mardi 7 avril 2020

Risk related to debt

We're at war, and at war, we need some strategy. We have to understand the battlefield as much as we can. Of course, this is a completely new battlefield and a very unusual one.

But one thing is clear to me: debt levels must be low for the stocks we own. Because, even if interest rates are incredibly low, many companies won't make money for months. Those that will remain profitable will make much less money. And, when you make less money, it's much harder to face your obligations. Any of these 600 000 quebecers who lost their job over the last month and recently bought a new car will probably understand very well what I'm saying here.

So, I believe that it's very important for us to take a look at our portfolio and reduce significantly our positions in stocks with high debt levels.

For instance, even if Boyd Group is a great canadian company, with an incredible growth rate and great cash flows, it's debt level is too high for me to be comfortable in that turbulent period. Plus, let's remember that most of the cars aren't currently driven because many people are in quarantine. So, a stock related to car accidents is not exactly in it's golden period.

Take a look at every stock you own and fix a percentage of stocks with high debt level with which you're comfortable. For me, this percentage is currently low. I'm comfortable with about 15% of my portfolio in stocks with higher debt levels.

I think that debt level is probably the most important metric to look now. Because it's directly related to the life expectancy of your stocks.

2 commentaires:

  1. Thank you for the post . Makes me worry abit now . That being said I’m hoping In 2 years time the stock price will be much higher then it is currently sitting at .
    Take care

  2. Good post. Debt tied to real assets, non recourse (Brookfield) is ok i think. Unsecured against cash flows when there is none, bad.

    The S&P came very close to a 50% retracement yesterday (2749 vs 2796) i think now there is more downside than upside over the spring. Im actually up 2% for the year, moving to cash, want to buy everything back lower on a pullback.