A bad day for techno

Since I own Meta, Microsoft and Alphabet shares, yesterday wasn’t a good day at all. They all had a bad day. Very bad in the case of Meta.

Even if these stock’s valuation wasn’t exxagerated at all (actually, we could almost say that they were cheap), they all went lower/much lower (Meta).  

I don’t understand why so many owners of these shares seem to panic. Of course, Meta’s last results were no good (EPS dropped by almost 50% versus last year). But not any of these companies is going bankrupt or will face tough times in the coming years (like lots of debt and little money on hand).

In the case of Meta, it looks like this :

* 14B$ cash on hand (about 50B$ if we add marketable securities and accounts receivable);

* Margins and ROE over 20 in the recent years (which is not that common on the stock market);

* 10B$ debt;

* 300B$ company, so that debt is not that high.

So, what should be the value of a company with lots of cash on hand, a small debt, high margins, high ROE, a company that offers services used by more than 3.5 billion people (which is a also a kind of monopoly). I’m not saying that it’s the best company in the world, but is a PE of 8-10 really rational for that kind of company? When you analyze 100 companies from the stock market, you see that such a PE ratio is usually applied to a very random company. Like an oil and gas company that produces something like 50 other companies. Or a company without growth for the last 10 years.

I don’t think that any company with high margins, high ROE, low debt and used/known by billions of people should be sold for a PE under 15. Because a PE of 15 is the historical mean of the market, which means that it’s also the usual mean of stocks. Which means that 15 is the PE of an average stock.

Meta, Alphabet and Microsoft are not average stocks.

Portfolio review (october 13th, 2022)

It's been almost 7 months since the last portfolio review. I guess it shows how much importance I've put on investing over the last months. 

Even if investing is not that important for me these days, I wish I had more money to invest. If I had 50 000$ right now, I would probably invest all of it in a few of my stocks. But it's not the case. I've had too many expenses this year to be able to invest a big percentage of my earnings. And I mostly want to reimburse my margin, because interests are higher and higher. 

The year has probably been tough on most of investors. It's been a bit tough for me too, but after almost 15 years of investing, I'm not that sensible anymore to market swings. 

I'm much more sensible to specific stock swing. Like a Valeant swing in 2015, for instance.

So, here's a few numbers: 

Number of stocks: 20

Average ROE: 42

Average FWD PE: 20

Top 2 positions: 25% of the portfolio

Performance YTD: -25%

S&P500 Performance YTD: -21%

How's it been for you?

The dangers of margin

Since the last 3 or 4 years, I've been a great fan of margin. In an environment of very low interest rates, why not borrowing lots of money and investing on the stock market with an almost guaranteed return of 9-10% every year (when you invest in the S&P500 on the long run). 

It looked so simple and easy. 

But a lot of us tended to forget that the PE of market was high these last years and interest rates where very low. Two abnormal situations at the same time. 

Recently, interest rates went up quite a lot and the PE of the market went down quite a lot. It was the perfect recipe for a financial suicide or a real suicide for those who were all in on margin. 

Imagine that scenario:

Your portfolio has a value of one million dollars. The PE of your portfolio is about 25. About 50% of your portfolio includes stocks bought with margin. The interest rate of your margin is 3%. 

A few months later, the PE of the market goes to 18 (28% reduction). Interest rates go to 6% (100% increase). Normally, you won't experience a margin call but it always depends on the kind of stocks you own. At the same time, you have to pay much higher interest rate on your margin (which is a debt). That's a substantial financial stress. Plus the stress of a potential margin call. 

If you owned a lot of super expensive stocks, the contraction of the PE was probably much worse. For instance, if you own Block (Square), the value of a current share is about 25% of what it was at the beginning of 2022. 

A lot of gamblers and bitcoin lovers may find current times very difficult. 

The lesson is that margin may be interesting but only for a small percentage of your portfolio. In my opinion,  a margin over 10% for a large portfolio may be dangerous. 

My margin represents about 3% of my total portfolio and I feel that interest rates are much less pleasing to pay now than they were 6 months ago. 

Try to remember that during the next bull market.