Financial Samurai Newsletter April 20, 2024: Cracks Forming

This is a free Financial Samurai newsletter that was published on April 21, 2024. Every week, I come out with a free weekly newsletter to help readers achieve financial freedom sooner rather than later. Join 65,000 other readers and subscribe here. This way, you'll never miss a thing.

Financial Samurai began in July 2009 and is the leading personal finance website today with over 1 million organic pageviews a month. Everything is written based off firsthand experience because money is too important to be left up to pontification.

Sam is the pioneer of the modern-day FIRE movement. He attended The College of William & Mary for undergrad, got his MBA from UC Berkeley, and worked at Goldman Sachs and Credit Suisse for 13 years until he retired in 2012 at age 34. Sam is one of the rare personal finance writers who actually has the background and experience in finance.

You can learn more about Sam Dogen by clicking his About page.

Financial Samurai Newsletter April 20, 2024: Cracks Forming In The System

This week's newsletter is sponsored by the Innovation Fund, an open-ended fund that invests in private growth companies such as OpenAI, Databricks, Canva, Vanta, and more. 

Cracks have begun to form in the system again with escalating war tensions in the Middle East, fading hope for a rate cut before year-end, and rising mortgage rates.

The good news is that one and two-year Treasury bond yields are back to 5.2% and 4.99%, respectively. Not bad! Check out the latest bond yield table I got from Fidelity.

Bond yield table 2024 - Financial Samurai newsletter April 20, 2024


The additional good news is that we have the opportunity to dollar-cost average into stocks at lower prices and potentially discover better real estate deals, as marginal buyers are priced out due to higher mortgage rates.

S&P 500 forward 12-month P/E ratio over past 10 years - Financial Samurai newsletter April 20, 2024

Below is the S&P 500's 12-month forward P/E ratio before this week's selloff. Despite the S&P 500 experiencing a roughly 5% decline from its high of 5,248 on March 28, valuations remain elevated. Moreover, a significant portion of the gains were driven by the top seven big tech names.

Personally, I've maintained an underweight position in the S&P 500 since purchasing my house in October 2023. Consequently, I view the pullback as an opportunity to increase my holdings. I'll be investing approximately $106,000 following a capital distribution from a private real estate fund. Perhaps I'll write a more detailed post outlining my investment strategy and rationale.

No Longer Stretched Thin

Years ago, and updated today, I wrote a post titled, The Need For Liquidity Is Overrated If You're A Financially Savvy Person, outlining why facing a liquidity crunch might not be as daunting as it seems.

However, after enduring a challenging liquidity crunch for four months, my perspective has shifted. While I managed to weather the storm, partially thanks to a timely capital distribution from a private real estate fund, I have no desire to undergo such a stressful experience again. I strongly advocate for maintaining at least six months' worth of living expenses for financial security.

My experience also brings to mind another post I wrote, Your Risk Tolerance Is An Illusion: Wait Until You Lose A Lot Of Money. Unless you navigated the 2008 global financial crisis with a significant amount of capital, it's challenging to gauge how you'll react to losing 30-50% of your net worth in a short period. The downturn in 2020 pales in comparison.

To help you assess your risk tolerance, I've devised a formula called FS SEER, which incorporates time as a variable to help you quantify your risk exposure and determine your optimal risk exposure. As you age, you're likely to become less willing to sacrifice time to recover potential losses.

Below is a chart illustrating the inversion of the yield curve, which has persisted for 511 days thus far. Please review previous newsletter that discuss the implications of an inverted yield curve.

United States Yield Curve inversion

Connecting The Dots In This Newsletter

In the past, I've emphasized how connecting the dots can enhance your investment decisions. The idea is to try and put peaces together to come up with an edge. Well, it seems I've recently stumbled upon such an opportunity, thanks to a seemingly random coincidence that occurred during a league tennis match.

During a match against a long-standing opponent's team last weekend, I inquired about his absence to the team captain, anticipating our customary showdown. To my surprise, the captain informed me that he had relocated to Australia earlier in the year to assist a company with their financial reporting.

Intrigued by this development, I decided to investigate further and discovered that my opponent had joined Canva last November, a private design company founded in Australia. He assumed the role of Head of Sarbanes, responsible for ensuring compliance with the Sarbanes-Oxley Act of 2002—a federal law governing financial record keeping and reporting for corporations aiming to go public in the United States.

This coincidence led me to recall a recent conversation I had with Ben Miller, co-founder and CEO of Fundrise, during his visit to San Francisco, where we discussed Canva. You can delve into our conversation in the new post, Investing In Private AI Companies Without Connections Or Big Money.

Investing In Canva Through The Innovation Fund

Canva in of the Innovation Fund's core holdings. Moreover, there is considerable market demand for rapidly growing design companies with an AI focus, exemplified by Adobe's unsuccessful attempt to acquire Figma for $20 billion last year due to antitrust issues.

While the future remains uncertain, I predict that there's a greater than 50% chance Canva will go public by the end of 2024, ahead of projected listings in 2025 or 2026. Even if an IPO does not materialize this year, I estimate a 80% probability of a public offering by the end of 2025.

Assuming favorable market conditions persist and Canva's estimated annualized revenue, exceeding $1.7 billion, continues to climb, there's a strong likelihood that its IPO valuation will surpass the $26 billion valuation from its secondary offering earlier this year.

Of course, the future is unpredictable, and the IPO market could freeze over when Canva wants to goes public. However, at present, I am inclined to invest in Canva 1-2 years prior to its anticipated public debut.

The thing with venture investing is once you see a company on a sustainable path to long-term growth, you want to get in and hold for the long term, almost regardless of whether it goes public or not.

You can check out the Innovation Fund and its holdings here. Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.

To Your Financial Freedom,

Sam

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