Make the S&P Great Again

Hi All,

In these markets, it is quite hard to maintain your cool as you are repeatedly having your hard earned capital values decimated. My objective is to create some accountability with respect to sticking to the plan.

YTD the portfolio is down 17% (before today and today is not good especially with the small caps), stock holdings battered saved by allocation to cash and zero allocation to basic materials which is higher than normal (in large part because of stock values falling off a cliff).

Violent moves:

While not investing in 2008, I was following the markets. The moves lately are violent (in case you haven't noticed). I put this increased volatility due to increased leverage (a consequence of central bank actions) and a sudden withdrawal of said leverage. Indeed the huge moves in currencies suggest and certain technical indicators like the currency basis seem to indicate some carry unwinds.

At the same time, there is rush for cash and withdrawal of credit as funds adjust their leverage for the increased volatility.

Such largely automated decisions impact the markets and therefore us. The technical functioning of the market is not withing my control and therefore I need to consider each holding independently of the markets.

Virus Impacts:

I have had a look through my portfolio with a critical eye on cash generation and debt.

For those that are higher risk / more speculative, I was pleased to note that debt was low and supported by operating cash flow. Where there was high levels of debt, this was invariably in the mega cap high dividend stocks. With hindsight, I would have sold all of these but I think it is too late.

I will do nothing for now, monitoring credit ratings. I am comforted by the fact that by virtue of their size, their debt will almost certainly become as big a problem for their lenders as it would be for themselves, which assists in forbearance.

Carnival was a particularly ill timed purchase and should have been sold had I not been a bit deer in headlights. I bought because of demographic trends, cash generation, market leadership and best balance sheet in sector. Unless coronavirus causes a permanent change in cruise take up, I think the shares offer compelling value to medium term investors.

Oil impacts:

I hold RDSB - enough said!!! I added recently. My reasoning is as follows - the price of an oil barrell is approaching the actual cost of the barrell - while I am not brave enough to call a bottom, I do not think there is that much further to go. Without buybacks and CapEx, I think they can sustain dividend without debt, but even with a 50% cut it offers a high yield, which is the main purpose of the holding.

Taking advantage:

I think anything I was tempted to sell before the virus hit and did not (FOMO on more gains), it is too late to sell. Indeed some stocks have been absolutely pummeled and at these levels offer some compelling value if you are willing to look through the next 6-12 months.

Psychologically, it is tough market to take advantage but in particular, there is some hideous value in micro caps with rock solid balance sheets. Indeed, with some of my watchlist, I feel a little like a kid in a candy shop.

I am now a selective purchaser, effectively putting the new ISA allowance to work a little earlier, but will stage my purchases. I don't want to miss out in a violent sustained rally, nor do I want to be without dry powder for what might be even better opportunities. At the same time, by holding some in reserve, I think I limit the psychological hits since losses hurt a lot more than gains!

I will also take advantage this month by increasing the regular monthly SIPP purchases. From an asset allocation perspective, I have many years until I need the funds and therefore am happy to maintain the already very high equity allocation and in the short term increase my allocation to equities.

Further, and ignoring capital appreciation, I do not understand why people hold negative yielding bonds to maturity (and by people I mean people like us who are able to hold cash). In a deflationary environment, it makes sense, but still not as much sense as just holding cash??

Market timing:

I would love to be able to call the bottom and would have loved it even more if I had been able to call the top. If I did call the top (I am sure I did a few times in passing!), action coupled with statements about overvaluation would have been preferable.

I did do some index shorts at well above this level but what I learned is that trading indices is not for me. I took profits at minor amounts as soon as profitable trades started moving back (risk averse for gains and risk seeking for losses!). If I held my nerve and stuck to the plan, it would have been a very profitable trade.

Safe in the knowledge that I am not a good trader, I will refrain from trading stocks or indices.

History - I don't particularly want to beat myself up about it or the fact that I am underwater on my most recent purchases. I will take solace from Aristotle:

Even God can't change the past!

If I am not able to call the top, then it stands to reason that I cannot call the bottom and hence my strategy. The scuttlebutt that I have to suggest that we are not at the bottom is that there are lot of people talking about investing for the long term and I take particular note of my comment like a kid in candy shop.

In the despondent desperation of a true stock market panic, I doubt very many people feel like they are in a candy shop.

At the same time, I do have some doomsday scenarios that are playing in my head - perhaps I will write another post to get these of my chest and some of the more experienced investors on here can tell me how ridiculous I am being!!

Stay safe!