TomB16 investing blog

This is not a decision point.

Several years ago, I began to transition to a portfolio designed to provide increased stability for the beginning of our retirement. The purpose was to provide a buffer from sequence of return risk. The transition was complete, a few years ago, but the S&P P/E ratio was a bit high we still have very little VOO.

At this point, we have a lot of cash. Even if the market corrects to 15%, we will not put a lot of cash into the market. I have some long term buy orders in place but they are extremely low. A good deal doesn't interest me. I want an amazing deal before I will put significant money into the market.

I'm watching this from Mexico with no idea of changing our orders. I did pick up a small amount of SH this morning. That was an easy decision. If the market crashes, it will increase our cash. If the market does great, it will hurt our cash but we will not need cash in that situation.

So, I continue to do nothing. Our portfolio will grow organically. No big changes.

 

I sold SH yesterday after a small but quick up tick. We are starting to see bonds with adequate real returns.

For now, the money will sit in cash with no rush to put it to use.

 

I have a decent idea regarding the current macroeconomic situation and how it will influence the economy and the market.

The thing is, macroeconomics are not the primary factor, at the moment. What is happening is nothing more than "buy the dip". We all knew this would happen. Long term market withdrawals are extremely unlikely, at this point.

My primary expertise revolves around business and value. I haven't found a really good value in the last few weeks. I believe a good technical analyst will have far more insight into current price events than I do, as technical analysis is a method of quantifying market psychology.

If current driver's continue for a while, it might be more profitable to be a technical analyst than to be a value investor. At least, for a while.

 

To clarify, this seems like a period in time when technical analysts are likely to do better than normal. Dividend investors are likely to do ok. Value investors are going to have extreme difficulty finding value. Index investors seem unlikely to do well in the near future.

Again, I am not looking at changing my approach nor do I discourage anyone from index investing. This is just a snapshot opinion in time.

 

Distractions

The reason my hold of SH was so short is because of a fundamental lack of trust of financial markets. I believe very few understand the mechanisms that underpin the market. 400 years ago, people bought certificates which give the holder title to a piece of the named business. 5 seconds after the first stock certificates were issued, people went to work on adding complexity which makes it difficult for people to understand.

How many people realize how easy it is to operate an ETF? Cathie Wood did a good job describing the advantage of operating an ETF versus operating a mutual fund. With an ETF, she doesn't have to scale. People can buy and sell ARK funds and ARK barely knows they have done it. Cathie certainly doesn't have to buy or sell anything when people buy and sell the ETF. That is all done by the market maker and it is built on derivatives to synthesize the return, not invest in the actual products.

The risk derivatives carry is wildly variable. Reasonable derivatives can be resold and become extremely risky. Derivatives are contracts so it will come down to the carrying party's ability to pay.

So, if the market crashes heavily will the people underwriting SH be able to pay? I'm not sure.

A study of risk leads me to the conclusion that corporate equity can be among the lowest risk asset classes. A company that is run well and honestly is one of the best bets on the future, in my opinion. If the country gets in trouble, honest and well run companies will be the last animals in the barn yard to be eaten, as they are the most necessary for the economy.

Bonds are paid ahead of common stocks in the event of a corporate liquidation and yet bond holders are the first to take a haircut when a company gets in trouble.

I see trouble ahead and believe the best defense is to own a very small group of simple, understandable, well run, companies. If I was a younger man, I would skew toward real estate but I'm too old to continue to carry RE. In fact, I'm moving away from RE but only because of the work involved.

 

Evergrande has now officially defaulted on one issue of bond debt with a second issue due shortly.

The government has signaled it will not bail out Evergrande.

I don't know how this will end but Evergrande will make a small but noticeable ripple in the global financial pool.

 

If someone reads this blog one day, they may notice that I have some confidence in a couple of areas but the vast majority of investing is a mystery to me. I can see some things coming and will position us to take small advantage of this knowledge but the thing I am most certain of is that well run companies will do well over time.

For this reason, I do not sell anything when I see troubled times ahead. I make adjustments to our cash position, DRIPs, and may consider macro ideas when allocating capital but I generally don't sell a business I know is well run. If I'm wrong about macro factors, it will be a minor impact on a really strong portfolio.

There is another forum I follow that is home to several people who are outright obnoxious in how they present their opinions. They are always right and have absolute knowledge. The issue for me is, what they write is nearly always wrong, in hind sight. This fact has not slowed their roll or reduced their confidence at all. They continue to post, sometimes in all caps, highly aggressive "statements of fact" that are actually opinions based on ignorance.

The best thing any of us can do is think for ourselves and try to be objective. Without objectivity, it is really difficult to succeed.

 

I've sampled CNBC, here and there, at the hotel where we are staying and they have presented pieces on, "violent ralley", "prolonged stagnation", and "bear market". That all happened today. CNBC has identical journalistic integrity as a magic 8 ball. They are a random number generator that is going to pronounce itself correct, in a few months. "Well, we called it!"

I am choking on the flatulence that emits from their feed. My gawd.

I will mention they have featured a few people who have provided solid insight into bond markets and monetary policy. Several of these folks have broken down recent events, future direction, and consequence in a way that is intelligent and insightful. It's too bad they dilute the quality content with so much crapola.

Here is my view.

Inflation will be kind to REITs, which we are heavy on. Rents will go up, owned buildings will appreciate, LTV will go down. The key with REITs is to watch they don't dilute their issue without expanding the business. If a REIT uses their asset valuation to extract cash from the market, they had better sink it back into the business or I will cut them like Snoop Dog explaining his dissatisfaction to an Uber Eats driver. On the other hand, if the REIT uses the lower LTV to leverage an expansion, it could cause enterprise values to go up extremely quickly.

Value investors, like myself, should continue to look for value. The only change is that future values need to be calculated with a higher multiple than we have recently used, due to inflation. I don't know if increased future values will compensate for the ridiculous PE multiples we currently have, to prevent stocks from dropping heavily. What I do know is that value investors don't have to be precise. If someone can find good value and their forecast of inflation is out a couple of percent, it will not turn a great company into a terrible investment. Also, at some point, things will stabilize and the good company will produce as they previously did.

Utilities, which aren't normally seen as good investments during high inflation don't scare me. I haven't held a utility in a few years but I would not let macro factors keep me from owning one now. If I find some value in the utility space, I will own a utility.

Lastly, volatility brings opportunity as much as it brings pain and loss. During a time like this, having high dividends allows for opportunistic allocation of capital which I've never seen calculated in a "total return" scenario.

Whatever the case, we were basically flat through January and I'm delighted with that. I'm trying to build a less structured life in a post work environment. It will be interesting to see how our portfolio makes out now, as compared to how it made out in previously volatile markets when I was paying close attention.

 

These are golden words by Benjamin Graham.

 

“The investment world nevertheless has enough liars, cheaters, and thieves to keep Satan's check-in clerks frantically busy for decades to come.” - Benjamin Graham

 

For what it's worth, I no longer plan to move into index investing.

I place the odds of democracy ending, or at least changing significantly, in the US at about 40%. It's time to break out the world atlas and look for opportunities.

 

I have no inside information. What I do know is that a very significant seditious movement is pounding at the foundation of American democracy and I don't see an appropriate response nor do I have confidence there will be one.

At some point, the world will be scared off american investment.

 

What is your thought on this? Zero chance? If above zero, when?