TomB16 investing blog

At this point of the morning, we have sunk about 30% of our cash back into two stocks that show strong value. One of the stocks is a hospital REIT. lol!

 

I'm in no rush to invest more of our money but the WBI is now at 139%, which is within the window of sanity.

I have some thoughts on the future but generally don't think it matters all that much. When prices are good, I will buy. When the WBI is low, I will go all-in. For now, we have returned to our normal levels of re-investment with all DRIPs on, etc.

For several years, I was all-in. All cash was re-invested at the earliest opportunity. When we first started building cash in early 2019, it felt like the right thing to do. As the cash built up, it felt less good. By the end of 2019, it was more cash than I've ever had on the sidelines, earning almost no interest.

It's still a lot of cash but I'm pretty chill about re-entering the market. One company is a unique opportunity to buy prior to the EC and I believe another was irrationally sold-off due to COVID-19. Other than that, it is steady as she goes....

I don't think rushing a decision has ever been the right move in my investing history. Whatever the situation, doing nothing is preferable to making a move that isn't well thought out.

 

With the fed indicating a likely interest rate cut and the WBI back at the top of the sane zone, this would normally be a buy indicator.

I don't think we can simply assume this to be a time to buy but I believe buying now would not be a mistake. Worst case, you have to wait two years to realize gains.

For now, we are going to hold tight with a large but more reasonable amount of cash.

Quick note about cash deployment:

I don't buy low / sell high. I don't think it's possible to do this, other than the occasional good fortune market timing. I buy more as the market goes down with clear triggers on when to deploy cash. At the moment, I don't know if I will respect my standard triggers.

The point is, our plan is to spend money on the way down so, if there is a crash, we will not be able to hit it with a lot of strength because we will have spent down much of our cash on the way down.

 

For those who are having a hard time imagining the coronavirus having much of an economic effect, this is a satellite nitrogen dioxide image image of China taken before and after the quarantines and COVID-19 mitigations.

Industrial production is way, way down.

 

I've been catching some amazing luck, from the cash build-up to the correction to yesterday's partial buy-in. This correction has been amazing for us, so far. This has been luck, as much as planning.

There is absolutely no rush to sink the rest of our money into the market. When Q2 earning reports come out, there will be plenty more buying opportunities.

I doubt this will be a double bounce as much as a long-term beat-down. We will see how the market maintains perspective when earnings are way off.

It doesn't take a lot of volume hit to make a profitable manufacturing facility run at a loss. I expect we will see an ocean of red ink by mid August. That ought to be a nice cool breeze.

In the mean time, I will continue to buy where I see value.

 

I watched an interview with someone from the CDC and they praised the work South Korea is doing. I'm sure they are working hard on containment but they are not in China's league.

South Korea has been gaining 30 to 50 percent per day. They have blown past 5000 cases.

Italy claims to have just over 2000 active cases but that seems unlikely.

... And Iran isn't fooling anyone with their 1500 case report. Iran is wildly out of control.

Zero chance of containing this. Brace for impact.

 

We appreciate the swift over-reaction of the market, followed by second guessing and jumping back in. My wife and I offer our heart felt gratitude. Thank you.

Now it's time to decide if we want to trade the next dip or just hang on and weather it.

 

It has become pretty clear the majority of retail investors don't have the attention span to follow macro market trends.

To date, we haven't seen a quantification of the COVID-19 impact.

The market was slow to react and then it hit us with a 12% correction. To be fair, that wasn't entirely unreasonable.

Now the market is gaining a decent chunk of Friday's losses.

It seems reasonable that we will see another correction in about 30 days, when profit warnings start coming in. I expect the impact to be small so it might be a small correction.

It also seems likely we will se a much larger correction in 120 days, when Q2 profit warnings start coming in. That's when we will see more significant impact and, I'm guessing, a more significant correction.

If my theory is correct, the market has almost no attention span at all.

 

We are now in the heart of re-defining history, with regard to the coronavirus. Some all-caps and bold face later and they will convince themselves they were 100% correct about COVID-19, all along. A successful investor will try not to be one of these people.

This is a great time to assess your situational awareness chops with some self evaluation and either make any necessary corrections or confirm you are on the right track.

Uneducated opinions on the virulence and medical impact of COVID-19 are an exercise in hubris and a waste of bandwidth.

Here is what matters to the investor:

- is it going to spread? (can be tracked with data that might be questionable but helps in this regard)
- how far is it going to spread? (we can now see the bulk of the global population is going to get it and vaccines will not be available in time, in sufficient quantity, to have an appreciable impact globally.)
- what will be the industrial economic impact? (the view, in this regard, is continuing to clarify but I think we have a bit of a handle on it and can start planning how we want to handle our money through this crisis)
- what will be the market impact?


TomB19's take

The virus is bad, far worse than the flue, and a huge portion of the population will get it.

It will likely have a profound impact on industrial output on the short and medium term.

I try to stay away from assessing market impacts, as my track record has been dismal, however, I don't believe we will see a global shut-down. I believe we will see impact but not an economic shutdown. I would not bet even a week's wages on that assessment. I recommend readers do not, either.


Let's drill into a worst case scenario.

If a factory has thousands of workers, at some point 10% of them could be out with coronavirus. Those workers can be expected to return to work in 6 weeks. During those 6 weeks, other workers will come down with the virus. It's possible we could see total factory closures up to a month in duration due to quarantine.

Once workers get past the virus and return to work, it's likely they will not become re-infected with the virus. Epidemiologists have said we don't yet know if it is possible to get COVID-19 twice, as some virus can have repeat infections, but they admit it is unlikely. With early victims back at work, the plant will enter a turnover cycle where leaving workers will be replaced with recovered workers.

I think it's clear, at this point, attrition is not going to be a major factor with regard to industrial production. Workers will die but it will be rare. COVID-19 is lethal to the weakest segment of the population, not workers in the 20~50 year old range.

A worst case scenario would expose a factory to 2 or 3 quarters of significant impact. Can your companies survive three bad quarters? Mine can.


Let's consider a likely case scenario.

It's too early to predict all factories will be ravaged by coronavirus. I suspect the impact will be less than 20% factories will be affected at all. This is subjective on my part. Those impacted will be impacted for 2 or 3 quarters.


A healthy company should be OK to survive the coronavirus. The biggest impacts will be manufacturing with long supply chains. Tesla appears to be doing OK but I suspect they, along with other automakers, are going to take a hit on this. We do not yet know how this will play out.

Businesses with shorter supply chains can be expected to endure little to no impact.


So:

facebook - little to no impact

apple - significant impact

netflix - little to no impact

google - little impact but they are exposed to advertising revenue which will vary with the health of the economy

 

Now, why do I think the economy will fail and expose us to a bear market?

When growth is as low as we are currently experiencing, a small negative impact will turn a market from bull to bear. Economies gaining 2% can easily end up losing 1%. Boom turns to bust.

None of this is the same as blood in the streets, people foraging for food. I'm not aware anyone is predicting that.

However, it is one hell of a lot easier to make money and think you are an investing God in an expanding economy. It is extremely difficult to make money in a shrinking economy, even if it is just barley shrinking. It's a bit of a knife edge.

Most people won't realize they are losing money, because most people seem to grossly over-report their gains and live in a fantasy world. Still, there is a domino effect that happens when things start shrinking that causes an over-reaction.

There is no question in my mind, there are very good times ahead. For those who have portfolios dominated by solid distributing companies like REITs (but not exclusively REITs), and resist the urge to purchase anything that isn't at a decent discount, I expect to see a whole new batch of wealthy investors emerge in the next few years.

I have no problem leaving our new cash in a low return, fixed income, vehicle for the foreseeable future. Opportunities will be seized when presented. I will not jump before.

Existing investments are in good shape and will simply be allowed to ride the market. I'm aware the odds of us losing net worth are extremely high. The reason I am "letting it ride" is because we are investors. We want to own companies. These companies are our partners in retirement.

May the markets smile upon you all.

 

One final COVID-19 thought.

I've been thinking about scenarios which might yield a complete cessation of coronavirus response. Literally do nothing and let it take it's course.

When I consider the idea of a country which does nothing versus a country which interrupts it's business cycle with quarantines, etc., I wonder how long we will go before we start ignoring it: Keep the factories open, stop the vast majority of testing, everybody wears a mask, and just carry on.

Halting all global industrial production would cause more than a 2% mortality rate. The cure would be worse than the disease.

It's not yet time for this line of thinking but it's something to consider. I don't see a scenario in which all global industrial production is halted, even for a tiny period.

 

Not exactly.


In case your scroll bar is broken, here is the quote.

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WXYZ, I have a lot of respect for you and wish to treat you with the regard you have earned.

In this case, however, I do not share your point of view. I don't see conflict, I just cannot allow you to redefine the conversation to smear out my point of view. We do not think alike on this.

I believe in science. I believe the data has value. I can see the data is flawed. I can see a few scenarios that fit the data, any one of which could be correct.

I absolutely do not equate COVID-19 with influenza. Both are severe but they are a false equivalency. coronavirus can spread before a carrier shows any symptoms. coronavirus has a higher mortality rate.

We had a pandemic a bit similar, a century ago. The Spanish flu. The Spanish flu killed a lot of people. It terrorized the planet but only infected about a quarter of the global population.

This is different than the Spanish flu. We are more urban. We have global travel. Every country is multi-cultural.

Back in the US, once COVID-19 rips through the homeless population who don't have healthcare, the outcome will be identical to a third world country. There will not be a way to control it but mitigation efforts will improve the survival rate.

At some point, I expect business to adopt policies of telecommuting where possible, face masks, mandatory hand washing, disinfection stations, etc. Not like the flu. Not the same mortality rate as the flu. Not the same business impact as the flu.

I respect your position but I'm going with science on this one. Actually, I go with science on pretty much every topic. I even believe global warming is real and has been accelerated by industrialization. Who would have imagined that someone at my level of net worth would empathize with people and think science is a thing?

 

While I'm here, I've been noticing a narrative that masks don't help so please stop buying them.

Masks don't work? Why are they manufactured?

If masks don't help, how come some of the same people telling us not to use them wear masks to deal with isolation patients? Hypocrisy? I wager so.

I'm familiar with isolation protocol. N95 masks need to be fit and tested to minimize leakage but this is not a difficult procedure. N95 masks do not filter out all particles and virus but do minimize it.

Someone wearing an N95 mask has a higher chance of surviving COVID-19 because they will have a lower viral load than someone who is not wearing a mask. That gives their body more time to generate T-cells to fight the virus. Any mask will help, even just a piece of cloth, but N95 is best.

I'm going to go ahead and wear a mask in public, where possible, but not until the virus is a bit closer to home.

 

If we agreed on everything, there would be no need for both of us on this forum or in this world, for that matter.

All good, from my point of view.

If I am wrong, it will cost me money. I'm good with that and I understand I am not always correct, to say the least.

 

As we plunge into a global recession, I think it's time to consider a couple of things.

Net worth doesn't matter, at a time like this. The net worth number is only relevant when someone is selling their portfolio. This is a time when traders sell, investors don't.

By this time in the crash cycle, it is important to have stripped away the less robust companies in our portfolio. This is what I did, starting 8 months ago. I hold less companies now than I did then, as per previous posts in this blog.

The companies that are left will lose value. I am prepared for that.

We have quite a bit of cash, although we did sink in a big chunk a week ago.

What matters now is not net worth but the number of shares held in companies strong enough to survive the storm. When this is done, if I hold significantly more shares in strong companies, that will be the mark of success. As the market returns to a reasonable level, our net worth will reflect how level headed we were during this time.

We're at a point where it doesn't matter all that much if we have DRIPs on or off. DRIPs will buy stock reasonably efficiently in a falling market but they won't allow us to optimize re-investment. Optimization can help at a time like this but the next year will net us 6.1% cash from our current portfolio. That isn't significant compared to the cash that has been allowed to accumulate.

Best wishes and happy investing.

 

As the virus blows apart Europe, it's interesting to look at Hubei province in China; ground zero. The daily death count in Hubei is lower than some other places, despite having over 3000 deaths, at this point.

It will be extremely interesting to watch Hubei develop. China has gone to great lengths to contain the virus and their efforts have not succeeded but they also have not failed. It will be very interesting to consider the outcome in Hubei, which will undoubtedly be the absolute best case containment scenario, versus a country like Italy where they are as prepared for coronavirus as a teen is prepared for the job market.

Countries unlikely to be reporting anything approximating real numbers are: India, all countries in the Middle East, and Northern Africa.

Luthansa is grounding their A380 fleet. We're going to see a lot less air travel, in the near future.

Going on a cruise is a terrific way to get the virus, at this point.

Wash your hands, don't touch your face, and invest well.