Saturday, February 25, 2017
Like any concept used in this world, and this seems in particular to be true for the world of investing, how a concept is understood and applied is often in the eyes of the beholder. So when talking ‘Buy & Hold’ to me that doesn’t mean that I never sell a stock once I buy it. Actually, if you read my last post you know that I recommend selling stocks to build up lots of cash because ‘the higher a market goes, the higher the risk’. So, when do I sell a stock?
1. A stock has gone up so much that it is taking up an unreasonable proportion of my portfolio. Lately, I have trimmed a lot of my bank holdings. The official term is ‘rebalancing my portfolio’.
2. A stock has dropped from it’s recent high or it’s recent purchase by more than the allocated stop-loss price. Typically, 20-25% from a recent high or from the purchase price. However, in volatile sectors like gold mining I may use a stop-loss at 40 or 50% price drops. If you invest no more than 5% of your security portfolio in one stock and you lose 25% then your total portfolio loses around 1.2% If you add to that the idea of buying in tranches, i.e. when you start buying shares in a company just buy a little bit do not buy the full 5% in one fell swoop. So now, if you made a mistake and you put only 1% of your securities portfolio in a particular stock your loss is only 25% of 1% or 0.25% of your total securities portfolio value. If you are like me and have around 50% of your net worth invested in real estate, then your total net worth is down 0.125%. You see that way you keep your losses to a minimum and if you have a big winner you let your profits ride – sometimes for years and you buy more and more of this now proven asset up to the max 5%.
3. A stock is ‘dead money, i.e. it pays no or little dividends and more importantly the reasons you bought it are no longer there and the price hasn’t moved significantly for 1 or 2 years. These stocks I tend to sell especially when I see a downturn coming. After all, why live through the stock value fall and lose 20 or 30% in a downturn with little upside? Especially, If you can convert it into cash and use that cash to buy a more desirable asset during the anticipated down turn? Makes sense?
So rarely do I truly ‘Buy & Hold’ for ever. Having said that, some stocks like Brookfield Asset Management I have been holding literally for decades and I only sell a bit if it becomes too large a portion of my portfolio. This strategy of buy and hold makes we sleep very well at night. A large portion of my portfolio requires very little attention and this allows me to focus on trying to find new opportunities to invest in. I try them out and monitor them closely in the more active portion of my portfolio. Some people call this ‘play money’ but you know I don’t ‘play with money’. I am willing to invest in new companies and may have fun when proven right (30 to 50% of those investments don’t work out and are sold within a year or so) but it is for growing and optimizing my portfolio and I am certainly not very cavalier about losing even a small part of my nest egg. In the end, I may have to live off this money for decades to come and if immortality is possible, I may have to live off it forever. 😊
Thursday, February 16, 2017
Prepare for the next crash!
Look at the graph below which I captured from the Globe and Mail website. It shows the S&P500 since 1978 up to the 2017 crash. What crash? The one that is probably coming soon in the U.S. and will drag us along with it even though in Canada we basically had a TSX bear market in 2015.
|S&P500 from 1977 until today - from Globe Investor|
I have to refer to a 2011 post on this blog titled Bull-and-bear-market-analysis.html to let you see what I am talking about. Remember 2008-2009? Remember all the hand-wringing about how slow the markets would recover? Much slower than any other recovery in history? All the headlines about the coming crash which would be worse than anything we have ever seen before? Well what does the chart tell you? Right: Poppycock! The market recovery from the 2009 lows was just as steep as that of previous crashes! The next graph shows you the S&P with 10 and 50 week(?) moving averages.
|S&P500 since 1977 with moving averages|
The maximum recorded percentage increase from bottom to peak recorded in the Bull and Bear market analysis post was 142%. Since the lows of 2009 we’re up close to 300%! If you listen to the pundits many don’t talk about a crash any longer and economic data in the U.S. show low unemployment rising wages and the Fed is talking about raising interest. The longer-term rates have been on the increase dramatically so the Fed runs a bit behind the facts. Remember Marty Zweig the legendary investor from Louis Rukeyser’s PBS‘ Wall Street Week’ in the 1980s? He had the rule: Three subsequent rises in the Fed’s interest rate and a bear market is likely to follow.
I think we’re close to the peak in the U.S. You may say that is the U.S. but Canada and Europe are not even close! True but not entirely. Look below. Yes, you see? Europe underperformed both the U.S. and Canada. But these markets often follow similar patterns. Canada is also at an all-time high in spite of the commodity rout. Many Canadian financials are at very lofty prices as well. Example: the banks. Guess what, in a U.S. crash Europe and Canada may not do as poorly as the U.S. but they will be dragged down as well. Certainly, short term.
What to do?
Look at the long-term chart and find back the infamous 1987 crash. What do you see? Virtually nothing. With a long enough a time horizon the crash meant nothing. But if you lived through October 1987 you probably woke up with a portfolio that overnight went down between 20 to 30%. What a great buying opportunity! Same for 2008-almost anything you bought between October 2008 and March 2009 went up by 300%. So long term the market returns 6 to 7% plus inflation annually. But you could spike those returns if you had cash to buy near the lows. Never forget that over the long term the impact on buying cheap is muted. So that is how you look at crashes and corrections - they are buying opportunities. Suppose you only buy during lows and sell whenever the market peaks? Then you may miss out on many years of dividends and on reinvestment opportunities – cost-averaging would work well during such market stages. Probably you would have missed more profits than you can ever make up by buying only during lows and selling at peaks. It is, as they say, time in the markets that are an important contributor to profits as well. That is why you never sell ‘everything’ and since you never know which stock will do well and which one will do poorly you have to diversify.
We know a crash is coming – the higher the market the higher the risk as we always tell you! So, take profits in your U.S. portfolio and build up your cash. Don’t buy a lot of new stock – not even in Europe. Wait for the crash and put your money in the most undervalued assets. Also, count on a big crash in overvalued Canadian Real Estate (I am talking Vancouver and Toronto). If the U.S. tanks oil prices will likely drop again (temporarily). But gold is a chaos hedge so consider it a currency and buy investments underlain by physical gold or buy bullion straight (on the rocks J); don’t buy investments underlain by gold derivatives . Silver may give you even more oompf! Gold and silver are forms of cash and hedge you against big falls in the U.S. Same for the Canadian dollar. So, put 10% of your cash in Gold and/or silver maybe even up to 10% of your total stock and bond portfolio. During the crash, you will know when the bottom is near – your timing doesn’t have to be perfect – ‘Good enough’ is good enough. That is the time to use your cash to buy cheap. Always diversify there are nearly always assets that do better than others. Don’t panic because long term your stocks will do well and buying at the lows will only spike your returns over the short to intermediate term – there is no real reason that you would miss the opportunity so try not to be in a hurry when buying at the low. You can even wait a bit to confirm the start of a new uptrend but don’t get too fancy. Get ready for the Crash of 2017 (or whenever it may occur). And... like with every crash before, I make the next prediction with confidence: Many gurus will come out with self-glorifying books claiming they predicted the 2017 crash with confidence and accuracy. Don't believe a word.