“It’s a perfect situation for a pancake.” I have to admit that this statement got me to sit up my chair on reflex as I hadn’t eaten in awhile. It came from “Cosmic Bro” geophysicist and Luke Perry look-alike Stefan Burns on YouTube Tuesday1. Burns was referring to the first CME or Coronal Mass Ejection (solar flare) on Tuesday, a 1.7 X-Class Flare, followed by a 1.2 flare and then a big 5.1 flare. The flares generally travel at 1850 km per second and have to cover a distance of 150 million kilometers so it takes around 22 hours for them to reach Earth. In this case the first flare was the slowest, the second was faster and the third is projected to be the fastest creating a combined shockwave and the aforementioned “pancake” effect.
Fact: Solar flares that hit Earth’s atmosphere cause big increases in the number of charged particles in the ionosphere, which expands the auroral oval and makes the colorful bands of the Aurora Borealis visible in much lower latitudes, as many in the US witnessed on late Tuesday night. Perhaps you’ve seen the beautiful pictures of the sky this week. The flares can cause or worsen geomagnetic storms, which are rated on a scale from G1 to G5. In this case, the flares as of the writing of this Wednesday afternoon created a strong G4 to low G5 Extreme Geomagnetic Storm Tuesday night, capable of stressing or even knocking out power grids3.
Theory: “Cosmic Bro” Burns contends that the radiation produced from the charged ionosphere from increased solar flare activity heats the Earth causing the Earth’s crust to expand and crust and further stress fault lines leading to large earthquakes. He said that the huge 2011 Tohoku Earthquake off the coast of Honshu, Japan, and its resulting tsunami that left 18,000 dead4 was preceded by both earthquake swarms and solar flares.
Burns has been attacked for his theory as many have said there’s no link. His explanation of the heat causing the earth to expand and stress fault lines makes logical sense. It tracks that warmth would cause an object to expand. It’s just that in this case, it’s the whole Earth, not just an object on it. But Burns is very much worried about the earthquake swarms lately off the coast of Japan that have been happening frequently and many in the 5 to 6 magnitude range. Thus far, one 4.6-magnitude did hit in Yamada, Japan this week as did a 5.7-magnitude quake in Cyprus, but those register more as shivers than megaquakes.
So what’s this got to do with the stock market anyway? Well for me it’s an excellent example of theory versus practice and that applies to portfolio management. Will Burns be correct and there’s a megaquake coming in the next few days to the Japanese archipelago as a result of a superheated ionosphere? It’s going to be impossible to say before the publication of this comes out either Thursday or Friday.
Just like geophysics has so many variables, there are many economic variables out there that can affect the economy in all kinds of ways. There are also different classes of stocks, some of which are more speculative or theoretical that could pay off big down the road, versus stocks that have proven in practice that they are tried and true companies. They have staked their claim to a share of an industry’s global revenue and likely aren’t going anywhere anytime soon.
Here’s the issue with theories as it relates to managing growth portfolios. Finding evidence to prove theories requires time. Finding evidence to support the theory that an individual “growth” company can have a much greater market share than it does today would require you to wait until that stock has proven its merit. So how well can you truly gauge the theory of Quantum Computing for example? Will that actually come to pass? What about theories surrounding future profits of companies that do DNA sequencing and gene editing? Cathy Woods of ARK Invest-fame buys that one. The most obvious theory today is that AI will be a huge money maker.
Speculation about trends and making big huge bets on them or on valuation is a strategy which can backfire. Look no further than the self-styled Cassandra (on X) Michael Burry whose hedge fund Scion Asset Management is closing up shop for good following “Big Short” bets on Nvidia and Palantir due to valuation5. (Even though Palantir is admittedly at stratospheric valuations, Nvidia’s PEG ratio – Price-to-Earnings-to-Growth – is 1.29 and still very good, while Palantir is at 6.39 and has a P/E of 317.95). Burry made himself famous for his “Big Short” bet big against the market and won big in 2008 when discovering terrifying macro issues with collateralized mortgage obligations (CMOs). But then he tried to take his prognostication skills too far and called himself Cassandra on X (how progressive), the Trojan princess with the gift of prophecy who Apollo cursed so that her predictions would never be believed. He seems to be self-fulfilling his own prophecy as he deregistered his firm after no one believed him that Nvidia and Palantir were flying too high and after he successfully predicted 15 of the last 2 recessions – the latest occurring on January 31, 2023 when he tweeted “Sell” and then deleted his entire Twitter account the next day. (The S&P is up 66% after it closed on 1/31/23 at 4,076.60 and now sits at 6,776.68 as of this writing).
No one can really predict the future, not Michael Burry, nor any other portfolio manager, so ideas about future success of a concept remain theories until companies prove themselves over time. That’s why we are building the Moat portfolio, and we hope it will give you confidence in investing in the future at a time of stretched valuations, government shutdowns and the final death knell of the US penny, which now costs 4 cents to make. Maybe we should shut down the government for continuing to produce the penny as long as they did??
Part of a stock’s total growth is surrendered by waiting for theories to become reality. In our WTA Tactical Growth Stock Portfolio, we try to see early trends developing and prognosticate future growth and not wait for all that to transpire. But likely Warren Buffett and the late Charlie Munger would hold, there is still plenty of runway for proven companies that have dominated market share over a period of time and have many characteristics that would preserve this dominant market position.
So what constitutes a “moat”? Just like in medieval times a moat would protect your castle, one or a combination of the effects below create an economic moat for these companies’ competitive positions. This list below comes from Morningstar’s “Why Moats Matter” book and would include: Intangible Assets, Cost Advantage, Switching Costs, Network Effect and Efficient Scale. Our Investment Committee has been doing a very deep dive on this and measuring market dominance over time in each Industry of the GICS (every area of the S&P 500). What we’re on the cusp of creating for you, can either be a Strategic (buy and hold) partner to your current Tactical (trade to the trend) Growth Stock Portfolio or a potential replacement for your current growth strategy, depending on your risk tolerance, time horizon and goals. We’ll be putting the finishing touches on our Strategic Moat Growth Stock portfolio soon, for which we’ll have both a Mainstream Moat Portfolio and a Christian Values variant. The key to realizing the benefits of a moat strategy is time. Our strategy will be to select a portfolio as carefully as possible and to commit to being in those companies through thick and thin for ten years or more. This has different risks to a more tactical investment strategy, which is why entry into the Moat portfolios is limited to those clients for whom it’s appropriate.
So what’s the conclusion about Burns’s theory? Well, it may be more than just a theory. There is some evidence of a causal relationship between increased solar activity from the sun causing increased seismic activity in the earth. It was documented in this 2016 study6 and the phenomenon is referred to by the authors as “Solar Seismic Precursors.” They posit that all M6+ earthquakes from 2012 through 2016 were preceded by a solar event such as Coronal Mass Ejections. But there is just the one study that I could find that suggests this is the case and much out there that may refute it. Gemini AI will summarize everything and tell you that: “There is no conclusive scientific evidence that solar flares directly cause earthquakes. Earthquakes are primarily driven by processes within the Earth’s interior related to the movement of tectonic plates, which occur independent of the solar cycle.” Whether this solar flare event will trigger a quake that corroborates his theory we’ll have to wait and see over the next couple of days.
We will invest in theory, and we will invest in practice. It depends on you and your philosophies. Help us align those with your wealth and give us a call to be added to the Moat Waiting List. Think of it as installing a pool around your financial house. We’ll let you know when it’s ready. If you listen to us, we’ll change your financial world …
Sincerely,
Scott Wright
Portfolio Manager
The Wealth Training Academy
Sources:
1Tomorrow Earth Gets ROCKED 💥 A Colossal CME from a 5.1 X-Flare is Fast Inbound
5Michael Burry of ‘Big Short’ fame deregisters Scion Asset Management
6(PDF) Solar activity correlated to the M7.0 Japan earthquake occurred on April 15, 2016
