Search

Inflation Will Be Short-Lived, I'm Not Concerned Either Way

2 Corinthians Chapter 5 verses 19-20 state, "that God was reconciling the world to himself in Christ, not counting people's sins against them. And he has committed to us the message of reconciliation. We are therefore Christ's ambassadors, as though God were making his appeal through us. We implore you on Christ's behalf: Be reconciled to God."


Reconciliation for myself as a Christian is highly important. I have a young son and while I know I'm not a perfect father, I find it invaluable to be able to explain my faults and build confidence with him through reconciliation. At the same time with my wife, reconciliation is equally a necessity. If I can't be vulnerable through admitting my faults with her, reconciliation will not be achievable. How do I allow myself to be transparent and vulnerable? Through being reconciled to God as the foundation.


Since last fall, I've been doing a lot of reconciling with respect to the portfolio. This has been mostly associated with focusing on the holdings and determining whether they all merit a sustained position, and if not, what the actionable steps should be. I find myself in a very interesting position as I now have only 23 holdings. The portfolio is extremely lean, and with today's inflationary debate ongoing, I am confident that I have the right holdings for the future.


Let's get a couple things straight with what has occurred from 2020 through early 2022. First, the pandemic hit in March 2020 and what happened? Aggressive growth was sold off harder than all equities. What was the reality? Select aggressive growth companies were much more resilient than their legacy peers and ended up reaching steep premiums as a result, the premium peak that occurred in February 2021.


By the fall of 2020, Wallstreet was already beginning to believe that the 2-3 year advancement in Revenue that select aggressive growth leaders achieved would result in negative Revenue growth for 2021. Boy were they wrong as many of these companies saw performance sustained in the 50-100% Revenue growth range.


This brings us to where we are today and a reflection on 2021. During 2021, extreme volatility ensued as the known sustained robust growth for select aggressive growth plays became more clear, so Wallstreet was forced to push a more generic and arbitrary "slowing growth" narrative, or in other words, a nothing-burger statement. But what Wallstreet has the ability to control is the domino-effect followed by herd mentality.


By the fall of 2021, certain Wallstreet firms were able to generate the domino-effect followed by herd mentality and that is exactly where we find ourselves today. I'm writing this as my portfolio saw a greater than 6% drop "the sky is falling". But I know that the companies I hold are financially superior to the vast majority of equity investment options. This is predicated by pristine B/S with only Net Cash positions. As well as substantial Revenue growth and Cash Flow inflection prospects.

Let's use an example to see some extreme absurdity in the markets. Companies including ThredUp, Inc. (TDUP), The RealReal, Inc. (REAL), and Poshmark, Inc. (POSH) are all IPO Dogs in my opinion. The all have similar traits - low Revenue baselines and lackluster growth from these levels. And they have been punished as they should have been. But Roku is in an entirely different position, and yet it has faced the same debacle. This is the problem with today's sell-off for aggressive growth. There are really really crappy aggressive growth companies. Unfortunately, anything aggressive growth is being feared because of inflation, which is simply comical.


I've written on this before and my question is would an investor rather own a company that will be growing 25-30% while seeing Cash Flow inflection double during an inflationary concern, or a company seeing growth in the single digits and seeing a temporary or no improvement in Cash Flows? Inflation increasing is offset by companies that can grow the fastest either sustaining higher margin Cash Flows, and/or seeing inflection, it's simply common sense.


As for the inflation discussion overall, today's inflation is not a product of increased demand. In fact, demand may be marginally better or even weaker across the globe. Rather it is a manufactured supply chain constraint generated by government restrictive policies. This is not sustainable and for those conspiracy theorists (which sometimes are true), the manufactured nature stemming from centralized government control affords a short-term shift away from the long-term deflationary environment.


So what do I do as I watch my portfolio get hammered more and more? I accumulate, plain and simple. I am buying everything and anything with some capital constraints having some impact on my abilities to take advantage of every opportunity. But what I know is that Wallstreet will be wrong once again as earnings season begins as they have been since March 2020. And wrong is probably a poor choice of words as they know what they are doing. I've already been seeing some comments regarding "stronger financial growth companies will end up being great investment options during this volatile time". Yea, that's how this portfolio is built.


The last thing I'll say on this subject is that just like the domino-effect that hit this past fall, and the herd mentality that followed, the same will come to fruition as inflation subsides for a return to growth. When will this occur? Who knows and personally I don't care. My focus is to build positions in the strongest companies within their competitive markets. There are not a lot of winners across the 6,600 or so public companies trading on the NASDAQ, NYSE, and S&P 500. In order to generate robust investment returns in the 25-30% level, picking winners is a necessity. While companies like Target or Walmart thrive in a manufactured economy, they will not beat Shopify. While e-commerce continues to grow slower in the U.S., Amazon will not beat companies like MercadoLibre, Sea, or Coupang for that matter. And for broader markets, they will not push higher or do very well without growth in the lead.


For me, it's not only about growth, but select aggressive growth leaders by innovation and over time, winners by execution. There are far too many risk averse companies that investors, I guess feel should get a free pass. This isn't how it works.

12 views0 comments