The Market Took A Dive – Here’s What Happened To My Portfolio And My Head (I)
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 “not look at your portfolio today.”
I responded and said, “I actually think we should look at our portfolio.”
Why? So, we can learn more about how we deal with emotions, how our portfolio handles bear times, and how we act when information is flowing everywhere.
Quality Did Not Matter
I’ve always told myself that since I own high-quality companies (those with solid management, earnings, growth, cash flow and boring pipelines 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 regardless.
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 signs of weakness.
But Stockles, it’s only quality on sale! Maybe, maybe not.
The last time the FED heavily raised the interest rate, 2004-2007, REITs heavily outperformed the S&P 500 by returning 80%, while utilities dropped to a low of 2.5% by 2007. Maybe it’s the opposite this time?
The market, especially the S&P 500 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 February 1, 2018 to 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&P 500 returned -5%. The overall portfolio beta is somewhere close to 0.60, so this is what I expected.
But, my overweighted REITs have caused my portfolio to underperform my goal, which tells me that those securities aren’t as safe as I thought.
My portfolio will outperform in a bear market, but the question is if this conservative approach has led me to give up considerable gains in the recent bull market.
It might be a zero-sum game, maybe even something worse. I will reflect on this matter more.
But people are doing it wrong
One observation was 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 to add a huge amount of emotional bias to your calculation.
Not only that but you will feel the fear of missing out and most likely act too fast.
Here’s 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 similar, 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 of around $115, write it down, just wait for your entry point. On very high-quality companies such as J&J, you might not even need a huge margin of safety. Maybe it’s okay to pay the premium for a premium company.
Do your 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 recently, 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 article 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 this, 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, 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.
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 boils down to these:
- I’ve done my homework and “know” that most of my companies will still sell their products even though the economy gets worse
- I’m young. Historically, I should experience around six 10%-15% corrections and maybe one massive correction. 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% to 30% of income in the future, I’ll add 20x portfolio value.
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 dig deep on the negative aspects more than the positive. That’s how we all learn from each other. Thanks!