There is a lot of rumblings in the financial market because of Federal Reserve raising rates.
With the impending increase in rates, many investors are concerned how happens to the stock prices – we have seen more than 10 years of bull market and everyone has seen his or her wealth blow up REAL TIME.
Now, the trend is reversing and we are now seeing our stock market wealth DECLINING REAL TIME. Unless you are one of those traders at WallStreetBets with iron balls, you are tempted to SELL.
YOU ARE ALSO PROBABLY REALLY TEMPTED TO SEEL IF YOU HAVE SIGNIFICANT LEVERAGE IN YOUR STOCK PORTFOLIO.
In light of inflation (no matter how you cut it) – the inflation is here, and I think the current asset prices (particularly real assets) do not reflect that yet – and rising interest rate (interest rate will HAVE TO BE RAISED – because of inflation), I am actively readjusting my asset allocation accordingly.
I have exited most of my stock portfolio (except for my best, highest conviction companies with SIGNIFICANT PRICING POWER – to the point where they can and have passed on rising cost to customers without any dent to demand growth) and am deploying that into real assets.
WHY STOCKS ARE LESS EXCITING NOW
Like it or now, a stock’s value is a summation of EXPECTED CASH FLOWS THAT ARE DISCOUNTED TODAY.
And the cash flow is essentially REVENUE OR SALES MINUS COSTS – key issue here is that both are subject to INFLATION. Inflation for product or service revenue HAS TO OUTPACE inflation in costs in order to PREDICTABLY GROW EARNINGS.
If a company is asset-light and most of costs are labor costs (a double-edged sword of business models that have been successful in modern economy), the chances are that inflationary pressure on the cost side will be very hard.
Most of the tech companies fall in this bucket – I was heavily tech focused in my stock portfolio.
Many positions are gone and now I am moving them into real estate and Rolex.
WHY REAL ASSETS ARE MUCH MORE INTERESTING
Real assets are CORE beneficiaries of inflation – they benefit in two ways – 1) most of the costs is historical – replacement cost goes up and can drive value up, and 2) , the maintenance cost is low (particularly if you can bring in depreciation expense to reduce TAXES).
In my view, real estate price has not caught upto value that has gone up due to inflation. I wouldn’t expect price to go up significantly for the next year– so many people ae over-invested in the stock market that I think many buyers now have lower firepower in terms of ability to pay – the price of super high correlation across various asset classes.
When it comes to real asset, I am not limiting myself to real estate – I am also talking about watches – not just any watch, but the most liquid and highly desired of them all – Rolex
It is often the case that ASSET ALLOCATION IS A BIGGER DRIVER OF OVERALL PORTFOLIO RETURN THAN MICRO SELECTION (STOCK PICKING) WITHIN AN ASSET CLASS.
Stock picking is obviously important, but make sure to take a step back and think about “DO I HAVE THE RIGHT ASSET ALLOCATION? AM I OVERLY EXPOSED TO STOCKS FOR LONG-TERM APPRECIATION OF MY OVERALL WEALTH?”
*NOT INVESTMENT ADVICE
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