Geopolitics & Markets: Navigating the Waves with Value Investing

Hello investors!

The intricate dance of geopolitics often leaves its footprints on the global markets. Today, we'll delve into understanding its impact and how seasoned value investors like Warren Buffett approach such scenarios.

In todays letter

• Learning: Geopolitics & Markets: Navigating the Waves with Value Investing

• Learning: Understanding Fully Diluted Valuation (FDV) in Cryptocurrencies

• News insights

  • Banking Jitters & Rising Rates: This Week's US Economy Roundup

  • UK's July Dip: Service Sector Drags Economy Down 0.5%

  • UAE's Boom Beyond Oil: OPEC Credits Non-Oil Surge

• Key takeaways from Book Talk with Bruce Greenwald

Geopolitics & Markets: Navigating the Waves with Value

Geopolitics refers to the study of the effects of geography (human and physical) on international politics and international relations. It's a field of study that seeks to understand the interplay between politics and territory, both at the national and international levels.

Geopolitics and Value Investing
Value investors, by their very nature, focus on intrinsic value and long-term growth. They believe that while geopolitical events can cause short-term volatility, they rarely impact the long-term intrinsic value of a well-run company. Warren Buffett, for instance, often emphasizes the importance of focusing on a company's fundamentals rather than getting swayed by transient external events.

Case Study: The 1990 Gulf War and its Impact on Global Markets

In August 1990, a significant geopolitical event rocked the world: Iraq, under the leadership of Saddam Hussein, invaded its neighboring country, Kuwait. This invasion led to international condemnation and eventually sparked the Gulf War when a coalition of countries intervened to expel Iraqi forces from Kuwait.

Immediate Market Reaction
The immediate response in the global stock markets was negative. The uncertainty surrounding the situation, potential oil supply disruptions, and the broader implications for Middle Eastern stability sent stock markets into a downturn. Investors were fearful about the potential escalation and the economic implications of the conflict.

Coca-Cola's Journey Through the Turmoil
Amidst this global panic, companies with strong fundamentals showcased their resilience. Coca-Cola, a global beverage giant, serves as a prime example. Despite the initial dip in its share price due to the widespread market panic, Coca-Cola's robust business model and its diversified global presence ensured that its fundamental value remained intact.

While many investors were selling off stocks, those who believed in the long-term prospects of companies like Coca-Cola held onto their shares or even increased their positions. Their faith was not misplaced. Over the subsequent year, as the dust settled and the geopolitical situation stabilized, Coca-Cola's stock not only recovered from the initial dip but also witnessed significant growth. By the end of the following year, its share price had increased by more than 60%.

Key Takeaway
The Gulf War case study underscores the importance of distinguishing between a company's temporary stock price movements and its underlying value. Short-term market reactions, often driven by fear and uncertainty, can present opportunities for discerning investors to capitalize on. Companies with strong fundamentals, like Coca-Cola, can weather geopolitical storms and emerge stronger on the other side.

Another 5 Key Analytical Points
When navigating through geopolitical uncertainties, consider these points:

1. Intrinsic Value: Always focus on the intrinsic value of a company rather than its current market price.

2. Management Quality: A competent management team is more likely to steer a company successfully through geopolitical turmoil.

3. Diversification: Diversifying your investments can shield you from regional geopolitical risks.

4. Long-term Vision: Short-term geopolitical events are less likely to affect long-term company performance.

5. Stay Informed: Regularly update yourself on global events but differentiate between noise and impactful news.

Historical Example
In 2014, Russia annexed Crimea, leading to sanctions from the West and a drop in the Russian stock market. However, companies like Gazprom, which had strong fundamentals, witnessed their stock prices recover and even grow in the subsequent years. Investors who had a long-term perspective and didn’t panic during the initial downturn reaped significant benefits.

The bottom line
Geopolitical events, while impactful in the short term, often become mere blips in the long-term journey of a strong company. As Charlie Munger once said, "All intelligent investing is value investing." So, as value investors, our task is to remain steadfast, focus on fundamentals, and trust in the resilience of our investments.

Decoding the Enigma: Understanding Fully Diluted Valuation (FDV) in Cryptocurrencies

In the ever-evolving landscape of cryptocurrencies, the concept of Fully Diluted Valuation (FDV) has emerged as a crucial metric for investors. This article aims to demystify FDV, offering a comprehensive guide to its implications, calculations, and significance in the crypto world.

The Essentials

Fully Diluted Valuation (FDV) is a metric that estimates the market value of a cryptocurrency, assuming all tokens are in circulation.

The Mechanics

FDV is calculated by multiplying the maximum supply of tokens by their current price.

Pros and Pitfalls

While FDV can offer a more accurate representation of a project's value, it's not without its limitations, such as not accounting for future developments or market conditions.

Addressing Popular Questions

• Is FDV a reliable metric for crypto valuation? Generally, yes, but it should be used in conjunction with other metrics.

• How does FDV impact token price? A high FDV can indicate overvaluation, while a low FDV suggests undervaluation.

• What differentiates FDV from market cap? Market cap focuses on current valuation, whereas FDV considers future token releases.

An In-Depth Look at FDV in Cryptocurrencies:

FDV isn't just a straightforward tool for valuation; it's a lens through which to view the future prospects of a crypto project. It provides insights into inflationary or deflationary tokenomics, helping investors make informed decisions.

Why FDV Matters

FDV serves as a barometer for assessing a project's long-term viability and potential for growth. It can be particularly useful for projects that have a significant portion of their tokens yet to be released.

The Investor's Compass to FDV

In the intricate world of crypto, FDV stands as a pivotal metric. Here's your essential guide:

Deciphering FDV

Think of it as a forward-looking metric that offers a glimpse into a project's future valuation, taking into account all tokens—both circulating and yet to be released.

The Calculation Unveiled

To calculate FDV, you need to multiply the maximum supply of tokens by their current price. This gives you an estimate of the project's value, assuming all tokens were in circulation.

What Catches the Investor's Eye

The ability to assess a project's long-term value and the potential for high returns make FDV an indispensable tool for crypto investors.

Concluding Insights

Understanding Fully Diluted Valuation is vital for anyone looking to make informed investment decisions in the crypto space. While FDV offers a valuable perspective, it's essential to consider other factors like market trends, project development, and overall market conditions. As always, the more you know, the better your investment choices will be. Equip yourself with the right resources, consult experts, and navigate the crypto market with confidence.

News insights

Banking Jitters & Rising Rates: This Week's US Economy Roundup

US regulators have taken over First Republic Bank due to its financial instability, marking the largest US bank failure since the 2008 financial crisis. Additionally, the US Federal Reserve and European Central Bank (ECB) have both raised interest rates, with the US suggesting this might be their last hike for a while, but the ECB indicating more increases are probable.

[📝Full article]

Key takeaway

The recent takeover of First Republic Bank, coupled with rising interest rates, may signal potential turbulence in the banking sector, suggesting investors exercise caution with regional US banks. Given the uncertainty in the interest rate direction, diversification across geographies and sectors may be prudent to mitigate potential risks.

UK's July Dip: Service Sector Drags Economy Down 0.5%

The UK economy experienced an unexpected contraction of 0.5% in July, primarily due to a decline in service sector output. Recent indicators, including the contraction of the UK Services PMI, suggest potential further economic downturns in August.

[📝Full article]

Key takeaway

The contraction in the UK economy, especially within the service sector which accounts for 80% of the UK's economy, indicates a weakening macroeconomic environment. Investors should monitor the upcoming economic indicators and consider the potential implications for the GBP/USD exchange rate and the broader financial landscape.

UAE's Boom Beyond Oil: OPEC Credits Non-Oil Surge

The UAE's economy has witnessed a 3.8% growth in the first quarter of 2023, with OPEC predicting continued expansion for the remainder of the year. Key sectors driving this growth include transportation and storage, construction, and accommodation and food services, with travel and tourism particularly notable as the number of international visitors to the UAE is projected to rise by 40% this year, surpassing 2019 levels by 17%.

[📝Full article]

Key takeaway

The resurgence of non-oil sectors, especially transportation, construction, and tourism, indicates a diversifying UAE economy, making it potentially more resilient to oil price fluctuations. For investors, this growth in diverse sectors suggests opportunities for diversified investments within the UAE, especially in the thriving tourism and construction sectors, but they should keep an eye on the country's monetary policy in relation to the US Federal Reserve's interest rate decisions.

Key takeaways from Book Talk with Bruce Greenwald

Here are the key takeaways from the video:

1. Value Investing Evolution: The conversation revolves around the publication of the second edition of Bruce Greenwald's value investing textbook. The discussion emphasizes the evolution of value investing from its inception with Graham and Dodd to its current state.

2. Timing of Publication: The second edition of the book was released during a time when many believed value investing was no longer relevant, similar to when the first edition was released during the peak of the telecom bubble in 1999. This timing showcases the resilience and adaptability of value investing principles.

3. Franchise Investing: The conversation highlights the shift in value investing from focusing solely on assets to considering franchise investing. This involves investing in companies with sustainable competitive advantages or "moats" that protect them from competition.

4. Importance of Understanding Growth: Traditional value investing, as conceived by Graham and Dodd, didn't focus on growth. However, in the current economic landscape, understanding the value of growth and how it impacts valuation is crucial. This is especially true for franchise businesses where growth can add significant value due to barriers to entry.

5. Measuring a Moat: A significant part of the discussion revolves around the concept of a "moat" or a sustainable competitive advantage. Two critical elements define a moat: the minimum viable market share an entrant needs to achieve to compete and the difficulty of achieving that market share. This involves understanding economies of scale and customer captivity.

[🎥Full video]

Stay informed, stay invested, and most importantly, stay calm. Till the next time.