October turned out to be a volatile month. The news tried to trick investors to panicking and selling their shares. The bear market was finally here, they said, and now was the time to accumulate cash and wait for the asset prices to come down: Market sell-off shares parallels with 1987 crash, strategist says.

Volatility

The defining characteristic of future change, according to Taleb (who continues a line of argument developed in previous books like Fooled by Randomness and The Black Swan), is that it is impossible and foolhardy, to try to predict it. Instead, the author argues, it is essential to make peace with uncertainty, randomness, and volatility. Those who do not — who insist not only on trying to predict the future but also on somehow trying to manage it — he disparagingly calls “fragilistas.”

What I Did During The Correction

I tried to remember that stocks should fluctuate. It’s natural that they move up and down. Random stock movement is one of the major reasons why stocks as an asset class offer higher returns than bonds.

Systematic or Market Risk

In a portfolio optimization strategy, it’s essential to understand the difference between systematic risk and unsystematic risk. Systematic risk (market risk) is a risk which you can’t control. Sometimes all stocks decline, no matter its financial strength or what they produce. This just happens from time to time. Accept this.

Unsystematic or Asset Risk

Unsystematic risk, on the other hand, is the risk which lies within a specific asset class or security. If you can’t handle high volatility then you can go for securities with lower beta numbers. Most of the stocks in my portfolio don’t move much in either direction and that helps me sleep well at night.

Another important point about unsystematic risk is you can control which sector you think is safer than others. For the longest time, I have suggested that the technology sector is overvalued, but I must admit that I found the sector highly difficult to value.

Instead of using too much energy on this highly complex sector, I focused on value investments and hoped that there would be a sector rotation at one point from technology to safer firms such as PEP and KMB. That’s what we observe now (partially at least).

Here’s my DGI portfolio. Do note that while I beat the index now, I have underperformed before. Crazily enough, that’s what I aim to do. My goal is to have a SWAN portfolio, sleep well at night portfolio. This often means that I go for boring and unsexy securities with far less growth potential than firms such as Netflix and Amazon. This normally means that in bull markets, I underperform.

And for me, that’s okay. Life is so much more than just generating more money.

Also, keep in mind that I have a very firm focus on generating dividend income.

My income does not change when prices fluctuate. That’s another positive thing about being a dividend investor. It’s easier to stay calm and safe in bear markets.

At least for now, at the beginning of my DGI career that’s how I think.

Stockles vs NASDAQ in 3 Months

Stockles vs NASDAQ in 6 Months

Instead of panicking like the news wanted me to do, I wrote a buying list.
  • Buy more EM/Global/Nordic index
  • Buy PEP ~ $100, KMB ~ $99, ENB ~ 41 CAD, PM ~ $80, OMC ~ $68, D ~ $63, HRL ~ $32, INVE B ~ 350 SEK, WELL ~ $54, ITW ~ $133. 

Some people asked:

Not waiting on a bigger fall?

My Answer Was Quite Simple:

My plan is easy. I figure out which firms I want to buy and why, then I buy in pieces, as we go down. No point mixing emotions to the picture. For me, nothing really changed, other than the price of my stocks are cheaper now than a week ago.

 

But sure, now SMA200 for QQQ broke, so I do suspect that tech should fall, even though Google and Facebook stood hard today. There will never be a “right time” to buy shares when people are panicking, but many are still expensive. Most of the firms I listed are trading close to fair values around my TP, IMHO

What I Bought

I bought many securities during the past month. Some positions were new and some were plain additions to current holdings.

To find capital, I used my saved dividend income, some savings and sold Oaktree capital with the following argument

Investment thesis says OAK had a negative correlation to the general market and especially towards the rising U.S. 10 year treasury yield. As we saw last week, OAK actually dropped 5% while they should (under my thesis), be happy for a rising interest rate, since they do focus on distressed debt. I might be wrong, might be right, but the following discussion (https://seekingalpha.com/article/4180468-oaktree-capital-time-yet) showed me that I don’t profoundly understand the case, so I sold this position and earned a Total Return of 4%.

Purchases

Altria

Apple

Enbridge

Illinois Tools Works

Investor AB B

Omnicom

Philip Morris International

Fund and ETF portfolio

These were all added to my holdings.

Future Returns In The Stock Market By Morningstar

According to Morningstar, the emerging market index should significantly outperform US securities.

Right now, most global indexes operate with a 60% weighting in the USA.  It should be interesting to see if these changes continue within the next 10 years.

With respect to GPS growth estimates, China and India should be the new growth case if we look 10 years forward. Since I don’t know anything about the future, I just hold both, but I do own a larger portion in EM than the US mostly because my DGI portfolio is heavy in the USA.

Source: Morningstar Markets Observer.

Takeaway

So, the takeaway is you should accept that stocks go up and down. You should also see this correction as a test for how your portfolio looks like and how much stress you can handle. If you feel that you could barely cope with it, I suggest lowering the risk. What we saw now wasn’t really something crazy. Within the next decade, we will see a greater fall and then you better be prepared.

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

Take care,

Stockles


7 Comments

Stockles · November 5, 2018 at 9:22 pm

If you understand norwegian, I recommend checking out Kaifus article:
https://www.frihetsfondet.com/et-frustrert-individ/

DivvyDad · November 6, 2018 at 8:37 pm

Nice summary Stockles, and like you I continued to execute against my strategy and deployed a good deal of capital into positions that were attractively priced to me. It did concern me a little with some of the reactions I was seeing from people across social media, and there are a number of people investing now that haven’t been through a harsh bear market. As you noted, I do think we will see a greater fall and people need to be prepared as best as possible.

    Stockles · November 10, 2018 at 6:03 pm

    Thanks DD!

    Yeah, I am seeing more and more people going crazy “I cannot take it anymore” and comments like that. I believe we will see a major panic once new beginners understand that especially tech stocks can actually go down, not only up.

Jake True · November 27, 2018 at 6:12 am

Hey Stockles!

Great update. I’m really enjoying your blog, and in the past few months, I have been changing my strategy to focus on primarily on dividend income. This month saw a lot of falls in the market (and my portfolio), but that didn’t matter for my dividends. They still ticked in according to schedule, and I’m pleased (following your example) that this month I reached the first dividend goal on the ladder (5000,- DKK a year). Very pleasing to turn the first box green in my excel ark. Now going for 10.000 DKK a year, and I hope to achieve that in 2019.

So the falls didn’t affect me at all actually (maybe also because I don’t have that much money yet, lol), but also because I buy stocks EVERY month. I never go a month without buying stocks, which means I buy when the market is high and when it is low, and this gives me a pretty good average acquisition price. So I don’t worry too much about buying on the top versus the bottom, and I avoid the whole “catching falling knives” scenario.

And at least I always know that I’m not alone in this endeavor, but that I do share some fate with a random Norweigan on the internet. And that is apparently good enough for my mental health.

Anyways, sorry about the novel. But I really do appreciate the work you put into this blog, and we do share a lot of perspectives on investing/moneymaking/life-pleasure balance. So keep up the good work.

    Stockles · November 27, 2018 at 9:15 am

    Hi Jake,

    “I never go a month without buying stocks, which means I buy when the market is high and when it is low, and this gives me a pretty good average acquisition price. So I don’t worry too much about buying on the top versus the bottom, and I avoid the whole “catching falling knives” scenario.”

    Now that’s how to think about investing. When you buy more and more assets, you increase the amount of shares which in the end is your tool for generating wealth.

    One of the strongest mental tools in terms of dividend investing is to think of each asset as a cash flow vehicle which generates more and more cash flow the more assets you own in this vehicle.

    Sometimes, especially in normal or growing economies, high quality stocks will trade a premium.

    A classic mistake is to go for the lower quality firms instead of the higher ones when trying to add new money to the machine.

    Most high quality firms should be trading at a premium, so don’t be afraid to increase your cost basis.

    When you see market dips, it’s easy to think that a huge fall is a pricing opportunity.

    That really depends.

    If he firms is lowering its guidance or generating less profit, you should not add more money solely based on that. Far to many people follow this strategy, pouring money in a bad case, but try to figure out why the firm is dipping before buying. A clue here is to look at revenue growth and earnings per share.

    Good luck to you and your investment journey. We are heading for volatile times so doing the due diligence now and not after is important.

    Stockles

Sally Evans · February 24, 2019 at 9:42 pm

Great post. Play the long game when it comes to these stock picks. As you account for gains, think about the longer term ROI.

Sophia Bee · April 27, 2019 at 7:49 pm

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