Take Two - Random Investing Notes
A collection of insightful investment pieces to broaden knowledge and elevate the investing mindset. Includes: Tough Industries to Invest In, First Rule of Compounding, CDN Focused Portfolios, Beta.
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Tough Industries
Investing in various industries or sectors is not always straightforward. Some are influenced by cyclicality, while others operate on narrow margins. Here are some examples that fit the bill:
Automobile Manufacturers
Car purchases often decline during a recession. Investing in cyclical companies that falter in economic downturns is not preferred. General Motors and Chrysler, for instance, required bailouts during the 2008 financial crisis.
Automakers generally lack a significant moat, with brand loyalty being one of the few reasons consumers remain loyal to a specific brand. Within each price bracket, cars often share similar features, offering little differentiation from a business perspective.
The automotive market is commoditized, leading to aggressive price competition. While most manufacturers compete primarily on price, businesses that have the ability to increase their prices consistently over time perform better.
Alternatives
Auto-Parts Suppliers such as Autozone Inc AZO 0.00%↑ and O'Reilly Automotive Inc ORLY 0.00%↑
Ferrari RACE 0.00%↑
Ferrari is considered more of a luxury good than a mere automobile manufacturer. Ferrari produces a limited number of cars each year, making them highly exclusive and sought after.
Ferrari does not engage in price competition, and its core clientele is typically unaffected by economic downturns.
Ferraris often appreciate in value over time, making them not just a car but also a potential investment.
Traditional Media Companies
In recent years, the rise of social media and gaming has led to a decline in TV consumption, particularly at the network level. Live television viewership is declining as younger audiences gravitate towards streaming services and online, on-demand content, whereas the older generation continues to sustain it for now.
Media companies have long engaged in mergers and acquisitions, a process that can accumulate debt and hinge on the compatibility of corporate cultures. As debts mount, shareholder profits are often squeezed due to the typically low profit margins in this sector.
The rising cost of producing streaming content is affecting profits. The capacity of streaming services to modify pricing is uncertain. It's doubtful they can raise subscription fees enough to offset content creation expenses without the risk of losing customers to other options.
Alternatives
Netflix NFLX 0.00%↑ - the best streaming platform in the world.
Airlines
As consumers, there is generally little loyalty to any specific airline. People tend to search for the most affordable and economical flights to reach their destinations, preferring to save their money for spending during their trip to enrich the experience. Consequently, there is minimal resistance to switching between airlines.
Moreover, airlines do not consistently yield profits and are vulnerable to fluctuating fuel prices, which significantly impact their financial outcomes. While some air travel is indispensable, the demand for non-essential travel diminishes when airlines raise ticket prices excessively or during economic downturns.
Retail - Apparel
Currently, brands such as Lululemon LULU 0.00%↑ and Nike NKE 0.00%↑ are prominent in the apparel industry, but this may not always be the case. Fashion trends are ever-evolving, making it difficult for a brand to remain on-trend indefinitely. Additionally, their stock charts exhibit tent formations, indicative of the challenging and dynamic nature of the fashion industry. I encourage you to analyze some of these charts.
First Rule of Compounding
Compounding is your most powerful tool as an investor, it turns small investments into big winners.
The longer you have your money invested, the longer time it has to compound.
Compounding works best when you give it time to do its thing, and the results are best towards the end.
99% of Warren Buffett’s wealth came after his 50th birthday.
Be patient, invest for the long term, and only sell if my investing thesis becomes broken to avoid missing out on price growth, dividends, and dividend growth.
It's hard to time the market, you’ll likely compound better if you remain invested.
Canadian Centric Portfolio
Downsides of holding a majority of your portfolio in the Canadian market:
The Canadian economy accounts for approximately only 1% of the world’s GDP.
The Toronto Stock Exchange (TSX) represents approximately a marginal 3% of world’s total stock market capitalization.
It’s concentrated in just a few sectors like financials, energy, and materials.
Long-term winning sectors like technology, consumer staples, and utilities are underrepresented.
The Canadian Dollar has seen a significant weakening against the U.S. Dollar in the past decade. However, between 2003 and 2013, Canada's currency experienced a rally against the United States, resulting in the opposite effect.
The key is diversification into high-quality companies regardless of where they are situated.
It is also more important to analyze where the company operates and earns most of its revenue. Even if a company is listed on the TSX, it may conduct most of its operations in a different market. This approach offers another method to diversify while still focusing on domestic investments.
Canadian banks, which are invested in the U.S., Latin America, and Southeast Asian markets.
Utilities like Fortis and Emera, which all have U.S. operations.
Pipelines like Enbridge and TC Energy, which both have a lot of assets in the U.S.
Retailers such as Dollarama, with its substantial stake in Dollarcity, offer exposure to Latin America, while Alimentation Couche-Tard boasts a global presence with stores worldwide.
Beta
Risk is measured by a unit called beta. Beta quantifies a stock's volatility in comparison to the overall market, assigning a numerical value to each stock. A stock that rises more quickly than the market during positive periods and declines more rapidly during downturns is deemed to have a higher risk profile.
A stock with a beta greater than 1 is considered more volatile than the overall market, while a stock with a beta less than 1 is viewed as less volatile than the market.
Low beta stocks can lag in bullish environments, but they prove their worth in bearish markets. Low-volatility stocks provide a cushion during market crises, outperforming the market in seven of the past eight major downturns.
The conclusion: less volatile stocks tend to outperform the market over the long term by losing less during downturns and compounding gains more effectively.1
