March 2022

By: 
Tom Qiao
 | 
Updated: 
April 3, 2022
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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.

Key Metrics

  • Revenue: $1,356 (-5% MoM, +324% YoY)
  • Sessions: 18,453 (+16% MoM)
  • RPM: $73.50 (-18% MoM)
  • Amazon Risk: 55% (up from 43% last month)

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 for TheDermDetective.com. 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.

Defensive Portfolio Strategy

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:

  1. Preserve Wealth: at the very least, maintain its value by keeping up with inflation (~15-20% per year right now, 20-25%+ if you measure the increase in real estate prices)
  2. Long-Term Growth: generate significant long-term value (10+ years) through appreciation, dividends, and cash flow opportunities (e.g. refinancing with real estate properties)

Based on these two goals, I've settled on a simple setup following the rule of thirds:

  1. Real Estate (1/3rd)
  2. Cryptocurrency (1/3rd)
  3. Defensive Stocks (1/3rd)

Real Estate

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:

  • Sovereign / Political Risk: real estate is ultimately tied to property rights, which are enforced by the state. Therefore real estate will always be influenced by the political environment (take for example, real estate in Russia or Ukraine in the current environment)
  • Low Portability: you cannot take your house with you 🤷‍♂️
  • Debt & Carrying Costs: unless you have a ton of cash, you will need to borrow heavily to buy a house and this creates an ongoing mortgage obligation (likely for the rest of your life) as well as carrying costs such as property taxes and utility bills. This means you must have sufficient offsetting cash flows (and buffer room to allow for increasing interest rates, property taxes, and utility rates) from a job, business, or investments.

Cryptocurrency (70-80% Bitcoin)

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:

  • Decentralized & Censorship Resistant: it is perhaps the only cryptocurrency that has truly proven to be decentralized from any market participant, given its tenured history (including multiple "forks") and number of validators. With recent events like the Canadian government illegally using the Emergencies Act, holding part of your wealth in a truly decentralized manner is extremely appealing to me.
  • Finite Supply of 21MM BTC: Bitcoin was designed to have a finite maximum supply with a gradual inflation rate from miners minting new BTC. This is in stark contrast to fiat money which is being debased by central banks (in tandem with overindebted governments).
  • Portability & Accessibility: finally, unlike a house, Bitcoin is portable to anywhere in the world, you don't need to carry it with you, and it's become extremely accessible with exchanges and Bitcoin ATMs, allowing you to convert BTC to fiat dollars when required. However, an even better option is to borrow fiat money using Bitcoin as collateral to finance living expenses or invest in additional assets.

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.

Defensive Stocks (Recession Resistant, Inflation Indexed)

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:

  • Consumer Staples
  • Utilities
  • Healthcare

While the typical inflation-resistant industries include:

  • Commodities
  • Real Estate
  • Financials (with rising interest rates)

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.

Defensive Cash Flow Strategies

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:

  • Traditional Employment: I am working full-time for an employer
  • Self-Employment: I run my website TheDermDetective.com - I'll be building additional websites this year and into 2023 as well for additional cash flow

And I intend to create the following sources to diversify my cash flow:

  • Rental Income: from the basement of my house
  • Freelance Income: offering my SEO services as a freelancer

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):

  • Refinancing: due to rising comparable prices, I can refinance my mortgage to pull additional equity out and put the proceeds towards hard assets, as outlined in my defensive portfolio strategy
  • Crypto Loans: using my Bitcoin as collateral, I can take out low interest loans to buy additional BitCoin or other 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,

Tom

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