[%QYFv%] callback to my article dated may 2022, we are starting to see commodity traders suffer huge losses as the spot prices of commodities drop, while they are left holding high priced inventory. 

 [%Pxjt%] especially so as a prime example.

@terence775 callback to my article dated may 2022, we are starting to see commodity traders suffer huge losses as the spot prices of commodities drop, while they are left holding high priced inventory. 

 $KLSE-ANNJOO especially so as a prime example.

$ANNJOO / 6556 (ANN JOO RESOURCES BERHAD)

Navigating a High Inflation Environment with Threats of Recession

For some reason, many people did not see inflation coming. It may have been made worse by the war; but high inflation was inevitable and is upon us.

The basis of my thoughts I practise for now are:

1. Covid is causing issues for workforce and supply chain. Palm oil prices and soy bean prices are going through the roof because not enough workers are around to pick and process. Construction and manufacturing labor are also constrained, with plant closures causing havoc on profitability and deliveries. Port closures and congestions at many of the worlds’ most active ports are also straining the inventories of many companies, causing them to stock up for “Just In Case”, instead of “Just in Time”. Somewhat similar to what happened during the glove mania in 2020-2021, the boom in demand was more from stocking up and deferred spending rather than real and sustained demand. (Read: 1918 Spanish Flu, roaring 20s, and the Great Depression of 1930)

2. Bad government policies by trying to "stimulate" the economy with helicopter money instead of targeted response and capital controls will have a huge negative effect in the next 5-10 years.

3. Cash is trash, hold productive assets (and NOT speculative goreng companies).

My overall portfolio guide is to find stocks that are able to compete internationally and be profitable, and buying in sectors that are overlooked by the majority of the market.
 
Basic, tangible, necessities like food, healthcare, additives, make up, plastics, chemicals, fertilizers, cooking oil. 

So how do we pick and buy? The answer is not straightforward...

Short answer: Buy stocks that have their own ecosystem and local input cost. Then the production and R&D is localised and exported out. We need to make sure that the companies can compete overseas and is taking market share internationally. These companies will continue to grow over time. The shares price will follow eventually. 

To delve in deeper:
What kind of inflationary impacts are we looking at? High input costs which are imported from overseas (raw materials like iron, electricity, electronics, chemicals, oil, feedstocks etc). High transportation costs like shipping and forwarding.

What kind of businesses to look for? Companies which can control their raw material costs; e.g. big companies which buy in bulk at long term supply contracts, or own feedstocks for agriculture, fertilizer etc in production. Also, end product manufacturers with their own supply chain and pricing power.

The ones to suffer the most are contractors and developers. Imagine selling a new project for RM 500 mil, which will take the next 3 years to build only for the input costs like steel, cement and fittings to double up.

The other ones that will suffer greatly would be the raw material traders as their costs pile up and spot prices are almost guaranteed to drop later on when the speculation ends. If you are in the trading house business where the profit margins are razor thin, you will quickly realize the profits from 2021 will be eaten up in 2022. (Warren Buffett also gave a similar example on mediocre businesses, which need to use all the cash generated simply to continue operating, such that shareholders will almost never get to see any of that cash.) 

Over the long term, what moves the market will always come back to earnings power and earnings sustainability.

Am I right or am I wrong? In the investing journey, it is usually difficult for someone to be completely wrong just as it is for someone to be completely right. I’m just being more careful than ever in this time, and I’m sharing my mindset and mental models in bringing my portfolio to 2022 and 2023. This is merely my opinion and thoughts; and by all means I hope it can benefit people who are unaware of what’s going on in the world or have no idea what to do. However, please do make your own plans and convictions for a portfolio that’s suitable to you.

I spent my whole weekend writing this, so I >really< hope it benefits some people  😂