A 'Break' Is Good for the Soul and Maybe Your Portfolio

The nonsense in the media... The difference between an 'investment' and a 'speculation'... We never believed the 'transitory' story... The ridiculously overlooked part of the 'Great Resignation'... A 'break' is good for the soul and maybe your portfolio...

'But it's not real'...

My wife kept repeating the phrase "but it's not real" as I (Corey McLaughlin) read the details of a mainstream financial news article a few weeks ago...

You may have seen the December 10 headline and story I'm talking about...

I don't know if we have that many Sex in the City diehards in the crowd here, so here's a quick summary and spoiler...

This article, from CNBC, was saying that shares of at-home, exercise-bike company Peloton (PTON) were essentially selling off big-time – roughly 15% over two days – because Mr. Big, a character from the HBO series, was portrayed as dying from a heart attack following a workout on one of its bikes during a newly released episode of the show.

If that makes you interested in more detail, our colleagues at Empire Financial Research chronicled the tale quite well right here.

But the point I want to make is what all married men should probably admit more often... whether it's true or not. My wife was right, of course.

It was not real...

The HBO show was not real... and the headline – while entertaining – shouldn't have been either, or at least prominently placed as one of the top global financial stories of that morning...

The idea that Peloton shares were dropping in response to a portrayal on a fictional show, even if somewhat true at best, was grossly overstated and certainly click-bait... that worked on me, only because I knew my wife was watching the HBO show the day before.

"People are doing what?" my wife said, referring to the part of the story that said shares were dropping because of the show...

She doesn't really follow the markets at all, just the type of person who would believe with certainty what she was hearing from me in this case.

I told her Peloton shares had rightly been in trouble long before Sex and the City came back into our lives.

And I thought to myself, this is the downside of speculation... if shares were really dropping because of the episode, that is.

In fact, Peloton shares had already dropped roughly 60% this year before Mr. Big's passing...

I'll acknowledge that the notable scene does highlight the "image issues" Peloton has right now... but only because it had underlying problems beforehand.

As our Dan Ferris detailed in the November 12 Digest...

Peloton soared 758% from March 2020 through its January 2021 peak... COVID-19 pandemic lockdowns prevented folks from going out of their houses to their local gyms, which caused sales of exercise equipment to skyrocket.

That's mostly behind us now, though...

Peloton's stock peaked at more than $167 per share in January... And it already had fallen to about $86 per share on November 4, when the company filed its latest quarterly earnings report.

At the root of the negative sentiment around Peloton are shrinking profits due to good ole' boring supply-and-demand factors. As Berna Barshay of Empire Financial Research wrote earlier this month, noting more about the company's balance sheet and forward guidance...

Peloton lowered its full-year revenue outlook for 2022 to a range of $4.4 to $4.8 billion, at the midpoint a 15% haircut to the $5.4 billion it had guided to just 10 weeks earlier.

Every other metric was guided worse as well. The adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") loss was raised to a range of $425 to $475 million from $325 to $350 million previously. Gross margin guidance was lowered as well to 32% from 34%. Essentially, Peloton warned investors to expect bigger losses on lower revenues. Not good.

While the number of Peloton subscribers continued to climb, the number of equipment buyers plummeted.

With Peloton's signature bikes priced at $1,495 to $2,495 versus subscriptions costing just $468 per year, billed at $39 per month, there was no way that revenue growth wasn't going to slow here. With the world reopening, gyms available, people spending less time at home... if you wanted a Peloton bike or tread, why wouldn't you have ordered one earlier in the pandemic?

The pearl of wisdom here is that the downside unfolding now in Peloton is just as speculative as the upside the company's stock price enjoyed when it rose by 8 times in 2020, when the company became a "work from home" darling...

It's the same story with video-conferencing company Zoom (ZM)... whose shares are down 65% from its all-time high in October 2020.

Bad timing happens in bad circumstances...

This story might have been a charming piece of free PR for Peloton during its boom times in 2020... And maybe the media would have been credited for boosting its stock price... Instead, it sent the company into "damage control" mode in 2021...

After the HBO episode made its splash, the Peloton brain trust rushed to publish an ad online featuring the Mr. Big actor, Chris Noth, showing he was alive and well... and, in fact, dating a Peloton instructor.

Funny... Until a few days later, when the company had to pull the ad due to sexual assault allegations against Noth... I can't make this stuff up.

Generally speaking, as an investor, this is all much ado about nothing – there are plenty of other stocks we'd rather own than Peloton... besides if a stock falls this much based on a headline, it likely did not have long-term staying power to begin with.

As a speculator, though, concerned only with price, this fleeting kind of stuff matters more than you likely want...

And this is why it's critical to understand the difference between an 'investment' and a 'speculation'...

As Dan wrote on November 12...

Investment returns come from the intrinsic earnings power of an asset...

In stocks, that means the (hopefully growing) earnings power of the business. Bond returns come from the debt-repayment capacity of a business. Rental-property returns come from the supply and demand fundamentals of the local property market versus the cost of owning and maintaining the property.

A true investor stays invested based on the fundamentals of the business, not the action of the company's stock price.

Meanwhile, speculation returns simply come from selling an asset at a higher price than the speculator initially paid... Most speculators will exit a position based solely on the price movement, regardless of underlying fundamentals.

I also like to think of this as the difference between "buying a stock" and "shares of a company." It might sound like the same thing to you, but to me there's often a difference...

When most people talk simply about "buying a stock" what they really are doing most of the time is hoping the price will go up.

When an investor frames the same move as buying a piece of a company, they are thinking of it as essentially investing money in an entity with the idea that the company will repay shareholders accordingly down the road.

I'm not going to say there is no room in life for some speculating. It's just that you should be aware that speculating is what you are doing... and know what each position in your portfolio really is ‒ a speculation or an investment.

If you were bullish on Peloton this year, you were speculating. Because the fundamentals were, and still are, bearish.

Case in point...

A few days after Dan's November 12 Digest, Peloton sold 24 million of its own shares to raise $1.1 billion to shore up its cash flow...

That story generated fewer headlines, but it tells us more about the company's fundamentals and legitimacy as a long-term investment than anything else.

Which brings me to the point of revisiting this weeks-old story... Be wary, or at the very least, discerning, about what you read in the mainstream financial media...

And, most important, think about what the headlines and words really mean or don't mean to you and your portfolio...

This is one of the takeaways of my eight-week sabbatical of sorts...

As I mentioned in the bottom of the October 21 Digest, my wife was due with our second child... and he arrived shortly thereafter. Thankfully, Stansberry Research has a generous time-off policy, now called "bonding leave," and I took it.

Two months later, everyone in our home is healthy, which is what matters most to me... I could go on about being a new dad again... and what having two young kids is like versus what I expected, but this is not the time or place.

I also can't just not write for two months and pop on back into the Digest like nothing significant happened. I need to make a few first-person observations that I hope apply to our little operation here and that I think relate to investing in general.

First off, I was out of my daily routine – had nary a work commitment and plenty of other stuff to do with the new kid and family – yet it still took me two to three weeks to break my "addiction" to the news and markets...

I kept checking the headlines on my phone... Looked at my own portfolio positions... and bitcoin's price (down, down, and down – for now)... until I didn't. What I mean is, until I realized the ridiculousness of these distractions and did what I should always do...

Ignore the stuff that doesn't really matter to me.

It's hard to do these days when you're bombarded with so much information, but even with two little kids now, and time and sleep at a premium, I feel more refreshed than before.

That is because I took the advice that a lot of our editors preach in these pages in various ways...

If you know your goals and have a plan, you can then act accordingly...

Forget the rest. That's really good advice.

Put simply, checking random headlines and compulsively looking at prices should not have been part of my parental-leave plan...

Those things could wait... and would be there again when I needed them (like today)...

Instead, I thought about why I had constructed my portfolio the way I had in the first place.

There are a lot of long-term positions in quality companies that will undoubtedly grow nicely over the next 10 or 20 years... some inflation protection for the "transitory" times... and a few short-term trades (dare I say speculations!) that whet my appetite for instant gratification.

I can't say I took a complete media "detox," but I cut back to one or two "drinks" per day... and it helped me relax and lower my anxiety levels... and thus, think clearer.

I don't think I missed much either...

If I did, I didn't hear about it.

If anything was important or unfortunately heartbreaking ‒ like the tornadoes that hit Kentucky, Illinois and four other states ‒ I heard about it during the five minutes of overnight news I watched as I fed the baby.

If you're going to watch the news, by the way, the 4 a.m. versions are decent. Even the national broadcasts had no bloviating guests – too early for them, I guess – and are as much "just the facts" as you can get.

Maybe it's the sappy dad in me now, but I felt like I looked at stories with fresh perspective...

We've covered the Peloton one...

When the Omicron variant popped up in the news the day after Thanksgiving, I thought "here we go again"... meaning short-term panic... I paid attention to the details that suggest this variant is more transmissible, but most otherwise healthy and vaccinated people will experience only cold-like symptoms, if anything, from it...

I avoided all the sensational headlines and stories on the topic but realized they were out there when I started getting messages from my older child's school about an impending "spike" in cases about to hit us.

When Chinese tennis star Peng Shuai disappeared from public life very shortly after making allegations against a retired member of the Communist government with close ties to the Chinese president, I thought about how the same thing happened in 2020 to Alibaba founder Jack Ma after he gave a speech criticizing the Chinese financial establishment...

That tells you a bit about how business is operating in China today.

'Tis but a hump...

When I saw this video from European Central Bank president Christine Lagarde, who described inflation as a "hump," I laughed with disappointment...

After decades of easy-money policies from the world's largest central banks that made dollars and euros less valuable every day, Lagarde was now talking about standing up for the "little guy."

Here's what she said...

I see an inflation profile, which looks like a hump. So it has clearly increased over the last three quarters. And we know how painful it is. We know that life is a little more expensive as a result, particularly for those people who have low income and who are more exposed to prices rising, particularly when, you know, you fill up the tank.

When's the last time Christine Lagarde, you know, filled up a tank? I can't imagine very recently. She continued...

But we see it as a hump and a hump eventually declines – and this is what we project for 2022, that inflation will decline over the course of 2022.

Just like, they said, inflation wouldn't be a significant thing for very long in 2021...

Similarly, the Federal Reserve this time last year projected inflation of 1.8% for this year, according to its preferred gauge. That was wrong, with that measure checking in most recently at a 5% year-over-year rise in October.

Good thing we never believed the "transitory" story anyway.

Either the Fed was sand-bagging everyone (entirely possible) or they just were that bad at seeing the obvious (also possible).

Either is not good. In a world where a Reddit-fueled short-squeeze can cost a Wall Street firm billions of dollars in a few weeks, the Fed is still using admittedly "blunt" tools on a months-long lag in some cases.

Having a months-long lag doesn't help when Amazon (AMZN) or Walmart (WMT) or Costco (COST) can ship things to your door in a day from one of their warehouses. It's time for the Fed to use some new tools.

Another striking item that was ridiculously overlooked was the 'Great Resignation'...

This is the label that refers to workers quitting their jobs across the country – because they can afford to do so with stimulus money and demand for workers strong...

There are all kinds of theories about why this is happening, but while I was "away," I realized that a key part of the story has been ridiculously overlooked...

In short, the "great resignation" might be better described as the 'great retirement'...

CNN published a story debunking the common narrative...

Last month, there were 3.6 million more Americans who had left the labor force and said they didn't want a job compared with November 2019, says Aaron Sojourner, a labor economist and professor at the University of Minnesota's Carlson School of Management.

Older Americans, age 55 and up, accounted for whopping 90% of that increase.

"I think a lot of the narratives imagine prime-age workers as being missing, but it actually skews much older," Sojourner told CNN Business.

Nearly 70% of the 5 million people who left the labor force during the pandemic are older than 55, according to researchers from Goldman Sachs, and many of them aren't looking to return.

Are you one of them? Let us know at feedback@stansberryresearch.com.

Wrapping up, if you take nothing else from today's Digest, take these ideas...

I hope they help in your investing or any part of life... Taking a "break" certainly helped me these last few weeks.

1. Consider cutting back on your information consumption. I realize this is hypocritical and potentially self-debilitating considering the daily nature of our business here, but hopefully we make the "cut."

If you use a smartphone, it's easy to track the time you spend reading news... by looking at how much time you spend on various apps or websites. On the iPhone, you can find this information in Settings under "Screen Time."

If you can't just avoid the apps on your own, there's computer software that will allow you to create settings that prevent you from visiting certain websites or limit the amount of time you spend on them... It's like keeping the alcohol out of the fridge if you don't want to drink.

2. Filter out the stuff that doesn't matter... and align the information you do consume with what matters to you.

This is useful not just for the result, but because this exercise simply makes you think about what's important to you... Why do you own XYZ stock in the first place? Is it because you think Peloton is impervious to fictional portrayals of its product?

Probably not, so ignore that story.

Or do you own certain stocks in companies – which sell in-demand and (also) addictive products, like Starbucks (SBUX) – that can afford to raise their prices in line with inflation and pass their good fortune on to shareholders?

If you're a longtime reader or you've been with us for any length of time, hopefully this is the case for you.

3. Even if you do the first two things, be discerning about what you read or watch.

When reading something, particularly about a company or trend, really think about what it means. Does it change my long-term thinking about this company?

I might be preaching to the choir here... and I hope I am. I know a lot of readers have much more life experience than I do and that many of you ignore all that nonsense already...

And judging from our mailbag, it seems hardly anyone knew I was gone, which is humbling and also great ‒ meaning that Dan Ferris, Kim Iskyan, and the rest of our crew kept things rolling and thought-provoking while I was out.

But I couldn't "come back" without saying at least a little about what I learned, or was reminded about, by taking a few steps away from the daily routine that we so easily got ourselves into.

A forced "break" can be good for the soul... and maybe for your portfolio.

New 52-week highs (as of 12/20/21): Cerner (CERN) and Nestlé (NSRGY).

In today's mailbag, an argument that this time really is different... at least when it comes to bitcoin. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"In [Monday's] Digest you ran a letter from Paul Y. that concluded with the lines, 'Then it's back to fundamentals again. And the tried and true.' I congratulate Paul Y. for leaving bitcoin off his list [tulip bulbs, Florida real estate, the roaring '20s, the Nifty Fifty, the tech bubble of the 1990s, etc.], although I'm sure many readers would have thought it should be there, especially when they see the counterpoint is 'fundamentals.'

"I'd like to take a minute to explain why I think 'this time is different.' This time, I'm buying bitcoin because of the fundamentals. When I buy a share of stock, there is an entire company between me and my money. A board of directors that never says, 'let's ask Alex what he wants to do,' a CEO that never calls and never checks in with me to see if my portion of the business is being run the way I want them to run it. I basically have to trust strangers to do the right thing. I can look at the fundamentals for Apple and think it is a good investment, or Tesla and think it's not, but I really am just buying someone else's shares, so I am in the group of people who are hoping someone else later buys our shares.

"A circuit breaker kicks in and there is no sale.

"The company turns out to be a fraud, and there is no sale.

"A judge points the income stream at the employees, as happened with General Maritime, blowing out the equity AND bond holders, and there's no sale.

"But what about the fundamentals of bitcoin? The fundamentals are so basic that they look like nothing to most people. But the ability to exchange value, as represented in telling my broker to sell a share, during bankers' hours, a couple hundred days per year, is a liability to the equity of a publicly traded company that limits the value of that company in a way that bitcoin is not limited.

"Bitcoin has other limits, to be sure, but the basic premise of bitcoin – peer-to-peer exchange of value – has a value to me that is extraordinarily fundamental, and different this time. If I say 'I'm not buying Tesla because I can't calculate the value of the shares,' a fellow investor might think I'm smart. If you say, 'I'm not buying bitcoin because it has no fundamental value' I would merely try to help you understand that it has value to me. And as long as it has value to any other human, then we are, to paraphrase Winston Churchill, 'entering negotiations.' Nothing more, nothing less. What is more fundamental than that?

"If you say my Emperor has no clothes, I say your Emperor has on a ridiculous powdered wig to gain some credibility that seems quaint to me." – Paid-up subscriber Alex W.

All the best,

Corey McLaughlin
Baltimore, Maryland
December 21, 2021