Search

"If you're in the market, you have to know there's going to be declines." - Peter Lynch Since 1950, the S&P 500 index, which tracks the performance of 500 large public companies in the United States, has been fairly valued or undervalued for most of the 70 years . These valuations allow for steady returns and a reliable market with minimal levels of volatility. However, there have been two instances in these 70 years where the S&P 500 has been extremely overvalued – the dot-com bubble in the late 90's and right now . This is not to say that the market is going to react in a similar manner to the crash of the dot-com bubble. Still, it is safe to say that the current market, as a whole, is overvalued . These high market valuations can be seen in the two graphs above, both of which are concerning. The price-to-earnings ratio, or PE ratio, divides a stock’s share price by its earnings per share. It shows relative valuation through the multiple of earnings that the market is willing to pay for a share of stock . The first graph shows the S&P 500’s PE ratio since 1950 compared to its average. As previously referenced, the present and the dot-com bubble are two times over this period where the market has been overvalued by two standard deviations of the PE ratio . The current market is well beyond the dotted line, representing the average PE since 1950 . In the dot-com bubble, the S&P 500 fell by almost 50% , showing investors need to be wary of valuations nearing previous highs. In the second graph, the Shiller PE ratio is used. This form of the ratio is similar to the original, but it is averaged out over ten years and adjusted to inflation for more accuracy . Here it can be seen across the 150 years shown by the graph that the market is at its second-highest valuation , only behind that of the dot-com bubble. Any time this ratio has been above a value of 30, there has been a severe market crash – eg. Great Depression and the dot-com crash. The market currently sits at a SchillerPE of 34.81 ; if history repeats itself as it tends to, investors should brace themselves for rough market conditions. Low-interest rates enable the market to stay at these valuations without crashing, but if they end up rising, it could be detrimental . From the recent years of near-zero interest rates , low bond yields , and a large influx of federal spending into the hands of investors, it can be seen why the stock market has seen such an attractive investment. The historical returns realized over this period have also caused many to oversee the current burdens on the market . Intense inflationary pressures , record gas prices , the aftermath of a brutal pandemic , 20-year highs in S&P 500 valuations, and the conflict between Russia and Ukraine are all weighing down investor sentiment. Domestically, the most significant concern today is inflation , which can ruin a country’s economy if not properly contained. The Fed has already announced its plans to implement a contractionary monetary policy , which reduces the money supply through increased interest rates. With inflation surging, there is no alternative to the Fed raising rates , which has the possibility of sparking a surge of selling in equity markets. Rising rates are unattractive to businesses because it increases the price of borrowing money , leading to higher costs for companies to finance their operations. These costs usually result in lower profits due to the added borrowing expenses . Moreover, most companies use a large amount of debt in their capital structure to finance their business and invest in growth. Therefore, a hike in interest rates affects almost every public and private company by increasing its borrowing costs. The repercussions typically lead to a slowdown in overall economic growth . Considering the current overvaluations in the stock market, which signals that investors expect a large amount of growth in the coming years, a rise in interest rates could serve as a negative catalyst for stocks . Higher rates prompt people to invest in new bonds and to hold more money in savings accounts , driving capital away from overvalued stocks. Although, during a time of rising rates, the bond market also can hurt investors, dependent upon which bonds they invest in. Similarly, there will still be an opportunity to profit in equity markets , but the stellar returns seen by most companies from mid-2020 until late 2021 should not be widely expected. The current market environment is comparable to an overinflated bike tire. The tire, representing the stock market with high valuations, can still be used, but it will not be as smooth of a ride as with a perfectly inflated tire . Some air must come out of the tire to sustainably function . Similarly, money leaving the stock market brings companies back to fair valuations. No different from how air from the tire doesn’t just disappear; it goes back into the environment into the air we breathe; the money from the equity market gets invested into bonds, savings accounts, and other lower-risk investments. Alternatively, this is a healthy stock market if rates stay where they are. However, nobody knows where rates are going, and it is difficult to predict the stock market’s performance. With the current pace of inflation and the Fed’s sentiment, rates will likely rise . The amount by which they rise will make or break the overall markets , but it will be hard to stop the surging inflation and please equity investors simultaneously. In these times, being a blind investor in indices may lead to the inability to produce returns for years. During the dot-com bubble, which is the last time S&P 500 valuations were as high as they are now, it took eight years for the market to achieve its previous highs again . That said, even in this new bubble, there is an abundance of possibilities for investment profit in the markets. The next newsletter will detail how to mitigate risk and safely navigate an overvalued stock market. Siddharth Singhai Chairman & CIO of Ironhold Capital Disclaimer : This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based

"We don't prognosticate macroeconomic factors, we're looking at our companies from a bottom-up perspective on their long-run prospects of returning." - Mellody Hobson, President and co-CEO at Ariel Investments Ironhold Capital is excited to discuss some reasons why the Russia-Ukraine conflict and inflation are not detrimental to the long-term success of investors in the markets. Detailed below are the micro and macroeconomics of the situation and the best strategy for navigating the markets through times like these. The Russia-Ukraine conflict has been a burden on the markets for a large portion of this year. Vladimir Putin’s decision to spontaneously invade Ukraine with the rationale of gaining back territory that was once theirs, yet independent from that nation for over 30 years, has many fearing global involvement . The Russian leader has directly threatened Western governments , which includes the United States , about their support of Ukraine through the invasion and the sanctions imposed on Russia. Additionally, the nation is incredibly rich in natural resources, exporting a notable amount of energy, metals, and agricultural products for global consumption. This disruption has already started impacting supply chains, inventories, and production levels worldwide. It is unlikely , however, that this war will escalate to the same magnitude of involvement for the United States as World War II, the Vietnam War, or the Cold War. The United States and other NATO members have clarified that they do not want to be militarily involved . Instead, the U.S. is contributing through economic sanctions and diplomatic relations. While the markets have responded negatively to the invasion, it can be seen throughout history that there is always a recovery from geopolitical tensions and minimal long-term impact on markets and economies. As a result of the tensions, there has been an impact on global food and energy prices . Russia and Ukraine are both large producers of each good, but Russia’s exports are down due to sanctions, and Ukraine’s primary focus is on defending their country rather than their economy. However, part of the beauty of capitalism encompasses the dynamic of producers taking advantage of a gap between supply and demand . Energy and food supplies will recover as these alternative producers increase their output to match unmet demand. Therefore, these problems are short-term and should not be weighted heavily in the decision to make an intelligent investment. Additionally, the Fed will likely continue to raise rates , similar to their policy decisions in the 1970s. CPI nearly hit 15% twice over that decade, inducing rates to rise to almost 20%. With the current CPI being 8% and only subject to increasing pressure from the Russia-Ukraine conflict’s impact on growing food and energy prices, 25 basis points is only the start of rate hikes from the Fed. The U.S. economy is now in a unique situation after the COVID-19 pandemic, with inflationary pressure, rising rates, and war in Europe. During the Korean War , there were high levels of inflation , reaching just under 10%. Yet, with direct United States involvement in the war during this period, the stock market continued to rise . The monetary policy during this period was focused on controlling inflation, with multiple interest rate hikes . This shows that there are exceptions to the common belief that the stock market always declines during war and inflation. In other cases, war has been more detrimental, yet not catastrophic, to the markets. During World War II, the stock market dipped over the first two years of war, but the markets surged during the final three years. The stock market finished the war at nearly equivalent levels to where it started . Still, the monetary policy over that period was expansionary as the Fed lowered rates and promoted spending. This displays the market’s ability to recover through periods of war , but monetary policy during this time differed from what is presently needed to control inflation. These two examples of war’s effect on the stock market and the continually increasing chart above show that macroeconomics has minimal impact on the markets over time. Long-term, the market always recovers . Additionally, events like inflation, rising rates, and war are immaterial if a business is high quality and managed correctly . Coca-Cola is an excellent example of a long-lasting, outperforming, and excellently managed company. Their stock has continued to beat expectations for a century – this is not due to favorable macroeconomics over that time frame, but rather how well the business had been run . Their earnings power and excellent management over decades have made the company a great investment, and that trumped whatever happened with inflation, global conflict, or other macro events over time. This can be seen in the chart below, detailing the company’s stock history over the past sixty years. The business has fluctuated over time, but over the sixty years observed in the chart, it can be seen why this has been an excellent long-term investment . Coca-Cola has prevailed through challenging macroeconomic events - World War II, the Vietnam War, the dot-com bubble, and the credit crisis - yet it has generated tremendous returns . A number of bad things could happen to an economy; however, if a company’s underlying business is strong and is coupled with a good management team, it’s likely to be an excellent profitable investment . It is expected for the economy and markets to go through booms and busts, but it should be noted that there has always historically been a recovery , even throughout periods of uncertainty such as those present today. The best way to survive during times like these is through investments in high-quality businesses with excellent microeconomics . As previously stated, it is tough to predict what will happen to the economy on a large scale, but looking at companies through a microlens adds far greater certainty to the success of an investment. By: Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based

"The single-most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business." - Warren Buffett An inflationary environment is viewed as negative due to its ability to turn suspected profits into losses . If an investment in a stock, bond, or savings account produces a lower return than the inflation rate, the investor loses money . Due to this possibility, years of positive returns can fade into nothing if invested in the wrong assets. Inflation hurts the economy because it erodes the value of cash , meaning a dollar will not buy as much tomorrow as it does today. For example, in the diagram below, the $1.25 that buys a single cup of coffee in 2010, would not be enough to pay for the same cup in 2019. The price is increased to $1.59 because of the decreased value of the currency. However, there is little need to worry in an inflationary environment if the correct assets are selected . Historically, there are some asset classes that are safer and have outperformed during times of inflation: 1. High-quality companies with pricing power Since the dollar is worth less from the effects of inflation, prices must rise to maintain the relative worth of products and services. This means businesses may not be as profitable due to having to pay more for inputs and labor in production. The damages that this causes for a business should be worrisome for investors. Lower profitability due to rising input costs can make the difference between a company operating at a gain or a loss , negatively impacting stock price as investors see the inability of the business to make money. High-quality businesses with the capacity, known as pricing power , to raise prices without losing volume can maintain sales and profitability during inflation. Investing in a company with pricing power helps prevent the adverse effects mentioned above that are caused by higher input costs. These investments are typically in areas where demand is highly inelastic , such as consumer staples and biotech. Inelastic demand for a good or service represents the concept that the overall quantity demanded for that product is barely affected as price changes. For example, people need to buy food and medicine, whether inflation is present or not, because they are essential products in day-to-day life . Even with higher prices, consumers remain willing to pay for a product or service they truly need. Therefore, in an inflationary economy, pricing power is key – the consumer absorbs the higher price due to inelastic demand. When there are few alternatives to the company's product, people have no choice but to keep buying it, especially if it is an essential item in their lives. Rather than the firm enduring the negative impacts of higher costs, they leverage their pricing power to retain high levels of profitability as long as demand remains relatively equivalent to its levels before the price increase. At the same time, this ability brings both the company and its investors greater comfort and stability through rougher economic conditions. Companies that have the most pricing power are near-monopolies . An example of this is Anheuser-Busch's ownership of multiple top-selling beer brands. They control over 40% of the world's beer profits and produce about a quarter of the beer supply. With strategic acquisitions over the past few years, Anheuser-Busch remains in an excellent place to continue this near-monopoly. Since the company controls a significant amount of production , they have pricing power. Beer, classified as a consumer staple, also has fairly inelastic demand, so consumers will continue buying Anheuser-Busch's products independent of the economic environment. Moving to utilities, another essential service, many of the same benefits of companies with pricing power are bestowed to investors during inflationary times. Utility companies provide amenities like water, electricity, and natural gas to both residential and commercial properties. Maintaining much of the public infrastructure and providing services that people cannot live without , like heat, air conditioning, and water, utility companies see little change in demand during inflationary times. 2. Real estate or other long-contract assets with inflation protection There is another group of assets that perform at a higher caliber throughout inflationary pressures, With contracts that allow for price increases . For example, rental properties, power plants, and gas pipelines produce very stable cash flows with built-in pricing power in their contracts with consumers. These assets have considerably high inelastic demand; Housing, energy production, and infrastructure are essential for everyday life . During periods of inflation that bring higher prices to most items, people are willing to sacrifice their discretionary spending to pay for their mandatory expenses , like a place to live. Pertaining to real estate, investors should avoid properties that do not allow the increasing cost of inputs to be passed on to the end consumer in their contracts. Rent-controlled real estate is especially susceptible to inflationary pressures. Another appeal of real estate is that mortgage payments are fixed, which means any increase in monthly rent is an additional profit. For example, if a 30-year mortgage requires $4,000 payments per month and the current rental rate of a property is $5,000 per month, the rental rate can be increased to $5,500 per month, leveraging pricing power. This changes monthly profit from $1,000 to $1,500, a 50% increase in rental income. Below is a graph of equity REITs compared to the S&P 500 during the high inflation in the late 1970s and early 1980s. The dominance of real estate during inflation is illustrated in the graph; many economists draw parallels comparing the current economic environment to this inflationary period. Data Sources: reit.com; macrotrends.net 3. Businesses purchased at a discount to their intrinsic value The final method of navigating investments through inflationary times is buying a business for less than its intrinsic value . As opposed to the other investments discussed in the article, these businesses do not need to have significant pricing power . Sometimes the market does not realize the true value of a company, giving investors a great opportunity to capitalize on an undervalued business . To demonstrate the power of this strategy, take a company that is, for example, worth $100 but priced at $50. Suppose we can ascertain that a company's long-term fundamentals are unchanged. In that case, the company will reach its fair value over time. In other words, within typically 2-3 years, the company will go from $50 to $100, with annualized returns being 25%. This return is multiple times higher than the current inflation rate of about 8%. It is a great way to outpace inflation . It is essential to invest intelligently across all market conditions. However, the best way to do this is to combine the first and third strategies listed above. High-quality companies with pricing power selling at a discount to their intrinsic value is the most promising approach to navigating uncertain inflationary periods. At the same time, an investment that has both qualities would most likely prove to be an ideal asset to hold through any economic environment, including the market conditions existing today. Siddharth Singhai Chairman & CIO of Ironhold Capital Disclaimer : This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

“Lack of resale inventory combined with strong consumer demand continues to boost single-family home building.” - Chuck Fowke, National Association of Homebuilders (NAHB) Chairman At the moment, there is a historic opportunity available in the homebuilding sector, since 2014, there has been a significant undersupply of housing , offering homebuilders a great opportunity for profit as they take advantage of this deficit. As the shortage continues through the current, uncertain economy, this sector will see much more safety and security of investment than most others. Housing Demand: Historically, the United States population has grown constantly and consistently on an annual basis. According to Census data, the total number of households increases, on average, by about 1.2 million per year. Additionally, over the course of 2021, the most recent full year of Census data, total households increased by almost 1.5 million, or 1.15%, as the market recovered from the Covid-19 pandemic. This means that, in theory, there must be 1.5 million more homes on the market to ensure a place for everyone to live, representing the demand in the housing market. Housing Supply: With the new needs of consumers in the housing market, homebuilders cannot meet the demand with housing starts. Inventory, the number of vacant housing units for sale on the market, hit an all-time low in November of 2021, as seen in the graph below. This means there are few options for homebuyers to choose from, increasing the need for new homes . Annual privately-owned housing starts have exceeded their historical average since 1959 of around 1.4 million. The current levels sit just above 1.7 million annual housing starts, yet homebuilders still can not meet demand. Even with all of these new homes being started and added to the market, the new supply and existing inventory still cannot handle the influx of demand . Since the credit crisis, housing inventory has steadily decreased. In contrast, housing starts have steadily increased, illustrating that housing demand has outpaced supply . This has left a large gap to fill for homebuilders as they work to build enough homes to keep up with the growing demand. Additionally, it will be hard for homebuilders to bridge this gap. The construction industry is short of 650,000 workers , according to a model that the Associated Builders and Contractors developed. Also stemming from the backlog caused by increased housing demand is a material shortage . A statistic provided by the National Association of Homebuilders stated that 90% of homebuilders reported materials shortages and delays in sourcing the materials. Therefore, due to the mere cost and shortage of both materials and labor, the timeframe for completing a new house has increased. Surge in Home Prices: Lack of supply has compounded into home prices increasing tremendously over the past few years. It is simply within the dynamics of supply and demand - prices rise when supply is low, and demand is high . Housing demand has reached a level where buyers are competitive , increasing the average home sale price due to bidding wars. The current median home price is not far off from the all-time highs of $411,200 recorded in the third quarter of 2021. With inventory at an all-time low and sales for new and existing homes at levels only seen before the credit crisis. The rising prices are bound to continue till we reach a normalized housing supply. The Housing Cycle: Just as the broader economy follows a business cycle with expansions and contractions, the housing market has its own cycle. The early 2010s marked the start of the recovery phase for the housing market after the credit crisis and giant housing bubble. New home construction slowed down in this period as the market absorbed the oversupply from the credit crisis. From that time until the present, there has been a slow expansionary phase as housing vacancies have declined and the construction of new homes has been steadily increasing. With the record low levels of inventory and the inability of housing starts to meet the increasing demand, the expansionary phase likely continues for the foreseeable future . Especially with the added difficulties of the supply chain and inflation, homebuilders still have much work to do to catch up. The Homebuilding Sector's Undervaluation: Houses are being bought at a rate where new homes cannot be built fast enough . Even with all of this happening, the relative valuation of the homebuilder sector remains very cheap compared to historical averages . The average homebuilder is only worth 6x earnings right now, well below the historical average since 2005 of the low teens. With the current high demand for housing and a 5-year projected earnings growth of the high teens, it is safe to say that there is much room for the sector to grow over the next couple of years. In addition, the industry has a return on invested capital (ROIC) of the mid-to-high teens, which is how well a firm allocates capital to generate profits. This is well above the broader market average of about 10-12%, showing homebuilders' high levels of profitability. Possible Risk Factors to Homebuilder Growth: Given the aforementioned statistics, some are still worried about the demand retreating due to rising rates. With most Federal Open Market Committee members expecting rates to stay below 2% in 2022, it will take more than that to deter new mortgages . Rates are still low enough to buy a new home with a 30-year mortgage comfortably. Despite the rate hikes this year, the demand in the housing sector stays strong . Why We Think This is a Great Opportunity: With all of these factors considered, it can be seen why the housing market is likely to continue its boom . High demand remains constant as very few homes are left on the market , and homebuilders struggle to construct enough new homes. While the boom may not be as drastic as in late 2020 and 2021, housing prices will continue to rise steadily . It is hard to predict by how much or for how long these conditions will continue, and supply-demand dynamics should always be considered locally on a state-to-state basis. However, it is safe to say that the current environment still offers much room for profit in the real estate market at large ; Another 2-3 years of solid home prices makes the homebuilding sector a very attractive place to be for investors. By: Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based

“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” -Peter Lynch The current turmoil in the stock market has driven many investors away. Since 2022, the Nasdaq has been down 24%, and the S&P 500 has dropped nearly 20%. ( Source: Investing.com ) It seems like the stock market's performance has proven the adage" Sell in May and go away" to be true. However, investors should value the opportunity that arises from the recent downfall. The U.S. economy: There are multiple factors contributing to the stock market’s lousy performance. For one, the United State’s GDP has decreased for the first time since quarter two in 2020, causing investors to fear and panic. But if we expand our time frame, we can see that one minor disruption in a few quarters is a mere blimp compared to the long-term U.S. GDP’s secular uprising trend. There is no need to be scared of a minor decrease in one, two, or even three quarters. As per the graphs below, the U.S GDP has fluctuated over the years as the U.S experienced Cold War, Dot Com Bubble, and the 2008 Financial Crisis. However, the short-term decrease in GDP when these crises happened is insignificant compared to the long-term GDP trend, which is a rising secular trend. ( Source: Macrotrends ) . ( Source: Macrotrends ) . Individual companies: Some may still fear and panic about some companies’ slow growth. For example, Amazon’s operating income decreased to $3.7 billion in the first quarter, compared with $8.9 billion in 2021. There was also a net loss of $3.8 billion in the first quarter, or $7.56 per diluted share, compared with a net income of $8.1 billion, or $15.79 per diluted share, in the first quarter of 2021. Other blue chip stocks, such as Walmart, also experienced a slowdown. Walmart’s net quarterly income fell to $2.05 billion, or 74 cents per share, compared with $2.73 billion, or 97 cents per share, from a year ago. ( Source: Walmart ) However, we need to view these problems in the current context. With inflation rising, it is natural for many households to save money and purchase cheaper items since they are not receiving any stimulus checks. Furthermore, grocery stores like Walmart face increasing supply chain costs that take a bite out of their earnings. Walmart's inventory also increased by 33% as it made aggressive buys to get ahead of inflation and make sure items stayed in stock. ( Source: CNBC ) The rising logistic costs result from supply-side disruptions caused by the pandemic, which will most likely resolve over the long term. Therefore, we shouldn't think that the future of Walmart is gloomy just because of one or two-quarters of lousy performance under the current economic environment. Furthermore, the average lifespan of a company on the Standard and Poor's 500 Index is 21 years, which is 84 quarters. ( Source: Statista ) One-quarter of bad performance only constitutes 1/84 or 1.19% of a company's lifetime, which does not affect a company's long-term fundamentals. Furthermore, Any business's fundamental or intrinsic value is the sum of all cash flows it will generate in the future discounted to the present. As previously mentioned, bad performance in one quarter is unlikely to change a company's fundamental or intrinsic value permanently. Therefore, Walmart's ability to generate long-term future cash flows is most likely unchanged. Let’s look at Walmart’s stock price since it went public. Although there were seemingly major downfalls at specific periods, Walmart rebounded strongly and has maintained a steady upward trend . Additionally, looking at Walmart’s earnings per share (EPS) for the past twelve years, we can observe that its EPS has rebounded strongly after every significant downturn. ( Source: Macrotrends ) . A similar situation is also happening to Amazon. The pandemic and subsequent war in Ukraine have brought unusual growth and challenges to Amazon in early 2022. Amazon has been navigating a host of economic challenges , including rising inflation, higher fuel, and labor costs, and global supply chain snarls. But its history is perhaps key to understanding why these problems don't matter. Looking at Amazon's past EPS(Earnings Per Share), we can see that it grew rapidly and steadily and survived crises such as the Dot Com Bubble and the 2008 Financial Crisis. Ultimately, the company's long-term fundamental value drives a company's growth. As we can see, Amazon's stock price kept increasing, mirroring its growing earnings. ( Source: Macrotrends ) . In conclusion, Investors should always be focused on the long-term fundamentals of a business as that is what ultimately drives a company's stock price over the long term. Most Importantly, any event that doesn't directly affect a business's long-term cash flow generation abilities can be safely ignored. By: Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based

All four major index funds have suffered significant losses since 2022. The Russell 2000 Index has dropped 33.2% from its all-time high, and the Dow Jones, which consisted of mainly blue-chip stocks, has decreased by nearly 20% from its all-time high. The stock market has officially turned bearish , which makes it critical for investors to manage their portfolio properly in order to survive the bear market. Therefore, it is important that investors can complete the following tasks Identify the high-quality businesses in their portfolio Determine the intrinsic value of their holdings Ensure they have sufficient margin of safety in their holdings Plan with their financial advisors Credit: Beaconsi.org In this article, we will discuss how investors can identify the high-quality businesses in their portfolio. Investors should start looking over each company in their portfolio and determine which companies are high quality and profitable. Now, many may wonder what defines a high-quality company. A high-quality company should exhibit the following characteristics: high returns on capital and modest leverage. Under the current environment, the FED is raising interest rates and the demand is receding. Low-quality businesses without attractive products or good business strategies will be likely to experience substantial loss as purchasing activities will likely decrease in the upcoming years. Low-quality companies usually have tremendous debt, lose money from its core business activities, and suffer from poor management. The return of capital of a company serves as a measure of the profitability and value-creating potential of companies relative to the amount of capital invested. For example, if you start a hot dog stand in Manhattan, and you earn $3 from each hot dog that you sell for $10, your profit margin will be 30%. Let’s say the initial investment is $10,000, and if you sell 10,000 hot dogs during the year, your return on capital will be 300% . Companies with high return on capital indicate a sustainable business model producing massive profits and that these companies have superior competitive positioning in their industry. Take Apple, for example. Apple’s return on capital is 54% in 2021, meaning that the company earns $1.54 for every dollar that it has put into the company. This is the end result of Apple being one of the most successful companies across the globe. Credit: Apple When it comes to debt and leverage, many investors may think debt will hurt a company more than it helps. Although the idea of which may not be one hundred percent correct, high leverage will magnify a company’s risk significantly if there is a downturn. Low-quality companies often do need to borrow a lot of money to support development and innovation; however, too much debt can greatly diminish a company's return on equity and profitability if there is a downturn. A great business doesn’t need leverage to earn a high return of capital. In times of economic crisis, businesses with lots of leverage and weak balance sheets are the first ones to go out of business. Vast majority of business failures or investment failures are a direct result of excessive leverage. Credit: Google Image During recessions, depending on leverage, the same hot dog stand can be in two different situations. Low Leverage: The business will continuously generate profits and survive when demand recess due to its high-profit margin. Will be just as profitable or more when demand comes back up again. High Leverage: The business’ capability to produce substantial profits will be severely limited as most of which are going into loan and interest payments. Unlikely to stay solvent during an economic crisis. Credit: Google Image Furthermore, temporary demand fluctuations do not affect long-term demand , which means companies with profitable products and modest leverage will continue to thrive in the long run. In the long run, high-quality businesses are like tennis balls ; when they get hit by a crisis, they will always find a way to bounce back. Low-quality businesses, on the other hand, are like eggs. Whenever a crisis strikes them down to the ground, they crumble permanently. By identifying high-quality businesses, investors can be assured that their portfolio will be able to handle economic downturns with ease , and come out the other side stronger. In the next newsletter, we will discuss how investors can calculate intrinsic value and can make more educated selling and buying decisions. By: Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based

In the previous article , we discussed the first task for investors to complete to survive under a bear market: identifying high-quality businesses in their portfolio. In this article, we will discuss task two, calculating the intrinsic value of businesses that can allow investors to make better buy and hold decisions. After identifying the high-quality businesses in their portfolio, investors should start determining the intrinsic value of the companies they own. Especially in the present day, with high inflation and sour markets, it is crucial to find a company’s intrinsic value. A company’s intrinsic value is key to surviving a bear market and making more intelligent buying, holding, or selling decisions. The intrinsic value of businesses is the present value of all expected future cash flows generated from business activities which are then discounted at an appropriate discount rate. The intrinsic value of a business differs from the market price because it is reached through objective calculations rather than the animal spirits of the markets on any given day. Credit: Market Business News Such a difference is shown in the graph above. As the graph shows, the stock market is efficient over the long run yet inefficient over the short run. The market value of a company can fluctuate significantly in any direction during the short run; however, the long-term movement will eventually reflect a business' intrinsic value. Company ABC, with an intrinsic value of $10 billion, can have a market cap of $16 billion when the market sentiment is optimistic and drop to $3 billion when it is pessimistic. However, this company will eventually arrive at its intrinsic value of $10 billion. There is one way that investors can go about calculating this value through qualitative and quantitative techniques. Qualitative as the name implies is everything outside of the numbers including the ethics and intangible characteristics of the business. While the quantitative side includes factors such as the numbers on the statement sheets and exact cash flows of the company. Take the company ABC, for example. ABC'S intrinsic value is derived from using a DCF model, which for inputs requires factors such as growth rate and projected cash flow. To find the values of these factors, a qualitative analysis must be deployed. Using qualitative analysis, investors are looking for factors such as competition, business demand, operating infrastructure, and other factors, which determine ABC’s growth and profits. Therefore, Investors have to take both quantitative and qualitative factors into account to calculate the intrinsic value of companies. Credit: Corporate Finance Institute Take a McDonald's store, for example. The qualitative and quantitative analysis must be used to value this McDonald's store. Qualitative Analysis: This McDonald's store has experienced an average of 500 customers daily, and the average profit from each order is around $5.5. Since the store opens daily, we can roughly estimate that it generates $1,000,000 in profits yearly. Furthermore, there are only two fast food restaurants within a five-mile radius of the store, and no new restaurants have opened up in the past year. The neighborhood where the store is located is expected to have a 5% population growth, and the store is looking to hike its price by 5% annually. Lastly, the owner is looking to close the store and sell its equipment and real estate at the end of year five, yielding a $1,000,000 income or the terminal cash flow. Therefore, we can assume that this store's terminal value will be $1,000,000, and its profit will grow by 10% over the next five years due to low competition, customer growth, and price increase. Credit: Google Quantitative Analysis: Investors can find the intrinsic value of the McDonald's store by using the above formula.The idea behind this formula is to discount all the future cash flows from this McDonald's using a rate that represents your opportunity cost. A typical discount or interest rate that investors can use is 10%, which is the long-term average return from investing in equities. Using this formula, investors can find the intrinsic value of the McDonald's store, given that the growth, which is 10%, remains steady for the next five years. Through valuation using conservative assumptions, investors can find that the McDonald’s store’s intrinsic value is around $5.1 million. Investors can use such methods to figure out the value of most equities. However, the key is buying the equity at much less than its intrinsic value, which will both reduce risk and improve return at once. In the following newsletter, we will discuss the importance of having margin of safety in your investments is key to surviving a bear market. By: Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based

In the previous whitepaper , we discussed calculating the intrinsic value of holdings, allowing investors to make better buy, hold, or sell decisions. However, the next step after finding the intrinsic value is determining the Margin of Safety of your holdings. Using the Margin of Safety, investors can buy a company at a market value much less than its intrinsic value, which can reduce risk and improve return simultaneously. Credit:Samco The concept of Margin of Safety was first introduced by the renowned value investor Benjamin Graham and his pupil Warren Buffet. It was soon popularized as investors find it effective as a cushion against errors in analyst judgment or calculation. As Warren Buffett says: “ You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing. ” The Margin of Safety is essentially a buffer zone for human error, bad luck, or unexpected events such as Covid-19. Take the McDonald’s store from our previous whitepaper , for example. We valued the store to be around $5.1 million, and the store will be sold at the end of year 5 for $1,000,000. If an investor buys the store at $4.5 million and all assumptions are accurate, they will get a 15% return after five years. The return is calculated by adding all the future cash flows that are discounted at the proper rate, subtracting the cost of the store, and divided by the cost of the store. However, the return may decrease if significant changes happen in the future that affect the store’s profitability or the neighborhood in which the store is located. For example, if people move out of the neighborhood around the store due to unexpected policy changes, and five new fast food restaurants with lower prices are built near the McDonald’s store, the assumption would completely change. As customers decrease, the store could shrink at -30% annually. The valuation of this store would change as well. Worst Case Scenario If the investors bought the store at $4.5 million, they would’ve experienced a 36% loss. However, suppose they use the Margin of Safety of 50% and buy the store for around $2.5 million through a bargain. In that case, the investor will still profit and make around a 14% return on investment even if the pessimistic scenario plays out. If everything is held steady and the optimistic scenario occurs, the investor will make a 106% return on the investment, almost ten times the return if they buy the store at $4.5 million. The Margin of Safety is often calculated by utilizing the market price as a point of comparison, and depending on risk preferences, it can vary among investors. In the previous example, the Margin of Safety is derived from the following equation A Margin of Safety of 50% can be considered to be very safe as it is very difficult for any high-quality business to lose more than 50% of its value. If a business is making $100 million each year, losing more than 50% of its value means that the business is only making $50 million or less each year throughout its lifetime. A 30% shrinkage in the previous example only led to a 44% decline in the store’s intrinsic value. Under this situation, the investor would still make money if they buy the store with a Margin of Safety. Therefore, it is very unlikely for a high quality business to lose half of its intrinsic value. Thus, risk-averse investors should always strive for a 50% margin of safety when analyzing new potential investments. Furthermore, once the stock reaches its deemed margin of safety investors should be cautious about the reasoning behind the drop. For example, many tech stocks have taken an unfair beating in the current market correction due to mass psychology. Investors are moving their positions from tech to other sectors like energy because everyone else is selling their positions in tech, scaring away more investors. Nevertheless, many of these tech stocks have not changed in any way fundamentally. This would be a special opportunity for intelligent investors who understand that the long-term demand in the tech market has not changed and the current short-term fluctuation is temporary. However, suppose the company’s price drop is driven by permanent, fundamental change such as emerging competitors, an adjustment in government regulations, or a complete change of management team. In that case, the short-term fluctuation would not be temporary. In conclusion, investors can be certain to achieve the Margin of Safety by buying businesses at a significant discount to their intrinsic value, and understanding the reasons behind the declines in a given stock price. In the next article, we will discuss the final task in surviving the bear market: strategizing with your financial advisors. By Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based

In the previous whitepaper , we discussed determining the margin of safety of your holdings, which can reduce risk and improve return simultaneously. In this whitepaper, we will examine the last task for surviving the bear market: planning with a financial advisor. Diversification Investors must plan their asset allocation thoroughly with a professional advisor. The first thing on the table is to ensure that your holdings are sufficiently diversified across asset classes and then within an asset class. Through diversification, one can mitigate unsystematic risk, which is a risk that is associated with a single company or single industry . For example, an investor whose portfolio solely focuses on airline stocks would’ve lost most of his money during the pandemic. However, suppose he decides to diversify his portfolio and build some positions in tech, medical care, and semiconductors. In that case, he may still lose some money but will be in a much better situation. Therefore, it is crucial for investors to have a diversified portfolio during the bear market. Credit:warrior training Leveraged Positions The second item on the checklist is to identify any high leverage positions. When the market is rising, having high leverage positions can lead to lucrative profits. Conversely, in a bearish market, high leverage positions face the risk of forced liquidation , which happens when investors fail to meet the margin call. In the current market, volatility in the foreseeable future would likely increase, which means if the market continues to decline, your positions can be wiped out completely . Therefore, leveraged positions are extremely dangerous, should be handled by financial advisors, and should be avoided if possible in our view. Credit:fvptrade Holding Period The next thing to be discussed is your holding period. For many investors looking to retire, their holding period may only be a year or two. For others who just started investing, their holding period can be decades. Investors near their retirement may have to sell their stocks in a bear market, which is the worst thing to do. Investors in this situation shouldn’t panic but thoroughly prepare for capital allocation with their financial advisor. Investors whose period is more than five years should treat this bear market as a bargain. As mentioned in the previous whitepaper , many tech stocks have taken an unfair beating in the current market correction due to mass psychology. Investors are moving their positions from tech to other sectors like energy because everyone else is selling their positions in tech, scaring away more investors. Nevertheless, many of these tech stocks have not changed in any way fundamentally. Investors should prepare a strategy with financial advisors for buying cheap and high-quality stocks like this. Liquidity Liquidity is another important matter to be discussed. Investors should figure out whether or not they need large amounts of cash in the upcoming future for events such as a wedding or home purchase. If investors have insufficient liquidity, they need to first stop investing more money into the stock market, and perhaps move to safer short-term instruments like T-bills. Last thing that investors would want is to be forced to sell their stocks in a bear market. Strategy After all of the above factors are taken into account with a financial advisor, investors should then have an answer to their strategy: defensive or aggressive. For those that have a short holding period and need liquidity, they need to be defensive . The average bear market has a 16-month duration. Unless investors can wait that long, they have to be defensive with cash instead of “buying the dip”. However, if you already have sufficient liquidity and a long time horizon, you are getting a bargain at the market’s current price, which means you can be aggressive. Buying in the declines often led to good results historically speaking. The average 12-month return after the end of a bear market is 43.4% while the average stock market return is about 10% per year. If one decides to be aggressive, there can be great returns coming out of the bear market. However, investors must discuss the exact strategy with their financial advisors before attempting to size up their positions. Credit: Wells Fargo In conclusion, investors should plan their strategy with their financial advisors after examining the following tasks: diversification and leveraged positions within their holdings, holding period, and needs for liquidity. After all, if your portfolio has been severely affected by the bear market, do not panic. Read our previous whitepaper on the market’s recovery after a crisis. Here Is Why You Shouldn't Sell In May and Go Away By Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

In the previous series of whitepapers, we discussed how to survive the bear market through fundamental investing and financial planning. In this whitepaper, we will discuss the enormous challenges cryptocurrency industry faces and whether or not it will be a good investment . Credit: The Motley Fool The idea of a blockchain has significantly challenged the conventional manner of "transaction" since a report written by developer Satoshi Nakamoto was first published. Over the past decade, Blockchain technology extended its application to various sectors. One major application is cryptocurrency transactions . Although cryptocurrencies have gained significant popularity among investors, their classification as an asset is yet to reach a global consensus . Amid a worldwide economic recession, the cryptocurrency industry faces enormous challenges following the plunge in crypto prices. Many investors are confused about crypto and blockchain; a simple analogy could explain this. Think of crypto as your credit or debit card and blockchain as the banking system that allows transactions to happen. Blockchain is a digital payment system that doesn’t rely on banks to validate transactions , making it decentralized . Peer-to-peer technology makes it possible for anybody, anywhere, to send and receive payments. Various Types of Cryptocurrencies Credit: Blockgeni Payments made using cryptocurrencies are digital entries to an online database that records individual transactions. A public ledger keeps track of all bitcoin transactions that involve money transfers. A Blockchain ledger differs from a typical accounting ledger as it is shared and immutable , meaning transactions cannot be hidden or deleted once they have occurred. Over the past few years, crypto has raised controversial debates about whether it is an asset. We believe crypto is not an asset . An asset, in our view, is an entity that generates cash flow. Since crypto cannot generate cash flow, it has no intrinsic value and cannot be valued. If Bitcoin’s intrinsic value cannot be determined, there’s no telling whether it’s worth $1,000 or $1 Million. To learn more about evaluating an assets’ intrinsic value, access our previous white paper here . People have considered Bitcoin to be digital gold, however, we see several differences between crypto and gold. Gold is considered a stable asset and is viewed as a favorable hedge against inflation . Gold is said to protect the owner from inflation as the value of the dollar erodes, the cost of every ounce of gold will rise as a result. This is because that gold has a rarity component to it, as it’s created inside massive stars when they explode into a supernova and are brought to earth from asteroids. This precious metal is hard to extract and impossible to recreate, holding a strong demand and functioning as a good store of value. Bitcoin, on the other hand, is easily accessible and can be duplicated as a unique coin by anybody. Bitcoin has a limited supply because of mining restrictions, but it is not a rare commodity. To meet market needs, people can always design new kinds of coins. In our view, bitcoin is not an asset that can hold value compared to actual asset like gold. Gold Volatility Hedging Against Inflation Credit: Funds Europe According to our CIO Siddharth Singhai , " We don't know what cash flows Bitcoin produces- it is sort of an exotic car, where you think it's worth a lot and it will hold its value because there are only 100s of it. But it might not be the case as it does not produce any cash flow and is not rare , there are many other cryptocurrency and you can create your own cryptocurreny. It is not like gold or like some alien metal that arrived on Earth and is limited where you can’t produce anymore of it. Saying of this, Hedge funds will embrace it as long as it does well" Click here to watch the full video on a seminar about value-investing with students from Western New England University. There are two key defining features of cryptocurrencies that make it difficult for them to be accepted as a currency; the first is their volatility, and the second is their inability to store value. For instance: If you have one bitcoin and it's currently worth $100,000, you can buy a Tesla with it. Cryptocurrency prices are very volatile; you might wake up the next morning to find that the price of bitcoin has fallen significantly to $80,000. Since the value of the currency just dropped by 20% , a business transacting through bitcoin would suffer a significant $20,000 loss in a single day. Therefore, no company will permanently accept cryptocurrency as a currency due to the volatility stated above. Volatility of Bitcoin Over the Past Decade Credit: Bitcoinist Since cryptocurrencies do not produce cash flow and are not a naturally scarce resource like gold, it is difficult to estimate their worth . From a risk-reward investment perspective , we do not consider cryptocurrency a good option to invest in as there is no real way to identify the upside or downside with this investment. We believe the value of most cryptocurrencies will go to zero or some small notional value in the long run. By: Siddharth Singhai Disclaimer: This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.