Cruising through the Stock Value Valley
Shift gears your investment strategy with an deeper look at the mechanisms driving stock analysis.
Hey there and hello new people :-)
I’m very happy to see you here!
If you’re new here, welcome aboard! If not, you know what to do.
I’m Michael, your friendly stock guy, and I’m on a mission to make stock evaluation as easy as choosing your favorite ice cream.
Last year, I embarked on a wild journey to create a program that does the heavy lifting when it comes to stocks. Curious about my wild escapades? Read the full story here.
Ready to cruise back into the world of stock analysis?
Last week we fastened our seat belts and took a discovery ride through the fundamentals of stock analysis. We learned about the power couple – intrinsic and relative value. Missed it? Don’t sweat it, here’s the link to catch up!
Today, we’re going to dig deeper. You might notice some familiar faces here and there from our last ride, and that’s on purpose. Think of it as an extra compression loop on our roller coaster ride. If the ride’s getting too fast, raise your hand, and I’ll adjust the speed.
As the famous Oscar Wilde once put it, a cynic is someone who …
“... knows the price of everything and the value of nothing.”
Price is not value
In other words, just because a stock is selling for pennies doesn’t mean it’s a golden ticket to the Dagobert Ducks treasury.
Identifying value drivers, both business-specific and macroeconomic, is like having a winding map to a secret place. It’s these drivers that can help you spot those elusive investment bargains.
Let’s discover one of these paths.
If the FED decides to shake things up by raising rates, the stock market goes the other way - south. Here’s why. Investing is like a high-stakes game of risk.
Ready for a game?
Here are your two options:
A. A guaranteed 5% return on your money, no strings attached.
B. A stock that’s bouncing around like a kangaroo on a caffeine high, and dividend payments are about as predictable as a roll of the dice. Can be a return of 8% or 0%
Which one is your darling?
I bet most of you would go for the second option.
Why?
You just made a quick and dirty valuation of the two options by evaluating your risk with your gut feeling.
And here is the good thing.
You have an opinion based on past knowledge.
Another good thing is, an imperfect evaluation is better than no evaluation at all.
It’s about being less wrong because being 100% right is about as likely as finding a unicorn.
When we buy a stock, we’re essentially buying future cash flow
The further we gaze into the future, the hazier our crystal ball gets, hence making our investment riskier.
That’s why we give risk a name and a number.
The name is beta.
It’s our risk-o-meter.
Now we add the numbers.
If beta is above 1, we’re taking on more risk compared to the market,
and a beta below 1 means we’re playing it safer.
With risk comes potential return and vis-verse.
What adds risk, you might ask?
Well, here are a few gang members:
High FED interest rates (the higher the worse)
The age of a company (the younger, the riskier)
Whether or not it’s a cyclical stock
The quality of the management
And so on
Professional investors are like master detectives, trying to find relationships between economic data to make investing less like a game of Russian Roulette.
Let’s bring it all together and imagine a scenario.
Hold tight.
The FED’s job is like walking a wabbling tightrope. They have to prevent the economy from overheating, which would send inflation soaring, and also stimulate the economy when it’s as cold as an ice cream in a freezer.
Here’s the fun part
Economic factors are interconnected like a spiderweb, and these relationships are constantly changing, keeping investors on their toes. A lot of them sleep poorly.
Currently, there’s a tightrope-like balance between US inflation and FED rates. If inflation climbs, so do FED rates.
Look at this beauty.
That’s your cue to sell stocks because rising FED rates mean companies grow slower. And if they grow slower, estimates won't be hit, and the stock price will take a dive. But here’s the twist.
If a company is still strongly based on its fundamentals, you might snatch the stock for a bargain price. And when the economy gets its groove back, the stock price will rise, and you ... might just find yourself resting on a sweet pile of profit!
It happens all the time.
Phew! Now you can relax again. But it just goes to show how powerful the data can be when you know how to read it.
For today, we’re coming to a stop and unfastening our seat belts.
Weekly Update
Days until the end of 2023: 230
Progress:
Made a big jump on how macro data influences stock valuation
Finally nailed my AI homework - check!
Launched into a new workout routine. Ever heard of Nick Bare? He’s an ex-Navy Seal and a beast of a man. I’ve started his Hybrid-Athlete 1.0 program, and when you’re done it’s got you feeling like Superman on kryptonite. If you’re into fitness, check him out!
Plans:
Attend a workshop
Craft the next article
Where is my head?
Right now, I feel like I’m solving a massive puzzle. Every piece I find leads me closer to the complete picture. It’s intense and oh-so rewarding. I love it.
Until our next ride. Keep learning, stay curious, and squeeze every drop of joy out of your days!
Michael
P.S.
My meme generator website is still not available. Can you recommend one?
Disclaimer:
The information in this article is my personal opinion. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. They are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk. Investing in the stock market can always lead to a total loss of the capital invested.
Hi Michael, thank you for the great blog 😊
Is there balance in any time between US inflaction and FED rates? Or it can be unbalanced?