Why do I continue to Invest despite the recent events?
What happened in the past week and my investment strategies.
In the past couple of days, volatility has consumed the market. Almost all stocks across different industries were affected by the price fluctuations driven by investors’ emotions. There are a few reasons which created the uncertainties among investors.
Inflation
On 12th May, the US released the CPI data and the numbers exceeded the estimated target for both Month over Month (MoM) and Year over Year (YoY) CPI rates. The CPI for MoM is at 0.8% while (YoY) has reached 4.2% which is relatively close to the numbers (4.9%) seen back in 2008. Investors were worried about inflation as this could potentially affect their investment performances. Rising inflation would mean a lower purchasing power for consumers which might affect the companies’ earnings.
Looking at the CPI, ⅓ of which is due to the rise in vehicle prices, particularly used cars, which has risen by 10%. One of the key reasons we can identify is due to shortage of chips and other materials. The shortage of parts creates a supply shortage of vehicles thus pushing resale car price up.
The next topic we focus on is: would FED raise the interest rates? We would not know but it would be best to take into account our investment decisions if they do. As they say, prevention is better than cure. On 11th April, Powell has mentioned that “it’s ‘highly unlikely’ the Fed will raise rates this year, despite stronger economy”. However, at the end of the article, he did indicate that if inflation were to rise, the FED rates will have to be adjusted as well. Their motivation for such action is partially due to their focus on employment rates rather than inflation itself. With the interest rates increasing, the cost of borrowing will increase as well. This will become tougher for companies to refinance and further reduce consumer spendings.
Commodities
Other commodities which gained the attention of investors globally are oil and iron ores.
The recent rise in oil prices was due to the fear of a potential shortage of gasoline. This happened after a cyberattack on the US fuel pipeline system which halted all operations and affecting 17 states.
Sources: CNBC | Reuters | Off-Shore Tech
The increased demand for steel, due to the year-long slowdown with the reopening of business activities globally, has contributed to the increase in iron ore prices. More importantly, the ongoing tension between China and Australia has caused the prices to spike. Australia is the largest iron ore reserve as of 2020. 60.9% of China iron ore imports come from Australia. With the ongoing tension, China has sought an alternative source of iron ore. However, this process takes time and it would be challenging to meet the demand especially when prices are increasing.
Source: Global Times | Reuters
My Investment Approach
Allow me to share on my investment approach, and why these market events does not, and will not affect my investment decisions. Being a long-term investor, I conduct my investment through a value-oriented approach. I look for companies with strong fundamentals and financial health, who also possess the economic moat and the scalability factor for future growth.
The goal as an investor is to remain invested in the long run. Buying low selling high, timing the market will probably have an adverse effect. Therefore, it is crucial to identify companies with the above-mentioned characteristics to ride through any form of disruption and emerge stronger at the end of the day.
One example of such a company which I shared recently is Disney. Despite the closure of their theme parks, Disney has managed to expand on their streaming business, Disney+. With the existing pool of content, it is fairly easy for Disney+ to scale. Looking forward into the future, when the theme parks reopen post-pandemic, coupled with their streaming services, revenue will be set to grow together with their share price.
Therefore, it would be ideal to identify businesses with similar attributes because such companies would have a higher likelihood to sustain their growth and succeed in the future. As investors, we have to understand the risk involved. Hence, to reduce our risk exposure and increase our returns, we have to conduct our due diligence before investing. This entire process of identifying such opportunities is why I love investing for the long term.
