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Why I Suck at Investing… Sometimes
Originally published June 5, 2021
Everyone makes mistakes and it’s up to the small investor to accept these as part of the learning process. It’s only human to avoid thinking of these train wrecks and move on as fast as possible, but that would be a lost opportunity in learning something.
My Mistake
I am referring to the sale of my Game Stop option in which I murdered 85% of my capital. So where did I go wrong? For the most part, I reacted too quickly to an opportunity that I felt had a limited-time offer. The stock was catapulted beyond logic by a group of amateur investors leveraging social media. Betting against them sounded like a sure thing at the time. That being said I purchased a complicated option without fully understanding the mechanics of the trade. Essentially I was betting for a large move in the stock in the down direction. This did occur – it fell from over 300$ to 40$. However, the volatility premium that I paid for the option was so high that it overwhelmed the effect of the move down creating very little added value in the option. The volatility then fell and the stock rose, basically eroding the volatility premium I paid so much for.
So What Did I Learn?
Do not jump into something without doing your due diligence. Remember that the seller of options has the advantage. Know that even if you have the right direction, magnitude, and timing in an option, you can still lose on something else like volatility. Three out of four factors were correct, but that was still not good enough…..it usually is.
Why did I not just hold till expiry you ask? My wealth advisor, who manages my retirement portfolio, asked if I have any potential capital losses in the hobby portfolio as he is having a good year and will likely be declaring net capital gains on the account. This creates a tax burden for me, which can only be offset by a capital loss. By selling the option I create a capital loss, and this will offset the gain at tax time next year. Generally, you can expect the offset to gain you back about 15 to 25% of the loss depending on your marginal tax situation. It’s not a lot, but everything helps.
The Strategy
The strategy for this position is not over. Effectively I still believe that GME will fall in the future and it’s still a viable bet. The plan is to wait the required tax selling period of 31 days and repurchase the option. This allows me to keep the capital loss deduction and continue the trade as a new position. I am assuming that all will remain equal for 31 days, but who knows what will happen in the future, so I will have to assess the market situation and make sure the bet is still viable. In any case, repurchasing it will be only a few hundred dollars so I am doing this more for educational purposes to see how the story eventually plays out. It’s not statistically very important in the bigger picture.
How Do You Protect Yourself… From Yourself?
That is really a difficult thing to do and to me, the answer lies in the discipline or a set of rules that you attribute to investment decision-making. In my case, I had already declared that the GME option would be a speculative position and as a result, should never exceed 2-3% of the portfolio (my own rule). To be clear, all speculative positions combined can never exceed 2-3% of the portfolio. In this case, GME represented about 1% of the total value of the portfolio. This rule as simple and ensures that if things go wrong, the worst-case scenario will not ruin your returns for the year or future years. A total loss, in my case (pretty close actually), means that 99% of the portfolio survives and the loss is barely noticeable in the big picture. One percent can easily be made up in other years with good decisions and a bit of luck… it’s not terminal.
I will throw in one of my other related rules. No regular position within a portfolio should exceed 5% of the total. The same logic applies here, in that should one of your positions go bankrupt or fall into a sinkhole, 95% of your portfolio survives and again the loss can be made up. As an example, should you only have 3 positions in a portfolio and one of the three goes bankrupt, you will likely never recover and in hindsight maybe you should have bought a market ETF. The 5% rule lowers your diversification risk by ensuring that you have at least 20 stocks and as a result, lowers your annual standard deviation (how much your portfolio zigs and zags).
If you applied these rules to your portfolios, would you pass my tests? Do you even know? Maybe you have a few too many Bitcoins, Tesla shares, or AMC. Maybe you are too concentrated in one sector (remember the tech bubble circa 2000). It’s easy to get enthusiastic about a particular stock or type of stock and then buy too much, or maybe your stock skyrocketed and without knowing it, your portfolio now depends on how well Tesla does as most of the value of your portfolio is concentrated on one stock.
Happy investing… oh, and try not to suck.
Marc’s Monthly Moves
Buy Sell GameStop (GME) Put POption Marc’s Portfolio YTD Performance
- Portfolio return 5.8% (Including currency losses/gains)
- Portfolio return 11.0% (without currency losses/gains)
- SP 500 return 12.6%
The portfolio under-performed the SP500 by -1.6 points.
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Are REITs Low Risk?
Originally published May 20, 2021
I don’t think there is anything inherently evil about Real Estate Investment Trusts (REITs). I have owned them in the past…they can be great depending on what you need them for. Generally, this asset class along with utilities, bonds, and some big stable low growth dividend companies attract those investors that want reliable low-risk incomes. The better question is are they really low risk?
The answer may be surprising because most investors think that no matter the situation they can count on those dividends or monthly REIT payments and all is well. The biggest problem is the underlying value of the asset can change depending on the interest rate situation. They tend to be interest rate sensitive! It’s nice that your income keeps coming in, but if you’re losing 20% on the stock every year, the payout/dividend is not going to make up for the loss, leaving you feeling a little on the poor side.
You may be wondering, how can all these different asset classes act the same way when they are all different businesses? Its Math! These assets provide a stable income with little underlying growth. It’s no different than a simple Bond, and Bond values vary with interest rates. So mechanically they must all act in a similar way. If your asset pays 2% annually and rates rise from 2% to 4%, then no one will want your asset when they can just buy a new one with a much higher rate. The only way to entice someone to buy your unwanted asset is to drop your price until it ends up paying a similar return as the higher rate. Mathematically, a move in interest rates from 2% to 4% would drop your asset value in half to make up for the higher rate that the new bond gets. This is a simplistic view of how this type of asset gets priced in a rising rate market as there are other factors involved such as risk, payout ratios, free cash flow, etc. Nevertheless, conceptually this is how it works. This phenomenon also affects regular stocks but at a much smaller magnitude. Stockholders are enticed to switch to bonds for higher returns, which lowers the demand for stocks and lower stock prices follow.
In our low-rate environment, one could argue that there is no other place rates can go but up. In fact, inflation has started to increase in the USA and that could lead to higher interest rates should the economy get overheated. At the same time, governments have messaged that they expect to keep rates low for a long period to kickstart and support the stalled economy. Raising interest rates would be bad for governments because they have piled a lot of covid debt on their books. The carrying costs (interest payments) of those debts are manageable only because of near-zero short-term rates. If inflation gets out of hand, they will increase rates to counter this and cause mayhem in the markets.
Should You Dump Your REITs, Bonds, AT&T, and Utilities?
The answer, like always, is “it depends”. Interest rates may not go up much and remain stable for years, but maybe not, no one knows for sure. Investing is a probability game, not a certainties game so I generally make my investment decisions where the likeliness of being right over time will be in my favour. My view is that given enough time it’s likely that rates will rise after decades of falling. This is why I do not own any of these right now. But what if I am wrong? A question you should always ask. The effect of being wrong would be limited because a well-balanced portfolio would only have a small weighting of these assets anyway, definitely less than 10%…. more likely around 5%. That being said, being wrong would not cause a substantial loss and my other assets could potentially make some of that up. If I am right, I will outperform a bit, and a bit is all I need.
Where is the hidden danger for the small investor?
Anyone who has loaded up on these assets or is practicing a traditional 60/40 split of stocks and bonds could see substantial volatility over time should rates increase. Should we panic? Only if you have too many. If you have a small amount as you should, there is no rush as rates increase slowly over time. You will see a slow deterioration of your asset values but you will still be collecting income to offset this. Eventually, most assets provide similar returns over the long term. The problem is that most investors lose patience and sell losing positions right when they are ready to turn around. They buy high and sell low.
Warning! Not all reits and utilities are the same. I have generalized the world in this newsletter and it’s never quite so simple, as there are many REITs that can have decent growth and are less sensitive to changes in interest rates. I prefer these types as they act more like conventional stock but have a smaller monthly payout or dividend compared to the traditional REIT.
Looking Forward
I continue to have difficulty in reading my crystal ball. The market sounds expensive if you listen to “experts” and of course, there are many warnings that come when you’re flying so high. I would say that there are some frothy areas in the market, but these are strange days and evaluations may stay like this for a very long time. Other than real-estate , like your house, there is no other game in town when it comes to longterm performance. So can the market crash? Of course, it eventually does, but no one knows when or how big. Trying to time an exit because the market appears expensive and therefore scary only lowers returns in the long run. You are likely going to be wrong getting out, and likely wrong getting back in, and in the end, only luck will determine if you have made the right choices. I do like luck but I would never bet on it and prefer to ride out the long term fully invested where I know that I will do fine.
Happy investing.
Marc’s Monthly Moves
Nada.
Marc’s Portfolio YTD Performance
- Portfolio return 3.9% (Including currency losses/gains)
- Portfolio return 8.6% (without currency losses/gains)
- SP 500 return 9.57
The portfolio underperformed the SP500 by -1.0 points.
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Long & Short Term Predictions
Originally published April 5, 2021
The American market continues to rotate in and out sectors as it continues to shy away from the ever-popular technology sector. In the last month, the big winners were materials, industrials, and utilities which all gained about 7% while tech and communications only advanced about 2%. As a result, my portfolio fell behind a little as it is weighted heavier on financials and energy, both of which took a breather this month after a strong February. If you are mostly invested in the Canadian Market, congratulations, after many years of lagging, the TSX is up 9%, a full 2 points ahead of the SP500…it was bound to happen sooner or later.
The Short Term
My market outlook has started to change to a more positive short-term view. There are reasons to be cautious, but this is true almost always in any part of the business cycle. I would say that for the next 1-3 years, it is likely that returns will be ok. Going out much further in time, however, there is a good possibility that returns may be negative or at least be lackluster for quite a while and a bear market (big 20% drop or more) is not out of the question either.
More specifically, I am starting to think that in the short run there will be a pent-up demand boom powered by cash-rich Covid prisoners finally being released into the spending economy. This will likely lead to widespread inflation as the prisoners bid up all consumer assets and services and in fact, we have already seen asset inflation in the forms of real estate and the stock market gains. Simply put, there is a lot of locked-up cash in the system and it’s looking for things to buy. The only reason consumer goods have not overall increased in price (inflation) is that there is little velocity of money or said in a non-economic way, people are physically unable to spend money as quickly as they would like. Governments have stated that they are willing to put up with some inflation in order to get the economy back on track. Once this is achieved, they will then put on the brakes by cutting spending, raising rates, or lowering the money supply.
The tricky part of government intervention is to avoid slamming on the brakes too hard or letting the economy run too fast. Getting it just right is what will determine how the markets will react. In theory, if done in a measured way, returns could be quite normal. Done poorly, we could see a stock market bubble (some say we all ready have one) or a multi-year market contraction. History has shown us that if the government panics over inflation and slams on the brakes, returns will likely be below average for years. Contributing to this view is the fact that the market has had a few years of great returns, which some view as being too exuberant and out of alignment with the rise of corporate earnings.
The Long Term
The stock market in the long run is a reflection of long-term earnings after all. This suggests that an overbought or expensive stock market will return to its averages by having many years of less than average returns. For example, Japan circa 1990 experienced such a contraction that a stock market bubble led to over 20 years of underperformance. Simply put, Japan’s 1990 exuberance drove stocks so high that the fall back to normal levels took decades. That is an extreme case, but even North American markets have had the odd ten-year period of underperformance over time.
So what is the small investor to do?
The smart ones play the long game. Historical averages are 9% plus or minus and can only be achieved with time. You take the good years with the bad years and keep risk down by being as diversified as possible, across sectors, countries, growth, value, and even different asset types. Personally, right now, I am looking for stocks that although boring in appearance will provide good returns because they are overlooked and out of favour. Verizon is a good example of a boring out-of-favour stock that Warren Buffet just bought. Even he could not get people interested in it and the stock actually fell after his purchase. Verizon has a 4.5% dividend, slow steady growth, and is involved in the 5G rollout. I am also looking abroad to Asia and other foreign countries to create more diversification over time.
As for switching into bonds in a rising rate environment? It’s a good question, and for the most part, historically over long periods, bond returns rarely beat the stock market. Should inflation get out of hand causing rates to increase to very high levels as seen decades ago, certainly there is an argument to switch and capture a high yield bond. This scenario would take quite a while to play out and timing this correctly is very difficult. The biggest problem is that bond values fall as rates continue rising… yuck.
So enjoy the short term while it lasts, like all good things it will come to an end. Just remember, this is the way of the market and to be fair, it’s normal. The purpose of my newsletter is to continue reminding myself that ups and downs are ok, nothing to be frightened of. This non-emotional view can provide an edge over others in the long run. As most of you know my goal is to achieve market-like returns and more specifically, consistently beat the market by 1 to 3% whether in an up market or a down market. Over years, a 1-3 % outperformance is huge, it will add over a million dollars at retirement.
Happy investing.
Marc’s Monthly Moves
Nada.
Marc’s Portfolio YTD Performance
- Portfolio return 5.2% (Including currency losses/gains)
- Portfolio return 6.4% (without currency losses/gains)
- SP 500 return 7.0%
Portfolio under performed the SP500 by -0.6 points.
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Portfolio Update
Originally published March 6, 2021
Since the last newsletter, there has been a lot of volatility in the market with some evidence of sector rotation. In particular, there has been some selling out of the euphoric high-flying tech sector and this cash seems to be finding its way to other sectors like energy and industrials. This is good for my portfolio considering the recent changes that I have made. In fact, the portfolio has moved from lagging the SP500 to outperforming it a little. The timing of the rotation is simply luck. I would not want to consider the idea that I have some magical insight into market timing. As luck goes, things can change fast and next week we could again be bidding up tech stocks for another year, no one really knows for sure. I will accept luck as it is an integral part of investing.
The portfolio is getting close to what I think is a great risk-reward situation. The few high flyers that are left in the portfolio have been seriously trimmed so that if the meltdown continues, it will not be devastating to returns, while at the same time if prices move up, there is still some benefit to having them. It’s all about managing the risk-reward equation.
Why I Added Berkshire Hathaway
I have added Berkshire Hathaway to the portfolio after years of badmouthing them. For the most part, they have underperformed as a stock and this is primarily why I have avoided them. Some of you do hold Warren Buffett’s BRK.b and have strong convictions about it. I always say that I can be wrong, so I did revisit BRK.b from a purely analytical perspective. It’s very difficult to evaluate a conglomerate like BRK.b because there are so many companies within the Buffett umbrella. What ultimately pushed me over to the other side is that the market has gotten expensive while BRK.b has not. Its stock underperformance has made the price we pay for its earnings really low. This means the risk for its high-quality boring companies is quite low relative to the market.
Besides the value proposition, it has even more value as it relates to how it affects the portfolio. BRK.B is not a sector balanced conglomerate, meaning that if the market rises or falls, BRK.b may or may not follow suit, and it will return something else. This helps in the diversification of the portfolio overall and I would say that this is even more important than its relative bargain bin cost. By luck, BRK.b has been overperforming since I added it to the portfolio, I do not know if this will continue, but even if it does not, it will likely be a very positive addition to the portfolio.
More Royal Dutch Shell Please
I added more Royal Dutch Shell (RDS.b) for the same reasons as described in the last newsletter. I am now overweight in energy, mostly because it is the most unloved sector and provides one of the few bargains in the investment world. The potential for more rotation out of high-tech stocks into more bargain areas only makes sense as a strategy. Also, I would agree in principle that the death of big oil is eventual, but likely not in the near future. That being said, there is a viable bet that the death of oil has been exaggerated and that it’s likely going to be around for a while. I am double weighted in energy and that is playing out well for now. At least one of you has an even stronger conviction towards energy, but energy is notoriously difficult to get right considering all the geo-political moving parts, so I am comfortable with a 5-6% total weighting.
What Will Inflation Mean?
Looking forward, inflation seems to be the new concern of the month. As long as there are no unseen shocks I would say slow rising inflation is not the end of the world as it does represent strong economic activity. It can play a role in the demand for stocks as a whole, but most do not consider that the assets that companies hold also rise with inflation, washing out its effect. Nevertheless, high inflation does add an extra layer of complexity for the small investor.
I will have to pull out my old economic books to understand it well enough to formulate a viable strategy if it is at all necessary in the future. Should we be switching to high-paying bonds? Good god….maybe? If we have to. The one thing that most agree with is that holding cash (you know who you are) is the worst thing to have as inflation keeps devaluing the hoard of cash under your mattress. While everything becomes expensive including real goods, the value of your cash keeps whittling away month after month.
At this point, I will only make small tweaks to the portfolio as stocks generally are like soap, the more you handle them the more they seem to melt away. As long as the current strategy plays out no need to make any major changes.
How is my Gamestop Put option? Don’t ask. Was up, mostly down now, but lots of time left. Luckily it was a small bet as all speculative plays should be… because I could be wrong. Time will tell.
Happy investing.
Marc’s Monthly Moves
Buy Sell Berkshire Hathaway B shares (BRK.B)
Royal Dutch Shell (RDS.B)Marc’s Portfolio YTD Performance
- Portfolio return 2.3% (Including currency losses/gains)
- Portfolio return 2.9% (without currency losses/gains)
- SP 500 return 2.29%
Portfolio beat SP 500 by +0.6 points.
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Shorting GameStop
Originally published February 6, 2021
What Does Shorting the Market Mean?
You cant start a financial newsletter without talking about shorting GameStop. Non-investors are chatting this subject up all over and I find it difficult to explain to those people what shorting means as a concept. In the simplest terms, I would use the following example: It’s like borrowing your mom’s new sweater and selling it to your aunt for full price, with the idea that Walmart is going to eventually have a sale where you can then buy the exact same one back and return it to your mom. There, that’s all there is to it. You make a profit by keeping the difference between what you sell it for now and what you will pay for it in the future. You’re betting that the sweater is going to go down in price in the future (especially since it’s an ugly sweater).
The risk lies in the possibility that you’re wrong and that particular sweater could all of a sudden becomes a huge fashion hit and everyone will want one, causing a shortage where frenzied people are willingly pay lots of money for a chance to be seen in that ugly sweater. So now as the price of sweaters goes up, you’re on the hook to buy a more expensive sweater to return to your mom. In fact, if a craze of sweater buying gets out of hand (think cabbage patch dolls), you could be in for huge losses.
Shorting GameStop
So to add to our example and make it more like GameStop, imagine your sister finds out that you short-sold your mom’s sweater and she gangs up with her dumb friends and buys up all the sweaters at Walmart and single-handedly starts the fashion craze of bad pink sweaters. Now you’re panicking because there are no more sweaters available at the normal price and they are getting more expensive every hour. To make matters worse, all your friends who thought that shorting their mom’s pink fluffy sweater was a great financial decision are in the same boat, competing against you and driving up the price as well. In the end, it’s just a pink fluffy sweater worth whatever they are normally worth in the Walmart bin.
Like our pink sweater example, the GameStop situation is driven not by your sister but a group of retail investors (like us) who forced the squeeze using the social media platform Reddit. Oddly the entire Reddit movement is conceptually ill-informed because its premise is to get back at hedge funds who are perceived to take advantage of the little guy. The problem is that hedge funds, like most investors, have underperformed the market, just to a lesser extent. There is actually no reason to pick on them but that is the view nevertheless. In the end, most retail investors will likely lose money along with most of the hedge funds. A small minority will walk away with most of the money. As for real investors (not speculators as described above), this is purely gambling, stay away unless you are making a small bet knowing that you may lose most of your money.
Now that the GameStop discussion is over… ok it’s not. I took a speculative PUT option against GME. I am betting that GME will eventually go back to being just an ugly pink sweater. Small bet, high return if I am right…why not be part of history?
My Portfolio Changes
It appears that I have made lots of changes to the portfolio, sort of yes and sort of no. I would generalize that I have lowered the portfolio’s risk to become a bit more defensive by increasing international diversification and value positions. Ok here we go:
- I have added another ETF, a vanguard product (VSS) to the portfolio in order to continue my diversification into small-cap stocks. This one concentrates on following the FTSE small cap world index with the American companies removed. I already have the Russell 2000 ETF for American companies, so no point in double dipping on them. Strategy: In the long run, small caps perform better than the market and this is what I am trying to capture. Large caps have had a great run and if there is a rotation out of big caps, these will do well. I shied away from small caps in the past because they are historically volatile, but by using ETFs you can lower this risk.
- I bought Intel (INTC) as it has stumbled recently and is out of favour. It’s great for the long run, value-oriented, and defensive at these prices.
- I sold cognizant (CTSH) to fund the purchase of Intel. Cognizant is still a good company, but they missed their earnings for this quarter. Also, it’s done really well and might be overbought. Strategy: sell overbought stock and buy out of favour stocks… sounds like buy low sell high right?
- I bought Taiwan Semiconductor (TSM). It’s a competitor of intel, so if things do not go well with the above bet, TSM will benefit. It’s also an international bet.
- I sold SAP to fund the purchase of TSM, which I think is still a good European company but has been struggling recently. The swap is just a switch to quality.
- I bought Royal Dutch Shell (RDS.b) to replace COP. Essentially the European energy companies are moving towards cleaning their carbon emissions while the US companies are not. RDS.b is moving into natural gas. There does seem to be a move towards better energy management worldwide so I want to take advantage of that. RDS.b is also an international company.
I realize that downshifting to a more defensive position might lower returns a bit in the short run. My guess is that the market will continue to surge forwards for some time, but for how long? Who knows? There is definitely some exuberance out there and that is a bad sign. But there is also a huge pent-up demand to spend money, which will explode once things go back to normal. There is also lots of cash being printed, which is increasing the demand for stocks. It’s basically a tug of war and I really can’t tell where it will end up. There is a valid argument for both the bear and the bull.
Considering that the portfolio has achieved 29% in 2019 and 26% in 2020 a downshift is not a bad idea. The more the market continues in its exuberance, the more likely I will make additional defensive adjustments. Simply cashing out of an exuberant market is not prudent because no one can really time the market. This exuberance can go on for several years and that could be a bigger price to pay in forgone returns than a relatively smaller correction in the future.
Happy investing.
Marc’s Monthly Moves
Buy Sell Buy Vanguard world small cap less USA, symbol (VSS)
Buy Intel (INTC)
Buy Taiwan Semi Conductor (TSM)
Buy Royal Dutch Shell (RDS.B)
Buy GameStop (GME) put optionSell Cognizant (CTSH)
Sell Conoco Phillips (COP)
Sell SAP (SAP)Marc’s Portfolio YTD Performance
- Portfolio return 3.17% (Including currency losses/gains)
- Portfolio return 3.0% (without currency losses/gains)
- SP 500 return 3.48%
Portfolio loss against SP500 -0.48 points.
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Review Your Portfolio
Originally published January 3, 2021
It is that time of the year -time to review your portfolio. I understand from some of you that it’s difficult to do this, especially if you don’t take note of your balances on or around January 1. To make it even more difficult, most trading platforms do not provide a year-to-date function for performance. In addition, it’s even more complicated as some of you do not have fixed portfolios, you add or take out money for real-life needs. This makes it extremely difficult to calculate annual returns as the portfolio artificially changes due to inflows and outflows and it skews real organic growth.
There are things you can do to reconcile this situation, but that’s likely the subject of another article. My TD platform has similar issues as it only provides the returns for the last month… not so useful. In any event, I always note all my account balances in Canadian dollars on January 1st so that I have a reference as the new year plays out. Without this baseline to start off the year, it’s kind of like driving a car without a dashboard; you will have no clue how far or how fast you are traveling. Maybe you’re doing well, maybe you’re not, it’s hard to say. If you cannot tell how well you are doing, then how can you make successful investment decisions?
I am always trying to convince people to measure their performance mostly to create self-awareness, i.e., am I good or bad at this? By knowing how you are doing, you can adjust your strategy or alternatively, you can get out of the game and hold market ETFs. There is no shame in using a market ETF strategy. It’s the easy way to beat over 90% of all actively managed portfolios, you win by not playing.
My Blog/Newsletter as a Performance Tool
One of the main reasons why I write this newsletter is to keep myself honest. Investing is more a mind game against yourself than it is a game of math, economics, luck, or statistics. The natural response to underperforming is to ignore your losses since it makes you feel bad. But then how do you learn from your mistakes? The opposite is also true. If you overperform you get arrogant and ignore the possibility that you were just lucky and now that you believe that you are a market genius, you start taking higher risks. By putting my performance and strategies out there for all to see, I feel that I am more likely to create balanced portfolio strategies. In 2019, I underperformed by 3 points and made sure everyone knew about it (I nevertheless returned 28%, accomplishing my ultimate goal of a market like return).
2020 Performance
2020 was a great year for the portfolio, ending off with an overperformance of 7.75 % after taking into account the additional market dividends (about 2%), which need to be added to the SP500 to get the total return. As returns go, the portfolio’s 26% is very strong, however, what is most important is that I achieved my goal of a market-like return.
I have always said that I try to beat the market by 1-3% and not more as I would have to increase my risk to do better. You have to accept the same 1-3% expected beat as a potential loss because risk works both ways – standard deviation does not care if it’s positive or negative. I personally prefer not to accept deviations more than this in order to keep my returns market like should things go wrong. This year was an exception because of the pandemic, it only made sense to become aggressive and take advantage of bargain basement stock prices. The market could have continued to fall and stay down for a couple of years but we were lucky to have it bounce back so quickly and dramatically. This is why the portfolio overachieved. In a regular year, this type of overachievement would be highly unlikely.
This year was another good example of why it’s important to be diversified. The Toronto Stock Exchange (TSX) only returned about 2% so if you are solely playing a Canadian game, you have underperformed hugely from a global perspective. The world is a big place and there is no reason to have such a strong home bias. My portfolio has a little less than 20% in Canadian stocks. Certainly one day the Canadian Market will outperform when the right combination of financials and energy come back in favour, but generally, I would prefer to keep hitting single base runs year after year than waiting for that big Canadian home run.
Recent Purchase
I have added the Russell 2000 small cap ETF by Vanguard (VTWO) to the portfolio. After much research and listening to Paul Merriman’s podcasts, I am convinced that you can capture the small cap premium (small companies get better returns than big companies over time) safely by using an ETF. Paul particularly makes a case for small-cap value stocks, however, value generally has been underperforming against growth. So the Vanguard VTWO Russel 2000 ETF captures both. I have a 5% weighting at this point. This is another strategy to eke out some overperformance while keeping risk levels acceptable.
Going Forward
I still cannot see the future market direction, there is certainly a case for both the bull stance as well as the bear stance. The US political situation is fluid, there are pandemic considerations, China, excess cash, a new bull market, etc. I do not really know where it’s all going. Last year I predicted a low-teens return for 2020 and I was pretty close. At that time there were a lot of indicators that pointed to that type of return, but that being said, it’s much murkier this year so I continue to hold a mostly equally weighted, heavily diversified portfolio. I do plan to increase my exposure to foreign stocks i.e. not US or Canada as the portfolio has gotten a little too USA-centric.
How has your portfolio done?
Happy investing.
Marc’s Monthly Moves
Buy Sell Vanguard Russell 2000 ETF (VTWO) Marc’s Portfolio YTD Performance
- Portfolio return 23.9% (Including currency losses)
- Portfolio return 26% (without currency losses)
- SP 500 return 16.26%
- SP500 total return 18.25% estimated
Portfolio beat SP500 by 7.75 points.
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What is Exuberance & Why Should You Care?
Originally published December 12, 2020
What is Exuberance?
Exuberance when your grandma calls you up to tell you about a new IPO (initial public offering) that she just bought. It’s when the number of YouTube financial channels starts to grow because enthusiastic investors keep making money on high-flying stock picks and think they are geniuses. It’s also when a new class of investors (Robinhood) enter the market and start buying “in fashion” stocks no matter the price.
Exuberance is what happened in 2000 before the great tech bubble burst… (see my personal note at the end). Now you see where I am going with this. It’s odd because there is also some serious fear in the market due to the expansion of the money supply across the globe, which is the result of government monetary policy to combat the economic/health emergency. This printing of money is unprecedented and could cause a financial catastrophe if not managed properly. These two forces are basically in a tug of war over the markets where depending on how you see things are either great (definitely expecting 20% per annum from this point on) versus the end of the world is near (expecting a long protracted bear market with little or no returns). It appears to me that the exuberant crowd is starting to take the lead.
Where is the Market Going?
I won’t lie, there are so many moving parts in the markets right now that the near future is not entirely clear. I have generally had a good sense of the future, but lately, it’s been much more difficult. I keep moving from bull to bear which means that for the moment there are no obvious strategies to play as there is a viable argument to be made for both sides. More recently I have noticed that IPOs like Airbnb are up 112% and Doordash is up 85% on their first day of trading. It could mean that the good times are here…increasing optimism yeah! However, to me, this is purely exuberance because people have stopped caring about the real value of stocks. Everyone wants to get rich quick and they are not so concerned about what they pay for stocks as long as prices are going up. The big banks are giving small investors what they want by creating a record number of new companies via IPO and now SPACs. It means that there is a lot of money demanding to be invested in the next big thing and as a result, billions of dollars are being absorbed into new company stock.
The stock market however is not unlike your local housing market. It ultimately has to abide by the laws of supply and demand. If you build too many houses, prices could stop rising or even fall, and company creation (IPOs) is exactly the same thing. Will supply just meet demand? Or will it be overshot and the market will fall? It’s hard to say at this point. Historically after a bear market, there are many years of economic expansion and good returns but as I have said in the past, this bear was a hybrid, mostly acting like a crash and not really a long protracted bear. Are we perhaps still at the end of the last bull run? Or is it a new day with many positive years ahead? No one really knows for sure.
I guess my point here is that the small investor should be careful not to get caught up in investing in speculative positions as it’s all the fashion right now. I have seen many small newish investors (not you guys) get caught up in the frenzy of buying large positions of Gold, IPOs, high-growth electric vehicle companies, and a myriad of other shoddy high-growth companies. They have also concentrated their portfolios with only growth stocks and have had little regard for sector balancing, diversification, valuations, etc.
Again, not to sound like a broken record, the best strategy for the moment is to keep a well-diversified portfolio that includes some hot stocks but also a bunch of solid boring stocks so that no matter what happens, you don’t get hit with a major downdraft of speculative stocks.
Following my Own Advice
Following the above advice, I added the Tractor Supply Company (TSCO) to the portfolio, a cool chain of stores that caters to country living folks – farmers, and pretend farmers “aka hobby farmers”. They sell all kinds of stuff like chicken coops, clothes, work gloves, garden tools, feed, etc. It’s not sexy, kind of boring, but it’s well run, has great financial metrics (my professional screener loves its financials), is a decent size, and weird. Weird is good because it adds to the diversification of any portfolio. It also fits well in my Consumer Discretionary section of the portfolio.
Measure Your Performance
Lastly, just a reminder that you should take note of your portfolio balances at the end of the month so that you can measure your annual performance. Comparing your results to an appropriate benchmark like the SP500 or the TSX composite is important because investing is a relative endeavor. If you are not achieving market-like returns then you have an opportunity to adjust your strategy or (if you chronically underperform) consider moving to a market ETF. Market ETFs are a boring way to guarantee getting market returns. There is actually nothing wrong with boring if they achieve your financial goals! Note that the small investor historically only achieves a 2-4% return vs the 9% of the market.
My Personal Story About Exuberance
Back in 1999 I got enthused with the market and set up one of my accounts with a balance of $20K (a lot of $ for me at the time). Because I was arrogant and overconfident, I leveraged these using options, meaning that a rise in stock was magnified maybe 2 to 3 times. In the beginning, it was like shooting fish in a barrel, the more money I made, the more I could bet. By 2000, I had about $125K in that account which is pretty good no matter what standard you use. I was feeling like a genius by then, and planning early retirement in my thirties (not kidding). As most of you know, history had a different plan. The bubble burst and any attempt to adjust i.e. buy the dip, switch to higher quality dot coms, only made things worse. After all the dust had settled, the account was valued almost exactly back to $20K.
I learned a lot from that experience, effectively that anything that can propel you up really fast can also propel you down even faster. Slow and steady is how the tortoise beats the hare and that is how investing should be managed in any market.
I am sure that some of you learned a thing or two at this time as well and likely remember how enticing exuberance can be.
Happy investing.
Marc’s Monthly Moves
Buy Sell Tractor Supply Company (TSC) Marc’s Portfolio YTD Performance
- Portfolio return 22.1% (Including currency losses)
- Portfolio return 23.8% (without currency losses)
- SP 500 return 13.39%
Portfolio beat SP500 by 10.41 points.
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Portfolio Update & Rebalancing
Originally published November 22, 2020
November is a big month as I have rebalanced the portfolio, and added a couple of new positions all in an effort to set up the portfolio for the next six months. I don’t like trading in and out of positions except when rebalancing and prefer to keep things simple for as long as possible. The more trades you make the more likely that your annual returns will fall. Two rebalances a year are sufficient to keep portfolio volatility in check.
Portfolio Rebalancing
This month I continued to concentrate on strengthening my Health sector positions by diversifying out of drug discovery positions. I have added Quest Diagnostics (DGX) which is a diagnostic company that provides diagnostic testing services and analytics. This stock is unknown to most, and among other activities, is currently involved in Covid Testing in the USA. Another addition is Intuitive Surgical (ISRG) which is the maker of robots that now take care of a lot of simple as well as more complex surgeries. Its years ahead of the competition and basically enjoys close to a monopoly in its field. Both of these positions score very well in my professional screener.
I sold off THOR which has underperformed more recently, although it was nice to have during the crash as everyone was buying RVs, and its stock went for a run but the effect was not sustained. Next year could still be a great year for RVs but it’s a little uncertain. I replaced THOR with Alibaba (BABA), which is basically the Amazon of China. Its stock has been under pressure lately due to its ANT spinoff, which the Chinese government recently blocked. The stock may continue to be out of favour for a little while but the rise of the Chinese economy is somewhat unstoppable. I think every portfolio should have a Chinese stock. My stock screener scores BABA very high and the diversification quality that it will bring to the portfolio is priceless. Its also BIG, like really BIG, almost 700 Billion $ big.
Some of you watched as Biogen BIIB rocketed up 40+% in one day after initial approval of their Alzheimer’s drug, only to be un-approved shortly after causing a bigger drop back down to earth. By luck, I sold 1/3 of my position after the rise as it just so happened to align with my diversification strategy. Luck unfortunately plays a big role in every investor’s portfolio, you win some, and you lose some.
Going Forward
Political Influences
Although there seems to be some conflict with the US election results while at the same time the pandemic runs amuck across North America, there may be light at the end of the tunnel with an emerging new president and promising covid vaccines. But as previously mentioned, there certainly can be some big volatility up or down if things don’t work out as planned. The historical data suggests that the inaugural year of a new Democratic president with a log-jammed senate and house is really good for stocks.
The fear that Sleepy Joe to turn America into a socialist country likely won’t come to fruition due to the split house and senate and as a result, everyone will rejoice in relief and therefore the market will go up (best case scenario). But what if he turns the senate? What if he can’t reign in Covid? What if he can’t make everyone happy? Oh my! Anything deviating from the best case is not the end of the world, it just means that it’s going to be more difficult to plan a strategy going forward. It’s still a little early to try and predict 2021 with all the known moving parts.
Observations
With very little year left, the portfolio is picking up steam with the help of some market rotation. The beaten-down stocks purchased in March are finally moving up fast and are starting to make a difference. An 8% beat is huge and makes all the previous strategic trading worth the work. As I have said before, finding opportunities in the market under normal conditions is difficult as everything is priced efficiently. When there is havoc in the market and people are panicking, you can find lots of opportunities as long as you keep emotion out of the equation.
My portfolio weighting is overweight (relative to SP500) in financials, and industrials (to a lesser extent). I have underweighted technology a bit, as well as utilities (completely missing). Tech has done phenomenally and is by far the biggest sector component in the SP500. Will it continue its run? Hard to say, but nothing wrong with selling some off and picking up bargains in the financials. The industrials are overweight mostly due to earlier covid bargain purchases of Boeing and Delta.
Happy investing.
Marc’s Monthly Moves
Buy Sell Intuitive Surgical Inc (ISRG)
Quest Diagnostics Inc (DGX)
Alibaba Group (BABA)Thor (THOR)
Novo (NVO) – Some
Biogen Inc. (BIIB) – 1/3Marc’s Portfolio YTD Returns
- Portfolio return 19% (Including currency gains)
- Portfolio return 18.2 % (without currency gains)
- SP 500 return 10.1%
Portfolio beat the SP500 by 8.1 points.
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The Case for ETFs
Originally published October 13, 2020
Market Call Option Sale
I finally sold my market call option with a gain of 38% YTD. The option was a pre-covid strategy to take advantage of a generally stable rising market. It basically returns what the Sp500 returns times 5. If the market went up 1%, then the call option went up 5%. The same is true if the market falls. This is the power of options, you can really increase volatility, therefore returns…or losses…ick. The volatility over the year was a wild ride, to say the least. The option was up 50% just recently and down 60% during the month of March. As always my bets are measured in case I am wrong. The total value of the option represented no more than 6-7% of the total portfolio and by nature would likely be worth something no matter how bad the market got. So a total loss would be improbable even in the current situation. I will likely return to a market option strategy in a couple of years when the probability of a rising stable market, returns. In any case, all things considered, the strategy was still successful. For reference, last year’s Option returned 60+%.
ETFs Instead of Cash
The purchase of the sp500 ETF (SPY) above is a direct result of the sale of the option, a direct exchange of proceeds. From a strategy perspective, the ETF is a placeholder for future purchases. As you know, I do not like holding cash for any length of time as it historically lowers returns. Effectively the call option on the Sp500 is equivalent to the ETF in every way except that the ETF does not have a multiplier effect. The market goes up 1% so must the ETF by 1%, easy peasy. It’s a great way to be in the entire market without worrying about individual stocks.
Surprisingly many of you are still holding large amounts of cash with the intention of one day investing it. As I mentioned earlier, from a probability perspective you are most likely going to underperform the market as it’s the time in the market that provides an equity return over and above fixed income investments. Most people keep cash out of the market because they fear something bad will happen. Yes, bad things can happen, but if you understand that your long-term investment horizon will erase any short-term losses, then there is nothing to be afraid of. It’s normal to have a few down years as it is normal to have many more up years. You can’t predict with certainty when these ups or downs will occur, but you can predict that with enough time, you will be up overall. With less money in the market, this just means that in the long run, your returns will be proportionately less as you forgo the long run return. To make matters worse, inflation erodes the value of your cash. Market ETFs like the one I am using for the Sp500 are a great way to stay in the market while you figure out individual stock picks. Just sell some of your ETF and buy that shiny new stock, until there is no ETF left. Or better, just invest solely in ETFs and you will likely get better returns than your average professional manager… but that is another story.
Market Direction
Going forwards, the market remains more uncertain than average, particularly since there is a controversial US election going on during a second pandemic wave. It’s hard to imagine more uncertainty than that but it’s still possible. I have been thinking that the economic effects of the pandemic will likely last longer than expected, so the question becomes “how does this affect the small investor?” The answer is not entirely clear, but history has shown that the market eventually gets over it, long term Covid is simply built into the market, and everyone gets used to it. The market reflects what it sees 12-36 months out, as long as it sees light at the end, the market will chug along. It’s the things we do not see that have the biggest effect – the unknown events, the black swans, like war, mass bankruptcies, and the second wave of zombies. But these things are possible at any time, so how is it really different for the investor? For me, there is no reason not to stay fully invested. The portfolio is now in a completely normal state, i.e. no market options, or margin and almost all Covid portfolio strategies have been unwound. However, I will continue to hold my underwater Covid picks – Delta and Boeing – as a return to normal will see huge gains. I will likely rebalance the portfolio in the next month or two and take advantage of the tax selling season but otherwise, I will keep my stick on the ice (Famous hockey reference I believe).
Happy investing.
Marc’s Monthly Moves
Buy Sell Sp500 ETF (SPY) Sp500 Mini Call Option Marc’s Portfolio YTD Returns
- Portfolio return 17.5% (Including currency gains)
- Portfolio return 16.5% (without currency gains)
- Sp500 return 9.5%
Note: Portfolio beat Sp500 by 7 points.
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The Market is Up… Where Next?
Originally published September 15, 2020
During this period I continue to manage risk by swapping out Gilead for United Health Group within my Health Sector group. The main reason for this change is to increase diversification, as all my health sector positions are biopharmas concentrated in drug discovery. At face value, they are all very different companies but they are all nevertheless in the same business so it’s prudent to try and diversify this sector/group. GILD is being sold at a 20% loss, so there are some tax selling advantages considering some of the huge gains in other stocks I recently sold. UNH is, in my opinion, a more well-diversified company involved in health services, insurance, software, etc. They are also a more consistent grower of earnings, and relatively a safer investment from a size perspective as it’s a huge company. UNH may also benefit more than most should spending in the health sector be increased due to the aftermath of the pandemic.
The portfolio continues to beat the Sp500 by 5.5 points and the Canadian TSX by 15 points. As discussed in previous newsletters, the TSX is a more concentrated index, not well balanced because the Canadian Economy is itself not well balanced. So when Oils and Financials are out of favour as they are now, the Canadian Index will underperform relative to everyone else. One day it will surely beat the US and world indexes, but who knows when? And it will always be biased toward financials, energy, and resources. This is why I always advise a worldwide diversification strategy.
Gold is Getting Hot
There continues to be a lot of noise in the markets ie speculation about market bubbles, and end of the world talk. As a result, Gold is getting hot, and even Warren Buffet has bought in if you believe the hype. In reality, a sub-lieutenant at Berkshire likely made the purchase on his own, and the amount is a rounding error relative to the value of Berkshire. It’s not a relevant position! So it does not mean anything. So do not get caught up in the gold fever, it’s always a speculative play. Interestingly Berkshire has become an Apple and Bank of America fund as these two positions alone represent more than 50% of the fund. This is not a strategy I would ever recommend to anyone.
Where is the market going now?
A couple of months ago, I was pretty confident that it was going to be up. Now that it’s up, will it continue? I am cautiously optimistic at this point, but admittedly there are a lot of moving parts with the pandemic and its eventual secondary effects… trade wars, US elections, and recent alien sightings. I think it’s likely that volatility will remain high till the end of the year and certainly in 2021. It’s really hard to say for sure, and that is why I am tweaking the portfolio to not be overly exposed to major reversals in the market.
What to do with Marc’s Really Risky Option Strategy?
My Sp500 index option is returning +20% after being down over 60% in March. The original strategy was to sell it this December when it expires, but this was a pre-covid purchase/strategy. Ultimately, I think I should take the money and run although there is a good chance that I may end up forgoing much more profit. I will likely let it ride a few more weeks but it’s likely that the better strategy would be to lower my exposure to the market by selling the option. Thankfully it’s above water at this point, for now.
Happy investing.
Marc’s Monthly Moves
Buy Sell United Health Group (UNH) Gilead (GILD) Marc’s Portfolio YTD Returns
- Portfolio return 11.2% (Including currency gains)
- Portfolio return 10.2% (without currency gains)
- Sp500 return 4.65%
Note: Portfolio beating Sp500 by 5.5 points
Money with Marc 