Originally published July 18, 2021
As most of you know, I have restructured the portfolio to be more defensive, i.e., I paired down high flyers like Shopify, Kinaxis, and Amazon, deviating away from communications and tech companies while increasing financials and energy. This deviation is a defensive move to counter the historically frothy market, particularly in the tech and communications sectors.
My Defensive Position
Early in the year, this strategy put me ahead of my benchmark as Mr. Market got spooked and punished high-flying tech. However shortly after, technology and communication stocks again continued leading the way forward, and to add insult to injury, it was at the expense of financials and energy of which I have an overabundance. This is completely the reverse of what is best for my portfolio and seriously threatens my plans to get that small business jet that I do not need. I mentioned in a previous newsletter that this strategy would likely cause some underperformance and that this would simply be the cost of being more defensive. My returns are still good, but the difference keeps growing, especially in the last 6 weeks!
Is the Strategy Worth It?
It’s hard to say. My ETF friends are all outperforming me without lifting a finger. The market and economy are pretty nutty, but where is it going to end up? Unfortunately, there are no clear answers. It could continue like this for quite some time. All I do know is that we are into some uncharted territory as it relates to the economy, so one should proceed with caution. If things go bad, or there is a sector rotation, the portfolio will likely be a winner, but until then it will likely stay a loser.
What is the Small Investor To Do?
At the very least, we should avoid making dumb mistakes like concentrating all our money in one or two sectors, or worse, getting caught up in high-flying stocks as these could reverse direction and our money could be permanently murdered. There is plenty of argument for an eventual long protracted pullback to return valuations to normal levels and that would see all sectors suffer with no place to hide… maybe for years. Statistically the sectors that went up the most almost always come down the most. The market could also simply just keep going up, at least for a while as high valuations are not indicative of future returns in the short run.
At this moment the stock market is the only game in town as fixed income provides a negative return when you factor in inflation. Lots of fixed income dollars have and continue to jump the fence into the equity pasture and are now also chasing stocks higher. Getting out of the stock market (timing) is not the answer either as it will lower your returns by average because no one can time the “out” and the “in” correctly. So you’re left with:
- “be the market” (invest only in market index ETFs);
- be defensive (lots of diverse high-quality boring stocks); or
- keep investing like it’s 1999 and make as much money as possible before it comes to a sudden stop.
FYI, I chose number 3 during the dotcom bubble, it was fun, but you all know how that ended. At this moment, if you agree that choice ‘3’ is dumb, then choices ‘1’ or ‘2’ are the only sensible approaches. I am not saying that there is a crash around the corner (there always is given enough time) but there are a lot of warning signs, enough to at least be cautious.
My Portfolio Changes
In light of the above, I have continued my broad diversification strategy by adding Cameco and KRBN. Cameco, the Canadian Uranium miner, has been in the dog house ever since the Japanese had a small incident involving a nuclear meltdown (apparently a big deal). The stock is up quite a bit recently but the long-term outlook for nuclear is changing, particularly as the pressure to lower carbon emissions continues to increase. There are a number of new nuclear plants that are safer and more affordable and that are coming online in the next couple of years, which will increase demand for uranium. This is a long play.
KRBN is a carbon credit ETF. Following the same theme as above, where you can see the world trying to lower emissions, the necessity to purchase carbon offsets will eventually become a thing. At the moment, the carbon credit market is small and there are only a couple of ways you can invest in it. Could this be the ground floor? Maybe. Like all markets, there is a supply and demand aspect that determines the price. Big companies like Google, Disney, Barclays, and Microsoft are all buyers trying to become leaders in the fight against climate change. As more and more companies green up by choice or by legislation, demand will go up, and hopefully so will prices. This is a new market, so I would say that there is a more speculative aspect to this position.
For those of you in the ETF world, I recently helped set up a friend’s portfolio with a simple ETF combination. URTH and XIC.to capture the MSCI world index return (URTH), which also includes a big USA component plus a Canadian index market ETF (XIC.to). This combination is so simple and will provide market-like returns with extreme diversification. It’s actually outperforming my portfolio… for now.
I added back the GME GameStop put option, (a bet that the price will fall) after selling it last month at a big loss for tax purposes. It’s worth just 300 odd dollars and is inconsequential on a cost basis, but its value in education is priceless and if the odd chance it does fall dramatically I could be a big winner.
The Best Types of Investors
Some trivia about the best types of investors I picked up from a podcast. The best investors tend to be independent thinkers, are likely never involved much in organized sports, but prefer individual sports like swimming, cycling, parasailing, windsurfing, etc. They are usually not as emotional about losses, care less about what other people think, and have stronger self-discipline. They also tend to trade less and have long-term strategies that make sense. They try not to follow every detail of how the market churns day in and day out. These are generalizations and may not apply to you, but it gives you an understanding of how emotions and personality affects the way you do things, including investing.
Happy investing.
Marc’s Monthly Moves
| Buy | Sell |
| Cameco Corp (CCJ) KraneShares Global Carbon Strategy (KRBN) ETF GameStop (GME) Put Option |
Marc’s Portfolio YTD Performance
- Portfolio return 9.2% (Including currency losses/gains)
- Portfolio return 10.2 % (without currency losses/gains)
- SP 500 return 15.2%
The portfolio underperformed the SP500 by -5 points.
Money with Marc 