The Hoot #5

That Last Minute Report

My name is Matt Brimacombe. I'm a graduate student studying Finance, and an aspiring fund manager. The Hoot is a weekly newsletter that breaks down some of the biggest and most-relevant economic and business events; analyzes both public and private markets, and all securities that entail; and touches on some sports news, with a focus on rugby. Any feedback is greatly appreciated, and you can do so by responding to this email. Enjoy! 🦉

Mr. Market Says No

Just when you started thinking that good times last forever... 

Year-to-date Market Performance:

• The S&P 500 is up 3.88%

• The Dow is down up 0.72%

• The Nasdaq Comp. is up 7.25%

• Bitcoin is up 39.90%

• Ethereum is up 38.04%

• The Scatt Capital Strategy is up 22.47% (up approx. 19.69% since inception)

• Earnings season is has kicked off! I'm proud to say that of the companies that have reported earnings so far, 83.3% in the Scatt Capital portfolio have beaten expectations. Historical corporate earnings will give us better insight into the effect of The Fed's rate hikes, however management's fiscal year forecasts are equally as important in determining any future hikes.

• A down week for 2 of the 3 major indices. News of layoffs & other economic data helped drive the market down this week.

• Producer Price Index (a measurement of average price change for domestic producers) came in lower than expected, indicating prices are falling across the board.

• Retail Sales declined more than expected, indicating the Fed's rate hikes might be starting to impact everyday consumers.

That Last Minute Report

For those that haven't heard the phrase "ChatGPT" in the last month, let me introduce you. ChatGPT is an artificial intelligence (AI) chat-bot designed and developed by Microsoft-backed company, OpenAI. GPT and it's incredible capabilities have been the talk of the town over the last few weeks, so much so that it reached 1 million users in just 5 days🫣 The awesome thing about GPT is that you can ask it to do almost anything from writing that last minute report (NYC public schools have already banned it), to work emails, to coding an entire program. It is honestly quite incredible!

Inflation is so bad right now, even the Goldens & their bones are being affected... 🐕

Behind all the excitement and fun lies a technology with the ability to, quite literally, change the world. As it stands, AI is already becoming a valuable tool in finance by analyzing and predicting price movement in various asset classes, including cryptocurrency (we should ask it to teach us mortals). It does so by analyzing patterns and trends; identifying sentiment; analyzing technical and fundamental characteristics; and creating predictive models. It can also optimize portfolios by identifying optimal combinations of assets, and uses the predictive models on how and when to balance things. A lot of the big funds and banks on Wall Street either directly use such technology, or compete against it (AI-based quantitative funds were one of the best performing hedge funds in 2022). At this rate, we could all be kissing our financial advisors goodbye (not that I even have one). 

Point being: Given its computing power and capabilities, AI is going to make incredible leaps forward in the next few years, and by researching & better understanding it, and its use cases in our daily lives, you'll be better equipped to look for opportunity.  

Remember, you heard it here first: AI will change the world. 

Chart of the Fortnight: Procter & Gamble

To give you all a bit of context, in each newsletter I will briefly discuss one or two companies within my portfolio and attempt to make some sense of their chart and any news-related events they are involved in. This week we'll be discussing Procter & Gamble, which was down 12.23% in 2022, and is down 5.67% year-to-date. Earnings season is in full swing, as previously mentioned, and P&G reported better-than-expected results last Thursday. EPS came in pinpoint at an expected $1.59, and total revenue surprised by coming in at $20.77bn vs. $20.73bn expected. This still represents a decline in sales and EPS year-over-year, thanks to higher pricing and shrinking consumer demand. They were also heavily impacted by the Russian war, and inventory reductions in China's lockdown.

P&G is an American-based multinational consumer goods corporation, originally founded in 1837. A few of their well-known subsidiaries include Gillette, Pampers, Oral-B, Pantene, Braun, Old Spice etc. I'll be honest, one of the biggest attractions to P&G as an investor is the level of diversity in their brands - they range from toiletries to basic household essentials. For that reason, I like to consider PG as an 'all-weather' stock, i.e., one that generally tends to perform better than the rest of the market. I believe that they're relatively well-positioned for what is expected to be a tough economic year, and I have full faith in management to steer the ship in the right direction. It is said that we should be fearful when others are greedy, and greedy when others are fearful. Right now, my estimate is that people are hesitant. What does this translate to? Put it this way: If dollars are seeds, P&G is a fertile piece of soil.

Capping Losses > Increasing Gains

Last week we spoke about the odds of success in investing, and what that looks like in the long-term. This week, we're chatting about something similar. In my opinion, as an investor - in whatever that capacity may be i.e. retail, accredited, institution etc. - you should be more focused on capping or protecting your downside (losses), than you are with trying to maximise or increase your upside (gains/growth). The photo below perfectly explains why. Don't get me wrong, I'm not saying don't take risks and look for opportunity, because that's what this game of investing is all about. 

Instead, what I am highlighting is that more energy should be put towards cutting losses rather than focusing on what stock or crypto you should buy next. It's all grand & dandy when you outperform another investor, but the true testament is in who performs better during a down ⬇️ market.

To give you a real world example: You invest $100 dollars into the market. The market turns and takes a dive. Your $100 is now worth $50. You're thinking, "Well, I'm 50% down, I only need to recoup a 50% gain to break even". WRONG! You now need to double your money (100% gain) to breakeven. Similar to gambling, investing can be risky if you don't know what you're doing. Conduct thorough due diligence & research, and don't be mistaken between a risk-junky and a calculated risk taker - the latter creates billionaires, and the former creates McDonalds employees. 

*A TIP 🕵🏼: What I like to do before I invest in a company is pretend that a 5-year old kid has asked me reasons for making such an investment. If I don't have at least 2 to 3 strong & valid reasons... I either wait until I do, or scrap the idea entirely. 

Rugby-Related

We had the European Rugby Champions Cup on this past weekend 🏉 

Awesome to see Kade Wolhuter back in the blue & white jersey this past weekend!

South African team results: 

• Bulls vs. Lyon: Lost 7-31

• Sharks vs. Harlequins: Lost 29-39

• Stormers vs. Clermont Auvergne: Won 30-16

 12 days until the Six Nations 🤑

That wraps up the 5th edition of The Hoot. 

See you next week for another update. 🦉

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.