🧟‍♂️ The Pioneer of “Zombie Investing”

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What’s on the Menu 🍴

We love to learn from the world’s best investors…

And today we’ve got a unique investing strategy called “venture zombie investing”.

• The Bond Vigilantes Are Back ⚔️

• Why A Stock Market Selloff Is… Good? 📊

• The Pioneer of Venture Zombie Investing 🧟‍♂️

• How to Win in the Era of Artificial Intelligence 📺

Today’s newsletter is a 5 minute read.

The Bond Vigilantes Are Back ⚔️

On Wednesday the Federal Reserve kept their key interest rate unchanged. Yet that hasn’t stopped the stock market from selling off nearly 5% over the past week.

We’re seeing more new lows and heavy selling in the consumer discretionary, tech, and real estate sectors.

What gives?

There are two main entities that set interest rates broadly:

1. central banks and

2. bond markets.

Although many central banks (including the Fed) are now slowing or pausing on rate hikes, long term bond yields are screaming higher as markets sour on government bonds:

Bond markets seem to be worried about a confluence of factors including:

• Rising energy prices

• Higher monthly inflation readings in August & September

• Central Banks refusing to back down from hawkish monetary policy

• A resilient US economy with low unemployment

• Higher fiscal deficits

When stocks were hitting new highs this past summer, we warned that sentiment was too bullish given the rise in yields driven by some of the very factors listed above.

We are not hugely bearish though!

We don’t think this is necessarily the start of a market crisis, but perhaps the market correction that’s needed to get the Fed to finally stop the rate hike cycle.

By the end of the year we think it will become clear that official inflation rates in the CPI are headed back down below 3%. Much of this will be due to lagging components like rent.

Here’s what the inflation swap market is forecasting for CPI in the coming year:

And despite resilient employment data, we ARE starting to see some forward indicators that the economy could be weakening, including:

• Higher credit card delinquencies

• Plummeting existing home sales

• Lower job openings & quit rate

• Stagnant bank lending

• Slowing domestic air travel

On the flip side: unemployment remains low, retail sales grew last month, wages are up in some sectors, credit spreads remain tight, and corporate earnings estimates are up slightly.

Our best guess is that the lagging effects of the rapid rise in interest rates are just now starting to be felt.

When it becomes more clear that these effects are intensifying, we think the Fed will back down and bond buyers could step back in to take advantage of these juicy yields.

Both stocks and short-term bonds could be areas to find value.

So while it could be a bumpy ride for the next few months in markets, don’t get too fearful.

Market corrections are VERY beneficial for long term investors!

Why A Stock Market Selloff Is… Good? 📊

The recent selloff in the S&P 500 is spooking investors.

While we still have economic risks to be aware of, investors have gotten used to a market that doesn’t stay down for long.

This leads to uneasy feelings when we do see selling.

But, there’s a case for this selloff being GOOD, and no reason to panic.

First of all, the S&P 500 declining in price should be no surprise if you’re a regular Daily Dough reader.

We’ve been talking about important levels for weeks, and now we’re approaching the MOST important level mentioned: $4,200

Note how the 200-day moving average is aligning with the major $4,200 support zone.

So, after an over 27% run from the lows of 2022, it’s safe to say that the S&P 500 has earned a right to take a chill pill.

Not to mention, we could see a selloff to the $4,200 zone and STILL have bullish price action in tact… that’s just how much the stock market ran up since 2022.

Perspective is important, and zooming OUT is necessary.

This should be a welcomed selloff as valuations have been difficult to get excited about.

Currently, the price-to-earnings ratio of the S&P 500 sits around 18.8x, while the 25 year average is 16.7.

During recessions, we’ve see the P/E ratio get as low as 10x (but, that was a VERY bad time economically).

Based on the current labor market and GDP estimates, a 2008-like valuation isn’t looking likely to come.

But a reversion to the mean, means we could finally have a reason to want to put capital to work in stocks.

Essentially, we don’t want to be paying premium prices for stocks forever… we need to see some kind of discount to get excited about buying again.

We think the lower stocks go, the more we could be looking at a robust “stock pickers market”.

So, it’s time to embrace the fear and pay attention to not just the indices, but, individual stocks that investors have left to die.

Lower prices lead to higher forward returns, which is what wealth building is all about.

The Pioneer of Venture Zombie Investing 🧟‍♂️

Andrew Wilkinson, co-founder of Tiny Capital, has long been celebrated as the Warren Buffett of the digital age.

His investment philosophy is straightforward: "I just want to own good businesses and never have to wear a suit."

This approach has propelled Tiny Capital to a portfolio worth over $600 million.

However, there's another layer to Andrew's strategy that's worth noting—what some call "venture zombie investing."

What is Venture Zombie Investing?

Venture capitalists invest billions each year in search of the next big thing. Yet, there are only about a thousand unicorns ($1B+ companies) worldwide.

This leaves a graveyard of companies that have taken significant investment but haven't scaled to match their valuation.

Andrew capitalizes on this by performing a "cap table swipe," essentially buying these "zombie" companies for pennies on the dollar.

This strategy not only offers a lifeline to struggling businesses but also provides a win-win-win scenario for all stakeholders involved.

The Big Wins: Beyond Traditional Acquisitions

• MetaLab: Transformed from a modest design agency to a global design consultancy with over $100 million in annual revenue.

• Dribbble: Grew from 40,000 users to over 500,000, becoming a marketplace for millions in design contracts.

Lessons from Losses: The Importance of Market Dynamics

While Andrew has had his share of setbacks, such as the task management app Flow, these experiences have only refined his acquisition criteria.

Despite its intuitive design, Flow struggled in a saturated market with competitors like Asana and Trello.

He now places greater emphasis on market dynamics over product features, a lesson that aligns well with his venture zombie investing approach.

Legacy and Takeaway: Shaping the Future of Investment

Andrew's influence extends beyond his portfolio. He's been a pioneer in advocating for remote work and his investment strategies serve as case studies at business schools.

As you evaluate your next investment opportunity, consider the wisdom in Andrew's approach: "The best investment is one you don't have to worry about."

Andrew Wilkinson shows us that with the right strategy and focus, you can build an empire one "boring" business at a time.

As you ponder your next investment move, consider this wisdom: "The best investment is one you don't have to worry about."

We Talk Money
How to Win With Artificial Intelligence 📺

AI has been disrupting EVERYTHING.

And for entrepreneurs and investors, this means massive opportunity…

IF you know where to look.

So today we’re inviting a special guest on the show.

Neville Medhora is an entrepreneur and early investor in the AI space.

Click to watch - How To Win In The Era of Artificial Intelligence

You’ll learn:

• How we’re using AI in our daily lives to gain a huge advantage

• Why AI will change startups (and investing) as we know it

• Which industries are likely to be disrupted the most

• And how to profit from this massive opportunity

Food For Thought 🧠

"Time is more valuable than money.
You can get more money, but you cannot get more time.”
- Jim Rohn

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.