discuss today:

  • Stock Valuation and input parameters – complex or common sense?
  • Stock Valuation Formulas
  • Methods of Stock Valuation
  • Equity risk premium

How to do stock valuation properly to get good investing returns not academic titles or grades!

To quote Warren Buffett:

“There is so much that’s false and nutty in modern investing practice and modern investment banking, that if you just reduced the nonsense, that’s a goal you should reasonably hope for.”

What is stock valuation?

For example, I recently analyzed Facebook ’stock and my earnings model looks like this:

facebook stock analysis 1

The parameters used are the growth rate and the discount rate that is my required return, a price earnings ratio of 10 for the terminal value which all lead to a present value. All other factors are qualitative and not quantitative, and I don’t believe anyone can put those into numbers. It is funny to compare my model with professor Damodaran’s model from the Stern School of Business at New York University. You can download his model here.

damodaran valuation

This is 50% of the first sheet of the excel file with 8 similar sheets. But let’s just focus on the first steps, the input page.

stock valuation

All normal things like revenue and margins, growth but then we come to the risk free rate and the initial cost of capital.

Munger:

“Some of the worst business decisions I’ve seen came with detailed analysis. The higher math was false precision. They do that in business schools, because they’ve got to do something.”

Stock valuation formulas

Stock valuation formulas can be simple or complex. The initial cost of capital – if you don’t know what is your firms cost of capital, you can compute it in a sheet like the following.

This shows more in detail what is required.

what is cost of capital

So, you are basing your investment decision on the risk free rate, ok, but then also on the beta coefficient, past equity premiums and here is where academics and practitioners strongly disagree.

To quote Munger:

“Using [a stock’s] volatility as a measure of risk is nuts.”

Methods of stock valuation

I always use this example, let’s say you are Luigi and you own a restaurant in Venice. Do you care about the risk free rate, equity premium and the beta coefficient of your business?

Luigi is a smart guy, and he only cares about the number of customers, the price of the ingredients used in the pizza etc. in order to get to the money he will be able to get out of the business in that year. He might reinvest that money somewhere, but then he will again compare what he has to put in, whether it is a good business and what he can get out. Does he care what is the price of his restaurant now or what it was 6 months ago, no, he will never sell it, he is a business owner investor and not a speculator.

Similarly, to quote Munger again:

“In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That’s your opportunity cost. That’s what you learn in freshman economics. The game hasn’t changed at all. That’s why Modern Portfolio Theory is so asinine.”

Buffett, looks at the business he invest in, not about what the market things about the business. That is the difference my friends. If you are studying business valuation and you have paid a lot for your studies, you degree will get you a high paying job and a good return on investment. As for your own investments, they will not benefit from what you are learning in school. All of those things that you learn in school change –  the risk free rate, the equity premium, the beta, everything constantly changes, you have to have a portfolio that embraces those changes.

Yes, academics will be right in their explanations, after the thing has already happened, common sense investing is about investing before the thing gets known to all.

And that is the biggest difference between academics and practitioners. Academics can only look back and estimate what will happen, practitioners can use common sense and street smarts. That is the advantage we independent investors have, 98% of the market is all about academics because you look smart. Those who made constant market beating returns, year after year, decade after decade, don’t use those mumbo jumbo, lollapalooza formulas.

The lollapalooza effect is often discussed by Munger that explains how most people do thing because of social pressure. If you pay $250k for an Ivy League education and all you learn about is the WACC and all of your superiors use the formulas or expect you to use them in you analyses, who are you to do things differently.

Munger: I’ve never heard an intelligent discussion on cost of capital.

BTW, in my Ph.D. all that I did is to compare what Buffett has been saying all his life and what academics. The explanation of stock market price changes from the Beta coefficient came to 5% max, while what Buffett says explained 36% of long term stock price movements.

Equity risk premium

According to academics risk is the standard deviation of a security’s price over a number of periods.

However, others say different things:

Risk is not knowing what you are doing – according to Buffett

Risk is looking for what you don’t know – according to Dalio

Risk is calculating what is the max permanent capital loss – according to Klarman

Risk is not short term volatility – according to Munger

Stock market valuation

Investing is yes about valuation, but not about what the market tells you the value is, it is about what you think the value of the business is and the advantage we have is to buy when the markets backward looking says one thing, but value screams the opposite.

“We don’t give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage.” Munger

For example, the recent drop in Facebook’s stock price would have made the stock riskier to academics due to the higher volatility and higher beta, but a real investor would see the stock as cheaper. The more you know about what you are doing, the lower is your risk.

How to do stock valuation

The key things to watch are:

  • Price earnings ratios,
  • Earnings growth
  • Fundamentals – book value
  • Have your own discount rate if you must as it is simply easier to compare
  • Compare investments and invest in the best handful
  • Think what can go wrong
  • KEEP IT SIMPLE

The point is to know the difference between investing success and academic success – academics cannot beat the market when using their formulas and complex analyses, and that is why the continue to discuss the efficient market theory etc. Investment practitioners, those who apply common sense to what is going on, they beat the market over the long term. I have both a Ph.D and I have beaten the market, better to say destroyed the market in the last 16 years just because I applied common investing sense to what I did in the stock market, not academics. So, I can talk about this.

I’ll finish with Munger who is amazing as always:

“I have a name for people who went to the extreme efficient market theory—which is ‘bonkers.’ It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality.”

If you want to save time by having me do full time stock market research and valuation for you for just $0.96 per day, check my Stock Market Research Platform.

If you enjoyed reading this or watching my videos on YouTube please subscribe to the weekly letter where I summarize what I’ve been doing through the week and the videos that were posted.

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How To Invest In Stocks

Investing in stocks requires answering the following questions:

How to invest money in stocks?

How much money to invest in stocks?

What are the best stocks to buy?

How to find the best stocks to buy?

How do I protect myself from a stock market crash?

What are the best stocks to invest in?

Should I invest in penny stocks? Should I invest in bitcoin? Should I invest in blockchain?

How to invest in stocks on your own?

Hi, my name is Sven Carlin, Ph.D, and I am an independent stock market investor and researcher. Before researching and analysing stocks full time, I was an Assistant Professor of Finance and Accounting at the Amsterdam School of international business and before that a researcher at Bloomberg in London. I am also a book author – Modern Value Investing – where I describe 25 tools to apply when looking at a stocks and other interesting modern value investing topics.

I want to explain what I do and how I go about these questions.

How to invest money in stocks? How much to invest in stocks?

I invest money in my stock market portfolio on a month by month basis. I have a model stock portfolio that I started with $10 thousand and I add $1 thousand every month no matter what. I do not necessarily buy with all the money that I add every month, that depends on the opportunities in the market, more about how I find opportunities and track them later.

My goal is for my stock market portfolio to be at $1 million in 20 years. This will be achieved if I reach an investment return of 12% per year. I believe, this can be achieved with proper research, good risk reward analysis and proper portfolio diversification. Investors that I admire like Seth Klarman, Warren Buffett, Schloss, have achieved even higher returns than 12% over the very long term. Other value investors are steadily above 15% which shows that this can be done over the long term with a smart value investment strategy.

The stock market portfolio is just one component of my investment portfolio that includes real estate, businesses, cash, and a separate option portfolio in the future, when the time comes for that. When I think stocks are generally cheap I might transfer some of my money from other asset classes to stocks.

As for you, see what your financial goals are, how many of those goals can be reached through the stock market, what is the long term return you can expect. Your long-term returns depend on the earnings the businesses you own deliver. This also answers the following question.

What are the best stocks to buy?

The best stocks to buy are those with good businesses that lead to growing earnings, cash flows and dividends over time no matter what is going on with the economy or stock market. The higher are the cash flows those companies make, the higher will be their stock price. For example, NIKE’s earnings in 2008 were $0.95 per share. In 2017 the earnings were $2.51, thus almost 3 times higher.

The stock price reacted similarly, or even a bit more as valuations expanded but you get the picture, the more earnings grow, the higher will your returns be. So, the key is to buy great businesses that will grow over time.

The market is now a bit overvalued from a historical perspective, so a fair price for NKE should be around $40 or $50, and that is exactly when I recommended it last summer.

nike stock priceSo, the focus for the investor should be in finding the best business earnings. This will also be the best stock to buy. So, how do you find such / best stocks to buy?

How to find the best stocks to buy?

Here it all boils down to research, looking for the best businesses, following sectors that are cheap at the moment due to temporary reasons. I was following the shoe sector last year because it was down due to fears about American retail, but for companies like NIKE it doesn’t matter if you buy in a shop or online, it is even better to buy online for them as their margins are bigger. I made my money relatively quickly in that sector last year. So, the key is to do constant research, keep the value models on lots of companies updated, research new sectors and keep an eye on the stocks you find interesting with a good business. By having a fair value model of many stocks, you know when something becomes a buy or no.

An overview of my research platform will give you a good indication of how this works. Please check the platform and the curriculum: Sven Carlin Research Platform

We have been looking at Argentina lately because those stocks are down 50% in the last few months, but many business have their revenue in US dollars, so not really affected by the Argentinian peso which creates an opportunity for those who follow such a situation. Solar stocks are also down, and there are other opportunities in current market.

But, this doesn’t mean a stock has to be down for me to buy it, positive structural long-term trends are also extremely attractive. For example, the electric vehicle revolution or 5G might really create great opportunities and there are too amazing value investments to be found because there are several ways to get exposure (nickel for batteries and copper but also the technology for 5g through stocks that have other good business segments too. I have found that the more research I do, the better are the risk reward opportunities I find, it takes a lot of time and I do this full time, but it pays with high returns of investment. My amatorial (unfortunately no audited track record yet) return since 2002 is around 18% per year on average.

You will be thinking that 18% returns sound nice but how do I protect myself from a crash?

How do I protect myself from a stock market crash?

Another question all would like an answer too is how to prevent your stock portfolio from crashing during a stock market crash.

Well, you can’t, let me tell it to you immediately. Peter Lynch, had seen his Magellan portfolio crash more than the S&P 500 each time the S&P 500 crashed 10% or more. That happened more than a dozen times while he was the manager.

However, in case of a crisis I like to be hedged against more money printing by owning gold miners. I like to be hedged against stupidity by owning stocks that produce things all people need and will need in the future, with good management, with a long term orientation.

Further, on stock market crash protections, you have to see when you need the money and then balance between cash and investing. Stocks to expensive? Have more cash and then balance as the market always fluctuates. The best protection is to invest in the best stocks.

What are the best stocks to invest in?

This is a bit different from the best stocks to buy because you sometimes buy on a merger arbitrage, or there are some catalysts that crate a positive risk reward situation. The best stocks to invest in are the best businesses at a fair price. When you see NIKE at a PE ratio of 15, you know your long term returns will be at first 7%, but those will grow by 10% per year over the next two decades and you will have 10%, 15% in time from a great business.

So, when you invest in stocks for the long term you simply buy the best businesses and forget about them. The returns will come.

Should I invest in penny stocks or bitcoin or blockchain?

Penny stocks and cryptocurrencies attract lots of people because big money can be made there fast due to the high volatility. However, that is speculation and you depend on someone paying more than what you paid. There might be penny stocks that are worth something but that requires huge research analysis of an investigative type that usually costs a lot and you don’t have much volume to make money on that. So be careful there and usually what you make here you lose somewhere else. Fortunately, those who tell you how much money they made on a penny stock or cryptocurrency don’t have to tell you how much they lost on something else.

On cryptocurrencies and blockchain, there is a big difference between investing in cryptocurrency scams or investing in the blockchain technology.

How to invest in blockchain?

To invest in the blockchain technology you are looking at long term investments in companies like IBM. There is even an IBM blockchain page.

ibm blockchain

This is something completely different than buying bitcoincash or other. The key is to know as much as possible about any form of investment assets, which will give us the answer to the final question.

How to invest in stocks on your own?

The first thing to know is to understand all the terms related to stocks and investing, all the accounting factors (I have to make a course accounting for investors, will come but I can’t promise when), read as many books as you can (we have made a summary of the intelligent investor here) and there is also my book, and give yourself time to learn. Invest the money you can afford to lose as tuition, you learn much better with real money.

Secondly, when you understand what is what, when you find your investment style you will also find what works best for you. If you like value investing, emerging markets, commodities, and pure common sense investing but don’t know how to do the research yourself or simply prefer to use your time in different ways, please check my research platform.

Perfect Stock Market Portfolio

  • How to build a perfect portfolio
  • How to manage a stock portfolio
  • It is all about portfolio risk reward

STOCK MARKET PORTFOLIO

Investing in stocks means you end up with a portfolio as having only one stock is too risky because you never know what might happen. Today, we’ll discuss MY PERFECT PORTFOLIO and 5 things to watch when building a portfolio in 2018!

Do you have a good investment portfolio?

Do you know what is portfolio management?

How to manage your portfolio?

Can you take advantage of market opportunities?

Is your portfolio hedged in a way?

Here is the video version of the article if you prefer:

I’ll try to answer those questions by showing how I go about portfolio strategy and the 5 key factors to watch when building a portfolio!

Best stock portfolio for 2018

We often discuss stocks, news, certain sectors but what is the perfect stock market portfolio in 2018? As I am building a Model Portfolio for my Stock Market Platform, I think an article on how to build a portfolio today would be really good. We don’t talk enough about portfolio management and how would my perfect portfolio look at this point in time!

What is a great stock portfolio?

A stock portfolio is a combination of various stocks that will lead you to satisfying investment returns no matter what happens in the economy and financial markets.

We are now in a goldilocks period, economic growth is strong, unemployment is low and stocks markets continue to go up. But as would ray Dalio say:

ray dalio

According to Dalio, there is a 60% chance for an economic slowdown prior to the next elections and we have seen Trump already preparing for that by putting the blame on the FED and higher interest rates.

So, a stock market or investment portfolio should be prepared for the financial world changing. Further, technology is changing the relationship between inflation and growth which is also something to think about when analyzing your finances and investments.

New interesting technologies include 5G, electric vehicles, data, etc. etc. So, apart from what might go bad, I also want to be open to what might go right in the next decade.

5 key portfolio management things to watch

Whether you only have a google finance portfolio or an actual money portfolio this exercise will help you understand the risk and reward you’re your stock market investments.

  • Focus on value investments

In an environment of low inflation, sky high stock prices, a long term investor has to keep his focus on value. What will be the things people will use also in a recession and what will be the technologies that will grow no matter what. Having value gives you protection from inflation and in case that stock prices drop you know you can easily buy more. A good example of such investments is where the price to tangible book value is around or below one. This means that the stock is trading at below what the company spent on its assets.

  • Portfolio valuations is key

Your long term returns depend on the earnings the stocks you have in your portfolio generate. The higher is the price to earnings (PE) ratio of your portfolio, the lower will be your earnings returns. The PE ratio of the S&P 500 is at 24.3 that implies a 4.11% earnings yield (100/24.3 = 4.11).

pe ratio

Historically, PE ratios have been lower, around 15, and this is why stocks market returns were higher than 6% in the last century.

stock market portfolio

So, if you can build a portfolio with better valuations but great assets, you will reach great financial results! Fortunately, there are great investing opportunities if you are willing to look for them.

  • Long term portfolio risk management is key

The stock market is usually very volatile, especially if you look at specific sectors. That is why you have to give yourself time to buy and prepare a portfolio. A few years, a healthy economic cycle, some market panics should do the trick. So, what I am doing with my model portfolio will take a bit to set up as it is a process and we have to wait for investment opportunities to come to us. Chasing stocks and buying just because it looks nice in a portfolio, simply increases the risk and lowers long term portfolio returns.

  • My Perfect portfolio exposure

The perfect portfolio exposure depends on volatility and risk and also hedges! It also depends on the risk reward of each position at the current moment so it is really a process through time, real portfolio management. But to give you an idea of how I see this at this moment in time, here it is:

GREAT BUSINESSES ACROSS:

20% DEVELOPED markets and global

8% LATAM

8% CHINA

8% ASIA (incl. Russia)

8% HEDGES & GOLD

8% REAL ESTATE

15% COMMODITIES

25% CASH AND OPPORTUNITIES

This will be around 20 stocks and a lot of those would be mixes. Further this does not include the cash balances in each position depending on the current opportunities and risk reward. Some stocks get hit extremely hard during a recession, while some simply continue to grow thanks to their amazing technology.

  • Portfolio risk and reward

In the long term, when it comes to stock market investing and portfolio management, even if only 5 things of 10 things only go right – the point is that you can make so much money on those five, if you do things properly, that you will not care about the losses. It is not rare that good stocks go up 10 or 50 times in a decade or two (multibagger stocks) that are the drivers of your portfolio returns. Careful risk reward portfolio management allows you to take advantage of such stocks.

Portfolio management – it is about risk reward and value

To conclude, with stocks and also with hedges – it is all about where can I get the most value for the smallest investment risk – that is what investing is all about.

For example, the risk reward of a portfolio hedge – a hedge is usually cheap when it is worth the most and the opposite way!

This is how I am going about building a stock market portfolio in 2018. Other things that matter are also your personal circumstances, the safety of your job, your monthly income, business, pension, country, wealth, healthy etc.

If you enjoyed this article please subscribe as I’ll continue with the portfolio management series where we still have to talk about things like:

  • Economic situation
  • Risk reward of investing at the moment
  • Likelihood of what might happen (technology, monetary easing)
  • Commodities (long term fair values)
  • Countries (some are cheap some expensive)
  • Sectors (some will implode some explode)
  • Portfolio weights (in the current environment)
  • Portfolio hedges
  • Currencies
  • Developed/emerging markets

It is all about buying when it is the best time to do so, selling around the positions when overvalued, or just reducing the portfolio exposure etc. at the and it all boils down to buying great businesses at the right time – the rest will take care of itself when investing.

Now, I will be opening positions when I find stocks that give me a 15% business return with limited downside and huge potential upside! For now, in my model portfolio, we have had one in commodities, one gold miner hedge, and two in Latin America with some more riskier plays in China.

Should I Invest? It is a Positive Sum Game

Should I invest in stocks?

Investing in stocks is a positive sum game. By being careful in what you invest in, you can reap many positive returns just from how things work in this world. The economy, other people, trade and technology all work in your favor.

Stocks went up 280 times over the last 85 years. Take advantage of it.

stock market

What should I invest in?

The key is to invest in things that will do well over time no matter what. Stocks benefit from economic growth, their business earnings create your returns, and over the long term you are protected from inflation.

Why should I invest?

Except from protecting yourself from inflation, if you don’t invest, the value of your money is eaten away slowly day by day. You need $25 today to purchase what you could had bought with $1 back in 1913. On top of everything, the global economy will continue to grow and develop, stock earnings will grow and your dividends will grow.

How much should I invest?

That is personal, but even a small amount will develop a habit, which is the key for long term investing success.

What stocks should I invest in?

You can invest in mutual funds, which is a good option if you don’t want to think and look for better investment opportunities. If you are willing to put some effort, you can find better and better investments that protect your capital and give you higher returns over the long term.

Should I invest in bitcoin?

Investing in cryptocurrencies is the opposite of investing in stocks. Stocks have dividends which lead to positive returns, stocks are parts of businesses that own assets that generate profits. Those assets protect you from inflation. Cryptocurrencies like bitcoin and Ethereum only depend on whether somebody is willing to pay more for them and there is a hefty fee related to every transaction that makes it a negative sum game. This can be seen by the big swings in cryptocurrency prices, an example is the ripple price.

ripple priceWhat should I invest in 2018?

The key when investing is to create a portfolio of assets that are going to do the work for you but where you will also be diversified. This means that you should look to build your investment portfolio over time. More about that in tomorrow’s video about my portfolio.

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Here is a video about why should you invest in stocks:

 

 

15 BRAZILIAN STOCKS DISCUSSED

When analyzing a sector to invest in, like I am currently doing, it is always good to go through a list of stocks to get a better feeling about what is going on.

Therefore, I just looked at 15 Brazilian stocks (EWZ)  listed on the NYSE. My list includes big companies like AMBEV (ABEV) but also three recent IPOs that took advantage of the positive environment emerging markets enjoyed in the second part of 2017 (Estre Ambiental (ESTRE), Netshoes (NETS) and Nexa Resources (NEXA)). The full list of the stocks discussed is the following:

AMBEV S.A. (ABEV)
BRASILAGRO (LND)
BRASKEM (BAK)
BRF S.A. (NYSE: BRFS)
COMPANHIA SIDERURGICA NACIONAL (SID)
COSAN LIMITED (CZZ)
EMBRAER (ERJ)
ESTRE AMBIENTAL (ESTR)
FIBRIA CELULOSE (FBR)
GAFISA (GFA)
GERDAU (GGB)
GOL LINHAS (GOL)
NEXA RESOURCES (NEXA)
NETSHOES (NETS)
TELECOMS

Enjoy the video, I’m sure you’ll get a good feeling about the investing environment in Brazil. We discuss valuations, value, risks and the key investing factors to watch when contemplating opening a position in the above businesses.