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Full course on stock investing (2 hours) — Transcript

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0:01Hey guys. So, I started this channel
0:03about two years ago with a goal of
0:05educating people to make better
0:06decisions when investing in stocks.
0:08Since then, I've been making a lot of
0:10videos about stock investing strategies
0:12like valuation, macro indicators,
0:14reading the Federal Reserve actions, and
0:16investment mindsets. Now, I understand
0:18that a lot of you are new to the channel
0:21and very recently I've been getting a
0:22lot of questions like, "How can I become
0:24a better stock investor? How can I read
0:26the market better? What indicators do I
0:28have to monitor? Now, while my previous
0:31videos cover everything related to those
0:32questions, I do understand that my
0:35videos are now quite scattered in the
0:37library, which makes it hard for you to
0:39find the ones which are strictly
0:41relevant to the fundamentals of stock
0:42investing. So, I wanted to make this
0:44compilation video which includes all the
0:47basic theories about stock investing.
0:49For each of the video, I'll include a
0:51short commentary in between so that you
0:53get an idea of why I made such video.
0:56Now, because this video is a compilation
0:58of my past videos, the quality of the
1:00videos may not be good for the older
1:02videos, but I hope you can bear with me.
1:05I can assure you that if you watch this
1:07video thoroughly a few times, you'll
1:09pretty much master all the basic skill
1:11sets you need to have to become a better
1:13investor. Okay, let's get to it. Now,
1:15the first video is a course on price to
1:18earnings ratio. As you may all know,
1:20this is probably the most important
1:21valuation metric which I refer to in my
1:24market update videos. Hopefully through
1:26this video you can get a better
1:28understanding about the most basic
1:30methodology when valuing stocks. Okay,
1:33here we go.
1:36Today I wanted to deep dive into a stock
1:39pricing and valuation metric. The most
1:41commonly used valuation metric in the
1:43stock market from an equity investor's
1:45perspective is the price to earnings
1:47ratio, which is generally noted as the
1:49PE ratio. Now, I've been monitoring a
1:51lot of videos on YouTube and they spend
1:5310 or 20 minutes talking about how PE
1:55ratio is important and that you need to
1:57focus on this valuation metric to
1:59succeed and also the way to calculate
2:01the PE ratio which literally takes like
2:032 seconds to learn it yourself. It
2:05really amuses me how all
2:07YouTubers talk about this simple metric
2:08on and on wasting everyone's time and
2:11what they're saying can actually be
2:12explained in 2 seconds. Today, I want to
2:14cover this concept of price to earnings.
2:16But going further from here, how to
2:18actually understand this number and how
2:20you should apply it yourself when you're
2:22investing. Okay. Now, what is price to
2:24earnings ratio? It is a very simple
2:26concept. All you need to do is divide a
2:28company's market cap by its net income.
2:30Assuming that company A's market cap is
2:32currently at 100 billion and its net
2:34income is at 10 billion, the company's
2:36price to earnings ratio is 10x. Simple,
2:39right? Now, this is where all YouTubers
2:42stop explaining about the concept itself
2:44and just go on and on about the
2:45importance of this metric and how you
2:47should be looking at it all the time.
2:49Now, why don't we just deep dive into
2:51it? I want to break down this topic into
2:53five topics to help you get a better
2:54idea of what this metric actually means.
2:56Number one, why is price to earnings
2:58ratio actually important? So, price to
3:01earnings ratio shows how long of a time
3:02a company takes for it to make money up
3:04to the total value of the shares you
3:06paid to purchase for it. For example, in
3:09the example I gave you just now, company
3:10A's market cap was at around 100 billion
3:13and it net income was at 10 billion,
3:15implying a price to earnings ratio of 10
3:17times. What this means is that starting
3:19from today, this company A will take 10
3:22years for it to make the money you paid
3:24to purchase the company. So assuming you
3:26purchased 10 shares out of a million
3:28shares, total shares of the company A,
3:31it would mean that you're owning 0.001%
3:34of the company's stake. If you purchase
3:36those shares when the company was at a
3:38market cap of 100 billion as a
3:40shareholder, you're also potentially
3:42gaining the right on 0.001%
3:45of the 10 billion net income the
3:47company's generating, which you can
3:48potentially benefit through dividends or
3:50share buybacks in the future. So
3:52basically, the basic concept is how long
3:55of a time it takes for you to get your
3:57invested money back from the company
3:59down the road. Depending on the price to
4:01earnings ratio, it may suggest that it
4:03may take 10 years or 5 years or 20
4:05years. Now, based on what I told you
4:07now, low number looks good, right?
4:09Getting your money back in 5 years is
4:11definitely better than getting it back
4:12in 10 years. Well, that's not really the
4:14case. So, let's move on to the next
4:17topic. Number two, understanding price
4:19to earnings ratio from financial
4:21projections perspective. Now, we talked
4:23about the overall concept of price to
4:25earnings ratio. Right? Now, you might
4:27think that a five times price to
4:29earnings ratio company is better to
4:31invest than a 10 times price to earnings
4:33ratio company. Well, let's try to prove
4:34that that is not the case. Let's say
4:36that you have company A and company B.
4:39Company A and company B both currently
4:41have market cap of 10 billion while
4:43company A has net income of 1 billion
4:46while company B has net income of 500
4:49million. This means that company A is
4:51trading at 10 times price to earnings
4:53ratio while company B is trading at 20
4:55times price to earnings ratio. Does
4:56company A look better to invest? Well,
4:59let's think about that. Let's assume
5:00that in 2024, company A and company B
5:03recorded net income of 1 billion and 500
5:06million. But in 2025, company A again
5:09recorded 1 billion and company B
5:11suddenly also recorded 1 billion. Then
5:14in 2026, company A's net income still
5:17stays at 1 billion, but company B's net
5:19income increased to two billion. In the
5:21next two years as well, let's assume
5:23that company A's net income stays at 1
5:26billion, but company B's net income
5:28increased to 3 billion and 4 billion.
5:30Now, in aggregate over the 5-year time
5:32frame, company A generated total net
5:34income of 5 billion, while company B
5:36generated total net income of 10.5
5:39billion. While it might seem like you're
5:41investing in an overvalued stock at the
5:43time of the investment, looking at this
5:45result, investing in company B turned
5:47out to be a better choice. This is why a
5:49company's future prospect is much more
5:51important than its historical
5:53performance when you're investing in a
5:54stock. So, let's move on to the next
5:56topic. Number three, understanding price
5:58to earnings ratio from a regression
6:00analysis perspective is important. So,
6:02based on what I told you so far, you'll
6:04now understand that low PE is not always
6:07a good thing. So now let's try to deep
6:09dive further into how we can understand
6:11the price earnings ratio better relative
6:14to its earnings growth. So now you
6:16understand that the future net income is
6:17crucial when buying a stock. So to get
6:19an even better idea of whether you're
6:22making the right purchase, you can do
6:23what is called a regression analysis. A
6:25regression analysis is something you do
6:27to find out how much of a close
6:29relationship two metrics would have with
6:31each other. Generally the formula is a
6:33linear formula which is noted as y = a +
6:37xb. If you have a fair number of set of
6:39data you can automatically generate the
6:41chart and the equation in the excel. So
6:43this is the excel spreadsheet and here I
6:45have 10 companies with different price
6:47to earnings and next 5 years EPS growth.
6:50There are two things to consider here
6:52when you're running this regression.
6:54Number one, please make sure that you're
6:55comparing against the companies within
6:57the same industry. And number two, make
6:59sure that you have around 10 companies
7:01to make the regression analysis more
7:03meaningful. Now, I'm not going to go
7:04into the details of the formula given
7:06the goal here is really to be practical
7:08rather than being academical. So, with
7:10the data that you have, you can create a
7:12scatter chart in the Excel like this.
7:14And if you press the plus icon next to
7:16the chart, you can also add a trend line
7:19and a regression formula. Now, based on
7:22the trend line, you can get a sense of
7:23how steep of a relationship your set of
7:26data has with each other. Also, if you
7:28press the plus button again, you can
7:29also insert a thing called R squar. Now,
7:32what is R squar? R squar shows how much
7:34of a correlation the two sets of data
7:36you laid out have against with each
7:38other. A higher R squared means that the
7:41correlation between the PE ratio and the
7:43earnings growth are highly correlated.
7:45So, you can confirm that for the
7:47industry which you picked, a higher
7:48earnings growth leads to a higher PE
7:51ratio. The reverse would work for the
7:52vice versa. Now I would suggest that you
7:54only put a lot of confidence on your PE
7:56ratio and the correlation with this net
7:58income growth projections only if this R
8:01squar is above 0.8. R 2 is between the
8:04range of 0 and 1 and a 0.8 would act as
8:08a strong basis for you to believe that
8:10the price to earnings ratio of the stock
8:12you picked is trading either high or low
8:14because of its earnings growth is either
8:17high or low. Number four, always look at
8:19forward price to earnings ratio. Now,
8:21when I say forward price to earnings
8:23ratio, what I mean is a forward-looking
8:25price to earnings ratio. For example,
8:27right now it's December 2024. So,
8:30generally you can find actual reported
8:32net income up to the third quarter of
8:342024, which is September 2024. You might
8:37add the last four quarters of net income
8:39to derive your price to earnings ratio,
8:41but often times this leads to a mistake.
8:44This is because companies have a lot of
8:46one-off items in the reported net income
8:48such as one-off taxes, one-off expenses,
8:50and etc. And therefore, you would want
8:52to look at either 2024 fullear net
8:55income projections as the basis of your
8:57price to earnings ratio calculation. Or
8:59if you're approaching at year end like
9:01now, you may even want to use 2025 net
9:04income to derive your price to earnings
9:05ratio. Also, given all equity investors
9:08are forward-looking, in other words,
9:10they care about what will happen in the
9:12future, not the past, it makes even more
9:14sense for you to focus on forward PE
9:16ratio. Number five, don't only rely on
9:19price to earnings ratio. Now, price to
9:21earnings ratios can be very volatile. A
9:23stock can be trading at a very high or
9:25low level because of a one-off event.
9:27for example, a political push,
9:29geopolitical tension, natural disasters
9:31like COVID 19, sudden inflow of capital
9:33from market participants and etc. I
9:36suggest you always make your own hard
9:38cold projections and follow your
9:39instinct when purchasing a stock. Now,
9:41let's summarize the key considerations
9:42of price to earnings ratio. Number one,
9:45price to earnings ratio is important
9:46because it shows how long of a time a
9:49company takes for it to make money up to
9:50the total value of the shares you paid
9:52to purchase it. Number two, a company's
9:54net income forecast is what determines a
9:56price to earnings ratio if the
9:58projections are high. A price to
10:00earnings ratio may be trading at a high
10:02level and vice versa. Number three, you
10:04should always verify the relationship
10:05with the price to earnings ratio and net
10:07income growth of your company which you
10:09want to invest using regression analysis
10:11and R squared analysis using comparable
10:14companies. Number four, you should
10:16always look at forward price to earnings
10:18ratio. And number five, don't only rely
10:20on price to earnings ratio as it may be
10:22impacted by one-off events which may
10:24fade away quite quickly. Now that's the
10:26end of my lecture on price to earnings
10:28ratio. I'll be back with more videos
10:30soon. Okay, so as a follow-up to the
10:32price to earnings ratio video, the
10:34second video is a course on EVA
10:36valuation multiple. And while price to
10:38earnings ratio is a valuation metric
10:40strictly for the equity holders, EVA
10:43multiple covers the debt structure of
10:45the company as well which would give us
10:47a better idea about the company's cash
10:49flow from its pure operations
10:51perspective. Okay, here we go.
10:57Okay, so some of you may have seen my
10:59video titled P ratio really explained.
11:01In the video, I explained why PE ratio
11:04is important, how to calculate it, but
11:06expanding from there also talked about
11:08the implications this metric has
11:10including the importance of future
11:12prospect of the earnings. However, in my
11:15investment strategy related videos, a
11:17lot of you may have realized that I
11:18generally look at EVA multiple just as
11:20much as PE ratio and sometimes even
11:23prefer to just look at EVA multiple
11:25rather than AP ratio. Today I wanted to
11:28explain to you guys why I look at this
11:30multiple closely and when this multiple
11:32can be meaningful when valuing the
11:34company. Now guys please watch this
11:37video very carefully. I know a lot of
11:39retail investors just focus on PE ratio
11:41because it's the most commonly used
11:43valuation metric among the public but
11:45understanding EVA multiple properly will
11:48really enhance your understanding about
11:49valuation and really up your game when
11:52it comes to investing. Now just like PE
11:54ratio I noticed that there are a lot of
11:56videos on YouTube which explains how to
11:58calculate EVA multiple but there are not
12:01that many videos which actually explains
12:03why this metric is important. Today I'll
12:06break down this topic into three
12:07subtopics including number one
12:09calculating the multiple number two what
12:12this multiple actually means and number
12:14three when we should be focusing on this
12:16multiple. Now as always I'll try to be
12:19as practical as possible. So I'll avoid
12:21going into too much technical and
12:22academic details around this topic.
12:25Okay. So on the first topic calculating
12:27the multiple just like P ratio is a very
12:30simple calculation though it requires a
12:32bit more manual labor. In order to
12:35calculate an EV the multiple you need to
12:37calculate EV which is enterprise value
12:40and EBIDA which is earnings before
12:42interest, taxes, appreciation and
12:44amortization.
12:46Now first on the EV basically EV is
12:49calculated with the following formula.
12:52Market cap plus total debt plus
12:54preferred stock if any plus minority
12:57interest if any minus cash and cash
13:00equivalent.
13:01Now market cap is straightforward. It's
13:04just the market cap you see on Google or
13:06any website. Let's assume there's a
13:08company with $10 billion of market cap.
13:10So the company's market cap is $10
13:12billion.
13:14Now, for total debt, you need to go into
13:17the company's financial statements, go
13:19to the balance sheet section, and
13:21identify line items that says long-term
13:23debt and short-term debt, and add the
13:26two. Basically, for total debt, you want
13:29to identify interestbearing debt only
13:31and just take into account of these
13:33items. Let's assume that the company's
13:35total debt is $2.9 billion. Now, one
13:40additional thing to note here is that
13:42after the global accounting standard
13:43changed to a thing called an IFRS16,
13:46they started booking lease agreements as
13:48long-term liabilities, which gets
13:50advertised in the income statement,
13:52which is effectively treating rent like
13:54an interest expense. Now, generally,
13:57these are quite small in size, so no
13:59need to be confused by it, but just note
14:01that if you see a line item which says
14:04long-term operating lease liabilities,
14:06just add that item as well.
14:08Now in our case, let's assume that the
14:11lease liabilities are $100 million. So
14:14in total, we have $3 billion of total
14:16debt. Now generally if we do this, we
14:20would have covered most of the interest
14:21bearing debt. Very rarely companies will
14:24show separate line items for other
14:26non-traditional interest bearing debt
14:28like convertible bonds, convertible
14:29shares with redeemable features,
14:32revolver facilities, and etc. If you see
14:35those items, you can just add them as
14:37well as long as they are interest
14:38bearing. But most of the times those
14:41should be captured under either
14:43long-term debt and short-term debt as
14:45well. Okay. Now moving on to prep
14:47shares. Now generally the companies
14:49which we look at will rarely have any
14:51prefares issued. However, if there are
14:54press shares issued, there will be two
14:56cases. The prep shares may be listed or
14:58may not be listed. Now, if you spot any
15:01listed pref shares, just add the pref
15:03shares market cap on top of the EV. If
15:06you see unlisted shares, we will need to
15:08conduct a separate valuation on the
15:09shares. However, given the size is
15:12generally very small, I would just add
15:14their book value on top of the EV. The
15:17book value of the pref shares can be
15:18found in a company's balance sheet under
15:20a line item called preferred stock. For
15:23our case, let's assume that this company
15:25has zero pref shares issued. Okay. Now
15:28moving on to minority interest. Now like
15:31press shares generally the companies
15:33which we look at will rarely have a
15:34sizable minority stake. A minority stake
15:37is shown on a company's financial
15:38statement if a company controls a
15:40subsidiary but does not own 100% stake.
15:44For example, if the company owns 80%
15:46stake in a subsidiary, the value of the
15:48remaining 20% stake will be shown as a
15:50minority interest in the income
15:52statement and the balance sheet and the
15:54company's market cap will assume that
15:56the 20% is not something which is
15:58attributable to the shareholders of the
16:00company. So, it will not take into
16:02account of the value. The reason we
16:05include minority stake in the EV
16:07calculation is because we want to get a
16:09full picture of the company as a whole
16:11including the subsidiaries which the
16:13company controls. For our case, let's
16:15also assume that this company has zero
16:17minority stake. Okay. Now, moving on to
16:19cash. All you need to do for this is
16:22just take the line item labeled cash and
16:24cash equivalents in the balance sheet of
16:26the company. It's generally the first
16:28line item that shows in the balance
16:29sheet. So, you can just grab that
16:31number. For our case, let's assume this
16:33company has $1 billion of cash.
16:37Okay, so to sum up, the company's market
16:39cap is $10 billion, his total debt is 3
16:41billion, and it total cash is 1 billion.
16:44Therefore, the company's EV is $12
16:46billion.
16:48Okay, let's move to EVA. Now, for EVA,
16:52you just need to take the number that is
16:54called operating income in the income
16:56statement and add depreciation and
16:58amortization. Operating income is
17:00generally in the middle of an income
17:02statement. Let's assume that our company
17:04has operating income of $1 billion.
17:07Also, for DNA, just go to the company's
17:09cash flow statement and take the number
17:11next to the line item depreciation and
17:13amortization. For our company, let's
17:15assume the company has $200 million of
17:18DNA.
17:20Now, if we add those two together, we
17:22get $1.2 billion as the company's EVA.
17:26Okay. So to calculate EV over EBA, we
17:28can see that the company has EV of $12
17:30billion and EBIDA of $1.2 billion, which
17:34results in EV over EBA of 10 times.
17:38Okay, so that was straightforward. By
17:40the way, if you don't want to calculate
17:42the EVA yourself, you can just get those
17:44numbers on Yahoo Finance or any other
17:46website. These multiples are generally
17:48easily available.
17:50Now, let's move on to the more important
17:52topics. Number two, what this multiple
17:55actually means. To give you a simple
17:57explanation, EVVA multiple takes into
18:00account of debt and equity of a company
18:02which allows the investor to value the
18:04company regardless of the capital
18:06structure. Now, to help you understand
18:08this better, let me try to give you an
18:10example using a house. Okay, let's
18:12assume there's a house. Let's assume
18:14this house is worth $1 million and has
18:16$500,000 of mortgage. Let's also assume
18:20that the house yields $50,000 a year in
18:23gross rent. But after interest on the
18:25mortgages, taxes, and etc., the net rent
18:28is $20,000 a year. Now, in this example,
18:32if you are trying to buy this house and
18:34the bank which provided the mortgage
18:36comes to you and says that they'll roll
18:38over the debt for you so that you can
18:40just keep the mortgage. Basically, you
18:42only have to pay $500,000 to purchase
18:44this house. Now, this $500,000 is the
18:47equity value of the house. Equity value
18:51is basically the amount of money you
18:53have to pay to purchase an asset.
18:55Therefore, the more debt an asset has,
18:58the less equity you have to pay. So,
19:00equity value of this house is $500,000.
19:04However, when you tell your family or
19:06friends that you bought a house and they
19:07ask you what the price of the house was,
19:09you generally won't say that the house
19:11is worth $500,000.
19:13you rather say that you bought a house
19:15which is worth a million dollars. Now
19:18this $1 million is equivalent to the EV.
19:21So basically what I'm trying to say is
19:23that EV represents the value of a
19:26company regardless of how much debt or
19:29cash the asset has at the current
19:31moment. Okay. So in a similar context,
19:34$50,000 of gross rent you get from the
19:36house is equivalent to the EB dah given
19:39that it's what you get before you pay
19:41any interest or taxes on it. Also,
19:44$20,000 of net rent you get from the
19:46house is equivalent to the net income
19:48given that it has already subtracted all
19:50the line items including interest
19:52expense and taxes.
19:54Okay. So if we value this house, this
19:57house has an E evbida of 20 times and
20:00price to earnings ratio of 25 times.
20:04Okay. So hopefully this example gave you
20:07a better idea of what EVA means. Now in
20:10this example, I didn't take into account
20:12of the depreciation and amatization
20:14given it may complicate things in
20:16understanding the basic concept.
20:18However, DNA is a simple metric which
20:20basically deducts any value from an
20:22asset. For example, if you bought a new
20:24laptop for $2,000, after 10 years, if
20:27you try to sell the laptop on eBay, no
20:30one is going to pay this laptop for
20:32$2,000, right? You'll need to
20:34significantly lower the price of the
20:35laptop to sell it. Now, before you
20:38actually sell the laptop, you're not
20:39paying any cash just because the value
20:42of the laptop is decreasing, but the
20:44value of the laptop is decreasing every
20:46day. Now, this is called depreciation.
20:49When you calculate EBIDA, you basically
20:51need to add this depreciation or
20:53amortization on assets to get a better
20:55sense of how much cash the company's
20:57generating every year. Operating income
21:00already deducts a certain part of the
21:02depreciation. So, it is not a good
21:03metric to assess the cash generating
21:05ability of the company. Okay. Now, let's
21:08move on to the third topic on when we
21:11should be focusing on this multiple.
21:13Now, EV multiple can be used for any
21:16companies with the exception of some
21:17very niche industries like banks and
21:19insurance companies. However, let's try
21:22to understand when this multiple can
21:23really be used more meaningfully when
21:25we're investing in public markets. Let's
21:27assume there's a company A. Let's say
21:30that this company's market cap is $5
21:32billion and its operating income is $500
21:34million. Let's also assume that this
21:37company has zero debt and also has
21:39almost no cash. Also, let's assume that
21:42this company has almost no hard assets.
21:45So, there's really nothing being
21:46advertised or depreciated. Basically,
21:49this is a company which has a very
21:51stable balance sheet with no debt and is
21:52super asset light. For this company,
21:55basically its market cap is almost
21:57equivalent if not exactly the same to
21:59the EV and its operating income is
22:01almost the same as EVA. In this case,
22:05EVA is not really useful. Basically, SPE
22:08ratio and EV vita multiple would pretty
22:10much be the same with some difference
22:13taking into account of the taxes.
22:16However, let's assume this company B.
22:18Let's say that this company's market cap
22:20is $2 billion but has operating income
22:22of $100 million and net income of $200
22:26million.
22:28Now, if we try to look at this company
22:30based on PE ratio, we'll have a negative
22:32figure. And if our investment principle
22:34is to invest in low PE ratio companies,
22:37we may just ignore this company as a
22:39whole. However, in some cases, that may
22:41not be a smart decision to make. Let's
22:44assume that we looked at company B's
22:46revenue growth and this company's
22:47growing at around 30% perom.
22:50Now, there's a very high growth and if a
22:52company is recording that strong growth,
22:54it's a company which is worth taking a
22:55look at. we would need to look at the
22:58company's capital structure and looking
22:59at its balance sheet, we realize that
23:01the company has around $2 billion of
23:03debt.
23:05Now, assuming the interest on the debt
23:07is around 5%, their interest would be
23:09around $100 million. Now here looking at
23:13their operating income and net income
23:15given the difference between the two is
23:16around $100 million we can safely assume
23:19that the additional $100 million of loss
23:22from their operating income is almost
23:24entirely coming from their interest
23:25expense. Okay, so we now figured out
23:28where the huge nonoperating loss is
23:31coming from. Now what's really important
23:33here is to figure out where this $2
23:35billion of debt is being used and
23:37whether this debt is being used
23:39efficiently. The situation we want to
23:41avoid is this company using most of the
23:44loans to pay down their interest on the
23:46existing debt which is not a healthy
23:47capital structure. So you look at the
23:50company's assets and realize that the
23:52reason this company has been taking a
23:53lot of debt is to build factories. Now
23:56this company built the factory only
23:58about a year ago and this $2 billion of
24:00debt was almost entirely used to build a
24:02new factory. So at this point you can
24:05make a few conclusions. Number one, the
24:07debt that they have is being used
24:09efficiently as they built a new factory
24:11with the loan. And number two, the new
24:13factory is actually contributing to
24:15their operations considering their
24:16revenue is growing at 30% perom. Number
24:20three, because their factory is
24:21relatively new, they had to spend a lot
24:23of upfront cost with a lot of new
24:25hirings and utility cost, which is why
24:27their operating income is currently
24:29negative. And number four, if their
24:31revenue continues to grow at this pace
24:33with the new factory they built, their
24:35operating income would also continue to
24:37increase. Okay, up to this point, you
24:39can basically conclude that this company
24:41is a good company with good working
24:43strategy with a factory which was built
24:45with the right purpose. Now, the only
24:48thing you need to check here is whether
24:50this company can actually pay the
24:51interest without much trouble. Now, this
24:54is when you can use the evida concept.
24:56Given EVA adds back non-cash expenses
24:59including depreciation and amortization.
25:02It's a metric which can better represent
25:04the cash generating ability of a
25:06company. You look at the company's
25:08depreciation and amortization and
25:10realize that every year this company's
25:12booking around $200 million of DNA with
25:14the new factory as well as the existing
25:17factory which they built around 10 years
25:18ago. Now, if you add this $200 million
25:21on the negative $100 million of
25:23operating income, you have an EBIDA of
25:26100 million. Now, given the company's
25:28annual interest expense is $100 million,
25:31you can assume that the company can most
25:33likely pay off their interest with the
25:35annual cash that they're generating. So,
25:37you can assume that this company will
25:39not go bankrupt or whatever because of
25:41their debt. One caveat here is that when
25:43the market has a very high liquidity
25:45environment with low interest rate and
25:47quantitative easing, you can be more
25:49aggressive with your assumptions. Even
25:51if a company's EB DA is not enough to
25:54pay their interest as long as they're
25:55recording a healthy growth, they should
25:57be able to refinance their debt as money
25:59becomes extremely cheap. Okay, but for
26:01this company B, they have a decent
26:03capital structure which allows them to
26:05pay their interest on time. Okay, so now
26:08you have a good ground to value this
26:10company on a EV beta basis given you can
26:12safely assume that this company will
26:13turn around anytime soon. Now the
26:16company's market cap was $2 billion and
26:18had $2 billion of debt. Assuming the
26:21company has minimal cash, its EV is $4
26:24billion and it EBA is $100 million which
26:27implies an EVA of 40 times. Now 40 times
26:31EVA sounds very high. However, based on
26:34the 30% growth rate which the company's
26:36recording, you can try to extrapolate
26:38the company's future financials and see
26:40what the EVA will be in the next 3 to 5
26:42years. In the next 3 to 5 years,
26:45assuming that the company pays off
26:46around $1 billion of debt and his EBA
26:49triples to around $300 million.
26:51Basically, on today's market cap, his EV
26:54will be $3 billion while his EBA is $300
26:57million, making his EVA 10 times. Now
27:00based on its future expected multiple
27:02you should be able to make a better
27:04decision on whether you should invest in
27:05this company. Okay so to summarize this
27:08is why EVA can be helpful when
27:10investing. Number one even if a company
27:12is going through a huge loss in its net
27:14income if you assess the company's
27:16capital structure and value the company
27:18on an EVA basis you might be able to
27:20spot good investment opportunities
27:22better. Number two EVA multiple allows
27:25you to get a sense of true value of the
27:27company regardless of their capital
27:28structures. For example, companies like
27:31Tesla also experienced a huge net income
27:33loss for almost a decade before turning
27:35positive. If you paid attention to this
27:38valuation metric, you may have spotted
27:40opportunities earlier on. Number three,
27:42if you monitor EVA multiple of a
27:45company, it'll force you to pay
27:46attention to the capital structure and
27:48fundamental business of the company.
27:50Calculating EVB yourself and building
27:52your own thesis around it requires a lot
27:54more work than just grabbing the market
27:56cap and net income and making a single
27:58division which is not really helpful in
27:59getting to know the company better.
28:02Number four, if a company is engaged in
28:04manufacturing or heavy asset business,
28:06this multiple is extremely helpful in
28:08understanding how the future of the
28:10company will be versus just looking at a
28:12PE ratio multiple. Okay, so on the last
28:14topic of how we should value companies
28:16based on this multiple, please refer to
28:18my PE ratio video for further details.
28:21Basically, the way you would value
28:23companies based on this metric would be
28:25very similar to a PE ratio. The only
28:27difference would be this. For companies
28:29which are not recording a high growth,
28:31let's say less than 10% revenue growth,
28:34please don't use forward EVB to compare
28:37the trading multiple versus its peers.
28:40EVA takes into account of the debt
28:42structure of the company which is a
28:43status quo position of the company's
28:45financials. So for a low growth company
28:48it makes more sense to compare against
28:50the peers using a historical EVA.
28:53However, for high growth companies I
28:55would suggest you try to focus more on
28:57comparing the multiple against the peers
28:59using a forward EVB multiple. This is a
29:02debatable point. However, after the
29:05excessive quantitative easing which the
29:06Federal Reserve started adopting,
29:08companies started to adopt aggressive
29:10capital structures in return for growth
29:13which forces us to look at this multiple
29:15on a forward basis as well. Basically, a
29:18lot of companies are willing to expand
29:19rapidly in return for high leverage. So,
29:22we sometimes need to focus on the future
29:24even for this multiple. Okay. So, with
29:26that, I went through all the important
29:28factors when looking at a EVA multiple.
29:30Please keep in mind that understanding
29:32this valuation metric is very important
29:34for you to better understand companies
29:36from a financial position perspective.
29:39So please try to familiarize yourself
29:41with this metric when making investment
29:43decisions. I hope you enjoy the video
29:45and I'll be back with more videos very
29:47soon. Okay, now that we have covered the
29:50two most important valuation metrics, we
29:52now move over to the macro side of
29:54things. The first video is a course on
29:56the Federal Reserve and the key metrics
29:58we need to monitor to get a sense of the
30:00overall liquidity situation of the
30:02market. Okay, here we go.
30:07Hey guys, now I mentioned in my previous
30:10video clips including shorting the
30:12market, investing in NEO and Plug Power,
30:15a lot of my investment thesis revolves
30:17around how the Federal Reserve shifts
30:19its monetary policies. I want to deep
30:22dive into this topic and give you an
30:23idea of how you can also make a lot of
30:26money by just looking at Federal
30:27Reserve's policies. To explain this
30:30topic, we need to familiarize ourselves
30:32with two metrics. Number one, the
30:34Federal Reserve policy rate. As you may
30:37be aware, Fed policy rate is the
30:39interest rate set by the governance of
30:40the Fed and the FOMC. They decide on the
30:43changes of the rate after
30:45recommendations submitted by the
30:46regional Federal Reserve. Now, this Fed
30:48policy rate is important given that it
30:51hugely impacts the borrowing rate of
30:52money. All financial institutions and
30:55companies would price their bonds loans
30:57based on this rate. And even when you're
30:59getting a mortgage loan, this rate will
31:01impact your life. Simply put, this rate
31:04determines how cheap the money is. So,
31:06if the Federal Reserve policy rate is
31:08low, it means money is cheap, given you
31:10don't have to pay much for borrowing
31:12money. And if it is high, it means money
31:14is expensive given you'll be charged
31:16with a higher interest rate. As you can
31:18see in the chart, sometimes the policy
31:20rate goes up and sometimes it goes down.
31:23Generally, when the economy is doing
31:25very good or inflation is high, the Fed
31:28will increase the policy rate to cool
31:29down the economy or inflation. And when
31:32the economy is doing bad, they would
31:33decrease the interest rate to bolster
31:35the economy by providing more liquidity
31:37in the market.
31:39Some examples of the interest rate going
31:40up is in 2008 when Lehman crash happened
31:44and 2020 when the co 19 happened which
31:47forced a lot of companies to shut down
31:48their business. Examples of the interest
31:50rate going up is in 2004 when the
31:53economy was doing very well led by the
31:55lucrative financial system and in 2022
31:58when the inflation was so high that the
32:00Federal Reserve had to intervene to cool
32:03down the purchasing power of consumers.
32:05The next metric we need to look at is
32:07the Federal Reserve balance sheet.
32:09Federal Reserve balance sheet represents
32:11how much assets the Fed has in their
32:13balance sheet which are generally the US
32:15Treasury bonds and mortgage back
32:17securities. When the Fed goes out to the
32:19market and spreads money around to
32:21provide liquidity, they will generally
32:23do that by purchasing bonds in exchange
32:25for cash to the buyers in the market. So
32:28as a result, the Fed will get more bonds
32:30in their balance sheet and the market
32:32would be provided with the cash. In that
32:35case, the Federal Reserve's balance
32:37sheet would increase. And when the Fed
32:39wants to decrease the money supply in
32:40the market, they would either sell the
32:42bonds and assets or just let it mature
32:45and not invest the money received in
32:47return for the matured bonds. In that
32:49case, Federal Reserve balance sheet
32:51would decrease and the market would be
32:53left with less cash. As you can see in
32:55the chart, sometimes the balance sheet
32:57goes up and sometimes it goes down. The
33:00Fed increases balance sheet to provide
33:02more liquidity in the market. Some
33:04examples are in 2008 when the Leman
33:07crash happened and in 2020 when COVID 19
33:10happened. It can also decrease its
33:12balance sheet to cool down the economy.
33:14Some examples are in 2018 and 2019 when
33:17the Fed felt there's too much money in
33:18the market from the quantitative easing
33:21from the Leman crash and 2022 to today
33:24given the Fed wanted to remove some
33:26liquidity in the market post multiple
33:27quantitative easing during the co 19
33:30period. Now to summarize if the Fed
33:33policy rate is low it means more
33:35liquidity. If the Fed policy rate is
33:38high it means less liquidity. If the Fed
33:42balance sheet is increasing, it means
33:44more liquidity. If the Fed balance sheet
33:46is decreasing, it means less liquidity.
33:49So in short, the most liquid period for
33:52the market is when the interest rate is
33:54low and Fed balance sheet is increasing.
33:57And the least liquid period for the
33:59market is when the interest rate is high
34:01and Fed balance sheet is decreasing. Now
34:04if you put that into a 2x two matrix,
34:07you have a chart which looks like this.
34:09You have four quadrants with the two
34:12matrix and depending on where we are
34:14with the Federal Reserve policies, our
34:16strategy should also change. Now
34:18starting from the section A, this is the
34:21time when you need to only focus on
34:23revenue growth. The reason interest rate
34:26is low and balance sheet is increasing
34:28is because the Fed is expecting the
34:30economy to slow down. So they're
34:32providing tons of liquidity into the
34:34market. In this case, all the liquidity
34:37that is provided in the world will be
34:39hunting for growth. Given growth becomes
34:41extremely scars. Also, given there's so
34:45much liquidity and money is cheap, you
34:47don't even need to worry about a
34:49company's profitability. They will
34:51survive somehow using debt and leverage.
34:54This strategy works during times like
34:56this. This is why I decided to invest in
34:59NEO and Plug Power in 2020. They're
35:02recording phenomenal growth despite
35:04having no profitability. Now, skipping
35:06to section D. This period is when the
35:09growth is not as valued as section A
35:11given there's so little liquidity in the
35:13market. In times like this, you will
35:16need to focus on companies with high
35:18profitability and margins. Look at price
35:21to earnings ratio and pick the stocks
35:23that are showing high margins with low
35:24valuation. This is when traditional
35:27sectors like pharmaceuticals, food and
35:29beverage, manufacturing gets a lot of
35:31attention. Now section B and C are a bit
35:34tricky. This section also applies to the
35:36world we're living in right now. Given
35:38interest rate is going lower, but the
35:40Federal Reserve balance sheet is
35:42shrinking. Like we see in section C, in
35:45a period like this, the market would
35:47look for companies which is both the
35:49growth and the profitability. This is
35:51when there's some liquidity in the
35:53market but not enough to focus only on
35:55growth. So people will look for a
35:57company which is both. Now this is why
36:00the tech stocks with both growth and
36:02profitability like Nvidia is getting a
36:04lot of attention. Stocks which are worth
36:07investing become so scarce that the
36:09market would really focus on few stocks
36:11that meets the criteria. Now that was a
36:13quick summary of how you should change
36:14your investment strategies depending on
36:16the Federal Reserve policy changes. Of
36:18course, there are a lot of other factors
36:19which you need to consider, but knowing
36:21what I just told you now will help you
36:23tremendously in making the most
36:25lucrative decisions when the right
36:26timing comes. Okay, now that we have
36:28covered the Federal Reserve, we now move
36:30on to the broader macro indicators. In
36:33order to understand how and when the
36:35Federal Reserve takes certain actions,
36:37we need to monitor the key macro
36:38indicators like unemployment rate,
36:40inflation, and economic activities index
36:43to preemptively make decisions. Okay,
36:46here we go.
36:50Okay, so a lot of you are following my
36:52channel to hear my analysis on the
36:54latest macro trend and the investment
36:55strategies in accordance with the macro
36:57data. During the past months, I have
37:00been uploading macro analysis videos,
37:02which hopefully would have helped you to
37:04make better investment decisions. Now,
37:07through those videos, I showed you how I
37:08analyzed the latest macro trend and used
37:10them to our advantage to predict how the
37:12Federal Reserve may take actions and
37:14further how the market will react in
37:16accordance with the Fed's expected
37:18actions. I also consistently emphasize
37:21that familiarizing yourself with the
37:23macro trend is the most important factor
37:25when it comes to investing in the modern
37:26economic world, especially after the
37:292008 financial crisis. I'm sure you guys
37:32listen to my videos carefully and try to
37:34learn how you can interpret the macro
37:35data. Now, while I've been uploading
37:38market update videos periodically, a lot
37:40of you guys said in the comment section
37:42that you guys would like to get a very
37:44basic overview on how to read the macro
37:46data. Now, this is a very broad topic
37:49and it took me some time to think how to
37:52do this in the most efficient way
37:53possible. The reason it took me a lot of
37:56thoughts is due to the following. Number
37:58one, every macro data are generally not
38:01independent and somewhat correlated with
38:03each other. What this means is that we
38:05can't just look at each macro data one
38:07by one, but we need to look at them all
38:09together to get a holistic picture of
38:11the current status of the economy.
38:14Number two, there are so many data that
38:16is thrown to the market. It is our job
38:19to pick and choose which data we'll be
38:21focusing on and use them to our
38:23advantage.
38:24Number three, a data can have different
38:27versions of numbers. For example, key
38:29data like unemployment rate or the CPI
38:32will have its officially announced
38:33numbers, but some other institutions may
38:36develop their own methodology of coming
38:38up with their own number for the same
38:39metric. Now, with all those
38:42considerations, I decided to make a
38:43video which is very basic for beginners
38:45with the following caveats. Number one,
38:48I'll focus on explaining the key data
38:50one by one. Now given this is a very
38:53basic introductory video, I'll not take
38:55into account of every implications a
38:57data may have but only focus on that
39:00single number and what implications that
39:02single number may have on the market.
39:04Number two, I'll focus on 10 key data
39:07which I focus on. Now there are millions
39:09of data which we can monitor but
39:11realistically we can't monitor all of
39:13them. However, I can assure you that if
39:16you monitor the 10 key data, which I'll
39:18explain, you'll be covering around 80 to
39:2090% of the macro economy.
39:23Number three, I'll focus on official
39:25data only. Now, the reason I only
39:27monitor the official data is because the
39:29whole reason we do macro analysis is to
39:32predict the Federal Reserve's actions.
39:34Now, the Federal Reserve monitors the
39:36official data. So, while we may monitor
39:38other versions of the data, it won't be
39:40too helpful in forming our view on the
39:42Fed's actions. Therefore, I'll only
39:44focus on the official data.
39:47Number four. Now, in order to leverage
39:49the macro data to your advantage when
39:51investing, please refer to my stock
39:54investing strategy for beginners video.
39:56What I'll be explaining today is just
39:58basic concepts of macro indicators and
40:00how those indicators impact the Federal
40:02Reserve's decisions. If you actually
40:04want to use them to your advantage when
40:06investing, please refer to my other
40:08video for more details. Now having that
40:11said, before we begin, all the macro
40:13data can be found on key economic news
40:15websites such as Yahoo Finance or
40:17Investing.com.
40:19Make sure you turn on the alerts for
40:21economic data from those websites so
40:23that you can get the latest data real
40:24time. Okay, let's begin. Now, when we
40:28look at the economy, the key data which
40:30represents the output of all the
40:32activities that happen in the world
40:33comes down to the GDP. You may remember
40:36that I explained multiple times that a
40:38GDP is composed of four components which
40:42are C, G, I, and X. Now C stands for
40:48consumer spending, G stands for
40:50government spending, I stands for
40:52investments and X stands for net
40:55exports.
40:57Now in recent years, the GDP growth was
41:00somewhat subdued with the growth being
41:01in the range of somewhere between 2% to
41:043%. However, while the GDP growth is the
41:07outcome of all the activities that
41:09happen in the country, GDP growth itself
41:12doesn't really mean much as it's just a
41:14resulting number. What really matters is
41:17the data that is behind the GDP growth
41:19which are released on a weekly or
41:21monthly basis. Now for those data if I
41:25had to group them in a few categories I
41:27would categorize them into number one
41:29job market related data number two
41:32inflation related data and number three
41:34economic activities related data.
41:38Now the reason I group the data into
41:40these three categories is because these
41:42three topics are what the Federal
41:43Reserve monitors closely. Basically, the
41:46Fed has its own moving targets for each
41:49of these categories of data. And by
41:51forming your view on each of these
41:52components, you'll be in a pretty good
41:54position to predict what actions the
41:56Federal Reserve will take. Okay. Now,
41:58behind each of the categories, there are
42:0010 macro data which are closely monitor.
42:03First, on the job market, the data which
42:06I monitor is number one, unemployment
42:08rate, number two, initial jobless
42:10claims, and number three, non-farm
42:13payrolls.
42:14Next on inflation, the data which I
42:16monitor is number one the yearon-year
42:18CPI, number two the yearon-year core
42:22CPI, and number three the month
42:24overmonth PPI.
42:27Next on the economic activities, the
42:29data which I monitor is number one the
42:31ISM manufacturing PMI, number two the
42:34ISM non-manufacturing PMI, number three
42:38Chicago PMI, and number four consumer
42:40confidence index.
42:43Okay, so as I said previously, I believe
42:46that if you monitor these 10 macro data
42:48periodically, you'll most likely cover
42:50around 80 to 90% of economic activities.
42:54To help you understand the implications
42:55of each data better, let me go into the
42:57data one by one to explain what these
43:00mean.
43:01Okay, first on the unemployment rate.
43:03Now, this is a very straightforward
43:05concept. Basically unemployment rate
43:07measures the percentage of total
43:09unemployed workers who are actively
43:11seeking for job versus the entire
43:14workforce. Now generally the
43:17unemployment rate measures how active
43:19the job market is which is a fundamental
43:21measurement of how the economy is doing.
43:23If the unemployment rate is low this
43:25would mean that companies are generally
43:27doing well with their products being
43:29sold a lot to their consumers which
43:31would provide the companies more room to
43:33hire more people. If the unemployment
43:36rate is high, it would be the vice
43:37versa. Now, the Federal Reserve and the
43:40government generally has its own target
43:42unemployment rate. In recent years, the
43:45Federal Reserve and the government
43:46generally views the economy to be fully
43:49employed if the unemployment rate is as
43:51low as 4%. Now, this 4% number is
43:55subjective, and there's really no strong
43:56rationale or backup to the number, but
43:59all we need to remember is that the Fed
44:01is focusing on this 4% number. Now with
44:04this 4% number as the threshold, the
44:06market and the Fed generally views the
44:08unemployment rate like this. Over 5.5%
44:12unemployment rate means a weak economy.
44:164 to 5.5% unemployment rate means an
44:18okay economy and under 4% unemployment
44:21rate means a strong economy. Now, for
44:24your information, there's really no hard
44:26rules or formula behind these numbers.
44:29Apart from the 4% target, I'm setting
44:31the high, normal, and the low numbers
44:33based on my interpretation of how the
44:35Fed and the government generally reacts
44:37to the numbers. So, you can have your
44:39own version of the numbers, but just
44:40think of my numbers as a general
44:42guidance. Okay? Now, when the
44:44unemployment rate is high or low, the
44:46Federal Reserve takes actions
44:47accordingly. As I said previously, while
44:50all economic data are correlated and
44:53impacts one another, everything else
44:54being equal, the Federal Reserve will
44:57take expansionary actions when the
44:59unemployment rate is high and take
45:01contractionary measures when the
45:02unemployment rate is low. Now, for your
45:05reference, when I say expansionary, what
45:07I mean is that the Fed will either cut
45:09the rates or conduct a QE. When I say
45:13contractionary, what I mean is that the
45:15Fed will either increase the rates or
45:17conduct a quantitative tapering. Okay.
45:20Now, the reason the Fed would take
45:22expansionary actions if the unemployment
45:24rate is high is because if the
45:26unemployment rate is high, this means
45:28that the economy is weak and corporates
45:30are performing bad. The Fed wants to
45:33bring the unemployment rate to their
45:34target level of 4%. So, they would
45:36reduce the company's financial burdens
45:38by lowering the interest rate. Now when
45:41the unemployment rate is low, the Fed
45:43would think that the economy is
45:44overheated and it may trigger an
45:46inflation. In this case, the Fed would
45:50try to cool down the economy by
45:51increasing the interest rate. Okay, so
45:54that was straightforward. Okay, now
45:56moving on to the initial jobless claims.
45:59Now, initial jobless claims represent
46:01the number of people who filed for
46:03unemployment insurance for the first
46:05time during the past week. This is a
46:07leading indicator of the unemployment
46:09rate and is released on a weekly basis.
46:12A higher number means that more people
46:14are losing jobs and lower number means
46:16that less people are losing jobs. Now,
46:19while the Fed does not have a hard
46:21target for this data as well, based on
46:23the recent trend, you can generally
46:25assume that any number within the range
46:27of 250 to 350,000 to be a normal state.
46:31Anything above 350,000 would be
46:33considered high and anything below
46:36250,000 is considered low. Now, in
46:39recent months, this number was
46:41consistently below 250,000. And this is
46:44why the Fed was assuming that the job
46:46market is too hot to decrease the
46:48interest rate, although they changed
46:50their stance at the Jackson Hole. Now,
46:52just like the unemployment rate, the
46:54Federal Reserve's potential actions are
46:57the same. If more people are losing
46:59jobs, the Fed's actions will be
47:01expansionary. And if less people are
47:03losing jobs, the Fed's actions will be
47:05contractionary.
47:07Now, one thing I'll note at this point
47:08is that as proven by the recent actions
47:10of the Fed, a single data such as
47:13unemployment rate or initial jobless
47:14claims does not determine the Fed's
47:16actions. Even if the job market is
47:19overheated depending on political
47:21situations and other factors in the
47:23economy, the Fed may make different
47:25decisions taking into account of other
47:27circumstances. Please remember this, a
47:30single data does not determine the Fed's
47:32actions, but you need to take a holistic
47:34view. I'm only explaining the basic
47:37concepts of each data. Okay. Now, moving
47:40on to non-farm payrolls. Now the reason
47:42this data is key is because this data
47:44represents the employment situation of
47:46the bulk of the entire industry in the
47:48US. The reason we exclude farming
47:51industry is because number one farming
47:53industry is highly cyclical. So it may
47:56distort the data and number two farming
47:58industry is only a small share of the
48:00total employment which is a minimal
48:02impact on the overall economy. Now, Hen
48:06said while there's no hard rule on this
48:08one as well, you can generally consider
48:10that any number between 50,000 to
48:12250,000 as a normal state. Anything
48:16above 250,000 would be considered high,
48:19representing a strong job market, and
48:21anything below 50,000 would be
48:23considered low, indicating a weak job
48:25market. Now, in this case, the Federal
48:27Reserve's actions would be the other way
48:29around. If the number is high, the Fed
48:32would think that the economy is strong
48:34and would take contractionary measures.
48:36And if the number is low, the Fed would
48:38take expansionary actions.
48:41Okay. Now moving on to CPI. Now CPI is
48:44the core measurement of inflation.
48:47Basically, it measures how much the
48:49price of goods and services increased
48:52for the consumers compared to the last
48:53month or the same month of the last
48:55year. Now, for this metric, while we
48:58need to monitor both the
48:59month-over-month CPI and year-over-year
49:02CPI, if I had to pick one, I'll look at
49:05year-over-year CPI, meaning that I'll
49:07look at the number which compares the
49:09price level of goods and services versus
49:12the same month of last year. The reason
49:15I look at this on a YI basis is because
49:17generally YI CPI removes any volatility
49:20in inflation movements which may be due
49:23to seasonalities or one-off factors.
49:25Also, YI numbers are generally easier to
49:28communicate which is more aligned with
49:30the Fed's target of 2%. Month-over-month
49:34numbers are naturally much smaller given
49:36it compares to the price levels of 1
49:38month before which results in small
49:41numbers like 0.1% or 0.2%. 2%. Which is
49:44a bit harder to comprehend.
49:47Okay. Now, as I explained multiple
49:49times, the Fed has a clear target for
49:51this number, which is 2%. Now, for this
49:54number, if the number is somewhere
49:56around 2%, you can consider inflation to
49:58be in a normal state. If it is over 2%.
50:02It should be considered a high
50:04inflation. And if it is below 2%, it
50:06should be considered a low inflation.
50:09Now a small deviation from the 2% like
50:1210 to 20 basis point may be okay but
50:14generally the Fed wants this number to
50:16be at 2%. Now for the CPI as you may be
50:20well aware the Fed's actions will be
50:22contractionary if the CPI is high and
50:25it'll be expansionary if the CPI is low.
50:28Now again as proven by the recent
50:30actions of the Fed, a single data such
50:33as high CPI does not determine the Fed's
50:35actions as shown in recent months.
50:38Please take this into account. Again,
50:40I'm just laying out a general theory.
50:42Okay. Now, moving on to core CPI. Just
50:45like CPI, I would look at this on a
50:47year-over-year basis. The difference
50:49between CPI and core CPI is that from
50:52the CPI, core CPI removes the price
50:55levels of food and energy. The reason
50:58this metric strips out a food and energy
51:00is because food and energy are the most
51:02volatile items within the components of
51:03CPI. Food and energy are highly
51:06sensitive to external factors like
51:08geopolitical situation or one of natural
51:10disasters and therefore removing these
51:13two items the Fed can get a more
51:15balanced view about the current
51:16inflation level. Now apart from this
51:19point the mechanism is the same as CPI
51:22both on the economic impact and the
51:24Federal Reserve's actions.
51:27Okay. Now moving on to PPI. PPI which
51:30stands for producer price index measures
51:32the price change of manufacturing goods.
51:35Now PPI is a very important metric given
51:38it is a leading indicator for CPI and
51:40core CPI. This metric basically measures
51:43the inflation from the producers
51:45perspective rather than the consumer's
51:47perspective. What this means is that
51:49this metric measures how much the cost
51:52has increased for the companies to
51:54manufacture their goods before selling
51:56it to the consumers. Now generally if
52:00more cost is involved for the companies
52:02to make their goods they'll pass through
52:04the increased costs to the consumers at
52:07some point and therefore we can get a
52:09sense of how CPI will turn out to be
52:11down the road. Now given this is a
52:14leading indicator and needs to be
52:15monitored real time for this metric I
52:18look at it on a month-over-month basis
52:20to get a better sense of how it's moving
52:22compared to the previous month. If you
52:25monitor PPI very closely, you can get a
52:27sense of how the CPI will be in the near
52:29term.
52:31Now, given this is comparing the price
52:33increase versus the previous month, if
52:35the number is in between 0% and 0.2%, it
52:39should be considered an okay inflation.
52:42While anything above or below that
52:44should be considered high and low. Now,
52:47on the economic impact and the Federal
52:48Reserve's actions, it is the same as CPI
52:51and core CPI. Now, before I finish off
52:54on inflation, while I didn't include it
52:57in the list, one other metric you may
52:59want to monitor is the core PCE index.
53:02While it's a very similar metric
53:04compared to the core CPI index, it
53:06covers a broader scope of items which
53:08the companies pay on behalf of the
53:10consumers such as employer paid
53:12healthcare and is also adjusted for
53:14changing consumer patterns. Therefore,
53:17it's a more stable measurement of the
53:18inflation which the Fed prefers to base
53:21their decisions on.
53:23Okay, now moving on to economic
53:24activities. First on the ISM
53:26manufacturing PMI. Now ISM stands for
53:30Institute of Supply Management and PMI
53:33stands for purchasing managers index.
53:36Basically this is a data based on a
53:38monthly survey conducted with executives
53:41in over 3 to 400 manufacturing
53:43companies. Now this is the Fed's
53:46favorite leading indicator of the real
53:48economy as the survey asks questions
53:50around new orders, production quantity
53:53change, employment and inventories.
53:56Basically, it's a survey which tries to
53:59see if the manufacturing industry is
54:01doing well or not. Now you don't need to
54:03know the details around the calculation
54:05of the index but all you need to
54:07remember is that the number 50 means
54:10that the economy is at a neutral state
54:12which implies that there has been no
54:14change to the manufacturing activity
54:16compared to the previous month. Now the
54:18Fed looks at this index to determine how
54:21overheated or underheated the
54:23manufacturing industry is. While the
54:26manufacturing industry is only a small
54:27component of the US economy with around
54:2910 to 12% share, it is still a very
54:32important metric given the manufacturing
54:34industry is generally a leading
54:36indicator of the overall economy.
54:39Now on the economic impact and the
54:40Federal Reserve's actions with the
54:42number 50 being the neutral state, we
54:44can generally assume that any number
54:46over 55 means a strong expansion in the
54:50economy while any number below a 50 is a
54:53contraction in the economy.
54:55Now on the Federal Reserve's actions, if
54:57the number indicates a strong expansion,
54:59the Fed will try to cool down the
55:01economy with a contractionary measure
55:03and vice versa. Okay, moving on to ISM
55:06non-manufacturing PMI. Now, the
55:08non-manufacturing PMI covers the
55:10services sector which makes up about 70%
55:13of the US economy and therefore it is
55:16generally the more important indicator
55:18in understanding the overall growth and
55:20inflation.
55:22services sector generally includes the
55:24likes of education, financial services,
55:26retail, hospitality and etc. Now the
55:30price levels of a services sector are
55:32generally more stickier than the
55:34manufacturing sector given most of the
55:36costs are human labor. Therefore, the
55:39Fed generally monitors this metric
55:41closely to plan their next moves on
55:43defending the inflation. Now the
55:46measurement is generally the same as the
55:48manufacturing PMI and the economic
55:49impact and the Federal Reserve's actions
55:51are the same as well.
55:54Okay, moving on to Chicago PMI. Now,
55:56while this metric is very similar to the
55:58manufacturing PMI, this metric focuses
56:01on the activities in the Midwest region.
56:03Now, the reason we look at this is
56:05because number one, Chicago is a
56:08manufacturing hub in the US, which many
56:10companies supply products nationwide.
56:13And number two, historically, Chicago
56:15PMI has been acting as a leading
56:17indicator for the nationwide
56:19manufacturing PMI.
56:21Basically, Chicago PMI gives us a
56:23preview of how the ISM manufacturing PMI
56:26will look like in the next 1 to two
56:28months given Chicago is the starting
56:30point of the manufacturing activities in
56:32the US. Now, on the economic impact and
56:35the Federal Reserve's actions, it is the
56:37same as other PMI data.
56:40Okay, moving on to consumer confidence
56:42index. Now this index measures the level
56:45of consumer confidence in economic
56:47activity. It is generally a leading
56:49indicator which the Fed monitors to get
56:52a sense of how the inflation and the
56:54unemployment will be in the future. It
56:56is measured through a monthly survey
56:58conducted with 5,000 households in the
57:00US asking about their sentiment towards
57:02their income, employment status and
57:05business conditions. Now, similar to the
57:08PMI index, while we do not need to know
57:10the details of the calculation, all we
57:12need to remember is that the number 100
57:15represents a neutral state. Generally,
57:18if the number is in between 100 and 120
57:21is considered neutral while above 120 is
57:24considered a strong sentiment and below
57:27100 is considered weak. Now, the Federal
57:29Reserve will take actions accordingly.
57:31If the consumers feel that the economy
57:33is very strong, they would take
57:34contractionary measures while they'll
57:37take expansionary measures if the
57:38sentiment is weak.
57:40Okay. So with that I have covered all
57:42the key data which you need to monitor
57:44to understand the economic conditions.
57:46As I said previously, please note the
57:48following. Number one, a single data
57:51does not determine the Fed's actions. As
57:53we have seen very recently, despite low
57:55unemployment and high inflation, the Fed
57:58may decide to lower the rates if
57:59political situation or other economic
58:02data are not aligned. Number two, while
58:05economic indicators are helpful in
58:07understanding the macroeconomy, we
58:09always need to take further steps to
58:11predict the movement of the market. For
58:13example, in 2020 when the COVID news
58:16came out, all the prior economic
58:18indicators became useless as everyone
58:20had to make a fresh set of predictions
58:22on how the indicators will change due to
58:24the pandemic. We always need to monitor
58:27the news and adjust the economic
58:29indicators accordingly on our own.
58:32Number three, while I lay out 10
58:33indicators to monitor, there are
58:35millions of other data which can
58:37suddenly be important at certain times
58:39and one data may be more important than
58:41the other. For example, in recent years,
58:44a CPI has become the most important
58:46economic data. But before 2022, no one
58:49cared about CPI.
58:51Okay, so with that, I hope you now have
58:53a better understanding of reading macro
58:55data. Please note that familiarizing
58:57yourself with the macro data only comes
58:59with time. So please carefully monitor
59:01the market to the extent you can, and
59:03gradually you'll get a better sense at
59:05analyzing the market yourself. I hope
59:08you enjoyed the video, and I'll be back
59:09with more videos very soon. Okay, now
59:12that we have covered the valuation
59:13techniques, the Federal Reserve and the
59:15macro indicators, we now put everything
59:17together to make our own stock
59:19investment framework. I wanted to
59:21emphasize that this investment strategy
59:23is my own strategy which you should only
59:26use as a reference to come up with a
59:28strategy which works for you. Okay, here
59:30we go.
59:35Okay, so after I started this channel, a
59:38lot of you guys asked me to make a video
59:39on stock investment strategy for
59:41beginners, which I've been giving some
59:43thought. Now, the reason I gave it a lot
59:46of thought is because number one, I was
59:48not sure how basic it'll have to be to
59:50make it understandable for everyone
59:52watching while providing some meaningful
59:54information. And number two, there's
59:56really no right or wrong strategy in
59:58stock investing. And number three, there
1:00:01just too many variables and things to
1:00:03consider to put into a single video. So
1:00:06I gave it some thought and decided to
1:00:08make the video with the following
1:00:09caveats. Number one, the strategy I'm
1:00:13about to explain to you is the strategy
1:00:15which I use. Now what I'm trying to say
1:00:18is that you may or may not decide to
1:00:21follow this strategy as I can't really
1:00:23say that this is the right strategy for
1:00:25you. Please consider it as a playbook
1:00:29which you can play around with to
1:00:31potentially make better decisions when
1:00:33you're investing. Number two, I'll avoid
1:00:36explaining every single basics of
1:00:38terminologies and concepts given they're
1:00:41either available in my previous videos
1:00:43or can be easily understood by searching
1:00:45it yourself. Number three, I don't do
1:00:49short-term trading. So please assume
1:00:51that my entire strategy is based on
1:00:53holding your investment for at least 3
1:00:55months up to a few years until you reach
1:00:58a satisfiable return. Now for the people
1:01:02who are viewing my video for the first
1:01:03time, I suggest you either watch my
1:01:05other videos or watch this video very
1:01:08carefully to fully understand the logic
1:01:10behind it. After all, I just want all of
1:01:13you to learn something from this. And
1:01:15also, if you fully understand the
1:01:17concept of this video, whatever your
1:01:19strategy is, I'm sure you can use this
1:01:21video as your investment playbook to
1:01:23make modifications as you see fit for
1:01:25your purposes. Okay, caveats aside,
1:01:29let's get to it. To explain my
1:01:30investment strategy, I'll first need to
1:01:33explain the Federal Reserve chessboard
1:01:35again. So, I've been repetitively saying
1:01:37that the most important aspect to
1:01:39consider when investing, especially post
1:01:41the global financial crisis era, is
1:01:44understanding the Federal Reserve's
1:01:45actions. Now, if any one of you disagree
1:01:48with this and would prefer investing in
1:01:50a stock in the super long term, say 10
1:01:53plus years without taking into account
1:01:54of the Fed policies, that is fine, too.
1:01:57In that case, this video might not be
1:02:00too helpful for you. But the reason I
1:02:02take into account of the Fed policies is
1:02:04because while I don't short-term trade,
1:02:06I do want to maximize my profits by
1:02:08adjusting my investment portion and
1:02:10types of stocks by taking profits in a
1:02:13few months or two years maximum. Okay, I
1:02:16also explained that there are two major
1:02:18metrics which we need to monitor with
1:02:20the first metric being the Federal
1:02:22Reserve interest rate and the second
1:02:25metric being the Federal Reserve balance
1:02:26sheet. Now to recap this table,
1:02:29basically the Federal Reserve uses these
1:02:32two tools to control the liquidity in
1:02:34the market. First on the interest rate,
1:02:36the Federal Reserve can guide it towards
1:02:38being low or can guide it towards being
1:02:40high. Now if the interest rate gets low,
1:02:43there are two implications which
1:02:44happens. First is in general the
1:02:48market's valuation will go up. Now when
1:02:51I say valuation, I'm referring to the
1:02:54typical valuation metrics like the price
1:02:56to earnings ratio and EV over EB
1:02:58multiple. Now let me try to explain why
1:03:01this happens. You might remember from my
1:03:04DCF video which I made as a joke in
1:03:06trying to value dating that when I
1:03:08discounted the cash flows, I used a
1:03:11thing called a whack. Now you may
1:03:14remember that the WAP is composed of two
1:03:17things which are cost of debt and cost
1:03:19of equity. Now simply put cost of debt
1:03:22refers to the interest rate the company
1:03:24needs to pay when borrowing money. So if
1:03:27the interest rate goes lower cost of
1:03:30debt becomes lower. Also on the cost of
1:03:33equity side, if the interest rate goes
1:03:35lower, a core component of the cost of
1:03:38equity, which is the risk-free rate,
1:03:40which is essentially the US Treasury
1:03:42yield, will also go lower. So you can
1:03:45safely assume that the whack will go
1:03:47lower if the interest rate goes lower.
1:03:51Now, you're using this whack to discount
1:03:53the future cash flows of the company.
1:03:55Therefore, if the whack goes lower, the
1:03:58value of the cash flows will go up. To
1:04:01give you a simple example, if the
1:04:03company is projected to generate $100 of
1:04:05cash flow next year and the whack is at
1:04:0810%. The current value of the $100 would
1:04:12be $100 divided by 1 + 10% which is
1:04:17$90.9.
1:04:19However, if the whack goes down to 8%
1:04:22the $100 divided by 1 + 8% becomes
1:04:26$92.6.
1:04:28Therefore, the future cash flow of the
1:04:31company will be valued higher, which
1:04:33leads to a higher valuation of
1:04:35companies.
1:04:36If the value of the companies goes
1:04:38higher, it'll lead to the price to
1:04:41earnings ratio or EV over EVA multiple
1:04:43also going higher because the absolute
1:04:46earnings of the company is fixed while
1:04:48the value goes higher leading to a
1:04:50higher multiple. Now the second reason
1:04:52the company's value goes higher is
1:04:55because if the interest rate goes low
1:04:57interest on bonds will also go lower as
1:04:59well. Now I don't think I need to
1:05:02explain why that is. Basically lower
1:05:04interest rate would mean that you'll be
1:05:06earning less interest on a bond. So what
1:05:09generally happens is because the bond
1:05:12interest rate becomes low the investors
1:05:14will generally avoid investing in the
1:05:16bond and look for a high yielding asset
1:05:19like stocks. Therefore, the demand for
1:05:22stocks would increase leading to a high
1:05:24valuation of stocks. Okay, so that's the
1:05:27first thing that happens. The second
1:05:30thing that happens is if the interest
1:05:32rate goes low, all companies debt burden
1:05:35will be significantly reduced. Now, when
1:05:38companies take on debt or issue bonds,
1:05:40companies will need to pay interest on
1:05:42them. Now, if the interest rate goes
1:05:44low, companies with a lot of debt will
1:05:46be reduced with the burden of paying
1:05:48interest on them. And even if companies
1:05:51don't have any debt, they'll be less
1:05:53reluctant to take on the debt because
1:05:55interest rate is very low. Now under
1:05:58this scenario, which companies do you
1:06:00think will benefit the most?
1:06:03Basically, the companies which are
1:06:05expanding rapidly and growing rapidly
1:06:07will benefit the most. I mean, companies
1:06:10which are not growing and only full of
1:06:12debt will also benefit, but I'll not go
1:06:14into those companies because we
1:06:15shouldn't invest in those companies.
1:06:18Okay, so going back to my point, the
1:06:20companies which are growing and
1:06:21expanding with a lot of debt with not
1:06:24much money because they're not
1:06:25generating profits will benefit the
1:06:27most. Okay, so those two are the biggest
1:06:30things which happens when the interest
1:06:31rate is low. Now if the interest rate is
1:06:34high, it's the opposite. Market
1:06:36valuation will go down because whack
1:06:38goes higher and there will be some shift
1:06:41from stock investors to bond investors.
1:06:44Also, companies with high profit and
1:06:46cash flow will benefit. Obviously, high
1:06:48growth companies are always good. So, I
1:06:51won't put that down here. Okay, so we
1:06:53covered the interest rate. Let's move
1:06:54over to the Federal Reserve balance
1:06:56sheet. Okay, so if the Federal Reserve
1:06:58balance sheet is increasing, this means
1:07:01that the Federal Reserve is buying
1:07:03assets and increasing their balance
1:07:05sheet. The assets which the Federal
1:07:07Reserve buys are mostly treasury bonds
1:07:10and mortgage back securities.
1:07:12Basically you can think of this scenario
1:07:14as the Federal Reserve conducting the
1:07:16quantitative easing. Now under this
1:07:18scenario I explained in my whether QE
1:07:21and bailout should be allowed video.
1:07:23Basically two things happen. First thing
1:07:26that happens is because the Federal
1:07:28Reserve purchased so much bonds from
1:07:30financial institutions. These financial
1:07:33institutions receive so much cash in
1:07:35return that they become extremely eager
1:07:37to lend the cash to people and
1:07:40corporates. So obviously the first thing
1:07:42that happens is it becomes extremely
1:07:44easy to borrow money.
1:07:47Now as I explained in my previous video
1:07:49as well because these financial
1:07:51institutions are so eager to lend money,
1:07:54money becomes extremely cheap and people
1:07:56can borrow at a very low borrowing rate.
1:07:59So that's the next thing that happens.
1:08:01The borrowing rate becomes very low.
1:08:04Okay. Now if the Federal Reserve balance
1:08:05sheet decreases, you can think of it as
1:08:07a quantitative tapering scenario.
1:08:10Basically, the Federal Reserve is
1:08:11draining the money in the market and
1:08:13sucking it up by either selling the
1:08:15bonds to financial institutions in
1:08:17return for cash or just not doing
1:08:19anything and letting the bonds mature.
1:08:21So, under this case, it'll be the
1:08:23opposite of the balance sheet increasing
1:08:25case. So, basically, it'll be harder to
1:08:28borrow money and the borrowing rate goes
1:08:30higher. Okay. Now, up to this point, we
1:08:33have covered the implications of the
1:08:34Federal Reserve policies. Now let's move
1:08:37over to the actual stocks. So let's
1:08:40assume there are four stocks. Stock A,
1:08:43stock B, stock C, and stock D.
1:08:48Okay. So when looking at a stock, while
1:08:50there are millions of things you should
1:08:52be looking at, if I were to pick four
1:08:54major metrics to look at, those would be
1:08:57number one, revenue growth, number two,
1:09:00earnings growth, number three, forward
1:09:02price to earnings ratio, and number
1:09:05four, debt to EDA ratio.
1:09:08Okay. Now, please keep in mind that I'm
1:09:10just giving some examples of stocks just
1:09:12to give you an idea how you can play
1:09:14around with the stocks in accordance
1:09:16with the Federal Reserve environment.
1:09:18Now, revenue growth is straightforward.
1:09:21Also, earnings growth is
1:09:23straightforward. Basically, you just
1:09:25take next year's earnings and divide it
1:09:27with last year's earnings and see how
1:09:29much growth the company is recording. On
1:09:32the forward price to earnings ratio,
1:09:34please refer to my price to earnings
1:09:36ratio video. I just want to emphasize
1:09:38that for the price to earnings ratio,
1:09:40you should not look at trailing price to
1:09:43earnings ratio. For example, right now
1:09:45it's early 2025. So don't use the price
1:09:48to earnings ratio by using the 2024
1:09:50earnings, but use 2025 year end expected
1:09:54earnings to derive the expected price to
1:09:57earnings ratio. The reason is number
1:09:59one, the investors generally care about
1:10:01what will happen to the company's future
1:10:03earnings as they're forward-looking. And
1:10:05number two, historical earnings can be
1:10:07heavily distorted due to one-off
1:10:09earnings or losses. Okay, on the debt to
1:10:12EVA ratio, the only reason I look at
1:10:14this is because I try to find out how
1:10:16much leverage the company has. Also, the
1:10:19level of leverage a company has become
1:10:22increasingly important given the drastic
1:10:24monetary and fiscal policies which the
1:10:26Federal Reserve is adopting these days.
1:10:29Basically, the level of debt a company
1:10:31has would drastically determine the
1:10:34company's valuation level given the
1:10:36interest rate they pay on the loans and
1:10:39their ability to refinance the loans can
1:10:41get significantly easier or challenging
1:10:44depending on the Federal Reserve policy
1:10:45environment.
1:10:47Now, EBIDA is the most representative
1:10:49metric which the company generates from
1:10:52its operations as it adds back interest,
1:10:55taxes and depreciation and amortization.
1:10:59So, you can just simply think of it as a
1:11:00free cash flow matrix which the company
1:11:03generates every year. Now, by looking at
1:11:06the debt to EVO matrix, you're able to
1:11:09figure out how many years the company
1:11:11will take to pay down its debt.
1:11:14Okay, so starting with company A, let's
1:11:16assume that company A has revenue growth
1:11:19of 5%, earnings growth of 5%, price to
1:11:23earnings ratio of 10x and debt to EVA
1:11:26ratio of one times. So basically,
1:11:29company A has humble revenue and
1:11:32earnings growth, but is trading at a
1:11:33very low valuation of 10 times price to
1:11:36earnings ratio and its debt to EBIDA is
1:11:39at one times, which means the company
1:11:41has almost no debt. So the company A is
1:11:45very very very stable company with
1:11:48little growth and no debt. Okay. For
1:11:51company B, let's assume that company B
1:11:53has revenue growth of 10%, earnings
1:11:56growth of 10%, price to earnings ratio
1:11:59of 20 times and debt to EDA of three
1:12:03times. So basically company B has some
1:12:06growth but it's trading at a slightly
1:12:09higher valuation of 20 times price to
1:12:11earnings ratio and its debt to EVA is at
1:12:14three times which means the company has
1:12:16some debt. So company B has okay growth
1:12:20slightly high valuation and some debt.
1:12:23Okay, for company C, let's assume that
1:12:25company C has revenue growth of 20%,
1:12:28earnings growth of 10%, price to
1:12:31earnings ratio of 25 times and debt to
1:12:34EBIDA of five times. So basically,
1:12:37company C has high growth but is trading
1:12:40at a high valuation of 25 times price to
1:12:43earnings ratio and its debt to EVA is at
1:12:46five times which means the company has
1:12:48high debt. So company C has high growth,
1:12:52high valuation and high debt.
1:12:55Okay, for company D, let's assume that
1:12:57company D has revenue growth of over
1:13:0050%. It could be 80% or 100% but let's
1:13:04assume it has a very very high growth
1:13:07profile. Also, company D is recording
1:13:10losses. So there's no such thing as an
1:13:12earnings growth or price to earnings
1:13:14ratio. Let's also assume that company D
1:13:17has a huge debt. But given the company
1:13:20doesn't have any earnings, its IBIDA is
1:13:22also negative. So debt to IBIDA can't be
1:13:25calculated. Okay. So let's go back to
1:13:28the Federal Reserve chessboard to see
1:13:29which stock we should buy in each of the
1:13:32periods. So let's start with the fourth
1:13:34quadrant which is the least liquid
1:13:36period. Basically the interest rate is
1:13:39high or getting higher and the Federal
1:13:41Reserve balance sheet is decreasing.
1:13:45Basically very little liquidity is in
1:13:47the market.
1:13:49Okay. During times like this, in terms
1:13:52of making the investment, I would
1:13:53personally not invest over 20% of my
1:13:56cash or even just sit on the sideline to
1:13:58observe the market. I would think that
1:14:01this would be a very risky time to
1:14:02invest given the stock valuations are
1:14:04getting lower and getting loans is not
1:14:06easy for companies as well. But if I had
1:14:10to choose a stock to invest during this
1:14:12period, I would choose stock A. Now the
1:14:16reason I'll choose stock A is because
1:14:18despite the low growth the company's
1:14:20recording the low level of leverage
1:14:23which the company has will keep the
1:14:24company solvent. Also given the
1:14:27company's valuation is already very low
1:14:29at 10 times the increase in the whack
1:14:33will not impact the company's valuation
1:14:35that much. Basically if your nominator
1:14:38is high increase in the denominator will
1:14:42have a much significant impact in
1:14:44absolute terms. Now percentage- wise it
1:14:47may be the same but my observation on
1:14:49the market is that if a company with
1:14:51high valuation multiple is impacted by
1:14:54increasing interest rate it'll trigger
1:14:56the selloff mentality of the investors
1:14:58and the stock may experience a huge
1:15:01drop. So to play safe I'll prefer
1:15:03investing in stocks like company A. So
1:15:06let's move on to the third quadrant
1:15:08which is the in between period.
1:15:11Basically, the interest rate is low or
1:15:13getting lower and the Federal Reserve
1:15:15balance sheet is decreasing. Basically,
1:15:18there's some liquidity in the market.
1:15:21Okay. During times like this, for the
1:15:23investment, I would personally not
1:15:25invest over 50% of my cash or same as
1:15:29the fourth quadrant, I'll just sit on
1:15:31the sideline to observe the market
1:15:32depending on the circumstances. I think
1:15:35you will need to invest in stocks quite
1:15:38selectively during times like this too
1:15:40given liquidity is still there but not
1:15:42always there.
1:15:44Okay, for the stock if I had to choose a
1:15:47stock to invest during this period I
1:15:49would choose stock C. Now stock B and
1:15:52stock C would both work but I would
1:15:55prefer stock C. The reason I would
1:15:57prefer stock C is because company C has
1:16:00high growth which would definitely be
1:16:03valued in the market but also has high
1:16:05leverage. Now assuming company C already
1:16:08has enough debt it needs it'll benefit a
1:16:11lot from the decreasing interest rate.
1:16:14Now because it has enough debt, it won't
1:16:16have to borrow a lot of new money and
1:16:18just refinance the existing loans. So it
1:16:21would work even under an environment
1:16:23when the Federal Reserve balance sheet
1:16:25is decreasing.
1:16:27Also while the valuation of company C is
1:16:29quite high as long as it can maintain
1:16:31the revenue growth as valuation will be
1:16:33justified given it low interest rate
1:16:35environment where the whack is going
1:16:37lower. Okay. So let's move on to the
1:16:39second quant which is also the in
1:16:42between period. Basically the interest
1:16:45rate is high or getting higher and the
1:16:47Federal Reserve balance sheet is
1:16:49increasing. It would be the similar as
1:16:51the third quadrant but slightly
1:16:53different in a sense that the interest
1:16:55rate is high. Okay. During times like
1:16:58this for the investment same as the
1:17:01third quadrant I would personally not
1:17:03invest over 50% of my cash or just sit
1:17:06on the sideline to observe the market.
1:17:08Again I will need to invest in stocks
1:17:10quite selectively during times like this
1:17:12as well.
1:17:14Okay. For the stock, if I had to choose
1:17:16a stock to invest during this period, I
1:17:18would choose stock B. Now, again, stock
1:17:22B and C would both work, but I would
1:17:24prefer stock B. The reason I would
1:17:27prefer stock B is because company B has
1:17:30some growth, which is okay, but also has
1:17:33some leverage. Now, given company B has
1:17:37some leverage, but not as much as
1:17:38company C, it should be relatively okay
1:17:41under a high interest rate environment.
1:17:43And also while price to earnings ratio
1:17:46is somewhat high but it is not as high
1:17:48as company C's. So the impact from the
1:17:51whack going higher would be relatively
1:17:53controlled. Okay. Now let's move on to
1:17:56the final quadrant which is the first
1:17:58quadrant.
1:17:59Okay. Now in this quadrant I will super
1:18:03aggressively invest into the market. I
1:18:06mean, I'll not only invest 100% of my
1:18:09cash, but if possible, even take on
1:18:11loans to invest. Basically, this is a
1:18:14period where the Federal Reserve is
1:18:16decreasing the interest rate and
1:18:18conducting the QE at the same time to
1:18:20increase its balance sheet. Also, in
1:18:23terms of the stock to invest, I will
1:18:25invest in stock D, which is recording
1:18:28excessive growth with no earnings. Now,
1:18:31as I said multiple times in my previous
1:18:32videos, this is the time when the
1:18:34companies rarely go bankrupt. So, you do
1:18:38not need to worry about the amount of
1:18:40debt a company has given they should be
1:18:42able to either refinance the loan or get
1:18:45more loan from the bank. Also, the
1:18:47financing cost is extremely low. So, the
1:18:49company would not have any issues in
1:18:51paying the interest with more debt or
1:18:53equity. Also given the low interest
1:18:56rate, this is the time when people hunt
1:18:58desperately for growth. All the money in
1:19:01the bond market will shift away to
1:19:02stocks and given there's so much
1:19:04liquidity, they'll just look for fast
1:19:06money where the growth can be achieved.
1:19:09Okay, so invest in company During this
1:19:11time. But I will make one single caveat
1:19:13though. For a stock like company D, you
1:19:17really, really, really need to exit the
1:19:22investment at the right time. When you
1:19:24feel like you gained a lot of profit or
1:19:26when you feel like there's any, and I
1:19:28mean any signs of the interest rate
1:19:31going back up or the quantitative easing
1:19:33ending, you have to sell the stock right
1:19:36away. Don't get swayed away with the
1:19:39media or Wall Street bats screaming to
1:19:41the moon or whatever. just just sell 20%
1:19:44profit, 50% profit, 100% profit, 200%
1:19:48profit. These are all great. Just hit
1:19:50the sell button whenever you see any
1:19:51signs of any changes happening in the
1:19:53market. Okay, guys, to wrap up, I'll
1:19:56note a few things. Please listen
1:19:58carefully. Number one, a stock with
1:20:01company D's growth and company A's
1:20:03valuation and leverage ratio would be
1:20:05the best in all scenarios. If you can
1:20:07find a stock like that, go for it.
1:20:09However, there are not many companies
1:20:11like that out there. So that's why I'm
1:20:13giving these illustrative examples with
1:20:15madeup companies.
1:20:18Number two, when you pick a stock,
1:20:20please compare it against other
1:20:21companies within the same sector. Try to
1:20:24check whether the company's valuation or
1:20:26growth is lower or higher versus peer
1:20:29companies and take that into
1:20:30consideration when investing. Number
1:20:33three, don't chase for fast money. The
1:20:37more you chase it, it'll run away. You
1:20:40don't have to invest and hold a stock
1:20:41for 20 years, but at least say bye-bye
1:20:44to your cash for the next 6 months or
1:20:46two years when you buy a stock. It may
1:20:49go down in the short term, but if you
1:20:50did your work, you have the chance of
1:20:52succeeding down the road. Okay, guys.
1:20:54So, this is the end of my investment
1:20:56strategy video, but now I do want to
1:20:59emphasize again and please listen to
1:21:01this. This strategy is my strategy. It
1:21:05may work for you or may not work for
1:21:07you. But if you understood my points
1:21:09correctly, you will learn something from
1:21:11it and you should be able to use this
1:21:13information in your own way to make your
1:21:16own investment decisions. Now, the
1:21:18reason I made this video is to help you
1:21:20make better decisions. So, I really hope
1:21:22all of you guys succeed with your
1:21:24investments down the road. Thank you,
1:21:26and I'll be back with more videos very
1:21:28soon. Okay, now that we have covered the
1:21:30valuation techniques, the Federal
1:21:32Reserve, the macro indicators and
1:21:34investment strategy, we move on to the
1:21:36right investment mindset we need to have
1:21:39to succeed in investing. I've seen
1:21:41plenty of people fail in investing even
1:21:43when they have decades of experiences in
1:21:45investment banking, private equity, and
1:21:47hedge funds. So, I just wanted to
1:21:49emphasize that everything comes down to
1:21:50having the right mindset. Okay, here we
1:21:53go.
1:21:57Okay, so until today in my videos I
1:21:59talked a lot about investment tactics,
1:22:01strategies, valuation theories and
1:22:03market updates which focuses on the
1:22:05technical aspects of investing. In my
1:22:07stock investment strategy for everyone
1:22:08video, I talked about how you can use
1:22:10the monetary policies to your advantage
1:22:12when investing. In my PE ratio explained
1:22:14video and EV vita explained video, I
1:22:17talked a lot about the key valuation
1:22:18theories which are most commonly used
1:22:20when making investment decisions. Also
1:22:21in the various market update videos I
1:22:23talked about the recent events that took
1:22:25place in the market in detail which can
1:22:27be helpful in positioning your
1:22:28investments. Now while I talked about a
1:22:31lot of the stuff related to finance
1:22:32investing I mostly focused on technical
1:22:34aspects of things which are generally
1:22:36helpful in enhancing your knowledge. Now
1:22:39however up until today I didn't really
1:22:41talk about the more important aspect of
1:22:42investing which is having the right
1:22:44mindset. Now, I wanted to emphasize that
1:22:47whatever skills and knowledge you have,
1:22:49if you don't have the right investment
1:22:50mindset, you'll most certainly fail. A
1:22:52lot of you may wonder whether my
1:22:54colleagues are working in investment
1:22:56banking and private equity are all super
1:22:57successful when it comes to personal
1:22:59investing. But I can tell you with the
1:23:01utmost certainty that not even half of
1:23:03them are successful. But at the same
1:23:05time, I can also assure you that those
1:23:07guys who work in the industry have the
1:23:09most in-depth knowledge about finance,
1:23:11macro, valuation theories, and various
1:23:13industries. However, I've seen many, and
1:23:16I repeat, many of them fail in personal
1:23:18investing miserably. Now, one thing I'll
1:23:21add is that they do have a higher chance
1:23:22of doing better versus the people who
1:23:24have no knowledge at all. However,
1:23:27nothing is guaranteed. And I've seen
1:23:28them failing miserably in their own
1:23:30investing. Now, why is this? The only
1:23:33one reason why this happens is because
1:23:34people, regardless of what knowledge you
1:23:37have or what background you have or what
1:23:39industry you work in, does not have the
1:23:41right mindset when it comes to
1:23:42investing. Now today I wanted to cover
1:23:44this topic in detail based on my
1:23:46personal experiences as well as my
1:23:48observations around me. Okay, let's get
1:23:51to it. Okay, so when it comes to having
1:23:53the right mindset for investing, first I
1:23:55wanted to make some overarching
1:23:56statements. There are millions of videos
1:23:58on YouTube or any other social media
1:24:00channels about having the right mindset
1:24:02for investing. Now I have a huge issue
1:24:04with these videos and I think almost all
1:24:06of the videos are scams because of the
1:24:08following reasons. Number one, most of
1:24:10the videos tend to generalize the right
1:24:12mindset when investing. A lot of the
1:24:14videos get fixated on a certain mindset
1:24:16you should have when investing and
1:24:17forces you to accept having that mindset
1:24:20as a holy grail. Now, the problem with
1:24:22this is that what I have come to realize
1:24:24throughout my life and looking at myself
1:24:26as well is that for every single one of
1:24:28you watching this video, the right
1:24:30mindset you should have is totally
1:24:31different from one another. I've come to
1:24:33realize that every single person's
1:24:35innate character is almost impossible to
1:24:37be changed. And depending on what kind
1:24:39of prison you really are, you must find
1:24:41the right mindset that fits you. Now,
1:24:43let's think about some general advice
1:24:44people give to each other. Parents
1:24:46generally tell their kids that you
1:24:48should do well in school. Now, if that
1:24:50was that easy, everyone would only be
1:24:52getting A grades in school and everyone
1:24:54would be going to a good college.
1:24:56However, the world does not work that
1:24:57way. Also, there are millions of people
1:24:59in this world who didn't do well in
1:25:01school but still become successful
1:25:02entrepreneurs, entertainers, athletes,
1:25:05salesmen, and etc. who do very well in
1:25:08their lives. Now if you told the kids
1:25:09who are doing well in school to drop
1:25:11what they are doing and try to replicate
1:25:13the people who are successful despite
1:25:15not having any college degrees, it may
1:25:17be tremendously difficult for them to do
1:25:19so. Also, it would be the case the other
1:25:21way around as well. So the point I'm
1:25:23trying to make here is that there are
1:25:24certain characteristics which people are
1:25:26born with and we need to embrace it to
1:25:28find the right investors mindset which
1:25:30fits each of us. Number two, most of the
1:25:33videos don't reflect reality. Now I've
1:25:35seen a lot of videos on YouTube and
1:25:37other channels referencing the likes of
1:25:39Warren Buffett's mindset which spans
1:25:41across almost 70 years and typical DCA
1:25:44mindset which also spans across decades
1:25:46of years. Now I wanted to make it clear
1:25:47that I do believe that having those kind
1:25:49of mindset are good. But the problem is
1:25:52that generally people don't set a 50year
1:25:54or 70-year target and try to invest that
1:25:57long of a period. The reason this
1:25:59typically doesn't work is number one,
1:26:01the speed of asset price going up in the
1:26:03past 10 years is incomparable to how
1:26:06fast it went up before then. And
1:26:08therefore, participating in the market
1:26:09with the same 100year time span mindset
1:26:12is very difficult. And number two, given
1:26:14the high inflation we're experiencing,
1:26:16there are multiple occasions where
1:26:18people have to pull their investment out
1:26:19to fund their day-to-day lives. Okay, so
1:26:21those were some of the fails I wanted to
1:26:23share about the existing investors
1:26:25mindset videos. Okay, so having that
1:26:27said, how should we approach investing?
1:26:30So these are some of the thoughts I
1:26:31wanted to share with you today. Number
1:26:33one, have your own principle and stick
1:26:35to the principle. Number two, don't get
1:26:38swayed away with noise and stick to the
1:26:40principle. Number three, review your
1:26:41principle on a regular basis. Number
1:26:43four, once you invest your money, remove
1:26:46emotional attachment from the money.
1:26:48Number five, don't talk to other people
1:26:50about what you bought or sold. Okay, so
1:26:52let's go through the points one by one.
1:26:54Number one, have your own principle and
1:26:56stick to the principle. So from my
1:26:58perspective, this is the most important
1:27:00point when it comes to investing. So as
1:27:02you may have seen from my previous
1:27:03videos, there are tens of millions of
1:27:05ways to invest. You could do long-term
1:27:06investing, mid-term investing,
1:27:09short-term investing, scalping, value
1:27:11investing, narrative investing, options
1:27:13trading, swing trading, momentum
1:27:15trading, and etc. Also when it comes to
1:27:18the securities you invest in, you could
1:27:20invest in public stocks, private stocks,
1:27:22bonds, cryptos, FX, commodities and etc.
1:27:25So there are endless ways which you can
1:27:27invest your money. Now I can say with a
1:27:29100% certainty that all of the investing
1:27:31strategies and securities which I
1:27:33mentioned will work if you do it the
1:27:34right way. There are many people who
1:27:36already succeeded in each of the
1:27:38investment methodologies and if there's
1:27:40a case of someone succeeding, you can do
1:27:42it too. Now the problem is while an
1:27:44investment strategy may work for
1:27:45somebody, it doesn't work for everybody.
1:27:48The reason it doesn't work for everybody
1:27:49is because each investment strategy
1:27:51requires certain soft skills and
1:27:53personalities which are designed to fit
1:27:55the strategy which you're about to
1:27:57adopt. For example, long-term investing
1:27:59requires patience and endurance. Value
1:28:02investing requires natural instinct on
1:28:04numbers and industries. And scalping
1:28:07strategy requires a gifted intuition on
1:28:09market movements. So depending on what
1:28:11kind of person you are, there will be an
1:28:13investment strategy which fits your
1:28:15personality. Let me give you my example.
1:28:17When I try to assess myself from an
1:28:19objective point of view throughout my
1:28:20life, I made a few conclusions about my
1:28:23character. A, I'm a person with a day
1:28:25job and will most likely remain that way
1:28:27for the foreseeable future. So I can't
1:28:28be trading stocks all day long. B, I'm a
1:28:31rather riskaverse person, so speculating
1:28:34will make me very uncomfortable. See,
1:28:36I've gotten feedbacks from numerous
1:28:37people that my strengths are numbers,
1:28:40patience, and perseverance. Okay. Now,
1:28:42taking into account of those factors,
1:28:44I've made the following conclusion about
1:28:46myself. Number one, short-term trading
1:28:48is not a good fit for me. So, I need to
1:28:50trade mid to long-term. Number two,
1:28:52given my obsession with numbers, I need
1:28:54to take valuation into consideration.
1:28:56Number three, to invest with a more
1:28:58peaceful mindset, I need to follow the
1:29:00macro closely and time the market
1:29:02correctly. So based on all those
1:29:04considerations, I built my own
1:29:05principles of investing. Now I laid out
1:29:08my investment strategy in detail in my
1:29:10stock investment strategy for everyone
1:29:12video. But just to recap a few key
1:29:14points. A I invest heavily when the
1:29:17market is transitioning towards a more
1:29:18liquid environment. I already
1:29:20demonstrated to you guys how I do it
1:29:22when I said that we should buy into the
1:29:24market in early April of this year. In
1:29:26April, it was a good time to buy into
1:29:28the market because number one, interest
1:29:30rate was showing signs of going down
1:29:31from the second half of the year. Number
1:29:33two, valuation level came down to a
1:29:35reasonable level. And number three, the
1:29:38government was being pedalier about high
1:29:40inflation, which gave more comfort for
1:29:42the market. Okay, moving on to the next
1:29:43point. B, whatever stock I buy, I try to
1:29:46build numerical logic. You guys can
1:29:49refer to my previous investment videos
1:29:50including Plug Power, NEO, and Nvidia.
1:29:53But I try to set a clear numerical logic
1:29:55behind my purchase price and my exit
1:29:57price. Now when the market is extremely
1:29:59liquid, I tend to be a lot more
1:30:00aggressive on valuation by looking at
1:30:02price to revenue type of multiples. And
1:30:04when the market is less liquid, I tend
1:30:06to stick to more traditional valuation
1:30:08multiples like price to earnings ratio
1:30:10or EVA ratio. I explained in detail
1:30:13about the PE ratio and EVB ratios in my
1:30:15previous videos for your reference as
1:30:16well. See, I try to hold on to my
1:30:18investment in the mid to long term. Now,
1:30:21I generally try to hold my investment
1:30:22for more than three months at the
1:30:24minimum. But this is not because I set a
1:30:26hard rule on how long I'll hold on to my
1:30:28investment, but it's because it
1:30:30generally takes time for the market to
1:30:32reflect my logic in the share price. If
1:30:35my target price on the stock is 3x the
1:30:37price I bought, it generally won't reach
1:30:39that price in a single day. Okay, so
1:30:41that kind of wraps up my thoughts on my
1:30:43first investment mindset. Now, moving on
1:30:45to the second point. Number two, don't
1:30:47get swayed away with noise and stick to
1:30:49the principle. Then now what I mean with
1:30:51this is that when you have formed your
1:30:53own investment principle stick to it and
1:30:56don't look elsewhere. Now let me give
1:30:57you my example. As I told you guys
1:30:59multiple times I started working from
1:31:01early 2010s and only started investing
1:31:03from late 2019. Now the reason I didn't
1:31:06invest at all for almost 10 years was a
1:31:08mix of reasons. I needed time to figure
1:31:10out what kind of person I am and forming
1:31:12my own investment principle which took
1:31:13me a lot of time and also I couldn't
1:31:16spot the right opportunity to invest
1:31:17based on my investment principle. Now
1:31:19obviously during those times I saw
1:31:21plenty of people getting rich with
1:31:22stocks and cryptos or whatever but I
1:31:24tried very hard to not get swayed away.
1:31:27Now even today I see plenty of people
1:31:29getting rich every day. I see people
1:31:31getting rich overnight with one huge bet
1:31:33on options with stocks but I don't care.
1:31:35I see people making huge exits on angel
1:31:37investments in private companies but I
1:31:39don't care. I see people making huge
1:31:41bets on cryptos and getting rich but I
1:31:43still don't care. I see people making
1:31:44money with short-term trading and
1:31:45scalping but I really don't care. Now
1:31:48what I know is that the moment I start
1:31:50looking away from my own principle and
1:31:52try to follow the path of others who are
1:31:54making big on the market, I become a
1:31:56follower who gets dragged into the game
1:31:58rather than a leader who is consciously
1:32:00making my own decisions. Now, this is a
1:32:02huge difference on your mentality when
1:32:04you're investing. If you guys want to
1:32:05know what happened when I deviated from
1:32:07my own investment principle, please
1:32:08refer to my how I lost $100,000 in one
1:32:11day video. This was one of the few times
1:32:13when I got dragged into the game rather
1:32:15than making my own conscious decision
1:32:17and the result was that I lost 100K in a
1:32:20single day. I think this video will be
1:32:22quite informative for a lot of you guys.
1:32:24So, please watch the video if you
1:32:25haven't already. Okay, moving on to the
1:32:27third point. Number three, review your
1:32:29principle regularly. Now, the reason I
1:32:32think this is important is because often
1:32:33times people forget that they could be
1:32:36wrong. Now this usually happens to
1:32:38investors who are relatively new in the
1:32:40market with less experience and believe
1:32:42that your own principle is the way to
1:32:44go. Now the reality is that the market
1:32:46is a very shrewd animal and your
1:32:48investment strategy may not work as the
1:32:50market evolves over time. You need to
1:32:52test your principle regularly and
1:32:54thoroughly. And if you think your
1:32:55investment principle is not working, you
1:32:58need to be nimble with your approach.
1:32:59But again, don't shift your investment
1:33:01principle by listening to other people.
1:33:03Come up with your own logic and
1:33:05principles. Otherwise, you'll be dragged
1:33:07into the game which will most likely
1:33:09lead to a failure. Number four, once you
1:33:11invest your money, remove emotional
1:33:13attachment from the money. Okay, so the
1:33:15reason I believe this is very important
1:33:17is because I saw plenty of cases around
1:33:19me where people involve emotions when
1:33:21investing and leading themselves to
1:33:23failures. Now, obviously I know a lot of
1:33:25colleagues in the hedge fund and private
1:33:27equity world whose job is to invest.
1:33:29Now, often times those guys are very
1:33:31good investors when it comes to their
1:33:33job and rarely loses money. However, as
1:33:35I said previously, I saw plenty of guys
1:33:37being terrible when it comes to personal
1:33:39investing. And the whole reason they can
1:33:41be so bad at it is really only because
1:33:43they involve emotions when they're
1:33:45investing their own money. Generally,
1:33:47when you're dealing with other people's
1:33:48money, you become cold-hearted, very
1:33:50logical, sticking to the investment
1:33:52principles of the firm, thoroughly
1:33:54investigating every price of the
1:33:56company, and etc. But once they start
1:33:58investing their own money, they suddenly
1:34:00start chasing after Nvidia, Tesla,
1:34:02Bitcoin at the worst time possible. and
1:34:04exit at the worst time possible losing
1:34:06huge amount of money. Now why is this?
1:34:09This is really only because they get
1:34:11emotions involved with money. They get
1:34:14impatient, anxious and hottempered when
1:34:16investing their own money that they
1:34:18become completely different person.
1:34:20Okay. So please when you make an
1:34:22investment please separate your emotions
1:34:24and just think about your logic and
1:34:26principles only and after you invest
1:34:28just consider it someone else's money
1:34:30like a money you gave to a company for
1:34:32them to use to make the company better.
1:34:34Now from this aspect if you're a midto
1:34:37long-term investor but checking your
1:34:39brokerage account balance more than
1:34:40three times a day there's something
1:34:42wrong here. Okay moving on to the next
1:34:44point number five don't talk to other
1:34:46people about what you bought or sold
1:34:49even on the internet. Okay, so this may
1:34:51be a controversial point as it may not
1:34:52apply to everyone, but let me explain.
1:34:55Throughout my days of investing, I've
1:34:57come to realize that if I share with
1:34:59other people on what I bought or sold, I
1:35:01become extremely agitated and anxious
1:35:04that often times I find it hard to stick
1:35:06to my principles. It's kind of like
1:35:08strongly recommending a restaurant to a
1:35:10friend and telling him or her to try the
1:35:12food at the restaurant. If you end up
1:35:14taking your friend to the restaurant by
1:35:15recommending it really hard, you may
1:35:17become a bit anxious about how your
1:35:19friend may react to the food. Now, if
1:35:21you went to the restaurant by yourself,
1:35:23you may have just enjoyed the meal and
1:35:25finished the meal with a peaceful
1:35:26mindset. But once you have someone
1:35:28sitting in front of you who came just
1:35:30because you recommended it, you may
1:35:32become a bit anxious about his
1:35:34reactions. Now, I think it applies the
1:35:36same to investing as well. If you built
1:35:38an investment thesis based on your
1:35:40principles, it's generally more helpful
1:35:41for you to keep it to yourself. At least
1:35:43that's how I felt. Okay, so I went
1:35:46through all the common mindset which I
1:35:47think are important when investing. Now,
1:35:49as I say all the time, even the right
1:35:51investing mindset may vary from a person
1:35:53to another. So please remember that
1:35:55these are my principles and mindsets
1:35:57which I try to stick to. You may have
1:35:59your own version of it. So just think of
1:36:01it as a sample guide for you to
1:36:02consider. Okay, so that's all I wanted
1:36:04to cover today. I hope you enjoyed the
1:36:06video and I'll be back with more videos
1:36:07very soon. Okay, now that we have
1:36:10covered everything, I wanted to end the
1:36:11video with a bonus clip on a simplified
1:36:13way to make money in the stock market.
1:36:16Remembering all the theories and the
1:36:17metrics may get tough, so I came up with
1:36:19a few critical things to monitor to
1:36:21avoid losing money and maximize your
1:36:23chances of making money in the market.
1:36:25Okay, here we go.
1:36:30Okay, today I wanted to talk about a
1:36:32general topic about investing and over
1:36:34the past year I produced some contents
1:36:36which are focused around the ways to
1:36:38invest and how to be successful when
1:36:40investing and a lot of the contents
1:36:42which I produced in the past were kind
1:36:44of spread across different topics. So I
1:36:47wanted to kind of bridge that gap and
1:36:49come up with a very simplified version
1:36:51of how to actually make money in the
1:36:54stock market. Now before I begin, I just
1:36:57want to let you guys know that there are
1:36:58three contents in my library which I
1:37:01believe you should really watch. Now I
1:37:04think those three contents combined
1:37:06would give you a generally a good idea
1:37:09about investing and even for those of
1:37:11you who are not that familiar with the
1:37:13technical side of things like how to
1:37:14value companies and how to do DCFS or
1:37:17how to come up with valuation metrics or
1:37:19how to monitor um the trend of the
1:37:22market. I think those three videos
1:37:24combined should give you a pretty good
1:37:25idea of how to successfully invest in
1:37:29the stock market. And those three videos
1:37:31are number one, the stock investing
1:37:33strategy for everyone video, and number
1:37:35two, macro investing 101 for beginners,
1:37:38and number three, you'll certainly fail
1:37:41without the right mindset video. So for
1:37:43each of the video, for example, for the
1:37:44stock investing strategy for everyone
1:37:46video, I talked about how the Federal
1:37:48Reserve framework impacts the overall
1:37:51market and within the Federal Reserve
1:37:54framework, which time you should invest
1:37:57your money and how much and in which
1:37:59stocks as well. In the macro investing
1:38:01101 for beginners video, I go further in
1:38:04depth into the macro indicators and what
1:38:07we should monitor and how we should
1:38:09interpret those data. And number three,
1:38:12in the most important, you'll certainly
1:38:14fail without the right mindset video, I
1:38:15talked about the kind of mindset that
1:38:17you should have in order to be
1:38:19successful in investing. And I also
1:38:20emphasized that, you know, I worked in
1:38:23investment banking and private equity
1:38:24for almost 15 years. And even among my
1:38:26peers, there are plenty of people who
1:38:28are very well equipped with the
1:38:30technical knowledge about investing and
1:38:32about the market. But at the same time,
1:38:34when it comes to their own investment, a
1:38:36lot of them fail because they don't have
1:38:38the right mindset. So before you watch
1:38:40this video, I really suggest that you go
1:38:42back and watch those three videos
1:38:43multiple times to get a sense of, you
1:38:46know, what a successful investor should
1:38:48be equipped with in terms of uh the
1:38:50knowledge of the market. Okay? And um I
1:38:53also want to let you know that in April
1:38:562025, I gave you guys the first buying
1:38:58call for my video. And in March 2026, uh
1:39:02which is about a month ago, I also gave
1:39:04you the second buying call which I
1:39:06thought uh was a good timing to buy into
1:39:09the market. And for the investments
1:39:10which I made uh for the April 2025
1:39:13investments, I I've I've told you guys
1:39:15that I'm already up about 75 to 80%. And
1:39:20for the investment which I made about a
1:39:22month ago which I allocated between the
1:39:24MAX 7 stocks and the semiconductor
1:39:26stocks I'm up by about 20 to 25% 40 to
1:39:3045% respectively. And in my previous
1:39:33videos, I talked about the concerns I
1:39:34have about the market, the fact that
1:39:36it's rising too fast. And despite all
1:39:39the red signals which are still
1:39:40lingering in the market, including the
1:39:42inflation, the oil price, the the new
1:39:45Fed chair, the earnings growth
1:39:46trajectory and everything, and the
1:39:48valuation as well, but the market is
1:39:50still going up. So, um, you know, we we
1:39:53would need to monitor what happens in
1:39:54the future very carefully. Now that
1:39:57aside, I just wanted to kind of give you
1:40:01a very simplified version of how to time
1:40:04the market correctly and how to actually
1:40:06make money in the stock market without
1:40:08going into too much details of the
1:40:10technical side of things. So, you know,
1:40:13even if I give you this kind of
1:40:14guidance, a very simplified one, make
1:40:16sure you go back and watch my previous
1:40:18videos as well because that's going into
1:40:20the more in-depth sides of the things
1:40:23I'm about to say today. But for those of
1:40:25you who have a hard time uh
1:40:28understanding everything which I said in
1:40:29my previous videos, I think this video
1:40:31may be helpful for some of you who are
1:40:32just kind of getting started and who
1:40:34want to monitor metrics one by one.
1:40:37Okay. So let's begin. Okay. So to
1:40:39simplify all the investment strategies
1:40:41which I laid out during the course of
1:40:43the past year, um I want to talk about
1:40:47the investments and the buying calls
1:40:49which I gave you within the past year.
1:40:52So one was in April 2025 and the other
1:40:56one was in March 2026. Now when I told
1:41:00you guys that I will now buy into the
1:41:02market, obviously I monitored everything
1:41:05which I could including the Federal
1:41:06Reserve sentiment as well as the
1:41:08geopolitical uh developments as well as
1:41:12the political situation which was
1:41:14involving Donald Trump um Scott Bassant
1:41:18and potentially the new Fed chair coming
1:41:20in as well. So I've been monitoring
1:41:23tens and hundreds of metrics before I
1:41:25actually came up with that decision. But
1:41:27if you compare the April 2025 decision
1:41:30which I made and the March 2026 decision
1:41:33which I made, there are common aspects
1:41:37and elements which kind of ties in
1:41:40between the two decisions I made. And I
1:41:44think there are about five things which
1:41:47were happening during the both periods.
1:41:50And I just want to give you a sense of
1:41:52what those five indicators are and how
1:41:55you can use it to your advantage. Okay.
1:41:57So the first one is VIX which is VIX.
1:42:02Now, if you compare April 2025 and March
1:42:042026,
1:42:06one common thing that was happening
1:42:08between the two periods was that the VIX
1:42:11was at over 30. Now, for those of you
1:42:14who are not familiar with the VIX, it's
1:42:15basically the CBOE volatility index that
1:42:18tracks the implied volatility. Now, to
1:42:21speak in plain English, it basically
1:42:23means that it measures the volatility of
1:42:26S&P 500 options over the next 30 days.
1:42:30And it mathematically prices the fear.
1:42:33So basically just think of it as if the
1:42:36VIX is high there are a lot of fear in
1:42:38the market. Now generally on average
1:42:41when the market is very calm and it's
1:42:43generally on an upward trend the VIX
1:42:45would be in the range of 15 to 20. And
1:42:48if the market is really optimistic and
1:42:51has been on a very great trajectory it
1:42:53could go down as low as 10 or even below
1:42:5510. And the band of the VIX could be
1:42:59between single digits, highest single
1:43:01digits and 20. So the VIX on a daily
1:43:05basis would make its movements but
1:43:07generally it would move within the band.
1:43:09However, when I made my investments and
1:43:11I when I gave you the buy calls back in
1:43:14April 2025 and March 2026, the VIX was
1:43:19at over 30 for both periods. Basically,
1:43:22it means that the market was trapped in
1:43:25a very fearful emotion and that kind of
1:43:28represents what the public was thinking
1:43:29about the market. Now, the second metric
1:43:32I wanted to lay out is that for both
1:43:34periods, the Federal Reserve's outlook
1:43:37on the interest rate was that the
1:43:39Federal Reserve interest rate is not on
1:43:42an upward trajectory. So, basically what
1:43:44I mean is the Federal Reserve by any
1:43:46means was not indicating that the
1:43:48interest rate was going to go up in the
1:43:50near term. Now, as I've mentioned to you
1:43:52guys multiple times, the federal funds
1:43:54rate is basically the most important
1:43:57metric when it comes to the valuation of
1:43:59stocks. Given that the Federal Reserve
1:44:01rate acts as the basis of the discount
1:44:05rate of the future cash flow of the
1:44:07companies, if the rate goes higher,
1:44:10there'll be a higher discount rate that
1:44:11is applied on the future cash flow of
1:44:13the companies. So when you discount the
1:44:15cash flow back to the current moment it
1:44:17would basically mean that the cash flow
1:44:19would be smaller when you discount it
1:44:22back to the present day i.e the
1:44:24valuation of the stocks and the
1:44:26potential market cap of the stocks would
1:44:28also go down. Now on the flip side, if
1:44:31the interest rate goes lower, that would
1:44:33mean that the discount rate of the
1:44:35future cash flow of the companies would
1:44:38also be bumped up in accordance with the
1:44:42decrease in the interest rate. So you
1:44:44can just think of it as if the interest
1:44:46rate goes down, it's positive for the
1:44:48valuation of the stocks and when it goes
1:44:51up, it's negative towards the valuation
1:44:53of the stocks. So that's the second
1:44:56metric that you should monitor. And for
1:44:58both of the periods, it was the case
1:45:00that the Fed was not indicating in any
1:45:02way that the interest rate would go up.
1:45:04Now, in March 2026, based on the dot
1:45:07plot that was suggested by the Fed, it
1:45:09was indicating that the interest rate
1:45:10may stay constant throughout the year.
1:45:13However, by that it doesn't mean that
1:45:15the interest rate would go up. And also,
1:45:18we had the new Fed chair Kevin Worsh who
1:45:20was coming into the market saying that
1:45:22the interest rate could be brought down
1:45:25very quickly. So that was also reflected
1:45:27in the sentiment of the market. Now the
1:45:30third metric which I want to mention is
1:45:32the debt margin i.e the FINRA margin
1:45:36statistics. Now in both of the periods
1:45:38the FINRA margin statistics which is
1:45:40which basically represents the total
1:45:43debt balances in customer securities
1:45:45margin accounts i.e. the money borrowed
1:45:47from brokers to buy stocks was on a
1:45:50decreasing trend. Now what that means is
1:45:53that basically there were a lot of
1:45:55leverage in the market which generally
1:45:57goes up when the stock market also goes
1:45:59up has been on a decreasing trend
1:46:02because the stock has been going down
1:46:04for at least a certain period of time.
1:46:07So when the stock goes down there are
1:46:10people who are deleveraged given that
1:46:12they get margin calls by the brokers. So
1:46:14I'd like to say that when you are
1:46:17looking at the market, the market may go
1:46:20down. But in order to give you a more
1:46:24concrete rationale in buying into the
1:46:27market, what helps is that if the
1:46:30leverage in the market is also going
1:46:32down, it gives you a more concrete basis
1:46:36to buy into the market because the
1:46:38deleveraging in the stock means that
1:46:41there are more room for people to
1:46:43leverage in the future. Now what I will
1:46:45say is that FINRA's margin statistics
1:46:48are generally posted on a delayed basis.
1:46:51So for example the April 2026 margin
1:46:54data would be released about 3 to 4
1:46:56weeks after the end of April. So when I
1:47:00gave you the buying calls back in April
1:47:012025
1:47:03and this time in March 2026, the margin
1:47:06statistics which I was able to monitor
1:47:08was about a month before from the time
1:47:11when I actually gave you guys the buying
1:47:12call. So in April 2025, I was probably
1:47:16looking at February 2025 data because it
1:47:19was in early April. And in March 2026,
1:47:23given it was late March, I was also
1:47:25looking at about February 2026 margin
1:47:28data. For both of the periods, I was
1:47:30able to see one month of deleveraging on
1:47:33the data. What it means is that in April
1:47:352025, I was probably monitoring the
1:47:39February 2025 data because I gave you
1:47:42guys the buying call in early April. So
1:47:44the data which I was able to see was in
1:47:47was as of February 2025 and I saw that
1:47:51from January 2025 moving into February
1:47:542025 there was a decrease in the margin
1:47:57balance. Also this time in March 2026
1:48:01when I was giving you guys the blind
1:48:02call I was able to see that the February
1:48:05data which was already released
1:48:08suggested that moving in from January to
1:48:11February there was a decrease in the
1:48:13margin balance. Okay. When you see that
1:48:16the margin has been on a downward
1:48:18trajectory it suggests two things.
1:48:20Number one, the market is deleveraging,
1:48:22which means that the market has been
1:48:24falling for at least one month or almost
1:48:27a month. And number two, if you've been
1:48:29seeing the realtime market also falling
1:48:32within that respective month, i.e. April
1:48:342025 and March 2026, it also suggests
1:48:37that there's a pretty high chance that
1:48:39there has been further deleveraging in
1:48:41the market. So you could monitor that on
1:48:44FINRA website if you search FINRA margin
1:48:47statistics on Google. Now the fourth
1:48:49area which I wanted to mention is that
1:48:51both of the times there were clear
1:48:53leading sector in both of the cases. So
1:48:56basically what I mean is that in order
1:48:58for the market to go up and in order for
1:49:00the market to have the power and the
1:49:02energy to go up in the future it
1:49:04generally requires a thematic engine to
1:49:07attract institutional capital. Now in
1:49:09both of the cases it was more so in
1:49:12April 2025 that it was more of the max 7
1:49:15stocks and in March 2026 it was more
1:49:19towards the semiconductor stocks and
1:49:21that's the reason why I decided to
1:49:22invest in those two themes back in April
1:49:272025 and this time as well. Now the
1:49:30fifth area which I wanted to mention is
1:49:32that now for those leading sectors that
1:49:35leading sectors earnings profile needs
1:49:37to be on an upward trajectory. Now the
1:49:40leading companies must provide their
1:49:42dominance via the actual audited
1:49:45financials
1:49:46and if they beat the EPS and the revenue
1:49:49estimates during a macro panic it
1:49:51confirms that the underlying business
1:49:53model is insulated from the broader
1:49:55economic fear which means that if the
1:49:57fear goes away there's a very high
1:50:00chance for these leading sectors to be
1:50:01on an upward trajectory again. Okay. So
1:50:04those are the five metrics which I
1:50:05suggest that you monitor um every day in
1:50:08order to gauge the timing of buying into
1:50:10the market and I do the same as well.
1:50:12Obviously there are hundreds and
1:50:14millions of other data which I monitor
1:50:15on a regular basis. But that aside, if
1:50:18you monitor these five metrics and try
1:50:20to gauge the timing when all these five
1:50:23metrics actually checks the box, you'll
1:50:26almost certainly not lose money in the
1:50:28market. Okay, so that's that. Now, one
1:50:31thing I'll say though is if there's a
1:50:34specific time within your investment
1:50:37horizon where all those five boxes are
1:50:39checked out, I would say that the
1:50:42probability of you making money is about
1:50:4580 to 85%. Now, why is it not 100%.
1:50:50And for example, 80 to 85% chances is a
1:50:53really high probability. And generally
1:50:57if those five boxes are checked out,
1:50:59especially after 2008 when the Fed
1:51:01adopted the quantitative easing, you
1:51:03should be able to make money most of the
1:51:06times when those five conditions are
1:51:08met. For example, let's think about some
1:51:10times when all those five metrics were
1:51:11actually satisfied. If you go back to
1:51:131997 during the Asia financial crisis
1:51:15era, all those five conditions were met
1:51:18and after a pretty big correction in the
1:51:22market, the market rebounded. So that's
1:51:24one of the times when when you're able
1:51:26to make money monitoring those five
1:51:28metrics. And also in 2011 when there was
1:51:30a euro crisis and US downgrade the VIX
1:51:34went up to almost 50 and the Fed
1:51:38maintained the zero interest rate policy
1:51:40that time as well. If you bought into
1:51:42the market at the right time, you would
1:51:44have made a lot of money. It also
1:51:45happened in 2018 as well when Powell
1:51:48suddenly decided to raise the rates
1:51:50which panicked the market. However,
1:51:51after some time market also recovered
1:51:54after VIX spiking to almost 35 or over
1:51:5835 to almost 40. It also happened in
1:52:012020 during the COVID crash. So during
1:52:032020 the VIX went up to almost as high
1:52:06as 83 but then when the Fed decided to
1:52:09pivot the market recovered very quickly
1:52:12and also there were leading industries
1:52:13which were mainly focused towards the
1:52:15tech industry. It also happened during
1:52:18the two periods which I just mentioned
1:52:19which is April 2025 and March 2026. For
1:52:23both of the periods the VIX was at over
1:52:2630. The Fed was not increasing the
1:52:29interest rate. There were there was
1:52:31deleveraging happening in the market and
1:52:34there were leading industries which were
1:52:38predominantly leading the market upwards
1:52:40and also those leading industries were
1:52:43recording healthy EPS and revenue beats
1:52:47versus the consensus. So 80 to 85% of
1:52:50the times I would say that this strategy
1:52:52would work. Now what about the other 15
1:52:55to 20%.
1:52:57Now the reason I give 15 to 20% of room
1:53:00um is because of the fact that there are
1:53:04certain times when there are systemic
1:53:06imbalances in the market. Now these are
1:53:08the times when there's so much fear in
1:53:11the market and they're leading
1:53:13industries and the industries are
1:53:16recording a healthy growth and also the
1:53:19Fed is posing the interest rate hike or
1:53:21even aggressively decreasing the
1:53:23interest rate but there is so much panic
1:53:24in the market that the systemic
1:53:26imbalance is causing the market to go
1:53:28down and down and down even further from
1:53:31the previous highs. Let me give you some
1:53:34examples. For example, in 2000 to 2001
1:53:37during the dotcom buzz, the model
1:53:40basically failed because of the
1:53:42fundamentals of the leading sector were
1:53:43completely broken. Now, when there's a
1:53:46situation where the market has been
1:53:48driving upwards due to one or two very
1:53:52nient sectors, it could cause a
1:53:55significant crash if the fundamental
1:53:58trust in the industry goes away. Also,
1:54:01if there were significant leverage that
1:54:03were adopted into the market in order to
1:54:06buy into those stocks, the power of the
1:54:08deleveraging and the speed of the
1:54:10deleveraging may not be able to be
1:54:12caught up with the Fed which is also
1:54:15decreasing the interest rate at the same
1:54:17time. So basically what I mean is if
1:54:19there's too much leverage which is
1:54:21concentrated in a few sectors which is
1:54:24not generating meaningful earnings which
1:54:26basically breaks the trust within
1:54:27everybody's mind the deleveraging may
1:54:30take place in a manner which the Fed
1:54:34cannot intervene to stop the market
1:54:37psychology from fundamentally breaking.
1:54:40So from 2000 to 2001 was a
1:54:44representative period when the VEX was
1:54:47obviously spiking high and the Fed was
1:54:49aggressively cutting the rates from
1:54:52January 2021 and the Fed was cutting the
1:54:55interest rate from almost 6.5% to 1.75%.
1:54:59The margin debt plunged from almost $300
1:55:03billion to 140 billion. So basically
1:55:06what happened was the clear leaders
1:55:08posted catastrophic earnings misses
1:55:11which fundamentally broke the trust in
1:55:13everybody's mind. So the deleveraging
1:55:15happened so fast that the Fed decreasing
1:55:18the interest rate was not playing any
1:55:22role in the market. The Fed just had to
1:55:24watch the market crash and there was
1:55:26nothing they could do. Now the
1:55:28fundamental reason this happens is as I
1:55:30explained in my is AI a bubble video
1:55:33companies like Cisco saw micros
1:55:35systemystems and Yahoo saw revenue
1:55:36growth evaporate rate cuts couldn't save
1:55:39the companies trading at 150 times price
1:55:42to earnings with deteriorating cash
1:55:44flows. So if there was a huge bubble in
1:55:47the market which is which has gone out
1:55:50of the fat's control this may cause a
1:55:53systemic imbalance which even when the
1:55:56five conditions are met the market would
1:55:59still be on a freeall. Now the second
1:56:01example I want to give you is the
1:56:03accounting scandals in 2002. So this is
1:56:06when the trust collapses. So basically
1:56:09so during that period all the five boxes
1:56:11were checked out. For example the VIX
1:56:13was at over 40. The Fed was at 1.75% so
1:56:17they were not on an upward trajectory
1:56:19with the interest rate and the margin
1:56:21was dissipating and there were a clear
1:56:24sector leaders including the financials
1:56:26and telecoms which were reporting strong
1:56:28earnings. However, when the market found
1:56:30out that the earnings were literally
1:56:32fabricated the system the market
1:56:35panicked to the extent where no one
1:56:37could save the market. The systemic
1:56:39fraud of Enron, Worldcom and Tao
1:56:41basically broke investors trust in SEC
1:56:44filings. So if you cannot trust the
1:56:48fifth metric which is the strong
1:56:49earnings growth, the model is void. So
1:56:52basically the market sank to lower lows
1:56:54until October 2002 which which means
1:56:57that the market was on a freeall for
1:56:59almost half a year. Now the other
1:57:01example I want to give you is the great
1:57:02financial crisis in 2008. So basically
1:57:06this was an ultimate systemic liquidity
1:57:09failure. So all five boxes were checked
1:57:12out in March 2008. But that also created
1:57:16a massive bull trap. So if you break
1:57:19down the metrics, the VIX basically
1:57:21skyrocketed. The FET was aggressively
1:57:23cutting the rates. The margin debt was
1:57:25unwinding. Energy and basic materials
1:57:27were the undisputed market leaders. And
1:57:30Exmo Mobile was printing record
1:57:31expectation beating profits. However,
1:57:34this also caused a systemic failure
1:57:36because the commercial banking systems
1:57:39toxic MBS hadn't fully detonated even
1:57:42though the Fed cut rates bank stop
1:57:44lending to each other. If the
1:57:46interbanking lending system fails,
1:57:48there's going to be a huge liquidity as
1:57:51as well as a credit crunch in the market
1:57:53which could basically freeze everything.
1:57:55And when everything is frozen and
1:57:57there's no credit in the market, even if
1:58:00the Fed continuously injects money and
1:58:02gives message to the whole world that
1:58:04everything's going to be okay, nothing
1:58:06works because no one is willing to lend
1:58:09the money to each other. So when there's
1:58:11a credit crunch and a significant
1:58:13failure of derivatives or off the book
1:58:16securities which nobody knew about or
1:58:20not everybody knew about this could
1:58:22cause a huge systemic failure which
1:58:25could ultimately impact the market to a
1:58:28near irreoverable level. Now the other
1:58:30example I want to give you is 2022. So
1:58:33back in 2022 this was a trap which the
1:58:36Fed set themselves. So basically the
1:58:39inflation was skyrocketing but the Fed
1:58:41has been telling the market that this is
1:58:43a transitory inflation for almost a year
1:58:46which basically gave a very limited time
1:58:49for the Fed to react to the inflation
1:58:51itself which ended up lingering in the
1:58:53market for such a long time. So when the
1:58:56Fed gives a wrong message to the market
1:58:58on a very significantly important data
1:59:01this could lead to a longlasting fall in
1:59:05the market just like what happened in
1:59:062022. So in order to avoid the 15 to 20%
1:59:09chance of falling into the bull trap, we
1:59:12also need to monitor a few more things.
1:59:14Number one, the ultimate thing that we
1:59:16need to monitor is the credit in the
1:59:18market. What I mean by credit is
1:59:21measured through a thing called a credit
1:59:23spread, i.e. the Bank of America US high
1:59:26yield index spread. Now what this is is
1:59:29the extra premium of the yield which the
1:59:32smaller companies or junkrated
1:59:34corporations must pay over the US
1:59:37treasuries risk-f free yield to borrow
1:59:39money. For example, if there's a huge
1:59:42company which is making so much money
1:59:44which which doesn't even need to borrow
1:59:45any money. If this company goes to the
1:59:47bank and tries to borrow the money, this
1:59:49company should be able to borrow at a
1:59:50very low rate. However, if there's a
1:59:52small corporation which wants to borrow
1:59:54money, if this company which is not
1:59:57performing that well goes to the bank,
1:59:59this company will have to pay a huge
2:00:01interest rate. Now the gap between this
2:00:04huge company's interest rate and the
2:00:06small corporation's interest rate which
2:00:08which both of them pay is the gap which
2:00:11we need to monitor and that is measured
2:00:14through a thing called a credit spread.
2:00:16Now generally this credit spread can go
2:00:19up to almost 8 to 10%. Basically the
2:00:23small corporations with junk ratings can
2:00:25pay almost 8 to 10% premium versus the
2:00:28risk-free rate. However, when there's a
2:00:30credit crunch, what happens is these
2:00:33junk companies has to pay 15% or 20%
2:00:38premium versus the risk-free rate. which
2:00:40basically means that all these smaller
2:00:42companies are on the verge of going
2:00:43bankrupt because they're being squeezed
2:00:45with the high interest rate. Now when
2:00:48there's less credit in the market and
2:00:49when the market is suffering from a
2:00:51credit freeze, these companies will not
2:00:54be able to borrow money and all these
2:00:56companies will go bankrupt which means
2:00:58that there will be a lot more
2:00:59unemployment which would lead to a less
2:01:02active economic activity which could
2:01:04lead to a unfavorable macroeconomic data
2:01:07which could lead to a further drop in
2:01:09the market. So this is a metric that we
2:01:12need to monitor. Now to give you an
2:01:14example back in 2020 after the COVID era
2:01:16when the Fed acted very fast to decrease
2:01:19the interest rate to almost zero and
2:01:22started pouring liquidity into the
2:01:24market. This spread despite the economic
2:01:28challenge which the whole world was
2:01:29facing because of so much liquidity in
2:01:31the market. Even these junk rated
2:01:33companies were able to borrow money at a
2:01:35very low rate. So basically how the Fed
2:01:39acts in response to certain economic
2:01:42challenges that they face could impact
2:01:44the market's liquidity which could in
2:01:46turn also impact the credit situation in
2:01:49the market. But there are certain
2:01:51circumstances as I said in my previous
2:01:53examples where even if the Fed is
2:01:56injecting liquidity and lowering the
2:01:57interest rate, there could be cases
2:01:59where the systemic imbalance is so huge
2:02:01that even the Fed's actions cannot save
2:02:03the market. So those are the situations
2:02:05where we need to look out for by
2:02:08monitoring the credit spreads and also
2:02:10the second thing that we need to monitor
2:02:11is the inflation. Now one thing I'll say
2:02:14is that the five metric strategy works
2:02:18when the Fed is actively involved in the
2:02:20market. Basically the Fed is trying to
2:02:22decrease the interest rate and they're
2:02:24trying to inject as much liquidity as
2:02:26they can into the market. That is the
2:02:28fundamental basis of the market
2:02:29rebounding. If the Fed doesn't do
2:02:31anything, we could go back to the Great
2:02:33Depression era when there was so much
2:02:35deleveraging happening in the market.
2:02:37But if the Fed does nothing, the market
2:02:39will just continue to go down and down
2:02:41and down leading to a decades of uh
2:02:45economic depression. So the fundamental
2:02:48assumption here is that Fed is going to
2:02:50be actively involved in the market to
2:02:51save the market's credit. However, when
2:02:55the inflation is high, there's nothing
2:02:57the Fed can do. One example is back in
2:03:001973 when the Fed had to just watch the
2:03:03stock market crash almost 50% because of
2:03:06the OPAC oil embargo forced them to
2:03:09prioritize fighting inflation over
2:03:11saving asset prices. Now under those
2:03:13situations we need to monitor what the
2:03:16Fed's primary mandate is number one
2:03:18lowering the unemployment rate and
2:03:20number two keeping the inflation low. So
2:03:22under a situation when the inflation
2:03:24rate is so high that there's no actions
2:03:27which the Fed can take this whole model
2:03:29just becomes broken. Now if we apply
2:03:32that to the current world basically the
2:03:34CPI on an Y y basis is currently at
2:03:37about 3.3% which is extremely high. Now,
2:03:40that's why I've been telling you that
2:03:42this inflation needs to come down very
2:03:44quickly to below 2.5% in order for the
2:03:47Fed to have a lot more room to take
2:03:50actions when there is a systemic or
2:03:53credit crunch. Now, the third thing that
2:03:55we need to monitor is obviously as I've
2:03:57mentioned in my previous example,
2:03:59whether there are any fraud in relation
2:04:01to the accounting standards. Now when
2:04:03there is a distrust of the accounting
2:04:05which is basically the language of
2:04:07finance and the accounting from the
2:04:10investors everything breaks. Now the
2:04:13contagion of fabricated financial
2:04:15reporting among top tier publicly traded
2:04:17companies may lead to a catastrophic
2:04:19disposal of all the assets in the stock
2:04:22market which nobody can stop. Even the
2:04:24Fed even if they inject liquidity into
2:04:27the market, people may think that the
2:04:29Fed's action of injecting liquidity is
2:04:32also a fraud. So this fine balance of
2:04:36trust between the market and the
2:04:37institutions and the corporates needs to
2:04:40be maintained very clean at all times.
2:04:43Okay. So today I gave you some very
2:04:45simplified version of how to succeed in
2:04:48the market. So those five metrics are
2:04:49the primary metrics which I would like
2:04:51you to monitor in order to succeed in
2:04:53investing. But obviously as I said at
2:04:56the start of the video, please go back
2:04:58and watch my three other videos as well
2:04:59very carefully in order to get a better
2:05:02understanding about investing. I hope
2:05:04you enjoyed the video and I'll be back
2:05:06with more videos very soon. Okay, so
2:05:08that wraps up everything I wanted to
2:05:09cover in this compilation video. As you
2:05:11may have felt from all the videos,
2:05:14there's no single rule to succeed in
2:05:16investing. I sincerely hope you
2:05:18thoroughly watch and study everything I
2:05:20laid out in this video and come up with
2:05:22an investment strategy which would work
2:05:24for you. After all, everyone has
2:05:26different personalities and life
2:05:27principles which makes it impossible for
2:05:29someone to force a single strategy that
2:05:32would work for everyone. So, I just hope
2:05:34this video at least helped everyone
2:05:36watching to some degree. And also, thank
2:05:39you guys for watching throughout the
2:05:40long video. I'll be back with more
2:05:42videos very

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