You Lost Money

Good morning investors. How many of you are liking this crazy volatility? Hope you are all sticking in there with me. Don’t get too anxious and worried about these crazy price movements. None of it really matters. Remember, making real money in the stock market is not produced by timing the market. It is generated from time in the market.

I like to remind myself of these three principals when there is more volatility.

1. Remember you are owning a stake in a business not a ticker on a screen. Buy assets, not stocks.

2. Think and act like a businessman. If asset prices are selling off, buy more. A real businessman does not rush out to sell his assets when others sell. He continues to operate his business. A home owner does not rush to sell his home when market prices are down 5%. He continues to own a home (follow our real estate newsletter if you want to learn about real estate investing)

3. The value of a company is not derived over a month or even a year time frame. When you invest in a company you are buying the future free cash flows that company generates through the entire lifecycle. Sometimes year ten cash flows are more important than year one cash flow.

If you want to do well in the stock market you need to think and act like a businessman, not a stock trader.

Acting like a businessman in private deals is easy because the market doesn’t grade you every second of the day.

Acting like a businessman in the equity markets is extremely challenging because you are graded by Mr. Market everyday through random price quotes.

To overcome this psychological hurdle you need to know what you own. To know what you own you need to do the hard work and underwrite an investment yourself.

Its easy to follow someone you respect into a stock. But when that stock starts to turn south on you, it becomes very hard to hold and even harder to double down. The only way to get the conviction to double down on a stock is to do you own due diligence.

Even if you do your own due diligence, it can be gut wrenching to watch your account lose money everyday. When a stock is turning south on me there are four things I like to do.

1. Look through my financial model. This helps as I can quantify what this business is really worth. If I can trust my models I can trust in my own conviction and hold or buy more when everyone is selling.

2. Remind myself that I am buying an asset, not a ticker on a screen. A helpful reminder that you are buying an asset vs a ticker on the screen can be done by looking at the balance sheet and seeing all of the assets you own. Most companies I invest in are asset heavy for this purpose.

3. Go outside. You don’t need to be on the computer looking at your terminal every second of the day. If you feel like you want to panic sell, leave your office and go outside. Don’t worry, those businesses you invested in will continue to operate even if you are not looking at stock prices every second of the day.

4. Look at the historical price chart. When a stock turns south and I get the urge to sell I like to look at the historical price chart. You can tell a lot about a chart and see all of the random dips, panics and euphoria. Most likely, if you are buying a real business, there are thousands of dips and panics throughout the cycle. Try to remember that this is probably not the last dip to end it all and you are not going to lose all of your money if you stick to your value principals.

If you got anything out of this newsletter it should be to think like a businessman, not a stock trader. Buy assets. Don’t panic sell. And get greedy when others are fearful. If you have the balls to hold and buy a stock through a panic, you may have what it takes to be a great public equity investor.

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Markets

• Markets recovered yesterday after inflation was reported to increase 6.2% for the month of October. The Russell 2000 was up close to 1%.

• Coal equities rebounded after a three day plunge. I continue to hold all of my coal equities and have not bought our sold anything since my recent note.

• Disney plunged over 7% after failing to meet subscription targets of 125 million (118 million reported) for the quarter. “Failing” movie theater stocks continued to increase high single digits. Disney is up only 25% year-to-date while my favorite movie theater company is up over 100%.

• Small retail names have rallied this past month as fears that the shipping crises is not as bad as it seems. I called the retail trade a slam dunk for 2021 earlier in the year and rebought into the trade after investor panicked about potentially higher shipping costs. I started trimming a few retails names on the way up but generally holding the majority until after 2021 for tax planning purposes.

Quick Stock Idea

Check out Social Capital Hedosophia Holdings Corp. IV (“IPOD”). Here’s the rundown.

• Trading at $10.38 per share with around $10 dollars in NAV on the balance sheet.

• A deal needs to be announced before April 2022 or cash will be returned to shareholders

• It’s a SPAC with a high quality sponsor, Chamath Palihapitiya, giving the equity instant hype with retail investors if a deal goes through

• Decent asymmetric upside to downside if deal goes through

• So far Social Capital has launched Virgin Galactic Holdings, Open Technologies, Clover Health Investments and SoFi Technologies. All have more than doubled besides Clover.

• If a deal is announced the stock will likely get some hype. If no deal is announced cash is returned around $10 per share makes for the case of low to no downside.

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