Market took a dive. Here’s what happened to my portfolio and my head

February 2018 has been a fun month. Finally, something is happening in the market. In this post, I’ll show you what happened to my portfolio and what went inside my head when the temperature was high.

The key to being a successful investor (also human?) is to think more than you act. When the market dropped, I noticed that some “advisers” wanted us to stay away from the news and “don’t look at your portfolio today”.

I responded and said that I actually think we should look at our portfolio.

Why? So, that we can learn more about how we deal with emotions, how our portfolio handles bear times and how you act when information is flowing everywhere.

No escape

Quality didn’t matter

I’ve always told myself that since I own high quality companies (those with solid management, earnings, growth, cash flow and boring pipeline such as toilet paper, healthcare and food) was a clever way to stay “conservative”.

This market drop showed us, even though we don’t like it, that quality didn’t matter. Everything dropped no matter what.

This is important. My idea was that technology was overvalued and that money would transfer to safer securities. Money didn’t transfer from stocks to stocks, but from stocks to bonds/cash!

While knowing that a correction will “drag everything down”, I’m still surprised that utilities and REIT dropped as much as they did. REITs have been a poor sector through most of 2017 and still shows sign of weakness.

But Stockles, it’s only quality at sale! Maybe, maybe not.

The last time FED heavily raised the interest rate, 2004-2007, REITs heavily outperformed the s&p500 by returning 80%, while Utilities dropped to a low of 2.5% by 2007. Maybe it’s the opposite this time?

Takeaway

The market, especially the s&p500 is bound for a correction and stocks are trading at a premium. While this can go on for a while due to strong economic growth and the new tax law, high quality stocks are trading at high valuations and will, along with other securities, revert to the mean.

This does not mean one can’t buy more shares in companies such as Kimberly Clark, but in a correction, equity will flow from shares to cash/bonds, not sector to sector.

Reasonable probability that my portfolio outperforms in a bear market

From 01.02.2018 until today, my portfolio returned -2.13 % while OMXS30 returned -3.16%, NASDAQ Composite returned -4.52%, OBX returned -2.35%, Dow returned -4.2% and S&P500 returned -5%. The overall portfolio beta is somewhere close to 0.60, so this is what I expected.

But, my overweighted in REITs have caused my portfolio to underperform my goal, which tells me that those securities aren’t as save as I thought.

Takeaway

Portfolio will outperform in bear markets,  but the question is if this conservative approach has led to my give up considerable gains in the recent bull market.

It might be zero sum game, maybe even something worse. I will reflect on this matter more.

But, eople are doing it wrong

One observation was that when the market dropped, people on Facebook and investment forums said “sale sale sale” and “I need to figure out what to buy and do research”.

First, doing research on securities while the market is going down will cause you do add a huge amount of emotional bias to your calculation.

Not only that, you will feel the fear of missing out and most likely act too fast.

Here is what I recommend:

Do your research before the drop.

Find the stocks you want to own.

If you don’t have any clue on how to do valuation, just look at valueline.com or something like that, and go with the lowest valuation. Then, do a margin of safety based on that price, and wait for an entry.

Let’s say that Johnson and Johnson has a fair price around $115, write it down, just wait for your entry point. On very high quality companies such as JNJ you might not even need a huge margin of safety. Maybe it’s okey to pay the premium for a premium company.

Takeaway

Do research / due diligence before your emotions disturb you.

Shareholders of Realty Income (O) show sign of cult-like behavior

I own 93 shares of Realty Income, so I’m also a shareholder. But, just recently, a Spruce Point Capital’s Ben Axler called Realty Income a Strong Sell, suggesting 30%-45% downside risk.

What really annoys me is the ignorance. People say that they googled him and that he’s a short seller, meaning that he should be neglected. You people should LOVE someone who uses his valuable time to analyze and write conservative opinions about your holdings.

It’s the risk you should care about, not every articles which states BULL BULL BULL. Damn it. I can feel that I’m getting a bit angry now.

As my friend “Tricky” said:  After reading here http://www.sprucepointcap.com/about-us/ I decided that it would probably be smart on my part to pay attention to exactly what they have written. These guys are short selling specialists, or in other words forensic researchers of companies with a short focus. Axler’s credentials speak for themselves and Donohue has a background at Kerrisdale, the shorting firm who made a huge killing last year when BAVA’s Prostvac flopped phase 3 trials and the stock dropped in the region of 50%. I’ve seen Kerrisdale’s report and the level of detail is amazing

Takeaway:

DO NOT NEGLECT SOMEONE JUST BECAUSE HE IS SHORT ON YOUR STOCK. RATHER, UNDERSTAND HIS POINT OF VIEW AND THEN DECIDE.

I’m way too unemotional, but I have my reasons.

I tweeted this on Monday:

Just got back from the gym and I see that many high quality stocks are down. Earlier today I was a bit worried that the correction was finished before it even started. Hopefully it continues for a while.

But how am I able to stay so passive, so unemotional? It roots down to this:

  • I’ve done my homework and “know” that most of my companies will still sell their products even thought the economy get’s worse
  • I’m young. Historically, I should experience around six 10-15 corrections and maybe one massive. The way I see it is that I’m now paying for experience so that I can be wiser when I have more capital.
  • Also, given that I save around 15 – 30% of income in the future, I’ll add 20 x portfolio value.

Takeaway:

I managed to stay totally passive, not doing anything, but I should have more cash in hand so that I can buy shares of my companies when the time is right. Right now, I’m just watching the ball, not playing the game.

How did you respond? What happened inside your head? Please tell me, and focus on your negative aspects more than your positive. That’s how we all learn from each other. Thanks!

Take care

Stockles

20 comments

  1. Because we are pretty much fully invested right now, we didn’t do a thing, nor did it worry me. I would like to pick up more, but I think a bigger corrections is still to come. I also still need to do my homework on what I would like for the longer term to own, as I’m able to see flaws in any model/company. That makes this selection harder, perhaps I just have to go by the numbers more…..

    1. It’s a strange feeling being fully invested and not worrying. I would see that as a sign of good due diligence and solid pre-work. Do the homework! It pays of!

  2. It didn’t worry me but I did double my position in O by adding 13 shares. I’m actually a bit proud that even though everything took a hit I didn’t get emotional at all but looked at my pre-researched wishlist and just bought what I wanted anyway.

    Now only if I could get less emotional about my Crypto-holdings! 🙂
    Mr. Robot recently posted…January 2018 Dividend ReportMy Profile

    1. Glad to hear that Mr.Robot. That’s excatly how you should react. Do you have a plan if the market falls like this for one straight week? Sorry to hear about the crypto-holdings. Hope you didn’t buy at the peak.

  3. Hey Stockles,

    that massive meltdown in stock prices on the 5th of Feb surprised me, but did not shake me at all. Your are absolutely right – do your homework before!!! something happens in the markets and react calm. I thought about buying for a few moments, but decided against it.
    First: I think that volatility remains high after Monday and we’ll see some more drops.
    Second: REITs have a reasonable valuation right now and i’m tempted to buy more, but my portfolio is too REIT heavy and i have to balance it first.

    Summary: I did nothing but observing and waiting for more good entry points with my extra cash. The usual regular buys per month will be made though…

    Greets,
    DividendSolutions

    1. Hi DividendSolutions,

      Seems you’re totally right about the first point. Market is still dropping. Also good observation that even though REITs are trading at fair prices, you shouldn’t add because you will be overweight. Smart.

      Remember it’s okey to stay passive. Then you still have the option to do something. If you use your cash now (and have zero left), then you will start to feel remorse. Simple is often the best.

  4. Stockles, I haven’t paid much attention. I did note our net worth dropped about 4% versus the 6.5% correction in the total US stock market. Our personal correction is higher than normal versus the market. The interest rate sensitive stocks and bond funds I own got hit pretty hard. The income my portfolio throws off is unchanged over the past week and a half. I try to focus on that. It doesn’t require much effort. I may do an add on buy to one of my stocks before the end of the week. Tom
    Tom @ Dividends Diversify recently posted…My Only Regret In Life: Speed To A MillionMy Profile

  5. Great post and excellent suggestions.

    When market drops like it did on Monday, emotions take over and people tend to freeze like a deer in a headlight.

    So it’s always better to have a plan in place. For me, plan means having a buy list based on Next man up concept.

    With the buy list in hand, l just executed the list during correction based on pre-set priority. I also have a sell/trim list for the purpose of raising cash in such events. So even if l run out of cash, l know how to raise more cash and very quickly. My tax tracker keeps me informed of tax implications as l trim or replace certain securities. I live for a day like this. Ha!

    As for the O declining 30-40%, l saw that report too. I laughed because O would be yielding around 8% and no matter how you look at it, O ain’t staying at that level for too long given 8% yield would be far superior to anything bonds can offer. So bring it on, l would be buying more O at that level like there is no tomorrow.

    Overall, l’m quite happy with my execution during the crash and had a blast!!!
    Mr. ATM recently posted…Micro Blog #9: Taking Advantage Of This Market PullbackMy Profile

    1. Thanks buddy!

      I really like your rational approach and I’m sure you acted in a smart manner.

      Yes, O yielding 8% would be amazing. I’m not selling! But I still think people should be more open.

  6. I was finally happy to see a correction of some sorts. Everyone is just freaking out and selling because everyone else is selling. But part of being a smart investor is having a plan in place. Not just during the down times or correction periods, but overall in the market. Long term dividend investing for most of us, so it is a buy and hold game. Hold forever for the most part if the company still matches your requirements from when you bought it in the first place. Seeing dips like this just lets you have an opportunity to pick up more shares at a discount. Again, just need to have a plan in place ahead of time and already have the stocks picked out that are next up to bat so to speak. Then hit the ball when the price hits your fair market value.

  7. As the drop is close to the option expiration date of my stock, I decided to take action in my option portfolio.

    In my etf portfolio, I did not yet deploy capital. The drop is too small right now. I keep adding every month according to the plan.

  8. I bought Veidekke just after they came out with very good q4 results today at a price i consider to be nice. I should have bought on wednesday, but i got to greedy and hoped for a lower price. They may drop more, but in that case i have money on hand and will be ready to buy more.

    1. Glad to see that you are commenting here Ogellers! We need more insight from fellow investors.

      Nice buy. As you know, I’ve said countless times that I think Veidekke is a superb investment, and with a pretty solid margin of safety too.. The funny thing is that due to the overall market drop, the current price doesn’t really show the true value of the Q4 result. The dividend increase from 4.5 to 5 was awesome too.

  9. Well I for one was a little upset. I missed the market drop by a day. Basically, I invest on the same day every month automatically, and it just so happened that on the day I invested, the market had briefly recovered after the large drop. Oh well. Can’t win them all.

    I wish I had money to invest so that I could have taken advantage of the drop. Unfortunately, I’m stuck with the same boring strategy of dollar cost averaging my way into the market. Things will change in the summer when my life circumstances will change, but until then, I’m pretty much out of the market beyond my monthly investments.

    I think having a long term horizon is important when investing in the stock market because it gives you time to recover from market drops. But I definitely didn’t worry over the decline although I did notice that the overall value of my portfolio went down (at least on paper).
    Dividend Portfolio recently posted…Google AdsenseMy Profile

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