Originally published March 23, 2020
The market has moved past the usual 20% correction into what many call the bear market territory. I have been trying to understand how to label what is going on and have concluded that this sits somewhere between a bear and a correction. Bear markets are usually slowly drawn out decline month after month until you get some really big selling to the bottom followed by a V pattern upswing of similar formation. Crashes are more violent, quick drops measured in days. This time we seem to have a bit of both, with covid19 being the catalyst.
Although scary and end-of-the-world feeling, it’s not the first time the world has had this kind of event, and every time the world has come out of it. Of course, it feels different now, but that’s the same feeling you likely had during 911. That is why it’s a shock; if everybody knew what was coming it would not be scary and there certainly would not be a stock crash. Fortunately, unlike the 2008 great recession, the financial system is intact. Fundamentally 2008 was much more dangerous as the confidence in the system was gone with the mismanagement of housing credit and confidence is the only thing that makes the financial world go round.
Going forwards, it could get worse. Probabilities are on our side that it will not, but the funny thing about probabilities is that given enough time, all rare events will eventually take place. I always invest with the notion, that I could be wrong even though the odds are on my side. As a more aggressive investor playing the long game, I have leveraged out (loan from my broker) about 10% of my portfolio in order to buy heavily discounted companies in order to benefit later. In the short run, however, I have increased exposure and am now looking at a 35% loss vs 28% sp500. I would not recommend anyone to try this at home. I am leveraged 7% and will increase it to 10% should the market continue falling past a 40% loss. I am essentially betting based on probabilities that it will not go past 40%, but have kept the margin to 10% max in the case I am wrong.
From what I can see, there are 3 scenarios that can play out 1) the virus mutates and infected people turn into zombies..very bad 2) the virus loses its momentum and people get encouraged 3) the virus situation drags on for months. Scenario one is a low probability scenario and no matter what you do with your investments it will not matter anyway. 2) is a more likely scenario, lasting no more than 3 months or so. China is already back at 90% capacity so it’s a viable scenario that would be very positive for the market. 3) this scenario is problematic as most economies can idle for short durations but long durations could threaten big companies into bankruptcy. Enough big bankruptcies can destabilize the financial system as its all connected. This is the worst-case scenario, and although more remote, should still be considered. The market would likely be down for a year maybe three, but then onto the next bull run. This is why so much money is being pumped into the system to avoid the machine getting out of idle and stopping all together. Ultimately though it would restart as new stronger entities would take the place of dead ones. If you’re playing the long game, only scenario one should scare you, everything else is survivable.
Some of you have asked about going to cash during the turmoil. My recommendation, which mirrors most experts, is to do nothing. Going to cash puts you in a bad situation as you’re going to miss the eventual move up. There will be no all-clear sign, it will just happen. You will lose on both sides of the curve. People like me will be buying your stocks now only to resell them to you later when you feel better.
My purchases represent overly sold existing positions and a couple of new battered positions. Those that have done the worst in my portfolio like my financials are great picks to average down your original purchase price. New picks like Boeing and Delta are companies that have been hit really hard and represent opportunity as long as they don’t go bankrupt. At this point only my financials have stabilized, Ba and DAL are still falling.
The market will keep searching for its equilibrium so continue to expect lots of volatility both up and down. In the long run, it will all work out. Yes, i could be wrong, the world could end…again, but your always best to bet on the higher probability that it will eventually be ok.
Happy investing… I guess.
Marc’s Monthly Moves
| Buy | Sell |
| Boeing (BA) Delta (DAL) Barclays (BCS) ING (ING) |
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