Why I Went From Tech To Commodities And You Should Too (Part 1)

This article is part 1 of a 2 part series. I’m eager to discuss my points of view, positive and negative in the comments section. Part 2 of this series comes out on Wednesday.

The Background

The situation in Ukraine has meaningfully complicated the investment landscape. I felt that everything would be OK and that my stocks would bounce back from this dip. However, I no longer believe this to be the case.

Further complicating the setup, I’d been way too bullish on my portfolio. I believed that inflation would come under control and that given that the consumers’ personal balance sheets are strong, this would lead to high-quality companies with strong positions being able to weather the storm.

Indeed, this is the thesis that I’ve had for more than 12 months. Meanwhile, in the past year, I’ve seen so much data that I didn’t put enough emphasis on. I’d noticed that they were plenty of supply shortages brought out about by COVID, and I didn’t believe they would impact my businesses.

Then, the impact of Ukraine’s invasion, not to mention Russian sanctions, together, now leads me to believe that the market is going to enter a new phase.

As someone said in my Marketplace so eloquently, the rules always change. Indeed, that’s true.

And I had been in denial. In a serious amount of denial. Every time I tried to be as transparent as possible with the facts that I had in front of me. Even if the market was pushing me back.

Incidentally, as one of my Marketplace members wrote to me over the weekend and put in very clear terms, sometimes we’re in a retail shop and our queue is moving slowly, but the other queue is moving fast.

And we’re afraid to swap queues because we believe that if we swap queues that will be the moment when our queue speeds up. So we stay in our queue getting more and more frustrated.

Same with my portfolio. As frustrated as I was, I believed that at the time, I couldn’t swap my portfolio. That everything I had was so cheap and due for a re-rating. If I gave the businesses another 90 days that everything would be OK. I kept saying, just a tiny bit more time.

I tried as much as possible to instill in you this same ethic. Don’t exit your positions because of a bad quarter. Stay the course. Don’t give up. A little more patience. However, it almost feels that this period that we are in with so many sanctions on Russia is like an exclamation on what has been a very long period.

I’ll attempt to layout three different scenarios to help you make your choice:

Option 1: Ignore all the signs and know that tech businesses are the future. Yes, share prices go up and down, but over the long run, including during the next two years, everything will be OK once again. In essence, don’t do anything.

Option 2: Russia comes to an agreement with Ukraine very soon. Everyone cheers. But the problems are then twofold:

• How long will the sanctions remain on Russia? It’s not inconceivable that the sanctions remain in place for a while.
• Also, the supply chain issues are not going to get resolved instantaneously. It’s not like you can print some code and get these supply chain issues resolved. Even if sanctions are removed the problems don’t get resolved straight away. It’s simple physics.

Option 3: We take back control of our situation. We understand that hoping that the portfolio will return to former highs can only come from us taking action. It’s down to us to position ourselves into businesses that have favorable outlooks. We must demand very strong balance sheets, and obviously, seriously cheap valuations.

This is the reality of the situation. It’s nearly inevitable that Europe is going to go into a recession this year.

We know that gas prices are up meaningfully and that this puts a serious hole in consumers’ pockets. Throughout Europe, gas prices are up more than 50% to 100% year-over-year.

You also have to keep in mind that Russia manufactures approximately 20% of the world’s fertilizer. With the cost of fertilizer jumping higher nearly every week, and now Russia’s supply of fertilizer via Belarus being cut off from the world, this further accentuates the shortage of fertilizer in the world.

This means that with gas prices increasing and fertilizer prices higher, this means that prices for foods will go up substantially. Then, you also have to contend with oil prices that have already increased somewhat. What this means for Europeans is that there will be less discretionary household income to spend.

I’ll provide you with one example. Let’s say that individual European consumers have less household income left over each month. Consequently, rather than buying a new iPhone this year, they delay their purchase by a year. How would this impact Apple’s (AAPL) share price?

We can run a similar example through Amazon’s (AMZN) retail business. The consumer tries to shop around a little more and decides that they can wait a few more days for their merchandise delivery and they purchase their chosen merchandise elsewhere. How would this impact Amazon’s near-term growth rates? And is that possibility fully factored into its share price right now?

These two companies are some of the biggest companies in the S&P 500 (SPY). And as you can see it’s very easy to see this first-order ramification.

What To Do?

The problem here is that there are second and third-order ramifications to all this that we can’t even begin to understand.

The problem then is that sometimes something that we didn’t believe to be all that meaningful has a chain reaction that implies considerations nobody gave much weight to before will now become an unavoidable fact.

In this article, I wanted to highlight the thinking behind why I had to change my portfolio. I’ll publish part 2 of this series on Wednesday, with some further actionable thoughts. I’m going to highlight specific sectors from fertilizer, to steel, aluminum, and natural gas, as well as others that are cheaply valued, with very strong balance sheets, and massive share repurchases.

Stay tuned.

Original article appeared on March 14.