Originally published July 3, 2022
The American market has finally achieved a bear market status (a fall of 20% or more within the year)… then it climbed back up, then it fell again. So are we in a bear market? Sort of. You have to remember that 20% is not a magic number, it’s simply a human construct to provide a label to the situation and does not have to mean anything other than “it is down a lot”. Relative to other bear markets with 20+ % drops, this one is moving fast. A normal bear market meanders for many months to get to this level. When and at what level will it reverse back to a bull market? No one knows, but the bounce up is initially very quick, forming a ‘V’ pattern on the charts. Almost every bear has them, so it’s a matter of depth and time.
As I have said before, it’s a nutty time for the market with inflation always present and running at levels unseen in decades. The governments have been increasing rates to slow down the economy. They have also been lowering their balance sheet (read lowering the supply of money). The problem is that the fed rarely gets this right because there are so many complicated moving parts. They often push the economy into a recession (which mentioned before is hard to measure) or slowly land the economy to a 2% inflation environment. No one really knows how it’s going to play out for sure. Either way, lots of serious stuff happening here, much of it pointing to higher pressure on stock prices generally.
Some of you recall that in 2020, during that weird pandemic bear market, I overperformed by about 9 points. The strategy was simply to margin the account by a max of 10% as the market fell. In other words, take a loan from my broker to buy more stock and be overinvested. Basically picking up perfectly good stock from those who were fear-selling. For those of you who still work, the strategy would be to increase your monthly buying as much as possible, and perhaps not have to deal with leveraging your accounts as this can be dangerous if you overdo it.
Lessons from 2020
So what am I going to do this time? Was there something to be learned from the last time? Good question! Yes, there was. In 2020, I was too quick to get into the carnage. I had set up 3 tranches of buying levels based on the SP500 drawdowns of -15%, -25%, and -40%. The first tranche was simply not worth it. After buying stocks at those levels, they simply did not return enough for the risk, especially after the market drawdown fell to about -34%. The second tranche did the heavy lifting and we never got to a third tranche. So what should the tranches be this time? There is no right answer as we cannot predict the future. We statistically have a general idea that the ‘V’ pattern will play out. We will have to make assumptions on how low it will go and how much time it will take. The deeper the fall the more pronounced the ‘V’ gets.
What else do we know? Generally, anything that has been severely beaten down almost always bounces back the most, like a spring. This is the basis for the strategy. Not all will bounce back, so we have to be careful.
The Latest Strategy
The strategy is three tranches of buying at -25%, -35%, and -45% year-to-date (YTD) results of the SP500. Let’s hope we do not see a 45% drawdown, but it’s nevertheless possible.
Purchases will be based on high-quality communication and consumer discretionary sectors as they are the two biggest losers YTD. I will also consider individual stocks from other sectors that Mr. Market chewed up for no particular reason.
- Purchasing existing positions or new positions are both acceptable.
- Selling some existing positions that have done well may also be used to rebalance the portfolio.
- I may use call options in the later tranches, but definitely not at the first tranche. These can be individual stocks or also index positions.
The strategy will not consider Bitcoin even though it has fallen almost 75% from its high and 56% YTD. The money destruction of Bitcoin has been dramatic… I have warned about this possibility. I don’t want to sound like a broken record, but Bitcoin is speculative, so no more than 2-5% of a portfolio. Unfortunately, an individual I know had most of his wealth tied up in Bitcoin. He was a very happy camper, having won the game of life, a great long-shot bet that paid off. Now, with 3/4 of that gone, it’s another life-changing story. Don’t get me wrong, things can turn around, but is this really investing? The moral of the story… stay diversified. Heavy portfolio concentrations are for people who can afford to lose it all and not have to eat Kraft Dinner for the rest of their life (although I do like kraft dinner).
Another plug for market ETFs
Yes, they are down, because the market is down. However, unlike most small investors, those with ETFs did not get their butts handed to them due to holding too many tech stocks. If you have ETFs, you also likely have some foreign and Canadian ETFs, meaning that you have done better than the big US market. You are likely ahead again. Note to self, if I ever get bored of investing, or start chronically underperforming, I will certainly go the market ETF route.
So there you go, that is the revised strategy. Now we just have to wait for the market to fall into the trap. As for individual stocks to add to, I am looking at Amazon, and Shopify and will likely add Warner Brothers Discovery (WBD) as a new position. I will keep my eyes open for any rotation within sectors or asset classes as well.
Happy investing.
Marc’s Monthly Moves
- Nada.
Marc’s Portfolio YTD Performance
- Portfolio return -14.5% (Including currency gains)
- Portfolio return -16.5% (without currency gains)
- S&P 500 return -19.75%
- TSX -11.13%
The portfolio overperformed the S&P 500 by 3.25%.
Money with Marc 