Welcome back to Flexibility Is Freedom, guys!
Q1 2022 is finally over and what a crazy one it was, just like the past 2 years. 😥🤔
In any case, regardless of what happens - whether it's COVID-19 or an ongoing war, the only thing that individuals like you and I can do, is to prepare early and position ourselves to benefit from (or at least, not be harmed by) the future macroeconomic environment.
In this month's income report, I review my business results and share my thoughts on building a defensive portfolio to weather the inflationary (and possibly recessionary) environment.
Revenue dropped 5% MoM due to lower conversion rates and average order sizes at my main non-Amazon merchant (revenue declined 36% from this merchant).
(sometimes you get blips like this - I'm not concerned but will investigate if it continues next month)
However, Amazon outperformed this month, with total Amazon earnings up 20% MoM - as reflected in the sharp increase in Amazon risk from 43% to 55% (my target level is closer to 40%).
Meanwhile, traffic continued to climb upwards to a record high of 18,452 sessions (up 16% MoM) - that's equivalent to almost 600 sessions per day!
Thanks to higher traffic, Google Adsense revenue was up 25% MoM as well.
Overall, March was a healthy month. However, as always, there's much more work to be done to improve the traffic and profitability of this website. 😎
Finally, I've now reached 77 active email subscribers on SendFox. I haven't used email marketing in a significant way yet, but this could be an interesting channel to engage my audience.
I've discussed inflation on this blog for the past few months now.
So far, nothing has changed my mind that we are about to see the most damaging inflationary environment since the 1970s, one that will destroy wealth, real income, and leave an even greater gap between the "have-assets" and "have-no-assets".
Overall, I believe the most optimal strategy against inflation is to borrow (short) fiat money and invest (long) in hard assets such as real estate, cryptocurrency, defensive stocks, and precious metals like gold (however I'm not personally investing in that).
To that end, I've given much thought to building a defensive portfolio that will accomplish two things through this prolonged inflationary period:
Based on these two goals, I've settled on a simple setup following the rule of thirds:
Real estate is one of the most traditional asset classes that's been proven to protect wealth against inflation.
I believe real estate should be at least 1/3rd of your portfolio, perhaps even 1/2th, and ideally as a primary residence (to avoid capital gains tax in Canada, plus you get to live there!).
However, in situations where you cannot afford to buy real estate directly, I would seek exposure through a co-investment opportunity (invest directly alongside family or friends) or perhaps a more liquid REIT.
The problem with a REIT, though, is that you cannot apply the same degree of financial leverage (i.e. obtaining an 80/20 mortgage) as you can with a direct investment.
In any case, I strongly believe that real estate will outpace the rate of inflation - in fact, it's already responded to the massive increase in money supply following COVID-19 in early 2020.
On the other hand, the risks of real estate include:
The next third of my portfolio will be in cryptocurrency, specifically Bitcoin.
This is a more controversial position, as Bitcoin is still relatively new and does not have a meaningful history of protecting wealth against inflation.
However, I believe the unique properties of Bitcoin will position it to be a dominant force in the future:
Aside from Bitcoin, I am looking into additional cryptocurrencies that have long-term potential.
As I learned from my first experience with Bitcoin, it's essential to truly understand what you're investing in, before making a significant dollar investment.
Lastly, the final part of my portfolio is traditional stock market equities - but only ones that are recession resistant with the ability to match or outpace inflation (i.e. has some level of pricing power).
The typical recession-resistant industries include:
While the typical inflation-resistant industries include:
I've just started to build out this portion of my portfolio and believe it's a good compliment to real estate (illiquid, ot portable, proven to hedge inflation) and cryptocurrency (liquid, portable, not yet proven to hedge inflation).
So far, I've taken a small position in Chewy - the ecommerce leader in the pets category - as its stock has taken a beating in the last 6 months. Pets is a very recession resistant category, similar in nature to grocery stores, and consumer attitudes towards pets continues to evolve towards "pet parenting".
It's a growing category (14% CAGR), with online sales taking increasing market share, and Chewy is the dominant player - neck and neck with Amazon - with 70%+ recurring Auto-Ship purchases and 20+ million customers.
I'll be looking out for other opportunities like Chewy to buy a market leader in a growing category, playing on the increasing dominance of online sales vs. brick-and-mortgage, at a reasonable valuation.
Lastly lastly, I want to briefly discuss my defensive cash flow strategies that will compliment my defensive portfolio strategy.
My above portfolio is designed to protect wealth and generate long-term appreciation, but does not generate any meaningful cash flow (albiet, my house can produce rental income and some of the stocks may pay dividends).
That's why it's important to have the appropriate cash flows to pay for my living expenses and meet any funding requirements from my portfolio (e.g. mortgage payments, housing expenses).
Currently, I have the following sources of cash flow:
And I intend to create the following sources to diversify my cash flow:
In addition to "building" cash flow from employment, self-employment, or other sources, I also plan to borrow (short) additional fiat money in the following ways (remember, the optimal strategy against inflation is to short fiat and long hard assets):
That's it for this month! A bit off the usual track but I think it's important to have a concrete strategy for what I believe is about to come. I'll also be finishing up a Next Steps 2022 post that outlines my plan for 2022-2023 for my business, including new business ventures.
To Flexibility and Freedom,