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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%

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)

Original date published: March 1, 2020

I am getting a lot of questions regarding the effect of the coronavirus on markets. I still stand by my last newsletter that any correction or effect will be short-lived. In fact, I am using this correction to get rid of any excess cash in my portfolio, and so should you. Statistically holding cash almost always lowers your return. The longer your cash is in the market the better you will be. I have used my small cash position to buy more of my existing positions that have fallen the most. These generally bounce back the most once a recovery takes hold.

Historically pandemics or other end-of-the-world events have only temporary effects on the market. Some examples are Sars and H1N1 – no impact on the market over the long run. Want something bigger? How about the Spanish flu in 1918… it wiped out 100 million people when the world population was much smaller, and again, limited long-term impact. Related events are Y2k….yawn, even 9-11 caused some serious panic, but the market recovered quickly. Same with ww1 and ww2. If anything, this is an opportunity to cash in on people’s fears by buying the perfectly good companies that people are panic selling. Investing is for the long run, not the short run.

The other view that no one is talking about is that the market was sort of due for a correction anyway. 2019 was a strong 32% return, and the beginning of 2020 added another 5%, so the market just may have been looking for an excuse to let some air out. Corrections in the 10% range happen every year or two, and corrections in the 20% range happen every 2-3 years, so we are likely experiencing a very normal event. Could I be wrong? Of course, but the probability is on my side, and it rarely ever makes sense to bet against the odds.

Note that my sp500 call option has gone from +20% to – 30% in about a week or so. It expires in December, so lots of time to recover. It shows how quickly things can change in the options world. It represented only 7% of my portfolio. I chose a small amount just in case I was wrong or simply unlucky, so its down effect is measured, ie I was not arrogant by making a big disproportionate bet.

My portfolio is all of a sudden returning -8% year to date in constant dollars vs -8.5% for the sp500 index. Even with the extra drag of my call option, I am slightly beating the market. How you do against the market whether in an up year or a down year is the only game that matters. You should think of the market’s gyrations, whether up or down, as simply noise, and it is normal.

For the benefit of others, I have been looking into a simple index ETF for a friend that provides simplicity and market-like returns. I have come up with Ishares Core MSCI World UCITS ETF USD (Acc). It’s a world ETF that tracks the msci worl index, it comprises the biggest developed countries. These include the USA, Japan, Europe, etc… This particular ETF is based in Ireland, so no US withholding taxes apply, low management fee, and it is a very big fund which is great for liquidity (you can sell it quickly if you need to). If you want simplicity with just one position, this would be it.

Marc’s Moves of the Month

Buy (more)	Sell
Shopify (SHOP) Conoco Phillips (COP) Activision Blizard (ATVI)