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Why Long Term Investing is Better

How Patience, Compounding, and Finding Exceptional Companies Lead to Greater Financial Success

Hello and welcome to this week’s Lockstep Investing Newsletter.

We have an exciting newsletter this week, as we discuss the following:

Ready?

Let’s dive in!

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MARKET RECAP

Market Performance: Week 24

It was another solid week for the S&P 500 and Nasdaq as the ongoing excitement around AI continues to drive tech stocks and related sectors higher. In contrast, the Dow Jones Industrial Average struggled due to its limited exposure to tech stocks.

Drivers of Performance

The AI Boom

Apple (AAPL) started the week with its Worldwide Developers Conference on Tuesday, which included details about its latest operating system, iOS 18, and how AI will play a fundamental role in the upgrade. Even Siri is getting an AI integration. AAPL’s stock price ended the week +7.9% higher as a result.

The SIRI upgrade reminds me of the movie “Her” and has me worried that we will fall in love with our operating systems sooner than expected. The scariest part is that Sam Altman and his team at OpenAI have already tried to get Scarlett Johansson to be the voice of ChatGPT.

Following Apple’s announcements, Broadcom (AVGO) reported robust second quarter (Q2) 2024 results, with revenue up +43% year-over-year (YoY) due to strong AI demand.

AVGO also raised its full-year guidance and announced a 10-for-1 stock split, a move generally well-received by the market. Consequently, AVGO’s share price surged over +23% last week.

Adobe (ADBE) posted solid Q2 2024 growth, driven by high demand for its AI-enhanced products. The company achieved record revenue for the quarter and raised its full-year guidance, pushing ADBE’s stock up by +14.5%.

Notably, companies didn’t need to publish financials to see gains. Arista Networks (ANET) saw a +10% rise in share price after Morgan Stanley upgraded its target price, citing benefits from providing networking capabilities to the growing data center industry, fueled by AI demand.

Even energy companies are riding the AI wave. Baird raised their target price for First Solar (FSLR) from $244 to $346 per share, recognizing it as an AI energy play poised to benefit from increased energy demands from data centers.

Inflation and The Fed

It was a busy week from an economic news perspective as well. May’s Consumer Price Index (CPI) was released on Wednesday, followed by May’s Producer Price Index (PPI) on Thursday.

May’s CPI matched expectations, rising +3.3% from May 2023, a relief after higher-than-expected readings in previous months.

The CPI release coincided with Wednesday’s Federal Reserve’s interest rate decision. As expected, the Fed kept rates flat despite the positive CPI reading. Fed Chair Jerome Powell stated that rate cuts are unlikely until there is more confidence that inflation is closer to their 2% target.

The Fed’s decision was followed by Thursday’s release of May’s PPI, which came in lower than expected. Although the Fed weights PPI lower than CPI, the surprise on the low side bolstered market confidence in a potential rate cut by September.

The market is pricing in a September rate cut with 70% confidence (as of the time of writing), up from less than 50% the previous week.

Inflation Check-In

With all the continuous data releases, it’s easy to get caught up in all the weekly and even daily market and economic noise. That’s why stepping back and analyzing data from a longer-term perspective is crucial.

As you can see above, CPI is within the 25-year and 50-year averages range. So, it might be unrealistic to expect it to drop significantly.

Instead, I choose to position my investments and portfolio so they do not depend on a lower interest rate environment. I do this by investing in stocks with little to no debt and investing in companies not dependent on near-zero interest rates to thrive.

What is your view on interest rates? How does it impact your investing?

INVESTING CHRONICLES

Investing is hard and the best way to improve your own investing is through others. So, under “Investing Chronicles”, I’ll share my learnings from my 18+ years in the stock markets.

The Importance of Having a Long-Term Mindset

Investing with a long-term perspective is crucial for success in the stock market. Focusing on long-term investments can yield better results than placing short-term bets on where the market, industry, or a specific stock might be in the next month or two.

Here’s why:

1. Increased Chance of Success

Predicting short-term market movements is incredibly challenging. Even the Federal Reserve’s experts struggle to foresee where the economy is headed.

For instance, in early 2020, few economists or market analysts predicted the rapid and severe impact of the COVID-19 pandemic on the global economy and stock markets. Many expected a prolonged downturn, but the market rebounded quickly, reaching new highs by the end of the year.

Another example is the recent inflation surge in 2021-2022. The Federal Reserve initially predicted that inflation would be “transitory” and not persist long-term. However, inflation has proved stubborn, leading to “higher for longer” interest rates.

While we can’t predict short-term trends, we do know that the U.S. economy tends to trend upward over the long term. High-quality companies see their revenues and profits grow, and as we’ve discussed in last week’s newsletters, as these financials improve, so do their share prices.

Need more proof?

Consider the S&P 500’s performance over the past 50 years. With dividends reinvested, it has returned an impressive 11.1% per annum. That means if you had invested just $1,000 fifty years ago, it would be worth approximately $193,000 today.

This growth hasn’t been a smooth ride—some years exceeded the 11% return, while others saw market declines. However, staying invested despite economic predictions, political events, and financial crises would have resulted in substantial gains.

If, instead, you had sold your investments during periods of uncertainty, waiting for the perfect time to reinvest, you would have surely missed out on the market’s gains and significantly underperformed the S&P 500.

2. Power of Compounding Returns

Compounding is often referred to as the eighth wonder of the world. It is an exponential force that accelerates the longer you allow it to work.

In the stock market, this means seeing your investment grow at an average of 11% per year. At this rate, your investment would double every seven years.

Investing for a year, withdrawing your money, and reinvesting later doesn’t have the same impact as a consistent, long-term investment strategy. Compounding is most effective when you remain invested over long periods, allowing your returns to generate more returns.

3. Benefitting From Exceptional Companies

If you find three wonderful businesses in your life, you’ll get very rich.

Warren Buffett

Buffett compares investing in businesses to baseball, where you don’t need to swing at every pitch. Instead, you wait for the perfect pitch—the ideal business—and when you find it, you swing hard. Investing in companies you believe are truly exceptional, run by honest people, and holding them for long periods can make you very wealthy.

Buffett himself has only made a handful of exceptional investments, such as Coca-Cola, American Express, and Geico. These companies have been part of Buffett’s portfolio for decades and have been massive contributors to his compounding wealth. If he held them for only a few years, Buffett would not be the “Oracle” he is today.

In previous newsletters, I’ve discussed companies like the St. Joe Company and Innoviva. Both have fantastic potential, but it will take years to realize. I won’t benefit from their long-term growth if I only invest for a year or two. Instead, I must commit to being a shareholder for many years to reap the rewards.

Conclusion

Adopting a long-term mindset in investing is essential for achieving substantial returns and benefiting from the power of compounding. It also allows you to identify and invest in exceptional companies, setting you up for lasting financial success.

By staying the course and resisting the urge to make short-term moves, you can harness the full potential of your investments and build significant wealth over time.

LESSONS LEARNED

There is no faster way to learn about investing than through the Greats. Here, I share lessons from the best investors and thinkers.

Top Tools and Tips for Finding New Stocks to Invest In

I thought it would be beneficial to summarize some valuable resources to help you on your investment journey:

Stock Screeners

A stock screener is a tool that allows investors to filter and rank stocks based on specific criteria such as valuation, growth, and quality metrics.

Users can efficiently identify potential investment opportunities that meet their predefined investment strategy by defining parameters like market size and geographic location.

Here are three stock screening resources:

Investing Forums

Engaging with investment forums allows individuals to exchange ideas, present investment theses, and receive constructive feedback regarding their research.

Here are two valuable resources:

NB: Make sure the research presented and feedback is of the highest quality.

Insider Trading

No one knows more about a business than the people who run it, so we should take notice when we see directors or management buying shares in their own company. As the saying goes, management has many reasons to sell, but there is only one reason to buy: they believe the company is undervalued.

Here’s a helpful resource:

Word of Caution

While the resources mentioned above are great tools for finding potential ideas, remember they are for idea generation only. They are just the starting point of the investment process.

You are still responsible for doing the homework and detailed research to determine whether it is a good investment. Remember, investing without a well-defined thesis can lead to uncertainty when faced with adverse outcomes.

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