Sunday Finds + Thoughts on Individual Stocks and Flows
Podcasts on Smith & Wesson and the housing market this week!
Welcome to Chit Chat Money’s Sunday Finds + Thoughts From Last Week newsletter. In this newsletter you will find some thoughts on an investing topic from last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
Chit Chat Money Podcasts From Last Week
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Thoughts on Individual Stocks and Flows
If you didn't hear, the market has been dominated by the seven largest companies this year:
A lot of this is due to strong fundamental performance, at least for a few of these businesses. They also started the year in major drawdowns for the first time in forever.
I’m sure on the whole these stocks will perform fine this decade, these businesses generally have incredible moats. But if you are someone like myself who buys a stock with the goal of holding it forever and earning the excess cash it returns to shareholders, well, I don’t like any of the Magnificient Seven at these prices.
Maybe Alphabet makes sense at a P/E of 26.5. Maybe Amazon at a market cap of $1.5 trillion will work. I think they probably do better than Apple or Tesla, that’s for sure. But how much better from a risk/reward basis perspective than a 10-year treasury yielding 4.5%?
I am open to the idea that these stocks continue to rise due to passive flows. Vanguard is closing in on $10 trillion in AUM. 20 years ago, it was inconsequential.
A growing chunk of the investing world is in vehicles that have two rules:
money comes in: buy
money gets withdrawn: sell
And more and more money comes in every year. There has to be an impact here.
I’m not sure anyone knows exactly how much of an effect passive funds have on stock prices. But I do know that whatever the effect is, it is growing. I don’t want this to be a part of my thesis.
So what’s someone like myself who — perhaps stupidly — wants to build wealth through individual stocks? Can you take advantage of this trend? Invert, always invert, my friends.
I think the formula is simple:
Hunt for stocks outside the S&P 500 and Nasdaq 100
Find a decent business with management that consistently repurchases its stock
Buy and be patient
The business doesn’t even have to be good. Dillard’s took out 40% of its share count in the last five years. Nobody wanted to own this thing. It faces major headwinds from online shopping. Its total return is 507% in the last five years. The S&P 500’s is 88%.
Dillard’s P/E is still below 10. You can create incredible amounts of value for shareholders if your stock permanently trades at a P/E below 10 and you have a lot of cash freed up to repurchase stock. That is my thesis for Ally Financial for the next five years. Either the stock rises by a lot or the company retires 90%+ of its shares outstanding.
These are the businesses I want to find, talk about, and write about on Chit Chat Money.
See you next week,
Brett
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3 Intriguing Reads
It has taken almost two decades, but we are finally witnessing substantial improvements in internet speeds across America. According to a recent report by HighSpeedInternet.com, the national average internet speed in 2023 is 171.30 Mbps, a 44% increase from 2022’s average of 119.03 Mbps
Reflecting on 18 Years at Google — Hixie’s Natural Log
Early Google was also an excellent place to work. Executives gave frank answers on a weekly basis, or were candid about their inability to do so (e.g. for legal reasons or because some topic was too sensitive to discuss broadly). Eric Schmidt regularly walked the whole company through the discussions of the board. The successes and failures of various products were presented more or less objectively, with successes celebrated and failures examined critically with an eye to learning lessons rather than assigning blame. The company had a vision, and deviations from that vision were explained. Having experienced Dilbert-level management during my internship at Netscape five years earlier, the uniform competence of people at Google was very refreshing.