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Moat Market Intel: Market Breadth Improving Greatly

One of the signs of whether the market is healthy or not is whether there are a few mini rotations happening in the market and whether the strength in the market is more broad-based.

One of the longest consolidations this year can be seen in the Russell 2000 index which represents the smaller companies in the US.

It looked like the index have finally broken through.

This chart from All-Star Charts show that there is more small and mid-cap stock hitting their 1-month and 3-month highs compared to the period of consolidation.

Perhaps we are ready to run.

How You Should Look at Catastrophic Risk and a $Goog mistake

In his recent piece, John Huber of Saber Capital revisits his decision to sell Alphabet last year.

We all can agree this may not have turned out to be the best decision. But sometimes, we can draw the wrong conclusion just because the outcome is bad.

If you are an Alphabet shareholder, John articulates what made Google such a good business.

Google has in my view one of the top 3 moats in the world. The company aggregates the world’s information in the most efficient way that gets better as its scale grows, and it has the network effect to monetize that information at very high margins and with very low marginal costs. Google might be the greatest combination of technology + business success the world has ever seen.

My friend Saurabh Madaan (a fellow investor and former Google data scientist) put it best: Google takes a toll on the world’s information like MasterCard takes a toll on the world’s commerce. This information over time is certain to grow and the need to organize it should remain in high demand.

John also reminds us that there is some risk in investing that we best avoid because the repercussion is so big.

There are some risks with downsides that, if you have concentrated your position and you are caught in some of these risks, it would set your wealth back for some time:

Confronting Your Investment Mortality

I name this podcast episode this way because this was the biggest message that I get from this podcast.

Bill Brewster chats with Kyler Hasson on how he generates his investing ideas, how he structures his portfolio and how he manages clients’ money.

Like a lot of his podcasts, I find it nice to listen to two people having an honest conversation.

Bill and Kyler discuss the challenges of managing other people’s money. Kyler explains why he shifted to finding more lasting businesses instead of doing the approach of buying $1 companies at $0.50 to $0.70. The main reason is that if you sell stock over there, you incur capital gains tax.

And if you operate in California, the tax drag can really hurt performance. So he would rather pivot to buying businesses that compound returns over time.

Kyler and Bill also discuss why they start moving away from being rather concentrated. Kyler shared how his confident concentrated position in the energy sector didn’t really work out the way he anticipated. Overconfidence can be a real problem in the business.

At the end of the day, if you understand the possible returns expectations of your strategy, you might not need to push your portfolio so hard.

Your level of concentration will also depend on who you take on as the clients. If you market your services as a niche manager, your clients may be more concerned with your top 10 best ideas.

But if you are managing money for clients with different objectives, then your clients might not be able to take on the volatility that your portfolio will bring (high returns often come with greater volatility). It may make sense to be more diversified or your securities selection may need to be very different.

They discuss Charlie Munger’s record and suspect that at the end of the day, Munger might not wish to see his client sit through some nerve-wracking volatility.

At the end of the day, you can read a lot of books on Buffett, but if we pull back and look at the base rate, we are not Warren Buffett and it would make sense that we remember that.

There are a lot of nuances dropped and discussions on Altice, Constellation Software, Google.

How the Chinese Government Look at Data as a Resource

Lillian Li tries to deconstruct how the Chinese government may look at data governance.

Deep Dive on Electric Vehicle IPO Rivian

Some of my colleagues got very fascinated by this company. Not sure why that is the case.

But after reading Packy McCormick’s introduction to Rivian, I really like the owner’s dedication to what they are trying to deliver.

The institutional backing also looks great.

Household Assets to Liabilities

We have a lot of money printing, and usually, the main comparison was the debt to GDP but often, we ignore that assets also built up.

In the right-side chart, we can see that the excess has also gone into the household balance sheet.

Whether the assets are well distributed or not is another matter altogether.

How the S&P 500 Did When Rates Rise

If we are worried that the markets will not do so well when rates rose, Ben Carlson tabulated these data, strangely from DFA.

Most of the time, when yields rose the markets did well.

It should be noted that while the markets were positive in 1971, 1976, 1980, 1983, inflation was so high that a cumulative return of 10% would be just as bad because you are losing your purchasing power.

Earnings Per Share of S&P 500 from 2009 to 2021

Compound advisers posted this chart of the GAAP EPS of S&P 500 companies. It is less common for me to see the index EPS put out there.

With this, you can take a look at whether the S&P 500 also did badly when the earnings per share went down.

There are probably two meaningful periods where the EPS went down (other than the covid period):

  1. Aug 2014 to Nov 2015
  2. Oct 2018 to Mar 2019

2014 to 2015 looked liked the market was volatile but got out some gain.

2018 to 2019 was the period where the market fell almost 20%.

Earnings per share are not the only factor that fundamentally affects the S&P 500 fundamentally.

If you look at this chart posted in one of my earlier Moat Market Intel, EPS is down, but Price Earnings can expand and markets can still continue to go up.

Given where our EPS are, it’s a given EPS growth should revert downwards. The question is whether PE can expand.

My hunch is that PE could expand with the market going higher, but likely that will be going to an unsustainable territory.

I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.

My preferred broker to trade and custodize my investments is Interactive Brokers. Interactive Brokers allow you to trade in the US, UK, Europe, Singapore, Hong Kong and many other markets. Options as well. There are no minimum monthly charges, very low forex fees for currency exchange, very low commissions for various markets.

To find out more visit Interactive Brokers today.

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