vendredi 28 février 2020

Nobody is happy at the same time

Wow, now, that was a fantastic week! It was the biggest market drop since 2008. I'm so excited! And I've bought probably more shares this week than in the last 2 years. My favorite stocks: 25 times next year's earnings stocks with a low beta and highly predictable earnings. Like Mastercard and Microsoft for instance.

I really like it when the whole market goes down. It's the only time when you can buy without thinking too much. When a single stock drops a lot, you're never sure if something stinks. When the whole market goes down, you know that it's a panic and panics are your best friend when you're an investor.

As the current crisis will continue and take more proportions (I'm not sure about that, but that coronavirus will probably not disappear anytime soon), you'll read many people talking about their financial strategy. And you'll wonder if their strategy is good or wrong. Probably that you'll be influenced by many of them, because we all seek advice when we face a new situation.

Here's my thoughts:

1- First of all, at any time, you should only own stocks that you like and that are appropriate for any time (crisis or economic expansion). If a crisis exposes the weakness of your choices, you've missed something. You should continue to read books and blogs about investment. The time when you take a crap is an excellent moment to perfect your skills about that field of interest;
2- When the market goes up, it's time to sell some stocks (reduce your positions), not when it's down (except if you've found something better and cheaper);
3- You should always have some money left to take advantage of a sudden drop. That amount of money goes with your personality. If you're prudent, save 5-10% of your portfolio for a cash reserve. If you're more aggressive, be fully invested. For instance, my cash reserve was about 15% a couple of weeks ago. It's now about 7,5%;
4- When a sudden drop happens like it happened this week, you'll be happy only if you have some money left. If you don't have any money left, you won't be able to buy some stocks with a bargain. It doesn't mean that you're not a good investor, it only means that this time, you'll be unhappy while I'm happy. It's gonna be your turn later. Because nobody is happy at the same time on the stock market.

5 commentaires:

  1. Thank you for the valuable article. The second paragraph part about the whole market being down and this being safer time to buy quality names than if they have a stock-specific kerfuffle is kind of a new way of looking at the situation for me.

    I have observed that I always have a tendency to run out of money at the start of a correction. I have deployed about 2/3 of my cash reserve money in January (I usually try to put as much TFSA contribution as early as I can) and about 1/3 in February. Overall, the new investments are worth 5% less than the purchase price.

    So far this year, I have made the following capital allocation decision:

    Ticker ; % new capital ; % gain
    ATD.B ; 24% ; -1% [new position]
    CTZ ; 23% ; -6% [new position]
    CCL.B ; 13% ; -12%
    DOL ; 10% ; -5%
    LAS.A ; 9% ; -11%
    NFI ; 8% ; +1%
    ECN ; 7% ; +11%
    LNR ; 4% ; -24%
    SJ ; 3% ; -9%

    Where do you keep your dry powder while you wait for correction? The banks pay below inflation rates. GICs lock up your money. Bonds seem to be overpriced and ripe for correction and other than an ETF are practically not accessible to me.

    I am not an economist, but from my limited readings about the past, I thought it was prudent to be close to fully invested as long as the stock earnings yields are reasonably higher than the bond yields. The central banks usually tend to increase interest rates to curb inflation before a major economic crash. At the same time, the equities tend to get very high multiples and thus low yields. During/after the crash the trend reverses... and bond yields are at record low because everyone is afraid and piles into them while central banks print money like crazy and normalized earnings yields on stocks are really high (in unadjusted yields of cyclicals very high) because they have sold off and nobody wants to own them. Right now my portfolio should still yield 6-7% in TTM earnings (more if adjust for negative earnings) while 10 year Canadian bond are yielding only 1.16%. I thought I was being fairly cautious by keeping an eye on these and making sure to not be too eager to buy expensive stocks. However, the bonds and stocks have been moving together in recent past and nothing makes sense anymore these days.

    I do not know what the next economic crash will be and I do not know how to evaluate macroeconomic indicators. In the long run, I think we are still more likely to have more inflation than deflation. Yes, the population is aging and organically shrinking in developed nations, boomers own essentially everything and are starting to retire with very few younger people able to buy up their overpriced assets or afford/desire the same type of consumption lifestyle as their parents, and technological innovation is driving productivity and efficiency higher thus crushing manufacturing costs... but at the same time everyone seems to be extremely levered - consumers, manufacturers, governments and in both developed and developing nations with no way of paying the debts in any reasonable time frame... other than hoping or making sure through policy for inflation to eat away at the debt faster than they have to be paid back. People do not want to pay taxes and the only way politicians seems to manage the books is through inflation. This is another reason why I am weary of owning long-term bonds with 1% yields or keeping a lot of idle cash.

    What do you guys think of the economic future? What indicators do you follow to make portfolio allocation decisions? When do you decide to start buying into a growing or declining market? Has your strategy worked for you in the past?

    1. I think the next earnings in 3 months will be horrible, with a lot more revised lower guidance. 6 months things will be back to normal, which will be the time to buy. Like you're suggesting, in 5 years from now we will be higher than today.

      You can park your money in, or for above 2% safe savings rate.

      I have 50k in savings, I might start to depoy 10k next month, and each month following that.

    2. Dear Blow,
      Congratulations on your disciplined and prudent cash management and sizeable warchest. I think the earnings will depend largely on the companies you own (and their Q1 numbers might not be reported until this summer...). For example, many of my holdings derive most of their revenue from North America and as long as there is no major outbreak here, their earnings will likely not be substantially impacted at least in the short term, as long as the public will not panic and central banks will not slash rates very fast. Most vulnerable companies in my portfolio are metal part manufacturers and if rates will be slashed then mortgage banks... but most of the negativity should already be discounted out of the price, in my opinion (some of my holdings are trading for 2-3x TTM free cash flow and nobody wants to touch them... even I am afraid to average down into some of them). Even though market seems to hate the smaller cap stocks for the past few years, these local companies should actually be more resilient if there is a disruption to the global supply chains, on which the multinational large-cap companies rely. Several of my holdings should also benefit by being able to acquire distressed competitors or take-over their business books (LNR is doing this in Europe right now for e.g.). Others might be able to secure government counter-cyclical spending if everything falls apart (for e.g. infrastructure / public transportation grants).

      Also thank you for the interesting recommendation. I never came across such no-lock up high interest bank deposit ETFs. For other readers, as of 1. of March, 2020:
      HSAV.TO has yield of 2.07% (gross yield minus MER)
      SCAV.TO has yield of 2.11% has yield of 1.99% (not sure if posted yield was gross or net)

      I do not have any left over investing cash reserve at the moment, just basic day-to-day safety reserve. I hold my money in EQBank usually in their chequing/savings account and 3month to 1year GICs (if they have some special higher promotional rate for them).

      EQBank chequing account has 2.3-2.45% interest rate. Eventually, their interests will probably go lower, but they should still be comparable to the above ETF values and have CDIC insurance up to 100k of deposits (plus you can open another account through their trust for another insured 100k... I think, but maybe I am wrong since I never had that much money to look into it). Only downside is that EQBank has restriction on how quickly large sums can be withdrawn and moving money to other banks can take up to 2 business days to settle, which sucks... but that seems to be an interbank issue rather than an EQbank issue.

      I worked about 28 hours this weekend and got kicked out of work on Sunday morning by my boss's boss since I am apparently not allowed to work more than 20hours in a 24hour period because of some silly labour laws, after my co-workers complained about me trying to work 3.5 shifts in a row. Now I am working on my schoolwork for this week instead. Hopefully by mid March, this should translate into a little bit more investing money.

  2. I prefer being fully invested all time, because it is easier than timing the market and long term I think it still have an edge.

    But at least I bought a few more MTY shares with the money allowed for a trip this spring that I prefer to postpone due to the virus spread and I made the bold move of selling UNP to buy very cheap SCHW.

  3. Another horrible week. My portfolio is down almost 20% YTD. Still no play money until second half of next week when I get my paycheque. Just sitting on my hands and being annihilated by the market.

    Is anyone buying CSU at these levels? At what level would be interested in buying more CSU shares? Mark Leonard has been selling his 100 shares every week. I think he has been doing this since he issued the statement about selling at over 1000 and buying under 800 last year. The high quality companies are holding their value even during the sell-off.