Friday, July 22, 2022

Reverse Engineering

Reverse Engineering


Generally speaking, stock prices increase with increased earnings. When a company makes more money, in general, their shares are worth more because investors put value in growth and reward it by bidding up the share prices of companies that increase their earnings. Naturally, the opposite is also true. Granted, there are always exceptions to the rule, but for the most part earnings drive the market higher.

Along those lines, investors should be able to reverse engineer a portfolio based on their spend habits, or even consider the spend habits of a typical cohort. So for example, if you have a breakdown of your monthly expenses you can also typically trace that spending to broad sectors, and specially individual brands. This provided a good backdrop to the Chinatown adage of "follow the money."

A classic Maslow's hierarchy of needs also works well in this example. For the "average" American, the top three expenses on a recurring monthly basis are housing, medical, and food. Now for people who are NOT self-employed, that medical cost might not be too high because your employer is picking up the tab. Consider their cost in our example as yours.

So right from the start we can see from a percentage basis how much of our monthly income feeds the banks for mortgages or the landlord, the medical plan operator, and the food prodders. Depending on your situation, there most likely will be energy costs (fuel and/electric), clothing, entertainment, and many others. List them out and I suspect you'll start to see the brands behind the sectors popping up. Take note of the specific brands you utilize both as a function of your purchase, but also your time. You might only buy a smartphone once a every couple years, but you most likely are using it frequently. Same for a computer. TV. Internet.

All of these purchases and time uses trickle down to brand utilization. The brands with the most utilization should be ones you pay attention to from a portfolio perspective. You are probably not alone in your brand utility. And generally speaking, yet again, the fewer brands choices you have for a good or service or time usage the more of the total market that brand is capturing.

This reverse engineering exercise should reveal some very powerful, some would say monopolistic, brands in your life. Maybe you should consider owning them?