investing

Investing and Wegovy

Before ending the year, I wanted to discuss why investing is so difficult for many of us.

Investing is complex because several factors influence our decision-making and behavior. Some factors are within our control, and others are not. If you believe investing is only about math and financial modeling, you will likely struggle as a long-term investor. Investing is unique because it is a science and an art. It requires more than just analytics. There is a behavioral and psychological side that is much harder to measure.

Long-term investing: Much of what you’re willing to endure and risk to achieve a reward.

Investing behavior and decision-making are rarely caused by a single factor. There is an interplay of various influences that determines your risk tolerance and expectations. The better you understand these factors, the more likely you are to develop effective strategies to improve your performance.

When you think about successful investing, compare it to dieting and exercise. There are no shortcuts or one-size-fits-all answers. Generic solutions often become platitudes. Advice like weight is calorie-in-calorie-out, becomes a platitude. Someone morbidly obese could have the same diet as a marathon runner; the results may not be the same. Several key factors contribute to a healthy lifestyle. The same goes for investing. A financial expert who tells you the best way to support is to “index fund and chill” is oversimplifying a solution that doesn’t work for everyone.

Generally, people need to be motivated to lose weight. It is challenging to feel motivated if they do not see short-term results or if it takes too much time and energy to maintain a diet. Knowing vegetables and fruits are good for you doesn’t necessarily lead to a change in action. Understanding that you need to do more cardiovascular activities doesn’t mean you will start running daily. Without goals or action plans, you will get situations where people want to eat healthier but do not make meaningful changes in their diet or exercise.

Improving your outcome relates to your behavior. How do you change your behavior? Create goals to help develop your strategy. The more personal your goals become, the more likely you are to become motivated to achieve them.

Why invest:

  • Buy more material things.
  • Buy more experiences or influence.
  • Be able to support your spouse or family.
  • Fund your retirement.
  • Pass along your wealth to your children.

Why lose weight and exercise:

  • Improve external appearance.
  • Feel better physically and mentally.
  • Not be bedridden later in your life.
  • Be there for your loved ones.
  • Live a longer and more fulfilling life.

Investing is a mixture of science and human behavior. Human behavior is very imperfect, different, and subjective. Your behavior needs to change to see different results.

Financial experts say the best way to invest is through ETFs or index-weighted funds. Such advice is generic and does not change your behavioral psychology. It does not change the bad habit of consistently buying overvalued assets and selling them at a much lower valuation.

What happens when the index you invested in, based on the advice of experts, is down 10% or more?

Do you sell?

What if, after ten years, your portfolio is flat? Did you even plan on having a holding period that long?

  • If you are a long-term investor but continuously trade in and out of stocks.
  • If you enjoy highly volatile growth companies but have little tolerance for risk.

  • If you are health conscious, but your diet consists of fried food and sugary drinks.
  • If you spend a lot of money on athletic clothes but do not work out

Your actions do not align with your goals.

Align your goals and timeframe with your actions; the outcome should improve.

The problem with professional investing:

Most people can agree long-term investing works, and allowing high-quality companies to grow and compound requires a long-term holding period. So then, why is the average holding period of an individual stock just 6-10 months?

Professional fund managers: A profession where their income depends on quarterly performance. Income comes mainly from fees charged to investors who invest in them.

Funds flow out of underperforming funds and into those performing best, creating a casino environment where most fund managers chase gains and trade in and out of positions. Institutional fund managers’ informational and analytical edge over retail investors is almost useless, as they act more like traders than investors.

Institutional and Retail investors: Actions and goals not aligned with long-term performance.  

Retail Investors: Freedom to invest without restrictions or deadlines. The behavioral edge often goes unrealized as retail falls victim to the same pitfalls as institutions – panic selling, over-trading, chasing gains/momentum, and emotional decision-making.

It is not your fault:

If you are struggling as an investor, it is not your fault. If you are struggling with losing weight, it is not your fault.

In 1942, the Metropolitan Life Insurance Company made standard tables to identify ‘ideal’ (and later ‘desirable’) weight, and with the naming of weight-to-height ratios as the body mass index (BMI) by Keys and colleagues in 1972, obesity was understood as a health risk that required medical intervention. 

The politics of disease: Obesity in historical perspective

It has taken a while, but society is starting to accept that genetics, medical conditions, and other factors that contribute to our weight are outside an individual’s control. The American Medical Association (AMA) recognized obesity as a disease in 2013!

Labeling obesity as a disease is helpful as it takes pressure off the patient, not putting the blame all on themselves.

The same goes for investing. Human nature works against good investing. There is a tremendous fear of non-guarantees and a need for certainty. Human nature can work against us when it comes to investing. How does it feel to bungee jump 700 feet above the ground? You can only understand the feeling once it happens, just like how you will feel and respond to watching your portfolio fall 20% in a week. For most people, it’s likely a combination of fear, depression, and panic.

If lousy investing habits and obesity aren’t your fault entirely, how do you fix it?

The answer:

Every patient is different.

Every investor is different.

Each requires personalized attention and solutions.

I hate the phrase, “It isn’t your fault,” because even if true, what now? It does not give people the mindset that they have the power or control to change their circumstances.

Genetics, human nature, and upbringing play a role, but we are all not destined to be victims of circumstance. It is within our control over what’s preventing the desired outcome – Maintaining a healthy weight or having enough for retirement.

With the proper motivation and mindset, behavior can change gradually. There are no quick fixes.

Can GLP-1s like Wegovy or Ozempic help with weight loss? It could be part of the solution but only part of the solution. Medication does not replace a healthy lifestyle, what you eat, or daily exercise. Anyone struggling with weight should consult an endocrinologist and obesity medicine physician to develop a beneficial outcome.

Investing does not have one-size-fits-all solutions. Depending on your circumstances and financial goals, investing in funds that track broad-based indexes can help a portfolio. Should you consult a financial advisor? If that person can take the time to understand your needs based on your situation, it could help. Any effective solutions need to be customizable according to individual needs. As an investor, your primary objective should be to obtain greater knowledge and, as a result, steer you to more control over your finances.

Invest in Meghan Markle Stocks

According to royal expert Katie Nicholl, King Charles reportedly nicknamed his daughter-in-law Meghan Markle ‘Tungsten’ because of her toughness and resilience. The Oxford English Dictionary defines tungsten as the chemical element of atomic number 74, a hard steel-gray metal of the transition series. It has a very high melting point (3410°C) and is used to make electric light filaments.

Being nicknamed after a rugged metal seems peculiar, but Meghan Markle, Duchess of Sussex, seems like someone with a strong backbone who gets what she wants. Meghan is opportunistic and cunning. Although these may seem like critiques of her personality, they complement her inner strength. Companies with tungsten-like qualities can turn into fantastic growth stocks to invest in.

Here is a list of some companies I would qualify as a Meghan Markle stock:

Alphabet
Shopify
Nvidia
Chipotle
Revolve
Airbnb
Taiwan Semiconductor
Zoom Video
Pinterest
Palantir
Moderna
Intuitive Surgical
Duolingo
Monday.com
The Trade Desk

So, what characteristics do I look for in a Meghan Markle stock?

Companies that have significantly more cash than debt: A company with more debt than cash is not necessarily a bad business – see Live Nation, Netflix, and Uber, as their debt is in use for future growth, but this does create higher risk, especially if a companies revenue plummets. Blue Chip companies like Apple and Berkshire Hathaway are in a separate category. They can safely take on debt for strategic reasons due to their strong balance sheets, track record, and business models.

Investing in the company’s future growth could pay off tenfold (Amazon investing in AWS) or backfire (Peloton expanding showrooms and acquiring Precor during the pandemic). Companies with more debt than cash risk serious liquidity issues, which may further dilute shareholders through equity raises or breaching a loan covenant.

A couple of companies that are NOT Meghan Markle stocks are Carnival Cruise and Royal Caribbean Group. We know why they took on significant loans, and although the pandemic was not their fault, they are far less attractive now than before 2020. These companies have recovered and are seeing healthy booking demand, but it will take several years (if not more) to right their financial health. The increased debt limits their options and leaves them with less wiggle room if the economy were to turn.

Low Capex and G&A ratios: Lower Capex and G&A spending can lead to higher free cash flow and a better return on capital. Relatively low costs for assets like factories or equipment mean the company can focus on capturing more market share and expanding into international markets. For tech companies, you want them to spend heavily on R&D rather than on upgrading stores. For apparel brands, you want them to spend heavily on S&M to build up their brand rather than on office furniture because when Capex and G&A make up a meaningful percentage of a company’s net income, that could indicate excess spending. If profit margins are increasing faster than Capex, that’s typically a sign of healthy financial growth.

Market cap higher than their Enterprise value: This characteristic echoes a company having more cash than debt. Companies like these have a low probability of going into bankruptcy and are attractive acquisition targets. Companies sitting on a lot of cash and little debt are typically more nimble and opportunistic. They can wait for the right time to issue share buybacks, reinvest in their business, make acquisitions, or be acquired themselves.

Proven more than two or more consecutive years or eight straight quarters of being free cash flow positive: A solid growth company has to prove it can be profitable in the long term. Being free cash negative is not a long-term sustainable business model. At some point, there needs to be a long enough track record of consistent growth; if not, the investment is just a speculative bet. If free cash flow exceeds net income every quarter, that could signify a money-printing business. Yelp has always been free cash flow positive since being a public company. The business may not seem appetizing, but its performance and return to investors have been much better than the companies that get the most airtime on CNBC and Bloomberg.

Important things to consider:

Asset light does not equate to a moat: Amazon is more debt-intensive than other big tech companies, which has helped them create a durable moat. How many companies will outspend Amazon to build a better logistics network? The same goes for Uber and its global ridesharing network. Debt and high spending can help a company have true pricing power, so there are potential trade-offs when a company sacrifices immediate profits for future growth.

Rising Free Cash Flow drives growth: A company that can produce consistently growing free cash flow is worth looking into, even if it has increased expenses, debt, or equity dilution. Apple is miraculous as they have higher free cash flow than most other companies, bringing in total revenue! They are more of an anomaly as they have so much cash and can increase their dividend while buying back their shares simultaneously.

Industry matters: Certain industries, like e-commerce, have more competition. Getting market share can be difficult during a challenging macro, creating a cash burn. The lower the startup costs, the easier for new entrants to disrupt the market. Specific sectors in technology are volatile, so a pristine balance sheet may reflect little returns for investors.

The critical aspects of these Meghan Markle stocks are toughness and resilience. Consumer headwinds can persist for several quarters, and if these companies remain profitable during a touch macro, that is a good sign of long-term durability. Like cockroaches, a company with low debt, consistently rising revenue, and free cash flow is almost impossible to squish. A company’s financials are easily accessible on a balance sheet, and any investor should know these basic figures to establish a framework of understanding before making a more thorough analysis and deep dive.