I'm a business owner with 20 years of entrepreneurial experience. I've owned and run several businesses in the martial arts (Brazilian Jiu Jitsu) industry, including jiu jitsu schools and a tournament circuit, along with online learning services. Over the last five years, I've become increasingly more interested in investing, as I've come to view stock ownership as partial ownership in a business, thanks largely to the words and wisdom of Warren Buffett and other deep value investors. As a result of five years of recreational interest, I chose 2020 as the year I'd build my own actively managed portfolio. I couldn't have picked a better time to dive in, and I couldn't have picked a better mentor than Tom to help guide me through a very turbid beginning.
Tom (pictured below) is a 20-year investing veteran with a strong emphasis in risk management. He has some tangential knowledge of different investment accounts (IRA vs regular brokerage), products (stocks, ETFs, muni bonds, preferred equities), and diversification factors (momentum, geography, sectors, size). Tom thinks automatically in ways that I have to struggle to think, since he invests for a living (and for fun). I've learned several years worth of lessons in a very short time. That's what this series of articles is all about.
These are candid conversations between Tom and me, generally from Messenger on Facebook. The tone will tend to be very conversational and informal in nature, but I've nevertheless found it extremely helpful to read over the information contained herein. After reading and listening to dozens of books on investing and economics, I've found that I have grown even more as a result of these very conversations. I present them to you largely in that informal manner in which they unfolded, no matter how dumb I might come across. I hope they're just as useful for you.
On Automation, Investing in India and Africa, and Politics
I’m currently still trying to get my head around the implications of AI powered automation of services. Lots of call center jobs will be eliminated, which as you probably know has heretofore been a growth industry in India. This accelerated automation could eliminate a traditional lever (cheap labor) that emerging countries have used to pull themselves out of poverty.
You're not wrong. One thing to note: India and Africa, collectively, have about 2% of the world's wealth. For comparison's sake, Apple and Amazon also own about 2% of the world's wealth.
On Valuing Businesses, and the Fed
Agree nobody really knows about senate, but believe that more investors will become ‘concerned’ between now and then, which will probably impact stock prices due to fear of reversing the trend of corporate profits/GDP ratio, which has gotten out of hand due to reduced corporate expenses related to tax cuts, low interest rates, and lower labor costs (automation).
I guess we'll see if that push is enough. A recession = a change of the guard, no matter what.... and there's no question one is coming, but the real question is, "when?" I don't think anyone really knows.
I would say that businesses are definitely overvalued, though, given that just before the crash in 2007ish, the Dow was LESS THAN HALF of what it is today. There's just no way American business is worth twice what it was 12 years ago, is there?
Value is in the eye of the beholder. Combine higher profits and expectations of continued profit growth with lower interest rates (used to calculate present value of projected profits) and the 2x value is ‘reasonable’. However, those projections are uncertain and can change VERY quickly. Personally, I’m staying very defensive until a recession occurs (however long it takes). Average stock market decline in recession is ~30%, and since the Fed has less room to cut interest rates this time, it could be worse. At least until they wake up enough to stimulate by other means (helicopter money) that will generate a trickle up economy.
I guess I'm talking about intrinsic value, not stock market value. Like, if I was an owner of the business, what would I pay for the whole thing? Then chop it up and divide by shares, etc. It's the small business owner in me that attracts me to security analysis.
Quite a lot of action w/the Fed, too:
This article from CNBC, from September 2019.
Nobody notices the plumbing until it stops working.
Yeah. I like watching out for signs, and I'm enjoying the pontificating about the inverted yield curve, etc, but it's also like, "well hey, we kinda know better how to deal with this now." What do you think of the Fed's recent moves?
The about face (from raising rates to lowering them) was necessary. Inverted curve is worrisome bc it can be self fulfilling prophecy (due to psychology). Also can cause reduced lending by banks which hurts economy. Fed needs to get short term rates lower than long term rates.
Can't believe I actually understand what most of this means.
As for what the Fed did around the Global Financial Crisis (GFC), although the quantitative easing was necessary to avoid (defer?) a depression, it did contribute to the increased wealth inequality we see today. Folks with pensions/401(k)s saw their pensions saved and portfolio values restored, which increased their wealth relative to folks who don’t have a stake in stock or bond or real estate values.
Google: impact of artificial intelligence on inflation. Good rabbit hole.
Tom Training Jiu Jitsu, with Andrew Doing Commentary
Some Homework Assignments
Andrew this is a very good read. Just blue belt level but as you know getting the fundamentals down correctly is a prerequisite for further advancement. Great chatting today!
This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.
© 2020 Andrew Smith