A Game Plan for Tough Markets Based on an Investing Legend

On Saturday, we shared some insights from legendary investor Philippe Laffont of Coatue Management... As we mentioned, we recently received a copy of one of Philippe's investor presentations and found tons of great insight there. The first insight was that Philippe and his fund have gone almost all cash in their public investing vehicle. This […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] A Game Plan for Tough Markets Based on an Investing Legend By Enrique Abeyta --------------------------------------------------------------- ['I'd put half my daughter's college fund into this stock without blinking an eye...']( We've just launched a new presentation on our favorite stock idea for 2022, and it could help you avoid huge losses in the current market. [Click here to see why I'd put half my daughter’s college savings into this stock](. --------------------------------------------------------------- [On Saturday]( we shared some insights from legendary investor Philippe Laffont of Coatue Management... As we mentioned, we recently received a copy of one of Philippe's investor presentations and found tons of great insight there. The first insight was that Philippe and his fund have gone almost all cash in their public investing vehicle. This data point prompted a friend, an experienced money manager based in the Phoenix area who runs a pool of family money, to reach out to me. He didn't tell me exactly how he was invested, but he expressed some concern about seeing that a legendary investor like Philippe was sitting on all cash. This prompted us to get together to have a long discussion about what I thought Philippe's game plan was with this exposure... Now – full disclosure – I have not personally spoken to Philippe in many years... although we occasionally trade e-mails. We certainly, however, have not discussed any of his positioning in several decades, so what I am sharing here is purely my opinion of what I think his game plan is – and what could be a good game plan for you. The first thing I told my friend is to remember that Philippe has a giant business to protect, and this can influence his decisions. He has a $70 billion asset management firm, and the money he makes from that over time dwarfs what he stands to make off returns in any given year. As a result, this means that when risks are elevated, it makes a lot of sense to step to the sideline to secure the business. But is this the best move for the average investor also? Well, it depends... Regular readers of my work will be familiar with the advice to either "trade a lot or don't trade at all." Philippe's move might be a combination of those two, but what he is really doing is matching his strategy to his business needs. We recommend the same to individual investors... Whatever strategy and capital you are deploying should match your individual financial needs and risk tolerances. However, there's another more interesting takeaway from Philippe's move that we didn't share in Saturday's essay... Last week, we shared the comparisons Philippe made between today and the 2000 to 2002 Tech Bubble. But later in the report, he continued the comparison by looking at some individual companies. We won't get into the exact stocks he discussed, but he made a point that while there are many similarities between the two periods, there are also key differences – especially when it comes down to individual stocks. In particular, he pointed out groups of stocks that look very similar to the Tech Bubble – they all have high valuations, lack profitability, are burning cash, and have questionable business models and sustainability. However, he also pointed out that there is a large group of technology and growth stocks that are quite different. While these are still technology stocks, they have well-established businesses, high barriers to entry, strong balance sheets, and profitability that aren't going anywhere. As we were still in the very early stages of the Internet during the Tech Bubble, we didn't see nearly as many of these at all back then. --------------------------------------------------------------- Recommended Link: ['That much is guaranteed']( Former $1 billion hedge fund manager just dropped a bombshell on camera... Explaining how you could profit instantly from this strange market phenomenon. [You can skim the proof for free, right here](. --------------------------------------------------------------- In his presentation, Philippe laid out a half-dozen different stocks that his team felt fell into this high-quality category... This led me to theorize about a potential strategy that Philippe might deploy, and one that personally I think is extremely interesting for our readers. Readers who also subscribe to our paid newsletters like Empire Elite Growth and Empire Breakthrough Investor know that we are seeing a great deal of opportunities with exceptional risk/reward ratios. There is a group of high-quality companies with great franchises and balance sheets with stocks that are down just as much (70% or more) from their peaks – just like all growth stocks. However, given their balance sheets and cash flow, there is literally no chance these companies will go bankrupt. Now, if the economy goes into a recession and we enter an extended bear market (for example, down another 25% for another 12 to 18 months), there is a very real risk that these stocks could go down another 25% to 50% or even more. Mind you, that would have many of them trading at or below the cash levels on their balance sheets. Again, however, given the balance sheets and cash flow – these businesses will survive... From there, as the economy recovers – and it will – they can take advantage of their large total addressable markets ("TAMs") with their powerful franchises. In the next three to 10 years, these companies should be able to grow earnings by 5 times or even 10 times. This means the stocks could have 3 times to 10 times upside... or even more. For most of them, even returning to the recent highs from six months ago could be a 5 times-plus upside. While we're not saying those valuations were appropriate at the time, they could be in the future, given the upside to the businesses. While there is a chance that these stocks will go down 25% to 50% for another year, there is no chance they will go out of business... And then we have the opportunity for them to go up 3 times to 10 times from there. Sounds pretty good, right? So what is Philippe doing with his low gross exposure (25% of capital allocated, or $0.25 for every $1 he has under management) and low net exposure (less than 10%)? Perhaps he is going out and buying a starter stake in many of these companies. Imagine buying a 5% or 10% position in five of them. This would give you a 25% to 50% gross long exposure. Then, however, imagine going out and shorting the Invesco QQQ Trust (QQQ) against that in equal weight. This means you would have a gross exposure of 50% to 100% but a net exposure of 0%, or market neutral. Realistically, these potential high-return stocks are much higher volatility than the overall stock market – even the Nasdaq Composite Index. Using a beta of 2 times and the 25% level of gross exposure (5 times 5% positions) would mean a net exposure of negative 25%. For every 10% the stock market goes down, you will lose 2.5% on your overall portfolio. What you could then do is add to your exposure for every down 10% on the overall indexes. You could do this by buying more of your long holdings, covering some of your hedges, or doing both! We probably recommend a little of both – perhaps covering 5% of your short and buying 1% or 2% more in each long as it goes down. At some point, the stock market will stop going down. By deploying this strategy, you will be max long at the bottom of the market – as long as you don't overexpose yourself and you can hold through this strategy. Now this is where the risk versus reward profile gets interesting... While these markets may have a 2 times beta to the downside, given the particular stock picks, we think they have much more upside than the overall Nasdaq. Remember, the index is heavily weighted to technology giants like Apple (AAPL) and Microsoft (MSFT). Those names are probably screaming buys right here, but they are highly unlikely to go up 3 times to 10 times in the next five or 10 years. Instead, this portfolio is incredibly well positioned to take advantage of the recovery and the ensuing growth. Stock picking is key, but this strategy is a way to manage your losses and exposure to the downside while setting yourself up for massive returns in the future! However, if you're looking for an extra boost, there's one strategy that the vast majority of investors don't know about... It's the same strategy I used to grow my hedge fund by 130,000% in less than four years – handily beating the S&P 500 for five straight years... and all in the midst of the dot-com bust. This year, you can use this little-known investing secret to make more money in the declining markets. It's a strategy you can start using today, and it offers short-term profits with less risk than buying stocks right now. [Learn more here](. Regards, Enrique Abeyta June 24, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](