As I’m writing this (first week in March), the market is in the middle of some obscene volatility thanks to the coronavirus that has started taking over the world like the second coming of Genghis Khan. The crystal ball is decidedly murky on this one, so no telling what things will be like when you’re reading this in April, but here’s hoping the zombie apocalypse chapter story you’ve read in these very pages hasn’t been a massive case of cosmic foreshadowing!
Something I’ve heard a lot in the last week from clients is: “should we be selling stocks?” Perhaps you’ve had the same thought yourself. Fortunately, there’s a straightforward answer to that question: yes, you should sell.
But, but....what about long-term investing and buying the dip and “the market will recover” and everything else people say? Irrelevant! Let me explain:
We had originally intended to keep unpacking December’s This One’s For Us newsletter and get into the superstitions and black magic of technical analysis...but things have taken a rather interesting turn in the last week, so let’s address the elephant - er, the bioengineered microscopic pathogen - that’s (probably) in the room. It’s not yet April, so we’ll try really hard to stick to facts...or at least what has been publicly admitted to.
Here’s what a pandemic looks like:
It’s beach renourishment time again! The dredges and pipes and bulldozers are all hard at work this offseason fighting with mother nature to try and keep those free-spirited sand grains in one place. Or at least temporarily reset them, I suppose. The more cynical among us might argue that it’s a bit of a losing battle...but man does that new beach look good.
From time to time, it’s a good idea to give your portfolio a little renourishment as well. We’re not talking about selling everything and starting over - after all, you don’t scrape the beach away down to bedrock and then rebuild it. You just need to move some things around a little bit.
There are all kinds of pithy sayings out there about how to renourish your portfolio: “cut your losers and let your winners run”, “if you liked it before, you should like it even more now that it’s cheaper”, etc. Gag. All you really need to do is a simple rebalance.
Happy Holidays, dear readers! Believe it or not, the vast majority of the newsletters we write are not, in fact, for our own entertainment. A couple of them definitely are - notably the April Tin Foil Hat series and the October Halloween series - but apart from those semiannual gems, most of the time we are trying to educate, inform, amuse, explain, entertain, and/or deobfuscate.
This one, however, will likely turn out to be none of that. If you’ve been paying attention to those trade confirmations that hit your inbox at the stroke of midnight, you’ll have noticed that we’ve been busy headed into year-end. The following is a glimpse into what we’re thinking, and why. Fair warning, it may feel a bit like climbing up an Escher staircase. But like we said, this one’s for us.
Hindsight is 20/20, as they say. Unfortunately, since my benevolent overlords editors here at Beachcomber have these things called “deadlines”, there is absolutely zero hindsight available for this first Rogue Waves of 2020, as it is, in fact, still 2019 as I write this. Which must mean it’s Magic 8-Ball time!
What’s that? You think we meant to say “crystal ball”? Ah, yes, that is to be expected given all the punny ways you can put “vision” and “2020” together for economic forecasting. But from time to time we like to refrain from beating a dead horse. And also, economic forecasts are useless.
To pick up where we left off last month: Diversification, huh, what is it good for? Well, most people would say a lot, that diversification is the foundational bedrock of an investment portfolio. But also - and this next point might be somewhat controversial - nothing.
If you want to make money in the stock market - like, turn $1,000 into $100,000 money - you won’t do that with diversification. Well, you will, but it’ll take 50 years. The quickest way to make money is by making a very small number of very large, concentrated bets...and then hopefully the bets pay off. Think of any famous investor you’ve heard of, and they’ve probably made their money that way.
The problem is, it’s a huge gamble. For every one investor you just named, there are hundreds that nobody has ever heard of, because they lost. And then there’s the ones that made it to the big leagues and subsequently crashed into bankruptcy: Long-Term Capital Management, Amaranth Advisors, Marin Capital, Tiger Management, MF Global...the list goes on. So sure, you can do all kinds of research/activism/questionably-legal market manipulating activities to try and make the gamble less of a gamble (*cough*hedge funds*cough*), but any investment with that kind of payoff comes with all sorts of risk.
That risk is exactly why the SEC, in their paternalistic omniscience, have limited most of the best investment opportunities out there to “accredited investors”. For the vast majority of “non-accredited investors”, that level of risk is unacceptable. If your investments are in the form of a 401(k), or maybe you have a brokerage account but know you will be needing to use those funds in retirement, the possibility of losing all your money should never be on the table to begin with. Yes, turning $1,000 into $100,000 a couple times over would be nice, but we’ll choose instead to take the worst possible outcomes off the table and make money the old-fashioned way: savings and time. And so we turn to diversification. Diversifying will not make you money, but it will certainly mitigate potential losses.
Back in the USA! And for our first meal in Atlanta after two months, we had...Chinese. Which was delicious, but our fortune cookie said - no joke - “Don’t invest in the stock market. Invest in family instead.” Well played, China. Apparently we have progressed to the psyops portion of the trade war.
But let’s leave China to the side for the time being (until we get into what it means to have the world’s reserve currency) and stick with Europe for another month. Europe is a hot mess.
Let’s start with Brexit. Boris Johnson is brilliant. Well, perhaps not. I mean, he kind of looks like he never outgrew his second year of boarding school where experimentation with sloppy hair and dress was all the rage, which admittedly taints our opinion. But he and/or his advisors (rumor has it Dominic Cummings is largely the brains behind the Brexit tactics) have played this beautifully.
If last month was Roger Moore as 007, then we’re closing out this summer series with Michael Bay. That’s right - it’s time for stock valuation, replete with explosions, special effects, and very confusing cuts in the action sequences.
Stocks, also referred to as “equity”, are shares of ownership in a company. These used to be issued as actual stock certificates (really decorative pieces of paper), but now it’s just digital 1’s and 0’s. Kind of like the cash in your bank account. When you buy a stock, you expect to make money in two ways. One is by collecting a dividend (which right now averages just under 2% for the S&P 500). The other is by the stock price going up.
Unlike bonds, there is no intrinsic starting point for stock valuation. There is neither a maturity date nor a future value, which makes them more or less impossible to actually value. Not kidding - there are textbooks upon textbooks upon college courses upon certifications all trying to impart some standardization to stock valuation. But that uncertainty is also where the fireworks come in, and why stocks swing they way they do.
Too Soon to Start Investing? Financial Experts Weigh In.
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