TomB16 investing blog

End times.

Over the last two decades, I developed a system that has served us very well. The system consists largely of Buffett pragmatism and Graham value ideas. With occasional tweaks and adjustments, it has made the decision making pretty easy.

I don't follow the system religiously. There are times when I purchase a stock that is not the highest value stock in my short list because either I have enough of the highest value company or I believe another stock has value that is not shown in the numbers. Still, we follow the system about 3/4 of the time.

The system has three modes, based on the WBI:

WBI below the reasonable window: DRIPs on, buy value, low to no cash

WBI within reasonable window: DRIPs on, buy value, 5~15% cash (I have gone down to no cash when the WBI was in a healthy state)

WBI above a reasonable window: DRIPs off, don't buy anything that isn't a good value, cash can grow to 50% without concern


The reasonable window is a wide range that is not nuanced. The bottom of the window is the same as the top of the window to me.

The system has served us well. It had us well prepared for the crash and has performed well, generally.

A month ago, I discovered a fourth operating mode: end times.

I'm used to having a pretty good idea of the medium to long term future. Right now, I'm blind. We could come out of this virus shutdown in bad shape or we could have a hard time coming out of it at all. I wouldn't know. Oddly, I have some specific short term ideas without much insight into the long term. This is opposite of my normal point of view.

The economy will re-start. There is no question of that. It won't even be all that hard.

The question comes down to: how long will it take? When will it start? When will the entire workforce be back online? What businesses will be left?

I don't have a clear answer to any of these questions but would guess as follows:

- Partial workforce restoration by the end of April.
- Entire workforce will not be restored. Most should be back to work by the fall. Many will never return to work.
- I speculate many companies will not survive this event.


Trump's plan to restore some of the workforce in early April might be a good move. It might also kill a lot of people. If done carefully, it could be a good idea. I have no confidence in the Trump administration so the prospect of a quagmire looms.

At times like this, I'm hedging with two mechanisms. 1) keep a lot of cash, despite the market deep discounts. 2) hold a bit of PSQ to leverage my cash, if things get worse.

 

For those who think we have this flu-like virus mostly under control, this graph may prove enligthening.

 

Where my view differs, from what seems to be a general view, is that I don't think we will be OK, when coronavirus is under control and this is behind us.

Economies are fragile. We are currently in freefall. The country has 100 corks but there are 10,000 holes. Not every company is going to be around, at the end of all this. We simply can't bail everyone out, backstop state and civic liabilities, and take care of health and needs of citizens. People are, generally, on their own.

Who is going to want to go on a cruise again, in the next two years? COVID-19 isn't going away, any time soon. Vaccines aren't going to be 100% effective. They never are.

Cruise lines and airlines are going to be irreparably harmed. They will continue to exist, particularly airlines, but cruise lines too. They will exist in different forms, though. Also, they will be less profitable than they currently are. These two massive industries are just the tip of the newly calved iceberg.

Banks might be just fine or we could lose several. I'm not aware of anything fundamental that is particularly out of profile but banks go down when people lose confidence, for any reason. If we all transfer our money out of our banks today, they would all be insolvent. We would discover they don't have the money they say they have; never did. They work because we don't all want our money at the same time... usually.

Bond markets are more core and essential than equity markets. Bond markets are a shambles, at the moment. The country can carry on OK, generally, with low equity valuations. It will be more difficult for companies to generate funds for M&A but not impossible. Stock swaps will be no more difficult. Companies use equity to raise operating capital, these days. This is an unusual time. Money has been cheap and freely available. Historically, companies have used bonds to raise capital for expansion. This is what the bond markets are designed to do.

One thing I do know is the world will look significantly different, one or two years from now.

The best I can do, for now, is determine a few companies and industries I feel are pretty solid for now and the future. I can also see a few companies that are the walking dead. The bulk of the economy remains a mystery to me.

 

A quick tangent on ARK Invest.

ARK formed in 2014 but I didn't notice them until 2016. At the time, I didn't know much about Cathie Wood or the team.

As I learned about them, I thought they were pretty far out there. AI, gene editing, electrification of transport, bitcoin,...... It was all tinfoil hats and unicorns to me, with the exception of electric cars.

It was clear they do not think like any other hedge fund. They are purely data and research driven. They are a real think-tank. The do not use their gut for anything.

I've come to realize they have been right all along, on a broad range of topics. No wonder they outperformed the S&P 500, last year (36% gain).

 

Things have settled down here.

We have a lot of psq, one short, some puts, drips turned off, and quite a bit of remaining cash.

We are now ready to ride along for a while.

The negative positions have done well but they do not make up for the losses we have weathered. We don't need them to. They will generate a bit of cash to attack deals in the future, if things get as bad as some are predicting.

In the years I have been planning, I have always included deep crash scenarios. I've considered 50 and 60% market losses. This could be worse than my worst case planning and it could be more difficult to survive.

I thought my system had the chops to boost our wealth by 50%, or so, in the face of a decent crash. Now, I'm holding back a big chunk of cash to live on while we weather the economic apocalypse. This is crazy.

 

Good morning.

Some are at risk. Specifically, anything office, retail, and most things industrial.

Our housing REIT barely went down, in all of this.

Our healthcare REIT was cut in half. It had gotten a bit high so it was a nice opportunity to take a huge drink from the firehose. At this point, it has recovered more than half of the losses.

Office REITs are hit hardest of all. There are some decent players, in this space, on sale at 75% off. If I was a younger investor, I would be tempted.


It's interesting that fundamentals and value were irrelevant, a few months ago. Suddenly, everyone can see that office and retail REITs are not a stable position.

I'm a bit surprised how big of a hit our portfolio took. We are currently down about 15%, even with the mitigation strategies I deployed early and the modest recovery of several positions.

 

We were down 24%, at one point. Most of the gain is equity recovery, not my mitigation efforts.

I keep coming back to the conclusion that complicated hedging strategies and other efforts are relatively low value. A well researched and implemented portfolio does well if simply left alone.

I'll take what I can get, though.

The biggest advantage to the puts which are all paying off and the short which looks like it will pay very nicely (remains to be seen...) is generating a bit of cash at a time like this when cash goes a long way. A lot of my cash went into the hospital REIT two weeks ago when it was on sale for half price but I have added to other positions, as well.

Cathie Wood, Bill Ackman, and a few other high profile people suggest we are in for a tough ride for a long time. I share their view but I don't have the same conviction in my ability to predict the future, to say the least.

I have moved forward on the following basis:

- downloaded a lot of stock certificates for companies I like and am confident will survive the coming apocalypse
- DRIPs off
- hanging onto about 40% of the cash we had when this apocalypse started and no plans to spend it

 

Today's rant is brought to you by Group Think (tm).

Over the weekend, I read a few articles and watched a few interviews with "experts" who declared there was no way to predict the coronavirus or the market crash. What a load of unmitigated bullshit.

Do not be limited by their hubris.

I doubt anyone reads this thread but I knew the market was in a precarious position and ripe for a crash, in March of 2019. At that time, I didn't panic but that was the first point at which I turned off some DRIPs and started to amass cash. It's all in this thread, back several pages.

By December of 2020, I had sold down all of our most optimistic growth prospects.

By the third week in January, I could see COVID-19 coming. I sold a couple of utilities that were at extreme valuations. That's back on page 7, or so. I also sold 30% of our Tesla shares during the height of the valuations.

At no point, did we sell our core holdings. We hold two companies for which we have never sold a single share. These are companies I wanted to hold through the financial apocalypse.

I knew where Tesla was headed and greatly strengthened our position in the last year. Most analysts can't keep up with citing where Tesla is, never mind predict their future.

I don't write this for the purpose of self aggrandizement. To the contrary, I write this because I'm just a retail investor from the mid-west who has a computer and a nest egg. I have no inside knowledge. I have no financial industry connections. My intellect does not set any records.

I have internalized the value teachings of Benjamin Graham and Warren Buffett. Oddly, I implement these teachings much differently than Graham and slightly different than Buffett. I do my own analysis. I put considerable time into thought. I have learned and internalized the lesson of not trusting my gut; ever.

It's not that difficult. If you have the ability to learn and implement theories learned, you can be more knowledgeable than any analyst on TV or print. The epic wrongness of that group makes me suspicious of their motives but I've come to believe that, for the most part, they are wrong because they are going with their gut instead of objective metrics.

If you have a set of objective and well thought through metrics that you use as signals and telemetry, you can do very well. If you aren't objective, you cannot do as well. No exceptions.

When you do badly, you need to be objective enough to identify the problem. If you immediately start explaining why the inaccuracy is a corner case and your system is the best anyone has ever devised, you will not do as well as someone who is objective. If you want to improve your performance over time, you need to be able to identify your inaccuracies. Those inaccuracies will not always be fixable but it is important to fix what you can.

Remember, when people explain to you how good they are, it is a work of fiction. They have no advantage over you. You can perform as well as anyone, regardless of their wealth or name recognition.

It is important to believe in yourself and have confidence in your analysis while, at the same time, understanding your gut is the same misrepresenting, self aggrandizing, poser the rest of the analyst community.

Don't "try your hand" at trading to see if you have the gift. You don't. If you do well with no knowledge, it is pure luck.

Hubris gained from lucky gains will hurt you more than knowledge and experience will help you.

Stay small, my friends.

 

Understanding the telemetry.

WBI = Wilshire 5000/GDP

The WBI is not a crash indicator. It is a crash *risk* indicator. It is important to understand what the numbers mean.

A WBI of 115% has the same crash risk as a WBI of 130%. That is to say, moderate. If the WBI drops from 130 to 115, that is not a buy indicator. It is a correction that was not predicted by the WBI. There isn't that much information in the WBI.

The WBI is a sanity check. Nothing more.

When the WBI goes beyond a reasonable level, that is a signal of an elevated risk of crash. It does not mean the market will crash, only that risk is elevated.

When the WBI shows an elevated risk of crash, the market could spontaneously combust, and it has happened, but generally it doesn't work that way. When the WBI is high, the market starts looking for an excuse on which to blame a correction or crash.

Like any theory, it is important to internalize and understand it. Implementing something you don't understand is not the path to success. Know it, think about it, run some scenarios through your head, then decide if you wish to subscribe to the theory and if it has any value to you.

 

Lastly,

What I own, what I would do, or what I think you should do are irrelevant. My wealth, whatever it might be, is irrelevant to you.

What matters is what you do and what you own. If you want to increase your net worth, think about saving more. Also, think about increasing your risk. Consider the former has 100% chance of working. What are the odds of the latter working? Your assessment of that risk will come down to your confidence and knowledge. How close your assessment comes to reality is factor of your objectivity.

It's OK to seek advice from experienced investors at the outset of your investing career but thinking for yourself is the most critical aspect. The more you think, the better you will do,....... if..... you are objective.

The nature of the human organism is such that people will declare themselves knowledgeable, authoritative, and highly successful. Those declarations have extreme little relation to the actual metrics. What little relation their is, will be inverse in nature. In other words, try not to swoon over the braggarts.

For that matter, try not to swoon over anyone. Believe in yourself and make learning a life long mission.

Read and succeed.

 

Tom's thought of the day: Something written in bold or all caps is no more likely to be correct than something typeset in the correct case.

 

It appears New York is at or near peak for COVID-19. This brings us to the next phase of considering economic impact.

If New York was not under quarantine, they would surely blow by the current peak. They cannot lift the quarantine any time soon.

The idea of simply sending everyone back to work is a non-starter so does not need to be considered.

The idea of continued quarantine and total shut down is also becoming increasingly unviable. The economy can only withstand so much idle time.

I suspect the next step will be a partial restart of the economy with continued social distancing.

Let's consider the numbers:

Population: 20M
Cases: 150K

If we assume a 50% under-reporting of cases, based on gross speculation, that brings us to 225K cases.

If we assume immunity after having the virus, about 1.1% of New York have been processed by the virus. We know re-infections occur but it seems to be rare. I will ignore re-infections as a statistical outlier.

Quarantine was only intended to slow the viral spread to keep the hospital system viable. It is not realistic to think quarantine can stop the virus entirely. We have too many morons to be able to deal with this epidemic as effectively as China.

New York is 37 days into the virus situation and 1.1% of the population either have the virus, have recovered, or are dead. It will take 3300 more days of quarantine (about 9 years) to process the rest of the population.

New York, being the first. Other states to follow.... later.

That brings me back to a partial re-start and some sort of economic activity that allow the state to survive for the next 16 months while a vaccine is prepared.

Two week quarantine..... lol! It will take a lot more than two weeks to process the bodies.

Let's see where PSQ is trading.....

 

By the way, despite my denigration of all people analyst, I have a lot of respect for a couple of people in the industry. One person specifically is Cathie Wood of ARK invest. Impressive lady. Her abilities far outstrip my own.

Just yesterday, she flipped from bear to tentative bull. She said this would not be the worst time for market re-entry.

I've considered the healthcare crisis, the global economic halt, and the problems before us and it is clear to me we have not yet begin to view what lays ahead with any level of sobriety.

I have a year to consider our next move. That's when we will be deep into second phase vaccine trials and some optimism may spring from initial results. Hopefully.

In the mean time, I'm going to sit on our stash, make a very small play on our negative position, and try not to die of a COVID infection.

Stay safe, my friends.

 

By the way, at this point, I believe the S&P 500 is a value trap. I see plenty of downside. I don't expect that to change in the next few years, even when the economy begins to recover.

 

OK. Why am I so grumpy?

Consider a 10% reduction in economic activity. That would be a huge blow to any business.

Few companies operate on margins above 10%. Those that do are primarily software companies at scale. Software either has huge overhead at startup or almost no overhead at global scale. All other companies have to sell a product or service and that means profit = revenue - expense.

Let's consider Ford.

If Ford sells 10% fewer vehicles, that would put them out of business, if they did not react.

Ford has 65 plants so they would have to shut down 6 or 7 plants and lay off 10% of their production staff to maintain the same capacity to production level. That doesn't mean their profit would only scale back by 10%, though.

Design, engineering, certification, and advertising would now take up a larger portion of each sale because they will be amortized over fewer cars. That means programs will be cut and more layoffs in these spaces, as well. With fewer vehicle programs, that means even fewer sales and the problem will spiral until it hits equilibrium. That equilibrium could easily be the F-150 program, the Mustang, and maybe two or three other vehicles.

Suddenly, a global automotive giant is no longer nearly as menacing.


This is going to play out in nearly every company and industry with a net result of mass unemployment, dramatically reduced GDP, and little any government can do about it.

So, I see 10% as a big deal but I don't see the COVID-19 impact as 10%. I see it as far more impactful.

How do you restore an economy with 30% unemployment? What happens if the jobs are mostly replaced by robots and never come back?

 

Let's consider Tesla, as opposed to Ford.

Tesla has demand that far outstrips their supply. This has been a problem. Now, it's a huge strategic advantage.

As far as I'm aware, Ford has no unfulfilled need. Tesla has a large unfulfilled demand that we haven't yet quantified.

No doubt, Tesla will have a heavy demand impact caused by this financial apocalypse. Less people working means less people buying Teslas. They will sell far less cars into the US market in 2020 than they did in 2019.

In the case of Tesla, they have massively under-served markets they can deliver cars into. It's to the point, I don't see Tesla having spare capacity now or in the future. Worst case, they may have to reduce their aspirations to scale the company.

This puts Tesla at an amazing advantage.

While Tesla's future did not get brighter, it got only a bit less bright while Ford's better idea bulb looks very dim, at the moment.