Hey guys, it's sasha, i don't care about inflation and in this video i'll explain exactly why i don't care about inflation or the interest rate rises as an investor in the stock market. I will tell you why i am not in the flip-flop club and why? I don't paper hand my positions, the very first time i ever see my stocks drop in value. I'll share some useful insight on why i think a lot of the panic is, in my opinion, somewhat unwarranted or perhaps overblown. So let's talk about inflation and its impact on stocks, because since november the fear of inflation has begun very seriously affecting the stock market.

First, we had the big demise of growth stocks, where pretty much every growth stock out there went and lost between a third and two thirds of their value. Depending on how early stage the grey stock was. Then, in january the planning got a little hotter with inflation figures for december, hitting seven percent, and then the big guns began following the small caps and we had a correction in the stock market where the whole thing did by around about 10 percent. In the last two weeks, the stock market is playing yoyo.

One day we forget all about inflation. The stock market has a massive rally. Then the next day, a member of the fed committee comes out and reminds everyone that interest rates are actually going to go up and everyone completely loses their and throws their toys out of the pram. So, fundamentally, why do inflation and interest rate rises affect the stock market? Why do they cause the share price to fall? Well, there are a few different reasons, so let me go through them one by one and i'll.

Tell you exactly why i don't care about each of those reasons. First, up, let's talk about the most obvious factor, and this is the big impact of inflation on the valuation of growth stocks. Most of my investments personally are in gross stocks, and growth stocks are the ones that are taking the big brunt here: they're the ones that are getting smashed to pieces by all of this inflation fear. So when you value a company, your job is to predict what the sum of future cash flows for that company is going to be.

When you buy shares in a company, you become a part owner of the business, so you essentially own a part of the money that the company will go to earn in the future. And when you do that calculation, you use something called a dcf model and dc stands for discounted cash flow model. The first word is where the issue is because those future cash flows have to be discounted any money the company earns in the future is worth less in today's dollars. There are a few different factors at play here.

First, there is this: natural inflation right as currency loses its value over time. One dollar buys less and less over time, so dollars from the future are worth less in today's dollars. A bit like how you could go and buy a new car for 2 000 in 1960 and gas back then cost 31 cents a gallon, but in the cf models the discount rate you apply is usually a lot higher more like 10 or 12 percent, and that Is a lot higher than the typical inflation rate of 2 to three percent on average? This is because the other factor in setting your interest rate is opportunity. Cost.

If you choose not to invest that money into the company, you are assessing. What else could you be doing with that money? How else could that money be working for you? Well, there's a lot of different things. You could invest in property, maybe stick it in total stock market index or something else, and a lot of those alternative options that are somewhat comparable tend to achieve returns of somewhere around 10 percent in the long run. So, in order to break even on your investment, when you compare it to those other opportunities, you want to be earning at least 10 percent rate, especially as you're picking stocks, which is significantly more risky than just investing in the s.

P. 500. So the industry term, for this is the weighted average cost of capital or whack anyway. Here is why i don't care about inflation affecting my discount rate.

In my models, i almost always use 10 percent as the discount factor. This is because my assumption is that the opportunity cost of money is about 10. If i choose not to invest in any given stock, and here is something really important, the discount rate you use in the model is not the sum of inflation and opportunity cost. It is one or the other, whichever is higher.

The stock market will return temps on average, even when inflation runs high. So it's not like you need to adjust it. It's not the case that when inflation say hits five percent, then the stock market expected return. Suddenly goes to 15 percent and mathematically.

That means that you are always discounting to. Whichever of those two factors is higher inflation in january or 7.5 percent, and there is every chance that it goes even higher, maybe even quite a lot higher. Historically, inflation has only broken 10 percent four times in the last 100 odd years, and the reason for those have always been pretty major. It's always been something really big like i know: world wars and a really substantial major economic crises in the 70s and the 80s.

Now you could argue that the global pandemic that we've been through is another somewhat major cause, so maybe we're going to break that 10. It's definitely possible, but i also know that if that were to happen, if the interest rates did go above 10, then everyone is going to be hitting the panic stations. Interest rates are going to shoot up a lot more quickly than people expect and inflation is going to come back down just like it went up because that's what it does every single time and when i'm investing in time horizons lasting in 10 years or 20 years Or longer i don't really care too much about a short-term spike that might go above 10 because on average over the long term, inflation is going to sit well under that 10 marker and my 10 discount rate is then going to be ruled by the opportunity cost. Almost all of the time now, another popular assertion is that higher inflation means a sharp drop in corporate profits.

Companies feel reluctant to increase prices as inflation is affecting their costs and the profit margins shrink as a result. But again, this depends a lot on how commoditized your product is and the nature of the products or service that the company sells tesla increased their prices by something like 20 last year, without any crazy inflation happening and with demand continuing to grow. They have pricing power to increase costs in the short term if needed as well. Five or another one of my positions earns money as a proportion of the amount that freelancers charge for their work.

So if we enter an inflation spiral, where higher costs push wages that push costs or push wages, then those freelancers will start charging more because they will be earning their wages on there and fiverr will then earn more as a result as well sure there might be Some short-term fluctuations that might be unforeseen outcomes, but the business model is naturally resistant to inflation. When i assess a company as a long-term investment, i always think about the risk worsening cases to understand how would the company fair in those scenarios and because i do that thinking up front, i actually don't really care when inflation does happen, because i've already done my Homework. The next concern is the impact of inflation on personal finance. The argument goes something like this: high inflation creates pressure on household spending, because goods and services become more expensive faster than the rise in wages, and that pressure means that households begin spending less and that can cause a drop in company revenues and push for a full-on Recession potentially, but two separate things are happening here.

One is that the world is a very, very different place today to the 80s. When this inflation situation last happened, the speed and elasticity of wage increases and price increases is in a completely different place. This means that people's wages can increase and probably will increase a lot more sharply than they did 40 odd years ago, and that could create a problem in itself, because if wages go up more quickly, it means the risk of that inflation. Wage spiral is greater, so prices go up, people demand higher wages, their demands are answered more quickly and people's wages rise, rising wages means the cost of providing those goods and services by the companies goes up and so on and so on.

But in reality i think that this will only mean that whenever the fed decides to finally wake up and stop scratching their ass, it just means that the action on interest rates is going to be faster in response, rather than the slower approach that they're currently intimating And, however bad the pandemic has been, it wasn't quite as bad as say world war ii, so inflation came down back then, and i think it will very likely come back down just in the same way as it has every time before this time around. The other reason that i don't care about inflation affecting purchasing power is because i integrate that risk into my thinking, of which companies i invest in. I try to invest in companies that have exceptionally fast growth and where that growth is relatively unaffected by inflationary or demand pressure relatively being the imperative word, because, of course, everything is connected and in a dire situation, every company is going to suffer. But if every company is going to suffer, i'm not exactly going to be making the wrong pick, because every stock is going to go down but take tesla.

For example. Their current demand is far in excess of their ability to supply, and this is not changing in any foreseeable future. Wait times on their cars are only going up, even as production is scaling very quickly and wait times have a natural cliff. Even if you are interested in say buying a tesla, a 6 or 12 month, wait means you may well not be entering that queue.

So, even if we have inflation and that causes a downward pressure on consumer spend, i feel that the amount of buffer i have in companies like tesla and some of my other investments is sufficient. That i'll probably be able to swallow a lot of that downward pressure. Without any material impact, or at least equivalent impact to some of the other stocks in terms of growth and performance and by the time it might really start impacting we'll probably be on the downward trend anyway, with inflation, so things might be looking a little bit more Rosy, the next issue is the impact of rising interest rates on corporate debt, because a lot of corporate debt is directly or indirectly linked to those rates. So the moment that rates start going up the cost of financing the debt goes up and if the rates go up significantly, that can cause a lot of trouble for companies that have a lot of debt.

But here's why i don't really care at all about this issue. I don't invest in companies like ford for a reason. Most of my investments are in companies where debt is not an issue. Tesla has negligible debt that is looking likely to be fully repaid in 2022..

Pinterest another one of my positions doesn't have any debt. Fiverr has more cash and short-term investments than their total amount of debt. Palantir doesn't have any debt. Do you see a pattern there so sure there is going to be a collective impact, some supply and change issues? Maybe maybe some partner companies will be affected by all of this, but i try to invest in companies with very healthy balance sheets for a very good reason, so i actually don't really care.

The other impact of higher rates is on personal debt. Any people with debt that is linked to the fed rate in any kind of way will see the cost of servicing their debt go up, they'll have to pay more in interest, and anyone who has to finance refinance maybe take on new debt, maybe buy a house For example, will have to pay a lot more interest, so the school of thought here is that this puts pressure on households and reduces discretionary spending, because you have to pay more interest on your debt, so they spend less on things that they don't really have to Spend their money on because they have to service those debts and that affects the ability of companies to sell to those people, and that affects those companies. Revenues, and i don't really care about this issue either. For the same reason that i discussed when i talked about inflation earlier, i see this as a relatively short-term factor that will cause a blip on the graph in the short term.

Sure probably will, but i do not see it as something that will create a long-term shift in the direction of the companies that i invest in, and the same argument applies about picking companies that are relatively resilient through having high demand or exceptionally high levels of growth. That i already covered one other argument that people sometimes pose is that higher inflation, higher interest rates mean that other times types of assets become more valuable relative to being invested in stocks. So you might choose to invest in commodities or paper or bonds, or something else like that now, here's my take, i think people who think that gold is some kind of a great hedge against inflation, are maybe a little bit over optimistic and haven't really looked at. What gold tends to do gold shot up the last time we had a major inflation spike in the early 80s, but it also showed up massively from 2002 to 2011, without any crazy inflation in sight and in the 70s massive inflation spike goldup went a lot less.

Hardly did at all and during the second world war, when inflation went absolutely nuts gold dropped in value. So i don't really see any good, robust analytical argument that says that there is some kind of pattern or a causal relationship. I know it is the accepted wisdom, but i just don't see it. Bonds can become very attractive in extreme scenarios as well, but the rates and bonds are unlikely to go up significantly in anticipation of rates.

Going up bonds tend to only really go up in terms of yields after the rates go high, so you can't use them as a hedge, in anticipation of inflation arriving and the only time they they went above 10 percent in modern history was during the 1980s inflation Spike, so it is by no means guaranteed that bond yields will go up. Remember: bond yields are by design inversely proportional to interest rate rises, because bond yields are inversely proportional to demand well in theory anyway. So as demand for bonds increases when interest rates rise, that, in theory pushes the yields down so the stroman argument that, as interest rates rise, you can try and hedge in advance through moving to other assets. Just doesn't really hold all that much water.

If you cash out and sit on cash and inflation does then go up, then your cash is losing you 10 or 15 percent a year as well, so you're, not exactly winning, and if you cash out and miss that rebound, which is the biggest danger, then you Get to collect the double whammy of a 10 drop because of inflation on your money and having sold at the very bottom, which you really really won't like. If you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you. So much for watching.

I really really appreciate it and i'll see you guys later. You.