4 steps to building a tariff proof portfolio
Navigating the whims and fancies of Donald Trump
Donald Trump has taken over the world (or should I say he’s trying to). The result: an uncertain economic environment and stock market.
Is this a buying opportunity?
While no one can predict with 100% accuracy where the market bottoms are, we don’t need to in order to be profitable in the stock market.
There are some steps that can help us decide whether to invest:
Step 1: Start with a high quality business with strong financials
Stocks are not just ticker symbols we see in our brokerage app. They are real businesses that provide products and services.
What does a high quality business actually mean?
In my books, it’s a company that consistently increases its revenues, profits, and cash flows year after year.
Cash remains the lifeblood of a business.
A company with ample cash are better positioned to weather economic downturns.
The recent tariffs are a good example.
Tariffs can affects some companies more than others, especially those with China exposure.
Take Nvidia, the stock market darling in recent years.
The company derives 13% of its revenues from China.
With Trump imposing tariffs of 145% on imports from China, which could reach as high as 245%, Nvidia’s profits are likely to be significantly impacted.
Step 2: Buying at a good level
What constitutes a good level?
There’s a fair price to pay for every stock.
Due to the assumptions baked into the calculation of intrinsic value, the fair value of a stock is fluid.
No two individuals will come up with same intrinsic value, even when valuing the same stock.
And that’s okay.
What we want is an estimate, and not a precise figure.
Looking at a stock price alone tells us nothing.
Stock A at $200 may look more expensive than stock B at $10. Without knowing how much each stock is worth, there’s no way to tell.
Step 3: When to buy?
Personally, I identify a few buy levels.
The stock price has to fall to prices where I get a discount of least 15% to 20% below my intrinsic value.
It’s not rocket science.
Technical analysts can combine fundamentals by coming up with trendlines as their buy points.
Step 4: Portfolio Allocation
Averaging down on stocks when they are selling at a discount is always a great idea.
But is there a point where it becomes too much?
When stocks fall, they often continue to free fall.
Even if we’ve got the stomach to buy as the stock price falls, there’ll come a point in time where we’ve to watch our allocations.
If continuously buying a stock results in that stock taking up 90% of our portfolio, that’s where we have to draw the line.
Waiting it out by staying in cash or using the cash for other opportunities in the market might be a better idea.
Thank you Trump
I am grateful to Donald Trump for his antics.
Without him, the stock market would’ve just kept running up and I wouldn’t have a chance to buy my favourite stocks.
With Trump, I get a chance to accumulate some of the best businesses at discounted prices.
What’s not to like?