A disciplined weekly review of the forces shaping risk and return.

Key Points

• Markets are down slightly this week with gold taking the biggest hit.
• The dollar is still relatively strong, showing mean reversion back to 2015 – 2022 levels.
• Visa earnings shows a continuing of strong FCF/Shr growth.

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Markets

• The S&P 500 is down 1.9% from last week
• Gold is down almost 10% this week but still up 168% in the last 5 years.

I’m thinking of changing the columns by removing 6m and 1y and adding YTD and 3y. Let me know what you think.

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Macro

The Dollar Perspective

With all kinds of noise around gold prices and the narrative of a collapsing dollar, I thought it would be a good idea to look at the dollar strength history:

As it turns out, the dollar hasn’t seen these levels since February of 2022. I’m not worried.

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Equities

Visa just announced their earnings this last week. I’m blown away by their ability to increase their Free Cash Flow per Share (FCF/Shr) over time. Here is their FCF/Shr Last Twelve Months (LTM) by quarter:

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Education

Capital Allocation

What does a business do with its profits? This is the question that Capital Allocation answers.

We’ve been chatting about Free Cash Flow for a few weeks now. Now let’s see where it goes:

There are a few ways to organize the pie on the right. For instance, “Acquisitions” could also be considered a reinvestment into the company, but I think this way explains a little better the choices. I also combined “pay down debt” and “increase liquidity” into one: “Build Cash.”

1. Save
   • Build Cash
2. Reinvest
   • Acquisitions
   • Reinvestment (R&D, Capital Expenditures)
3. Give
   • Share Buybacks
   • Dividends

Each of these options have a time and place. Without getting too far into the weeds (yet), and I’ll let two industry giants chime in:

Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.

Warren Buffett

Effective capital allocation . . . requires a certain temperament. To be successful you have to think like an investor, dispassionately and probabilistically, with a certain coolness.

Michael Mauboussin

It’s a good idea to look at the history of capital allocation within a business as one of the prime indicators of overall quality.

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Wealth

The Real Cost of DIY

Why would someone hire a wealth manager when all the information is out there for free? Can’t someone simply look up how “how to manage wealth” and do this themselves?

The answer is, of course. But this is not unlike maintaining and flying your own airplane.

Most people are comfortable working on their little airplanes, flying them, and landing them.

The problem is the cost of seemingly small mistakes as the airplane (your wealth) gets larger and requires more specialization. In a small plane, you can forget to put up the landing gear. In a large plane, this can affect fuel efficiency so much as to create a deadly situation. Also, in a small plane the manual fits in your lap. In a large plane, the manual and all there is to know can easily fill a cockpit.

Know when the cost of a small mistake has the potential to greatly alter your personal financial outcomes.

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Quote of The Week

What the wise man does in the beginning, the fool does in the end.

Howard Marks

No explanation needed. Howard Marks is a legend. His book “The Most Important Thing” is a must-read.

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Michael’s Corner

Mental Models — Thinking Tools and Meta Frameworks

I love mental models, so for the foreseeable future I’ll be talking about them here.

My favorite is Inversion. Popularized by Charlie Munger, inversion is a way to flip a problem on its head.

For investors, it’s flipping the question (and answers) “How do I make sure I succeed my financial goals?”

So, how would I make sure there’s almost zero chance of reaching financial goals?

• Trade the news
• Ignore fear, greed, hope, and ignorance
• Not pay attention to incentive structures
• Have high concentration in one or a few stocks
• Check portfolio every week (or more)
• Make many trades per year
• Assume no blind spots

Have a great weekend.

— Michael

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Disclosures

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