Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

D J Thomas

Pause and reflect

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Time out

Most of the mainstream financial media are consumed with the debt ceiling talks.

Sometimes China is mentioned, referencing the PRC’s One China policy and the ramifications for the global economy if China were to gain control of the world’s supply of semiconductors.

The buzzword is ‘deglobalisation’, a de-coupling of international trade where the CHIPS act and similar state investments into the manufacture of semiconductors from governments around the world have started to gain pace.

But I’m getting ahead of myself.

Today’s post highlights the two macro themes present in todays markets.

It’s an exercise I do periodically to think about the market ‘as is’ and deny Dementors access to my psyche.

Don’t fight the Fed

I get it.

It is cliched and low-hanging fruit. So I’ll pass you over to a Wall Street veteran:

What I like about Ichan’s self-assessment is that he is able to have an open and frank discussion about his shortcomings.

‘Don’t fight the Fed’ would have saved Ichan’s ass $9 billion.

However overused the phrase has become, ignore the substance of its meaning at your peril.

When the Fed injects liquidity, stocks go up. When it tightens, stocks should decline.

But right now, the Fed is tightening, banks are failing, and stocks are going up which leads me to…

Why tech has led the YTD returns v the S&P 500

An overdone selloff in tech in 2022 encouraged many investors to hark back to the bad old days of the dot com minnows at the turn of the millennium.

Today’s tech stocks have become titans, leviathan entities that actually have earnings, and have woven themselves into the fabric of the global economy.

A far cry from the 2000s when the words ‘dot com’ in your prospectus would get you a listing and a centuries high price-to-earnings ratio.

Tech titans make so much money, they can afford to overhire, spend money on vanity projects and woke initiatives then cut back on both headcount and ‘non-core priorities’ making investors and the market happy again.

It reminds me of how rappers, ever boastful about how much money, houses, cars, women, and narcotics they can amass, metaphorize their excess:

There’s so much coke that you could run the slalom

Jay Z

Pause and reflect

Tech and the excess cashflows it generates are here to stay, AI is the next tech frontier and the race for global dominance has already begun.

Position your portfolio accordingly.

PS Wealth Accumulated and its author do not in any way sanction the use of narcotics, but we do think it’s funny that you could go skiing on it due to the excesses of recording artists

3 new purchases for the portfolio

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I have positions in stocks mentioned in this article.

On this Monday 15th May 2023, three new purchases for the Wealth Accumulated portfolio have landed.

At the same time, President Biden is still trying to negotiate with congressional Republicans a deal to avoid the United States government from defaulting on its debt.

Such a scenario was recently described as ‘potentially catastrophic’ by Jamie Dimon, CEO of JPMorgan Chase.

The US Treasury Secretary and former Federal Reserve chair also chimed in:

The notion of defaulting on our debt is something that would so badly undermine the U.S. and global economy that I think it should be regarded by everyone as unthinkable

Janet Yellen

The negotiations and potential default are not so important, for the same reasons that Yellen espouses.

What is important is that the portfolio is now fully invested, save a few pennies for sundry expenses.

Why I had to act now to invest 100% into equities

Nearly 100%.

Besides, the window of value is closing.

It was wide open in the fourth quarter of 2022, a year in which equities did not do so well:

Even though much of the year has passed, there’s still a small window of opportunity to get in at reasonable prices.

Today’s additions are:

  • Alphabet
  • Berkshire Hathaway
  • Vanguard’s US Equity Index

Alphabet because I believe they will win the AI race.

Berkshire because it’s Berkshire.

The S&P 500 to protect me from my own hubris.

The most interesting purchase is Alphabet because its earnings skyrocketed due to the pandemic and lockdowns. They have fallen back a little since but not so much to worry about.

I’m not sure that a foldable smartphone will bring in the much-needed boost to earnings, but its continued search dominance – over 90% of the internet – combined with AI features said to be integrated into search results should cement its leadership status.

Welcome to my tech-heavy, US large-cap portfolio.

Apple is NOT 35% of Berkshire’s portfolio

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Apple is not 35% of a Berkshire portfolio… Berkshire’s portfolio includes the railroad and the energy business Garanimals, you name it, See’s Candies — they’re all businesses

Warren Buffett

The mistake I sometimes make is not that I rely on sources like dataroma’s breakdown of Warren Buffett’s portfolio; the mistake is not placing that data into context.

Buffett owns a lot of Apple stock compared to the rest of his portfolio, but compared to the portfolio of the entire business of Berkshire, not so much.

To place the data into context, at the end of the last quarter, Berkshire had $997 billion in assets, $328 billion of which were in equities.

Even so, there’s no doubt, Buffett loves Apple.

But as with Greeks bearing gifts, beware of sources bearing data.

Fundamentals are about noticing that it is raining today

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I’m in a perpetual state of scholarship when it comes to financial markets and used to suffer from a little snobbery: I used to be naive enough to think that traders, as opposed to investors, couldn’t teach me anything about value investing or fundamentals.

That is until I started listening to Hedge Fund Market Wizards by Jack Schwager.

Here’s a quote from one of Jack’s interviewees Colm O’Shea, founder and Chief Investment Officer of COMAC Capital, a global macro hedge fund trader based out of London.

Fundamentals are not about forecasting the weather for tomorrow, but rather noticing that it is raining today. The great trades don’t require predictions. The Soros trade of going short the pound in 1992 was based on something that had already happened; an ongoing deep recession that made it inevitable that the UK would not maintain the high interest rates required by remaining in the ERM. Afterward eveyone said ‘that was incredibly obvious’. Most of the great trades are incredibly obvious.

Colm O’Shea

For me, that first line ‘fundamentals are not about forecasting the weather for tomorrow, but rather noticing that it is raining today‘ is extremely powerful because it focuses the mind on the now (common sense) rather than the later (speculation).

As necessary as it is to listen to the talking heads of the mainstream financial press in order to avoid what the market is doing, resisting the urge to get drawn into their incessant predictions can become tiresome.

Like the Dementors from the Prisoner of Azkaban, the majority of MSM financial jockeys are relentless soul-suckers:

Dementors are among the foulest creatures that walk this earth. They infest the darkest, filthiest places, they glory in decay and despair, they drain peace, hope, and happiness out of the air around them… Get too near a Dementor and every good feeling, every happy memory will be sucked out of you. If it can, the Dementor will feed on you long enough to reduce you to something like itself… soulless and evil. You will be left with nothing but the worst experiences of your life, and you will just be an empty shell that lost its soul

Remus Lupin

My disdain for them is self-evident.

So in order to combat their vampire tendencies, focus on the fundamentals just like O’Shea preaches, and replenish your mind body, and soul with a committed behavioural finance practice as an antidote for having to share the same digital space as these creatures of the night.

The Woodstock for capitalists: Warren Buffett and Charlie Munger speak out

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Jimi Hendrix woodstock

Here’s some of what Warren Buffett and Charlie Munger had to say at the annual Berkshire Hathaway meeting that caught my eye this past weekend.

Forward earnings

The majority of our businesses will report lower earnings this year than last year

Warren Buffett

This one’s pretty straightforward and speaks to the earnings recession that has been predicted for some time.

The fact that a massive and massively diversified conglomerate like Berkshire Hathaway will suffer lower earnings for the foreseeable future means that the rest of the US economy will suffer the same fate.

If you’re investing in 2023 like I am, be careful how you go about it.

Diversification

One of the inane things that’s taught in modern university education is that a vast diversification is absolutely mandatory in investing in common stocks … That is an insane idea

Charlie Munger

Charlie’s straight talking is what I’m most impressed with. He really does not give a cr*p if he insults you or not, but at least you get the truth.

For me, this quote speaks to the choices you have as an investor:

  • Buy a low-cost S&P 500 index tracker, or
  • Invest in a portfolio of 10-15 common stocks that are conservatively financed and represent an adequate margin of safety at purchase.

Investment opportunities

What gives you opportunities is other people doing dumb things

Warren Buffett

Recent examples include Kanye West’s antisemetic ranting (he’s a special kind of pleb) leading to a collapse in the Adidas share price, government-enforced worldwide lockdowns leading to a collapse in the price of oil, and Mark Zuckerberg basing the future of Meta on an unproven technology which also drove a collapse in its share price.

See a pattern here?

Other people.

Dumb things.

The best publicly listed business in the world

It (Apple) just happens to be a better business than any we own

Warren Buffett

I own some Apple and so does a sizeable chunk of the investing public, either through their pensions or if they simply track the S&P 500, such is its size.

There’s no doubt that right now, at this time, Apple is the most recognisable brand in the world and happens to manufacture the world’s most iconic item – the iPhone.

Apple’s recent foray into banking in collaboration with Goldman Sachs is a great example of how a business with a crocodile-infested moat can take advantage of its dominance by entering into new markets with ease. AAPL is a keeper.

QE is over. Hello QT

During the last six months or so, the incredible period for the US economy has been coming to an end

Warren Buffett

Buffett was referring to the massive amounts of government spending and quantitative easing that ensued as a result of the coronavirus pandemic. Which lead to some dumb things.

Such as a lot of Berkshire’s businesses overspending.

Buffett noted:

Some of them had too much inventory on order, and then all of a sudden it got delivered, and people weren’t in the same frame of mind as earlier. Now we will start having sales when we didn’t need to have sales before.

More sales to get rid of stock means lower earnings going forward until that inventory has been worked through.

All whilst rates continue going higher.

Conclusion

The thing I’ve learned through multiple market and economic cycles is that people will ALWAYS do dumb things which leads to some excellent investment opportunities.

In the past, I’ve been reluctant to take them either through fear or through trying to catch the bottom.

Developing a behavioural finance practice has made a huge improvement in my ability to execute on an investment.

Warren Buffett and Charlie Munger, didn’t talk much about behavioural finance and a calibrated mindset, but they sure lead the way when it comes to knowing how to find investment opportunities, managing a portfolio, and the best types of businesses to own.