Welcome back everyone, We have an exciting day today.
We've had one of the worst stock market sell offs this year.
Right now the Dow Jones is down -2.2%, the S&P 500 is down
2.54%, and the QQ, the NASDAQ is down 2.6%.
Now these are big draw downs and it's not even the worst of
today. It was worse just a couple hours
ago. So we're having a bit of a
comeback, but it's still a really bad day.
If we look at the map overall, the heat map here shows across
the board we're deeply in the red.
We have a lot of the big leaders like NVIDIA trading down 6%,
Apple down 4%, we have Google down 2%, Amazon down 3%, and so
on. You look anywhere in the market
and most likely it's deeply in the red.
And what is causing the sell off today?
Well, there's a couple different factors.
There's talks of an upcoming recession.
That's what Baron says is the primary concern for investors
today. We also have Japan's market, the
Nikkei, suffering the worst sell off since 1987.
And then we have the young carry trade unwinding.
Now, if you're not familiar with the young carry trade, that
makes you normal. Most people aren't.
We'll be discussing what it is and how it's impacting the
market. And then finally, perhaps the
biggest news and maybe the most rattling for the market is the
news that came Sunday that Warren Buffett sold half his
apple steak. Half his apple steak is massive.
This wasn't a normal 5 to 10% position.
This was 50% of his public portfolio.
He had well over $150 billion of apple and he sold half the
steak. It's bumped up his cash balance
to currently $278 billion. This is the most cash that
Berkshire has ever had. Why did Warren Buffett decide to
dump half his Apple position? Why is he raising so much cash?
Why did Berkshire recently just sell a lot of their Bank of
America position? They're doing a lot of sells and
we're going to get to the bottom of it.
And then of course, we're going to be looking at My Portfolio,
what I'm currently buying during this market chaos and much more.
So we have a lot to get into. Let's go ahead and jump in now.
We can first start off by talking about the sell off
today. After a stable 2024, a pretty
smooth sailing 2024, we finally got our first taste of a big
sell off. It reminded us way back of the
COVID era. Remember then when we'd have
sell offs like this quite frequently?
Well, this gave us a little bit of that memory.
And for a lot of people, that's not a fun experience.
Seeing your stocks dive 1015% in a single day is not fun.
Seeing the major indices down 4% in a day is really not fun.
That's a lot of money if you've built up your investments over a
long period of time. In many cases it shows us the
investments take the staircase up and the elevator down.
When the stock market drops, it drops very quickly and quick
drops in the market cause panic. Now behind this drop, there's a
lot of different things. There's a lot of different
factors. The main one that Barons says
the biggest factor is recession fares.
This was caused by fares that the US is at risk of recession.
After Friday's week, job reports triggered mayhem across global
markets. So there we have it.
We have a jobs report come out that's a little bit weaker than
expected. We have the Fed that has not
lowered interest rates, and now there's many people speculating
that the weak jobs is the start of a recession.
Jobs are a lagging indicator. They show us when a recession is
already started by the job market falling apart.
Once a lot of people lose their jobs, that is the single biggest
indicator that we're now in a recession.
So seeing any indication of weakness in the job market
scares investors. Now this week, jobs report in
the US also had an impact on Japan.
Japan's Nikkei, which is like their index, their S&P 500, had
its worst day since 1987, falling 12.4%.
So we've fallen so far somewhere around 2 to 4%.
Imagine the market falling 12.4% in a single day.
That's what just happened in Japan.
Over the past month, it's down over 25%.
You're seeing a decline in 1/4 of your wealth, 1/4 of your net
worth in just a month. This is an incredible sell off
in Japan. This is cause for two primary
reasons. One of them is the US job market
being disappointing. We don't live in an isolated
insular environment where what goes on in the US doesn't impact
the rest of the world. This is global markets.
What happens in the US impacts the rest of the world.
So if the US is going into a recession, the biggest, most
powerful GDP country in the world is headed into a
recession. It's going to impact the rest of
the world in a negative manner and in many cases worse than the
impact on the US. So this is having a secondary
impact on Japan. And the biggest problem is Japan
also has another factor. The yen surged, and this is
unwinding a trade called the yen carry trade.
The yen carry trade is pretty simple.
Interest rates are really low in places like Japan, and they're
really high in places like Mexico.
So investors are borrowing money from Japan and investing in
places like Mexico and earning the difference.
It is an arbitrage play. This trade depends on borrowing
currencies remaining cheap and market volatility remaining low.
Both of those factors have turned against investors in
recent weeks as the yen has surged, forcing them to close
out of their positions. So all these investors that have
been doing this trade, borrowing money from Japan in this low
interest rate, low volatility environment and investing in
places like Mexico are finding that this trade is collapsing
and you're seeing them head for the exits.
Hedge funds and other speculative investors were
holding more than 180,000 contracts, betting on weaker yen
on a net basis worth more than $14 billion.
By last week, those positions have been cut to around 6
billion. So this trade is halfway over.
So many people are heading for the exits and the data shows
that it's not done yet. We're going to see further
unwinding of the young carry trade.
Now, the big risk for traders when they're doing these type of
investments where they're betting 1 currency against
another and earning the difference between the two, of
course, is currency risk, which is volatility and changes in the
value of of currency or interest rates.
That risk is immense when you're using a lot of options, a lot of
leverage. Now, in most cases, traders know
about these risks and so they buy insurance, they buy hedging
for it. But in this case, this trade has
been so popular that the price of hedging has become
unaffordable. So many of them just decided,
you know what, I'm going to go without any type of hedging,
I'll go without any type of insurance.
With so many traders not buying any insurance for the past
couple of years and now there's a lot of volatility, they're all
rushing to do so. Since they're all rushing to
hedge now, it's creating a lot of demand for the yen,
increasing the price and value of the yen.
This creates a vicious circle. As more and more of them are
rushing to hedge their position, it increases the value of the
yen. As the yen value increases, more
of them are closed out of their positions, which further
increases the value of the yen. So you're seeing this circle of
people being closed out of this trade and the yen increasing in
value. We don't know how long this is
going to take to completely unwind, but it is in the process
of doing so. So the Japanese market's
currently a mess right now, down 25% and 12% in a single day.
You have this vicious cycle unwinding with these leverage
trades currently unwinding, and that's going to last some more
time. And then you layer upon that the
news that the US has weak economic data.
All of that is causing a lot of trouble in Japan and some
trouble in the US But then, of course, I think the biggest news
out of all of this, perhaps the biggest symbolically is Buffett.
Buffett, the Oracle of Omaha, selling half of his Apple
position. He's talked about this company
as being the greatest company in the world, a pillar of
Berkshire, like it's one of the third pillars of the company.
And here he is chopping away at half his shares.
We had the news come Sunday. The Omaha based conglomerate
disclosed in its earnings filing that it's holding of the iPhone
maker is valued at $84.2 billion in the second quarter,
suggesting that the Oracle of Omaha offloaded a little more
than 49% of the tech stake. Even after selling Apple, it
remains the largest stake by far for Berkshire.
So he sold roughly half his Apple position, but Apple still
remains the largest holding in Berkshire by far.
Now to put this in perspective with the rest of his public
portfolio, this is what it looks like.
The second largest holding is Bank of America, which he's also
been selling and that was 12% of the portfolio and then you had
Apple at 40.8%. Now that is before this news.
So he's sold roughly half of this.
Now Apple makes up roughly 20% of the public portfolio, so it's
still the biggest position by about double, but it is much
smaller than it was before. Before it was 41%.
Now it's around 20%. He is selling down Apple.
Now there's a lot of takeaways from this news.
Anytime Buffett sells, it's used for clicks and shock value.
But I want to breakdown what this cell actually means and the
reason that Buffett's doing it. I want to put this cell in the
context. Four months ago, I I made a
video of why I was trimming my Apple position.
I was selling down the position and I listed off the reasons why
on the whiteboard. The first one and this video is
available. You can look it up right now,
but the first one that I listed is Apple trades at a relatively
high valuation of a 27 Ford PE ratio and expectations of growth
around 7 to 10% earnings per share growth.
In summary, Apple is a expensive company trading at a high
multiple that's now growing slowly.
Now the second reason I listed off is Apple's being piled on by
regulators. The EU is fining at $2 billion.
They're implementing new regulations forcing Apple to
open up their App Store. This is a weakening of Apple's
Moat. The more and more regulators
tear down the Apple ecosystem, the weaker the Moat becomes.
Now if we go throughout this video, I list off more and more
reasons of why I was trimming my Apple position.
Another one was the DOJ lawsuit against Google represents a
threat against Apple. Google pays Apple a lot of money
to be defaulted. If the DOJ ends that
relationship, that would be an immediate hit to Apple's bottom
line. So we have the slow growth, the
high valuation, the challenges from constant regulation and the
lawsuit against Google, which could impact Apple.
And then finally, I list the final reason I was trimming
Apple. Let's go ahead and just play a
clip from this video from four months ago.
Warren Buffett is a massive shareholder of Apple.
He's really championed the company, and I believe that he
does represent a little bit of key man risk in the story of
Apple. For example, last quarter
Berkshire sold 1% of its Apple stake.
And because Berkshire sold 1%, you saw story after story after
story of Buffett selling Apple, trying to make investors
fearful. Now, the fact that he only sold
1% wasn't great. It wasn't positive news.
He wasn't buying more Apple, but it wasn't the worst possible
news. If we got news that Buffett
trimmed his stake by 5 or 10%, what would that do to this
stock? How would investors react to
that type of news? This analyst argues that
Buffett's already up a ton on his stake in Apple, which is
true. He was buying the company 2016.
So he's made like five times his money on Apple already.
It represents 50% of his equity portfolio.
And what would happen if Buffett started to sell, which he could
do because the valuation potential issues with it,
Buffett could start to trim the holding a little bit more.
He argues that the likeliers, if Berkshire sells more shares,
would be retail investors rushing for the exit and Apple
shares getting slaughtered. So I had a list of concerns and
the reasons why I was training my Apple position.
Part of that being that Warren Buffett may sell the stock and
we see a bit of a trade down if he does.
It's not encouraging when one of the best investors in the world
is selling out of his stake of a company.
And in this case, he didn't just sell 5 or 10%, he sold 50%.
And I believe he's going to continue selling.
I don't think Buffett's done. And the reason why is simple.
Apple is a stock that Warren Buffett bought back in 2016.
If we look at the share price, we go way back to 2016.
We have it right here. Apple is around $23 per share
2324. This is when Buffett was really
buying the company. At the time Apple traded at a 16
Ford PE ratio. At the time Apple was a $600
billion market cap company. It grew dramatically from $20
per share now up to $200.00 per share while paying dividends the
entire time. Buffett has made five XS money
on this investments. It'll go down as one of the best
tech investments from any investor ever in history.
It is one of the most significant best investments
ever done in tech. And Buffett did that with a huge
chunk of his portfolio. He poured $35 billion into Apple
and then 5X that invested capital.
Now again, when he was buying Apple, the market cap was around
500 to $600 billion. Now it's $3.34 trillion. the PE
ratio of the company was around 16 to around 17 depending on the
day he bought. Now the PE ratio is 30.
The earnings per share of the company have gone up
dramatically, but the valuation of Apple has doubled since
Buffett bought the position. And Buffett is a value investor.
He likes getting good value for what he's buying.
He likes it when he buys a company cheap and the multiples
go up and it becomes more expensive.
When Buffett was buying Apple back in 2016, many people talked
about the company being a weak company.
It was just a hardware company. They didn't really have any
significant software built out. But Apple soon became a massive
software company. I followed along with his buy in
2018, and Apple has gone up three times since when I
initially purchased it. This is one of the best buys to
follow Buffett into. But Buffett's not only good at
buying, he's also really, really good at selling.
Many investors sell companies at the wrong time.
You have investors like Terry Smith that sold Estee Lauder too
late, that sold PayPal too late, that sold Amazon too early and
into it too early. He has trouble with his cells.
Buffett, on the other hand, is pretty good overall with cells.
He likes to buy companies cheap and sell them expensive.
Now, he's not perfect. There's some cases where Buffett
has sold at the wrong time. One company that Berkshire sold
at the wrong time was Costco. Berkshire sold Costco in around
2020. So right around here, Berkshire
Hathaway sold Costco and that was a really bad time to sell
Costco. Costco's up over double the
returns of Berkshire Hathaway since they sold the position.
So Costco is an example of Buffett getting the sell wrong.
This is a company he should have held onto in hindsight.
In the case of Apple, only time will tell if this is another
Costco that he should have held onto or another great sell from
Buffett where he sold it at a good time given the risk and
reward. If I was to guess right now, I
believe this is going to be a good sell, and I say that
holding a little bit of Apple myself.
The reason being is that it's simply undeniable that Apple is
trading at a higher valuation with lower growth.
The combination of being higher valued with lower growth means
that there's far more downside for Apple than upside.
The chance of multiple compression is far greater than
the chance of multiple expansion.
Buffett likes to find companies that have lots of catalyst
earnings growth, free cash flow growth, and low valuations.
He likes to get a lot for what he's paying for.
With Apple at $210.00 per share, it's difficult to see that
there's going to be any type of multiple expansion.
How are multiples going to expand?
It already trades at a 34 E ratio.
Is it going to go to a 40 or A50?
It might, but you can't really count on that.
It's more than likely going to go down a little bit to a 25 or
23. As the growth slows, the PE
ratio should follow. And we've seen this happen with
other high quality companies in the past, ones like Estee Lauder
or Nike, Those companies were considered compounding machines,
but when they get too expensive, the multiples can compress.
Now, no matter what metric you look at, if you compare the
price of Apple today, the valuation of the company
compared to when he was buying it in 2016, he was getting much
better value in 2016. And I think that Apple's
unlikely to have the same returns it's had over the past
10 years. Now, of course, with Buffett
selling half of his Apple position, this raises another
question. What is he going to do with all
this money? Half his Apple position was $80
billion. This brought the total cash
balance of Berkshire to an incredible $277 billion.
This is the most money that Berkshire has ever held, the
most cash they've ever had. This is over a quarter trillion
dollars in cash. It's really an incredible amount
of money. Now, of course, anytime Buffett
does some big sells and he has a lot of cash, that raises some
eyebrows. Why is Buffett, the best
investor in the world, holding so much cash?
Something that's helpful to do is anytime you look at the
amount of cash that Berkshire has, you have to put that in
context with how big Berkshire is.
It makes sense for Berkshire to hold more cash as a company
itself becomes bigger. If we plot out the tangible book
value of Berkshire against the cash balance they currently
hold, it paints a far clearer picture.
You can see that Berkshire is continually gaining in the
amount of cash they hold as the company overall grows.
The blue line, the top one is a tangible book value and
Berkshire grows this year over year quite consistently.
You can see the tangible book value just continuing to go up.
Now you also see the cash balance going up with the
tangible book value and they go up almost in parallel.
There is some zigging and zagging.
There's sometimes where they do some buys and the cash balance
will go down in proportion of the book value.
But overall you see consistency here.
As Berkshire grows as a company, they also grow their cash
balance. And This is why the headline the
Berkshire's holding a record amount of cash is a bit
misleading. They're always holding a record
amount of cash. In 2022, they're holding a
record amount of cash. In 2018, they're holding a
record amount of cash. The same thing with 2016 and
2014 and 2008 and 2005. As a company grows overall, they
grow the amount of cash they hold.
And this is consistent with their history.
So the headlines of the record cash that Berkshire holds is a
little bit less scary when you put it in context.
The thing that concerns me more than the record cash they hold,
something that I actually look at that does raise some
eyebrows, is this chart right here, Berkshire's net purchases
or sales over time. This goes back to 2017 and it
shows how much they bought or sold every single quarter.
The red, of course, is when Berkshire is selling.
The green is when they're buying, and this Nets out their
sales and buys. What you can see is that
overtime from 2017 to 2022, Berkshire was a buyer.
They're buying shares of companies in net over those
three or four years. Then you get to December of 2022
and all of a sudden they start selling from December of 2022 to
June of 2024. They are a net seller every
single quarter. That's seven quarters of
consecutive net selling from Berkshire.
Why is Buffett selling right now quarter over quarter without
doing any buys? Well, Buffett himself will tell
you that he does not sell based on anticipation of market
events. So he's not selling because of
what's going on in Japan. He's not selling because he's
predicting a recession. He's not selling because of the
jobs report. That's not the reason that
Buffett sells. The reason that he sells is
multiples have gone up, growth has slown, and he does not see
good value with his companies. He sees better values just
holding it in Treasuries. That's the reason that he's
cashing out of these positions. Buffett will be a buyer when
free cash flow yields go up. When PE ratios go down, that's
when he'll start to buy stocks again.
He is a value investor. He buys low, sells high.
Stocks right now are rather expensive.
Even with today's scary sell off of 2 to 3%, both the S&P 500 and
the QQQ are in the green by around 10%.
The stock market's doing great. Valuations are high.
Most people have been greedy over the past year, pushing
prices up and up. Buffett does not follow the
trends. He doesn't follow the herd as
people are buying the market, pushing prices up and up.
He sells out when everyone finally capitulates and starts
to sell out of their positions when they start to.
Give up on great companies that are earning money.
Buffett will be a buyer. So if you want to invest like a
Buffett, you do not play the game of predicting recessions or
economic events. You buy and sell based off of
value. He bought Apple during a time
period where it was cheap value. He's now selling it during a
time period where it's expensive and everyone else wants to buy
it. He buys during times of
distress, when people are scared and anxious and selling out of
their positions. He sells in the strength when
people are happy, when they're making money, when valuations
are pushed up to extremes. Buffett doesn't follow trends.
He doesn't just push prices up higher and higher.
He buys great companies at low valuations and holds them long
term. He's held Apple since 2016.
And this sale of Apple, which I believe will continue, I think
will be one of the best trades ever done in history.
And I think it's going to be one of Buffett's best trades that
he's ever done with his track record.
The size of this trade, the profitability of it, the timing
of buying it when nobody else wanted it, and selling it during
a time where there's so much talk of AI and everyone wants to
buy Apple is just incredible. And it shows how good he is of
an investor. He's had other misses.
He's had smaller bets with different companies that he's
missed on. But those pale in comparison to
the size and scale of this Apple investment.
It really is remarkable. If we want to invest like
Buffett, we want to buy great companies when they come at
discounted prices, when for some reason the market doesn't like
these companies and they're at low valuations portfolio, that's
the goal. It's to buy high quality
companies at dislocated prices and hold them long term and
allow them to compound. Now today I have been doing a
series of buys. I have been buying booking,
holding. Booking Holding is a new
position to the portfolio. I'm just buying into it and I've
increased my stake dramatically over the past month as it's sold
down. Booking is selling down because
of these general fares of the market.
It's going down a lot even though the fundamentals are
incredible. It trades at a low valuation and
18 Ford PE ratio, a 6% free cash flow yield.
These are really healthy numbers and the company has incredible
fundamentals. Their gross bookings is at an
all time high growing year over year.
Room nights sold continues to go up quarter over quarter.
Even the most recent quarter this year there's more room
nights sold than last year. The company is super high
margin, super profitable. Look at the free cash flow
growth over time. On a free cash flow per basis,
they grew by 25% year over year. This is faster than Visa or
MasterCard or S&P Global or many other companies I hold.
So I have a company that's growing incredibly fast, trading
at a low valuation. And of course, if there is any
trouble with the company that continues to sell down because
of fears of an upcoming recession, they'll just continue
to buy back their shares, which is something they've done
aggressively over the past 10 years.
Since 2014, the shares have gone from 53,000,000 down to 36
million. Last here they bought back 7% of
their total market cap. So this company is a buyback
machine that pays a dividend at the same time.
Now if we go into a recession, Booking Holding may trade down,
but because of the high margins of this business, they'll be
fine. They'll be able to buy back
their shares aggressively even in the case of a recession.
So I don't fear going into recession even with a travel
company. Some people think that's crazy,
but recessions only last typically for a year.
One year of holding a company, you might have a down year.
And in this case, I see a great future and great current value
for the company. So that's what I've currently
been buying. But I also have been holding all
of my companies. I hold my Costco shares, I hold
my Texas Roadhouse shares. I still hold all of my S&P
Global MasterCard, Intuit and Moody's, Microsoft and Apple and
all of these companies. I'm not concerned about a
potential potential recession. It just doesn't worry me.
All of these companies will be able to pull through in the
story fund. It's given back some of its
gains this year, but still, year to date it's up 12.7%, which
beats out the S&P 500 and the QQ.
We're still up $48,000 in this portfolio even after Amazon has
been hammered today, down 5 or 6%.
So even though these companies are trading down a little bit,
it doesn't concern me at all. Intrinsically, they're growing
day by day, quarter over quarter.
Amazon's going to be worth a lot more in the next three years
than they are today. Overall, what I'm looking for
are companies that will steadily grow their cash flows quarter
over quarter, year over year. I like companies that have
earnings growth and free cash flow per share growth.
And even if the price comes down, as long as they're growing
in their cash flows and earnings, I feel fine about it.
It just means that it's a temporary dip.
It means that eventually will recover.
If not, they can do buybacks and dividends and grow their
earnings even faster. When the fundamentals are going
up and the price is going down, that is the best situation to be
a buyer. That's the best situation to be
an investor. The issues you should avoid as
an investor are when the fundamentals go down, when the
earnings and cash flows go down. That's a situation like Intel.
Intel's having fundamental damage to the company.
It's down over 50% this year. It's not coming back quickly.
This is the situation I try to avoid is when the actual
fundamentals of the company are tanking.
I don't have any company in My Portfolio where that's the case.
Every single position I hold is growing in it's free cash flow,
growing in it's earnings per share.
So if prices come down, that's fine with me.
I'm going to be a buyer. So as far as I'm concerned,
nothing changes with news like this.
Even if we go into recession, that should be something that's
already planned in terms of your investment strategy.
And if this does cause a lot of grief, if you're genuinely
concerned about the past couple of days, And I think that may be
a, a message that you need to rethink your investment strategy
and maybe rethink your portfolio because you should be well
prepared for these type of instances.
It's not unusual at all for stocks to drop dramatically in a
couple of days and you should be prepared for that.
That's all for this episode. See you in the next one.