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#5 - Interest rates and the coffee company

Updated: May 4, 2022

Stock Picking after Moat | Invest with Martin

Interest rate hikes

There’s been a lot of talk about the inflation and interest rates these last two months. What you should know here, is that when inflation goes UP the central bank (FED in US and ECB in EU) can control it by pushing the interest rate UP as well.

So that’s what they’re doing.

The main reason is that interest rates control how expensive it is to loan money. When it gets more expensive, then people can take less or smaller loans, which means they will stop spending as much and as such the demand for a lot of stuff will go down.

It’s the US who mainly controls this, and the other countries follow along including Europe. If you want to take a loan for a house these days, you are probably looking at 2 - 3% interest rather than around 0 - 0,5%.

So that’s the situation we’re in as the FED has to control the inflation, which is just going higher and higher, and will likely continue due to the war. In fact, we have to go back 40 years to see such high inflations.

So in other words, expect still higher prices on your gas, food, cars etc., and more expensive loans on almost everything.

In times like these, historically there have been a few good investment opportunities, that you can see here. I also copied the image here:

Stock picking after moat

Last week I told you about how you should think about stocks, and what you should consider before buying them.

Today I will show you 1 of 5 things that you should look at when buying a stock.

Remember, that when you want to buy a stock you’re not just buying some random “ticket” so you gain money when the stock goes up or down.

You are actually buying a piece of the company, so when you buy 1 share of Microsoft stock you own 0,0000002% (something like that) of Microsoft as a company.

This means that you can think of it, as if you’re buying the entire company. You would do the same if you had to buy 10% of the coffee shop down on the corner, as this helps you make sure it’s a good business.

What do you need to know when buying 10% of a coffee shop?

That they are competitive! That they have a “moat”, like a moat around a castle (the thing with water in it, that goes around the castle, to protect it…)

Let’s keep Microsoft as an example here.

Microsoft has a GREAT moat. They basically “own” every single computer out there, that’s not made by Apple. Why? Well Lenovo, Dell, HP, Acer, etc., are pretty useless machines without Windows running on them. (Linux dudes… I’m sorry).

If you don’t want Apple, then you get Windows. It’s that simple.

On top of that of course they have Office, Xbox, Minecraft, Laptops, Headsets, etc.

Now you might think “what a boring old company Martin”. Yes! But they still grew their income by 38% this year, from 44 to 61 billion. That’s interesting enough for me. And you’re probably using a lot of their products, either at home or at the office.

So that’s the first thing. Moat.

The company you’re looking at needs a competitive advantage, to maintain their position as a market leader and protect them from outside attacks.

Like the coffee shop you want to buy 10% of. Do they have their own secret way of making coffee, that only they can do? Is it their service that is just next-level? Did they create a special kind of cup, that you put the coffee in only at their shop? Do they have the best location in your city?

That was it for today's Stocks on Sunday's newsletter.

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