I simplify my investment principles into 3 factors (from my 25 years of experience in economy):
- money
- power
- enthusiasm
Money
This is the most important factor in my investment decision, which I think will be able to explain todays mysteries and is still important to next few years. I hold my money theories above all, including any economy theories.
In my money theory, we usually have big rally when:
- money easing has been decided. People get this wrong with when economy is in worst shape (depression, recession, etc). It’s incorrect. Economy only turns when money easing is already decided, not because of the bad shape of economy.
- rally is on their last leg/blow off. This is usually an artificial rally, for example due to:
- big devaluation of currency, e.g. commodity rally between 2005-2008
- big structural issue in bonds due to 60:40 bond:stock for example.
Recently, there is an economy debate in regard to recession. I acknowledged risk in June 2022 development of four horsement of apocalyse, and June 2022 due to Fed and Government efforts to reduce demand and inflation with focus in oil/energy, but I still hold my thesis strongly that we are not in recession risk with details in my July 2022 article. Our internal research has been driving along the non/less recession risk rally since early July (not necessarily need to hit bottom in mid of June 2022) until today. People are simply ignoring power of money theory, when they are predicting technical recession risk (even if that’s technically happening), for example due to artificial yield inversion (just like YCC) and future yield/inflation expectation.
Regardless of any recession possibilities, the USA still has 3 big money supports and for me that’s enough, getting stronger when SOFR is not affected by July 2022 rate raise.
- RRP ~ 2.1T$
- TGA – treasury
- very strong currency – USD
Power
In my second investment principle, successful investment should be supported with power, ability to control, win competition (unfairly if required), and less risk with possible bailout/golden parachute. This underlines our investment principle to stay only with big firms (overweight in index) and only little amount with small companies. We may only give exemptions to small companies when they are having relationship with strong power such as government supports or excessive economy structural supports.
Big firms usually have ability to drive public money decision making, and they would have less risk due to ‘big to fail’. They are hard to get manipulated easily as well. We also hold strongly our thesis, that even if in the event of correction or crash, the big ones usually have opportunity to rebound stronger and earlier. We may not get confused with this month small company rally, which might be related to their over positioned short position and excessive correction. They may not yet guarantee long term rally. If we look into Berkshire investment portfolio, more than 80% of their investment today are concentrated into only 5 to 8 big companies.
I also worry economists which could easily be driven wrongly with CPI and PPI numbers (and their formula). Whether power had been practising in dirty shirt emerging economy between year 2010 and 2015, we should learn how emerging market could pass on their real high inflation between that time in artificial CPI and PPI numbers. The power could easily adjust the numbers and confuse economists.
However we should not take these money and power principles easily, when they have been abused excessively. Apple is an example of money and power abuse. They may lack evolution/enthusiasms after their excessive rally over years. It’s example of money and power, but to purchase their current price is too risky for us (indeed supporting that they may continue their rally). It’s an example that I must use my principles considerably with price factor.
We should see how policies are playing important aspects in driving price control. Record of stimulus, power to decide interest rate, inflation reduction act (which is also money), for examples, can drive next Estafet of rally. Recent example of inflation reduction act may benefit certain individuals or parties, such as billionaire tax loophole in return of their other benefit of more money to reduce inflation (double benefits).
We should see many mining companies benefit with defence protection acts. We should also notice small mining companies can only survive their mining defence from any “terrorism” when they signed strong agreement with “those who own the sea”. It’s showing how power is becoming our second most important factor. Other example, Space X is becoming important in defence spaceships and may benefit their related companies.
We still hold our thesis in EV strong since year 2020. We did acknowledge NASDAQ risk in December 2021 when NASDAQ must go down their hills to normalize their huge rally, in return to higher yield and inflation/higher USD. However after this mid year 50% correction from their peak, we may think that the normalization thesis may have been completed. Recent EV credit (370b$ for next 10 years) is a support to our EV evolution thesis. It may help EV industry to compete (fairly and unfairly) and raise their price from near to almost free. We emphasize many times in our articles past few years, that market rally may also be related to our third investment principle, Enthusiasm.
Enthusiasm
enthusiasm is intense and eager enjoyment, interest, or approval
I think there are 3 aspects of enthusiasms:
- Market psychology. Market price is still driven by psychology. Regardless of how we see from technical analysis, market participant purchase, hold and sell are still driven by human emotion and enthusiasm. Therefore I’m still focusing on evolution such as EV since year 2020. I did acknowledge that EV run too quick in December 2021, therefore they required normalization to their long term evolution trend, not necessarily need to revert back to their much cheaper price.
- Financial income. In statement of income, I believe we should emphasize top line, power of revenue, profit margin/EBITDA, and less look into bottom or earning. It’s far more difficult for company to maintain strong growth of revenue and margin, rather than strong growth of earning. Company could easily do financial engineering to entertain bottom line, PER, etc. Top line and profit margin trend are true indication of market acceptance/enthusiasm with company product/service.
- Momentum. Usually rebound from near to death momentum (small positive divergence) gives higher momentum, as well as smaller negative divergence. Momentum power may show persistent enthusiasm to take benefit into.
Economy needs evolution enthusiasm to rally. It’s our thesis that EV is the evolution of todays economy to next decade. This coffin has been nailed with many governments/funds/power support in green acts. We become more confident in our green energy and material mining/commodity and EV (electric vehicle related) thesis, where more than 90% of our investments are, since year 2020.
Inflation and Pivot
Market thinks that the Fed will pivot next year or ease the market with their transitory inflationary thesis, based on historical behaviour. I think market will be wrong with their pivoting expectation/transitory inflation thesis, but we should use this opportunity very well. My argument to differentiate with historical behaviour is because we currently have strong supports from money and power, which were not available during that historical events.
I still hold my thesis that inflation will be sticky. It will correct, but high inflation is going to be sticky high in their highest normal range or near to terminal rate. This is where power may help to adjust inflation numbers into terminal rate. Not surprisingly, inflation reduction act uses money on top of the power.
Historically, any country has implemented power abuse to official inflation numbers, possibly to protect country debt sustainability. Therefore in order to survive in this kind of abused environment, we continue to hold our 3 basic investment principles above, i.e. money, power and enthusiasm.
If we looked into few crisis, their inflation narratives into their currency devaluation may last for years. However in this case, since USD is the most powerful currency, market doesn’t have enough power to devaluate the USD, therefore the narrative of USD normalization may last longer. If USD is not allowed to devaluate quicker, then in my opinion, inflation or higher rate will last longer, unlike historical conditions.
Even China, shown in their weak Yuan (USDRMB), is not able to revive their economy since year 2021. This is also factor in my argument that the Fed will not go into pivoting thesis. As a result, there will be difficulty to economy such as expensive cost and interest to economy (PPI) and also risk to highly debt-ed property sectors. I already start to reduce/hedge and prepare to capture that possible opportunity, to walk my thesis with sticky inflation/high interest/inflation thesis.
We have big hands with huge money, as seen in RRP, TGA and USD. There is less reason for them to normalize high interest/inflation quickly, other than to benefit their own interests. It means next few years volatility will be very challenging and only certain individuals and sectors will survive.
USD TO PLAY
Past few months ago, we may think too early that USD would be too much overvalued. It’s normal, we will always have difficulty to spot peak/bottom but we still hold our thesis that USD should normalize from current excessive recession and bear market fears. With recent indication that inflation may ease and less structural risk which is not as big as market expectation, our internal research in August 2022 may show that USD may also have peaked and technically it can be very bearish to at least next 3-6 months with possible weak rebounds along their supports. This may be our opportunity to reduce our investment risks for next year. Hopefully we could see higher high market price, before it may possibly happen.
We have to refer back to money and power plays. There’s a very high risk once this USD has been normalized properly. Therefore in our thesis, we will use this event as a risk reduction opportunity, rather than decision entry. It’s also in preparation to capture possible near future collapse in extremely highly debt-ed vehicles due to sticky high interest rate/inflation (my thesis).
Any idea in this blog and website are my personal own. They are not financial advise.