Originally posted June 6, 2020
As expected, the market meltdown as indicated in my last newsletter never passed 40% on any of the major exchanges and in fact has since rocketed back up in the customary V pattern. This is the very exact reason doing nothing was the best option. It’s counter-intuitive but it always works given enough time. Panic selling only ensures that someone else will benefit from your fear.
The more aggressive approach is to be buying during these times. Even for me, the scariness of buying stocks during a free fall is intimidating even though I believe it to be the right strategy. The result however is obvious only when prices start recovering and you start benefiting pretty quickly on those dirt cheap purchases. The portfolio was behind the index by about a whopping 8% at the worst point and just a little over 2 months later its now ahead by almost 5% in constant dollars. If you factor in currency gains the portfolio is actually at about 7% return or an overperformance of about 8% against the sp500 index.
The challenge for me will be to figure out when to unwind the strategy and rebalance the portfolio. For the moment, I am benefiting from the move back up, as the portfolio is in an aggressive bull stance riding the wave up. However being leveraged and holding stocks I would usually not own has its risks, so returning to a more boring but conservative strategy is the eventual goal. A strategic buying strategy during a meltdown is one of the few ways that the small investor can catapult long-term returns by taking advantage of market mispricing. A few percent of overperformance now makes huge differences in the long run. The market is too efficient on a normal day to gain a big advantage on pricing, but when there is a meltdown and nothing makes sense, it’s best to pounce on good companies that have been beaten beyond logic.
Going forward
There is still a lot of uncertainty in markets today, but for the most part, I believe most Covid information has been priced in. That does not mean new information or unrelated shocks could affect markets in a negative way….they always can. All things being equal, the market will likely keep its upward V trajectory and will continue to confuse most analysts….best not to listen to those guys.
Opportunities
For those with unused cash, the market still has lots of mispriced stocks here and there. In Canada, the banks are stupid cheap with dividends of 5-6% which is a no-brainer. Generally, the financials are cheap as they hold debt from bankrupt companies that do not know they are dead yet. The reality is that if the banks go down, everything goes down…like the entire economic system. The risk is attributable to banks, but in reality, the entire economy will be subject to it. Energy also represents potential opportunity as it has also been devastated not only on the demand side (covid effect) but also on the supply side (oversupply of oil by Saudi Arabia and Russia). Recent changes in the supply-demand curve are already moving prices up and will likely continue as consumption increases.
What is with Warren Buffet?
He dumped all his airline stocks. Oh and around the same time i bought some, is that dumb? Ok, Warren is a smart man, but history has shown that he makes mistakes all the time… in oil, in banks, in holding too much cash, in not investing in tech, etc. He also hates airlines generally (got burnt once), so he was likely uncomfortable in having a large position anyways and the Corona Virus was the catalyst in getting him back to his safe place. Also note, that his Berkshire Hathaway fund has been a hit and miss over the last decade. At least in the Delta Airlines case, the stock price is already higher than what he sold it for by quite a bit. Am I smarter than Buffett? At least for now….
The case for ETFs
Although the Corona Virus is sort of unprecedented, it goes to show that black swan events do occur from time to time. Certainly, companies like cruise lines, travel companies, etc. will be changed forever and many could end up bankrupt. If you held an index ETF you had less individual stock risk to worry about. Even with my 30 positions, the effect of Corona on the portfolio was extremely varied. Shopify and Amazon were big winners, Financials like Barclays and TD as well as industrials were down a bunch. There is a bit of luck involved and having a well-diversified portfolio averages things out, but does not entirely protect you like an ETF index fund.
Happy investing…
Marc’s Monthly Moves
- Nada.
Marc’s Portfolio YTD Returns
- +3.5% in constant dollars (currency effect removed)
- +6.8% actual dollars
- Sp500 return -1.14%
Money with Marc 