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#6 - Are you holding your breath?

Updated: May 4, 2022


Stock Picking after Moat | Invest with Martin

Holding our breath

This week was honestly a bit "slow" compared to the last 2 months. There have been no completely crazy news and the stock market is calmer. Alright the oil price dropped 12%, which in a normal scenario is crazy but at the moment is kind of standard. Given the current situation with the war, new lockdowns in China, still rising inflation, rising interest rates, and so on (I mean.. what the actual??) it seems to be the silence before the storm. I'm not remotely confident that we're out of uncertainty yet. Putin is not to be trusted, and China's continues support/non-support of Russia is looming in the background. Would I invest at the moment? Certainly. It's always good to get into the broader markets, no matter the conditions. If it falls, you can always try to buy a bit more, lowering your own average price. As a reminder to this you could go with the "iShares MSCI ACWI ETF" which tracks 1672 stock in the entire world. In these weird times, where everything seems to be upside down always remember the bigger picture. So here's the S&P500 index (USA's largest stock index) over the last 5 years:



As you can see, we simply did a correction in the last 3 months (as it's so fancily called), meaning we dropped more than 10%.

The big question that remains is if we are going towards a recession, which is where the stock markets are down between 12 to 18 monthspow. That will remain to be seen. That was the update on the stock market. Let's go to the individual stocks and their health.



Spotting a healthy company

Last week we talked about the "moat" of the company, which is the competitive advantage they have. Today we are going to talk about point number 2 of this list:​​​​​​​​​​​​​​​​​​​​

  1. The company needs a competitive advantage called a "moat"

  2. The company needs to be healthy, meaning a low debt

  3. It needs to be performing well and consistently, so we can predict it into the future.

  4. It needs to be better and better at making money for us

  5. The company has to trade for a price that is giving us a huge discount, so we are confident in making money

We took Microsoft as the example last time, so let's look at it again today. You can check all their financial numbers on macrotrends.net. Here you will find their "long term debt" under the "Balance sheet":

They are currently rocking $50 billion in debt, which sounds like a lot of money of course. But when you then go to the "Income Statement" and look for "Net Income" you will see that they made $61 billion in profits in 2021. In other words the debt-to-income ratio is 0.8, so they can pay it off in less than a year, if they really wanted to. A good rule of thumb here, is that it needs to be below 2. This is a super good sign of a healthy company.

Why you might ask? Well when they some day get into some headwind, or unexpected challenges or competition they don't have to deal with a heavy debt as well. Just like if you have low debt in a moment where you will make less money or lose your job, it's just a better economic situation for you to be in. As investors we are looking for this! Remember that when we are buying a stock, we should think about it as buying the whole company. So we ask ourselves "do we want to own a company with high debts?", the answer is "HELL NO!". That was the first two topics on the list:

  1. The company has a competitive advantage, like we talked about last time.

  2. The company has a debt-to-income ratio below 2.

Next time we are going to take a look at how we can check for a well performing and consistent company, so that we can better predict it's future.


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