By Daniel Shvartsman
We posted yesterday’s roundtable, the first part of a three-part series featuring Marketplace contributors’ stances on how to handle the current bear market climate, before the ‘full’ bear market had set in. Well, after another 7%+ drop and no clear signs of when things will stabilize, today’s segment should be timely. It focuses on how to put recent events into a broader historical context, and how authors are managing their own portfolio risk and their emotions.
As mentioned yesterday, we asked nine total questions about how our authors diagnose the current situation and what their prescription is for their own portfolios, and we’re breaking the responses into three parts, with three questions at a time. These questions went out Tuesday morning, March 10th with the last answers coming in Thursday, and authors are listed in order of the time we received their answers. Our questions are in header font, and we’ll include author’s disclosures at the end of each roundtable.
What aspect of this story, or what example from history, do you think is being relatively overlooked by the markets?
Richard Lejeune, author of Panick High Yield Report: There will be pent-up demand and economic stimulus in Q2 and Q3 from China (where coronavirus has already peaked). For example, this should lead to higher iron ore imports by China. High yield stocks such as NMM were crushed as coronavirus hurt already struggling dry bulk shipping rates. We could see a very robust rebound.
Cestrian Capital Research, author of The Fundamentals: The Italian experience. Italy has a stronger healthcare system than people realize, and they are experiencing grave difficulties containing the virus and associated disease.
ADS Analytics, author of Systematic Income: In our view, the path towards deglobalization will only strengthen from here on as companies realize that the previously nimble and light supply chains can disappear very quickly and become very expensive.
Andres Cardenal, CFA, author of The Data-Driven Investor: The market seems to be missing the other side of this crisis: The recovery to come. The U.S. will sooner or later overcome the coronavirus, and when this happens the economy will benefit from record low interest rates, historically low energy costs, and tax cuts. Chances are that the US economy will have a strong recovery when the coronavirus crisis is over, and the stock market should substantially benefit.
Lance Roberts, author of Real Investment Advice PRO: The stability of the economy and markets was already resting on massive fiscal and monetary stimulus before the virus was a known problem. Many investors believe the virus is a short term phenomenon, and in short order, the markets will recover. Few, if any, recognize that the virus could be the pin that pricks the economy and, ultimately, the markets. Given that valuations are still sky high we urge caution.
Ruerd Heeg, author of Global Deep Value Stocks: The US healthcare system is not a good tool to handle a massive virus outbreak. Think of the many people uninsured. Think of the many people afraid of losing their job if they are away too many days. So, the market underestimates the risk of a massive outbreak in the US. More generally, the market underestimates the effect on global production now so many people have to stay at home in so many countries.
Long Player, author of Oil & Gas Value Research: The 2016 oil price “war” lasted a few months. The SARS likewise did not last long nor did Legionnaire’s or any of the other so called Pandemics. So, what is consuming the news now will likely be a memory by late summer.
Dane Bowler, author of Retirement Income Solutions: REITs have a barrier to temporary economic shocks. Tenants may suffer in Q1 and Q2 if large portions of the population are self-quarantining, but the cash flows of most REITs will be uninterrupted.
Elazar Advisors, LLC, author of Nail Tech Earnings: People always like to say the market’s missing something. It’s not. It’s an orderly valuation mechanism. I like to respect markets. The fear is valid because nobody knows when this ends. Business is drying up as people are in quarantine. Funding is also locking up similar to 2008 causing the Fed to act. So, the market is reacting to two very real forces, lack of funding and lack of demand. Markets and action need to be respected at all times.
Mark Bern, CFA, author of Friedrich Global Research: The only experience in modern history that had the potential to disrupt the global economy like this was the Spanish Flu pandemic of 1918. But the world was a much different place then. We were in the midst of WWI, the global economy was not interconnected like it is today and travel was limited. People still rode horses, and air travel had not yet arrived. We also have more news, some reliable and some not so much, and faster dissemination of events globally. So, fear can move faster as well. The mobility of so many people and the globalization of trade and supply chains make this a very different world, and it also makes a pandemic much more dangerous. Fortunately, we have much more advanced medical and technological capabilities today to counteract come of the negatives.
Chris Lau, author of DIY Investing: When the countries come together as a community unified in fighting the virus, it overcome the harshest of market sell-offs. The world can and will beat this virus.
Richard Berger, author of Engineered Income Investing: Major, fast moving corrections (and bears) like this one sink all boats, even those immune to the headwinds. The infrastructure and utilities I discussed above are good examples. In any crash, look for those targets that are not affected by the headwinds driving the crash and be prepared to write cash secured puts and even further decreases (perhaps 10%? out of the money beyond the a current crash level) and earn annualized yield rates of 50% and more with that downside protection, while getting a great value bargain price entry point if shares do get presented. This is really a no lose and large gain opportunity in many cases.
Mark Hake, CFA, author of Total Yield Value Guide: Compared to the last recession and market dip, this one will likely be much shorter. In fact, it may not even qualify as a recession, since that requires two consecutive quarters of negative economic growth. I don’t think this will happen since Q2 is likely to be a rebound quarter. And that assumes Q1 will have negative growth, which I am not sure it will necessarily have.
Dhierin Bechai, author of The Aerospace Forum: I think the recovery and stabilizing of COVID-19 is overlooked. We are currently seeing price movements as if we are heading for an economic crisis tomorrow. However, much of the price movement stems from uncertainty as well as a price war on oil. We are seeing parallels being drawn between now and the financial crisis in 2008, but the price movement back then and now they are inherently different. COVID-19 is a virus causing economic impact, the crisis in 2008 was caused by the financial system and lack of robustness.
Damon Verial, author of Exposing Earnings: In terms of historic market corrections, the one brought onto us by the coronavirus is truly a “this time is different” catalyst in its potential economic impacts. Compare it to, say, the 10% correction on 9/11 – a correction that led to a rebound rally, and, why not? What was the economic impact of a war with Afghanistan besides losing a bit of trade with its tiny economy and bolstering the US military need for production (indeed it helped the economy)? The fact that SARS-CoV-2 is so unpredictable in its effects on the global economy is driving panic selling, profit-taking, and risk-hedging, but it is with merit. While the current crash looks like 2000s, the driving catalyst creates a situation in which historical analysis cannot easily apply.
Integrator, author of Sustainable Growth: Markets typically all recover within 6-12 months of past pandemics, whatever they have been. This isn’t some permanent, structural event. Throughout history, evidence suggests that these things come and then they go.
Fredrik Arnold, author of The Dividend Dog Catcher: The tech bubble didn’t burst until everybody was talking about it and every tech stock was overwrought. The financial market bubble has to yet inflate appropriately to its bursting point. The Fed is going its best to impress the king of debt.
D.M. Martins Research, author of Storm-Resistant Growth: By and large, I believe the market’s reaction is justified. While sharp corrections tend to unveil buy-on-dip opportunities eventually, a number of factors suggest that the stock market should trade at a discount to January and early February 2020 levels: (1) no one knows for sure how long the COVID-19 spread will last or how severe it will be, (2) the health crisis could not only have a meaningful impact on business in the short term, but it could also trigger a long-overdue recession (in which case equities could very well drop another 15%-25% in the next several months), (3) stocks had been trading at historically high valuations a mere 3 weeks ago.
Anton Wahlman, author of Auto/Mobility Investors: It’s the urban-rural divide. So far, almost 100% of the virus cases are in larger cities. In rural America, the reaction thus far is “Virus? What virus?” and everything remains normal. The virus may cause individuals and corporations alike to allocate a greater part of their lives into rural America – and for individuals, that would mean moving away from the cities permanently. There, they would buy and drive their own cars, instead of relying on mass transit or taxis, including Uber (UBER) and Lyft (LYFT).
Cory Cramer, author of The Cyclical Investor’s Club: I think the relatively slow earnings growth going into this sell-off, combined with high valuations, is what is being relatively overlooked by the bulls. The problem with many of the bears who might not have overlooked this is that many of them have been bearish for half-a-decade, so even if they are eventually correct, they will still be wrong. I’ve tried to thread the needle, and I’ve been bearish on individual stocks over the past two years, but have suggested staying in the market until the end of February when it seemed clear to me a recession, or something very close to it, was coming.
JD Henning, author of Value & Momentum Breakouts: My greatest concern relates to debt and credit markets that are far larger and more consequential than equity markets. Of particular concern is the health of small businesses that have limited cash reserves, less access to credit, and may be at risk of default much sooner than larger firms. Many of these small businesses are not publicly traded, but impact a substantial number of jobs throughout the country and the world. With the consumer driving over 70% of economic growth, it will be the health and survival of these small firms that are critical to a quick economic recovery after the virus passes. It is not clear enough action is being taken to help this small business sector endure the worst case scenario with a pandemic virus that has not been halted in any global economy.
ONeil Trader, author of Growth Stock Forum: Historically, outbreaks like this one didn’t have a very significant impact on the stock market, including the Spanish flu 100 years ago. But the sample size is small, and this time may actually be different (and it already is to some extent).
Dividend Sensei, author of The Dividend Kings: No one knows when COVID-19 will end. What we know with certainty is that it will end. Most likely this year, with most economists and Goldman Sachs’ COVID-19 economic model forecasting the end to supply chain disruption by Q3 2020, 2% GDP growth in Q3 and 4% growth in Q4. Whether or not that actually happens, there is little chance that COVID-19’s effects will be permanent for any company. The companies I and DK members have been buying during this correction are not because we are looking for quick gains this year or expect strong EPS growth right now. We’re buying what the market hates now, because we are looking at 2021 and beyond. To paraphrase football legend Jerry Rice, “Today I buy what others won’t so tomorrow I earn returns others can’t.”
Bull & Bear Trading, author of Trader’s Idea Flow: For those of us who remember the 2nd term of the Reagan presidency, the most powerful economic results of conservative capitalist policies are experienced as they have time to take root and grow throughout the economy. This is the aspect of this story, and the example from history that is being relatively overlooked by the markets.
Bret Jensen, author of The Biotech Forum: Madness of crowds rarely lasts. We already are seeing dramatic drops in new Covid-19 cases in China and South Korea. Warmer weather and higher humidity of Spring and Summer should also help slow the spread of the virus. Gilead Sciences (NASDAQ:GILD) is testing an antiviral compound in China that has proven effective in the clinic against other coronaviruses such as MERS and SARS. Preliminary results should be out near the end of the month. If successful, this could ease a lot of the panic out there. While not a vaccine, knowing something is close that could treat the most impacted individual would be of great relief to the general populace. Provided we haven’t done significant damage to the global economy by time the panic ebbs, the markets should start to recover in short order.
Joseph L. Shaefer, author of The Investor’s Edge: Quality firms will always persevere. Quality firms’ shares will always come back. Crises of liquidity provide quality firms the opportunity to expand their businesses on the cheap.
Laura Starks, author of Econ-Based Energy Investing: As enormous as this pandemic is, the 2008-2009 recession was worse. Then we knew much less about why the instability happened. The whole financial market wobbled in a moment-to-moment alarming too-connected but lack-of-trust way. No one could easily explain the (complex) source of the problem or why it evolved the way it did. Here, while the progress of the pandemic has been fast, from the news we can understand country-by-country quarantines and the differences in how each country handles the virus – including the completeness of testing and data on infections they (and we) generate.
Michael A. Gayed CFA, author of The Lead-Lag Report: Oil, Oil, and Oil. Often times, it isn’t the obvious that is the reason a real collapse takes place in markets, but the risk that’s been percolating for a while underneath the surface. Credit spreads are widening because default risk is rising exponentially for drillers and energy producers. That may be more of a financial Black Swan than coronavirus.
J Mintzmyer, author of Value Investor’s Edge: Markets are pricing in multiple years of recession because of the uncertainty of what is unfolding even though there’s little evidence to suggest long-term decimation of the economy. Q2-2020, perhaps even all of 2020, is going to be somewhere between ‘rough’ and ‘horrendous,’ but we’re seeing multiple years, or nearly decade in some cases, of implied profits getting erased from equity values. That might make sense with highly levered firms facing refinancing, but for firms with no liquidity problems even when stress-testing a year of terrible revenues, I believe the market is acting irrationally. There are some interesting doctoral reviews of the GDP impact of the 1918 Spanish Influenza, the data wasn’t as clear back then, and the world is far more globalized now, but it’s interesting to consider how quickly the economies recovered then back then, running wildly back up for another decade.
Long Hill Road Capital, author of Bargain-Priced Compounders: I think it’s clear that we do always get through these things. The world has never ended before. We’ve been through two world wars, the Great Depression, the Cuban Missile Crisis, 9/11, and the list goes on. COVID-19 should be temporary because the world is beginning to take extreme measures, and a vaccine will be released in due course. In the meantime, we have all-time low mortgage rates, which are leading to a refinancing boom, which will put more money in our pockets. Gas prices are at lows and heading lower, which also puts more money in our pockets. And any lack of consumer spending now caused by people staying home is going to create pentup demand for when things return to normal. Plus, interest rates are ultra-low, which means all asset values are worth more than they otherwise would be. So, whenever we do get through this, or the market even gets a whiff that the end is in sight, I would expect a pretty serious stock market rally.
Laurentian Research, author of The Natural Resources Hub: As stock market participants, we are not so good at putting current events in a proper historical perspective. Take WWII or the 1997 Asian financial crisis, which had crescendoed as it ravaged through the Old World, before it reached geographically-separated America. By the time the U.S. had to be mobilized, the end of it was already near. The Federal and State governments, in coordination with various industries, are getting their act together in fighting the coronavirus. I think we are nearer to the end of the pandemic than to the beginning.
The Macro Teller, author of Macro Trading Factory: We thought that the market is expensive way before anyone knew what “Corona” isn’t only the name of a beer. As far as we are concerned, the market was “desperate” to lose steam, and the virus was a perfect reason. Thing is, now that things are out of control (and we believe they are), there’s no way to put the Genie back in the bottle through financial-engineering (as the Fed did for so long over the past 11.5 years). The only period that comes to mind is 1929-1932, but I must say that I’m not the type of person that say “This looks like YYYY”, and I also don’t expect the market to go down that much. I believe that the S&P 500 will stay within the 2,XXX “area code”, but I don’t see a reason to go back to 3,XXX before the US elections.
Robert Honeywill, author of Analysts Corner | H2 Supergrid: I understand the Spanish Flu was devastating for younger persons whose stronger immune systems over-reacted with fatal results. COVID-19 is deadly for older persons with weak immune systems. There will be significant issues for all companies who have a customer base comprised wholly or largely of older persons. This, of course, extends beyond the healthcare sector. These significant issues will involve both great challenges and great opportunities. Identification of companies with significant opportunities and/or the ability to address and ameliorate the challenging aspects will be something I will be addressing as part of my continuing review of my 120 and growing data base of dividend paying companies.
Slingshot Insights, author of Become the Smart Money: My company Slingshot Insights has run a proprietary survey of 25 practicing infectious disease experts as well as a 35 minute interview with a pandemic expert. The expert’s view on this subject is that a) The disease cannot be ‘contained’. Measures such as quarantine, event cancellations, etc. will not result in this virus ‘disappearing’. I don’t think the market full has appreciated that his disease will likely be around until significant community resistance or vaccination occurs. That said, I also do not think the market fully appreciates that the severity is over reported currently. The pandemic expert we spoke to emphasized the point that mild and asymptomatic patients are not being tested. This dramatically mischaracterizes the lethality and severity of the disease. The denominator is too small. One thing I think politicians really need to understand is that more testing will result in less panic. There will be more cases, but most of those patients will be “ok” and recover. The fear in society and the markets will subside the faster this happens.
From Growth to Value, author of Potential Multi-Baggers: Markets overlooked the coronavirus for a long time. Now that the effects become more apparent in the West, prices have dropped. I think this may continue for a while because the virus seems to be very contagious, and lots of people could get infected. That could cause a more significant recession than a lot of people seem to realize. On the other hand, that doesn’t mean I’m pessimistic. Over the longer term, markets tend to go only in one direction: up. In 2030, this will probably be seen as a recession but also as a buying opportunity.
Howard Jay Klein, author of The House Edge: A BUY AND GO SLEEP STRATEGY. No question, within a year, we will see major recovery and big profits to those with the risk profile right now to dive in big time and mop up the bargains all over the place.
Joe Albano, author of Tech Cache: Supply chains have gotten very diversified and, combined with other global factors, have gotten very complicated. If I asked you in December, would semiconductors see memory pricing increase through the events happening in the last month, would you have said, “Yes, absolutely,” or would you have figured it was the black swan event to cut the cycle upturn extremely prematurely? I bet the latter. Granted bits shipped are not going to grow in line with pricing, but as soon as this clears, the difference between semi names and their stock prices is going to make them extremely attractive. This is where I’d get in before the market puts the timing of it together.
Victor Dergunov, author of Albright Investment Group: The market’s reaction has been largely fair considering recent events. If there is something from history that some market participants are missing it is that the current level of volatility is somewhat unprecedented and does not appear to be a healthy sign for the future. I have not seen many financial crises, but I was active in 2007-2009. I’ve seen companies that I never thought could go bankrupt go bankrupt. I’ve seen Citibank’s (C.PK) shares (and many other companies) at $1 or so. I’ve seen the SPX, DJIA, Nasdaq, etc. move 10% up or down in one trading session multiple times. I’ve seen the VIX at around 90, and I remember seeing the S&P 500 bottom at 666. Younger people working in the financial industry today may not have witnessed such factors. Once again, I cannot emphasize enough that lowering of high risk, high debt, high multiple names is a must and that hedging is extremely important and should not be underrated at these times.
Ian Bezek, author of Ian’s Insider Corner: People aren’t paying enough attention to what happens once the virus concerns peak. Fed funds futures contracts suggest the Fed will be cutting to zero shortly, which means we’ll effectively have had five rate cuts as a result of this virus. Plus, potentially, a major tax cut, and who knows what other sort of stimulus. Also, interest rates are at record lows. What will people do once the virus fears pass? For one, people will buy houses at record-low interest rates. And with bond yields through the floorboards, people will buy stocks to get income. The market could still take a while to bottom, but once it does, we’re going to get an upward surge for the record books.
App Economy Insights, author of App Economy Portfolio: If we look at the history of previous outbreaks, markets swiftly rebounded. It can feel like the world is coming to an end in the heat of the moment. But once a vaccine is out, whether it is in six months or a year, life will go back to normal for most businesses. Most people don’t even remember the Swine flu, a disease that affected 24% of the world 10 years ago.
Stanford Chemist, author of CEF/ETF Income Laboratory: I believe the markets still do not fully realize the scope of the event if the coronavirus spread would follow the case of the Spanish flu. I heard the worst case scenarios count with about 2-3 billion people getting infected.
KCI Research Ltd., author of The Contrarian: There are many parallels to the 1999/2000 market today. Nobody really remembers what was the pin that pricked that technology infused bubble, however, the extreme valuations, and the dominance of growth over value for the preceding decade plus are very similar.
Rida Morwa, author of High Dividend Opportunities: History tells us that the worst of bear markets come to an end and are followed by a higher highs. As income investors, we recommend patience. This pullback has been one of the most violent one in history. I believe that it will be followed by a sharp and swift recovery.
Thomas Lott, author of Cash Flow Compounders: Every recession and bear market is different. This time around, I suspect US-centric investors continue to underestimate the economic impact that containment creates. A complete economic halt is at hand. This could be worse than the Great Recession. While avoiding Ground Zero sectors (travel, energy, financials) is prudent, there seems nowhere to hide. Markets move faster than economies. Shutting down the US economic system will happen quickly. Restarting that system will take time perhaps. I don’t anticipate a V shaped recovery.
Bram de Haas, author of Special Situation Report: As strange as it will sound, I think people continue to underestimate the impact of the coronavirus on the sustainability of businesses. I’m seeing some renewed insight into balance sheet health but I think that will become a main focus point in the coming months.
Which is more important right now – risk management or emotion management? Why, or how does that play out for you?
Richard Lejeune: At the Panick High Yield Report, I provide a Risk Rating indicating how risky each high yield issue I cover is. Members need to do their own risk management based on their personal risk tolerance and objectives.
Cestrian Capital Research: We went into the crisis already heavily in cash so we have maintained a steady hand through the period. Our main concern is to ensure we can dance the line between the progression of the virus (negative for markets right now) and the Administration’s fiscal stimulus program (positive for markets right now). The actual reality of the economy – meaning earnings – we see as down in Q1 and Q2, but that’s less important right now than those two factors above.
ADS Analytics: An appropriate and well-thought out investment strategy going into the drawdown will itself be a big help in the emotion management department. And a poorly thought out strategy will hardly benefit from risk management, given the sharp moves we have seen so far. Given the level of valuations across various assets, a gradual move towards quality over the past year or so should have given investors enough dry powder to deploy into what can very quickly become indiscriminate selling in these markets.
Andres Cardenal: Those are actually two sides of the same coin. Having a solid and time-proven risk-management strategy allows you to control your emotions by knowing that your capital will be well protected through the ups and downs in the market.
Ranjit Thomas: For investors, risk management is paramount. The rest of the population needs to manage their emotions with the constant media barrage!
Lance Roberts: Both. We use risk management to avoid making emotional decisions. For example, we got stopped out of our energy holdings the day before oil fell 25%. We followed our process despite seeing a lot of value in the sector. That decision would have been emotionally charged had we not reacted to our signals and rules when they triggered.
Early Retiree: The time for risk management was some time ago when volatility was low and puts were cheap. I was 40% in cash before the correction started and own a quite recession-resistant portfolio of stocks, which doesn’t require any sort of emotion management.
Ruerd Heeg: Risk management. I think currently only the very cheapest stocks are good enough. Avoid momentum stocks.
Long Player: Risk is probably getting lower by the minute. It’s emotions that need a lot of management.
Dane Bowler: Selling at these prices would likely be a mistake. So, whatever emotion management one needs to do to stay invested is paramount.
Elazar Advisors: As soon as the SPY broke our key level of 331, we reduced all positions to almost nothing and got net short using ETFs. We had been exiting the weeks before too because of the demand risk. The key now is not be a hero to ‘call a bottom.’ The key is to wait for a trend. Traders love this market because they respect the volatility and the trend. Keeping a portfolio smaller now avoids a big drawdown. It keeps people humble until there’s better news and more clarity. I don’t care about catching a bottom. I care about catching the trend.
Yuval Taylor, author of The Stock Evaluator: Risk management and emotion management are, if you look at it from one angle, the same, since the biggest risk to one’s portfolio is succumbing to emotion. Because I have dedicated myself to a quantitative strategy with very clearly laid-out rules, my emotions play no part in my investment process. I manage my emotions by joking about my losses. I manage my risk by picking stocks with low-risk characteristics.
Mark Bern: Risk management allows investors to reduce the need for emotion management, so I have to go with risk. As stated earlier, I got my client out of most equities and into bonds in early January so nobody in my stable is getting hurt and emotions have not been a problem.
Chris Lau: Risk and emotion management are inherently tied together and more so when markets sell-off. If investors did not already manage the risk of holding too many speculative stocks or too much energy, then it is too late. Those who planned ahead will be less emotionally invested in both the breathtaking sell-offs and the volatility. Our DIY Value Investing teachings always stressed on demanding a deep discount on the stocks we want to hold.
Richard Berger: Emotion has no place in investing but certainly is a major risk element that needs to be managed. The very first and essential element of all investing is risk management. My recent article The Key Elements Of Risk Management discusses the key elements of risk management.
Mark Hake: Emotion management is much more important. No one should be selling their portfolio. They should be adding to it and lowering their cost basis in stocks they already own.
Dhierin Bechai: Emotion management. Risk management is something you should do going forward, but for now, I think emotion management is more important. You can lock in some gains as part of “risk management”, but emotional selling is dangerous to your portfolio. So, managing that part is more important. I sold airline names months ago even before COVID-19 became a problem, but other than that, I haven’t made big changes. I added some Apple Hospitality (APLE) to my portfolio, but I didn’t sell any shares. I was also able to see which stocks do not really provide me with the stability I am looking for. Some entertainment focused REITs such as EPR Properties (EPR) are a good example. I haven’t sold the name, but I will be using the low prices in other names to reduce the weight of some names that didn’t provide me with desired stability.
Damon Verial: When the market shifts, these three things are roughly equally important: managing panic, managing FOMO (fear of missing out), and managing risk. Hence, the people most hurt will be retail traders and investors; for the most part, funds and quants, following models, are better at managing risk, and the fact that they follow models shields them from FOMO buying as well as panic selling. Luckily, for investors, panic-selling typically is the right move in the short-term after a flash-crash, but the rather reliable post-panic bounce over the subsequent sessions can create some untimely FOMO, right before the market falls farther.
Integrator: Emotion management – I tend to invest in businesses that are long term secular growers that will continue to prosper over the next 5-10 years. The trends of digital commerce, digital advertising, moving from on prem to the cloud and data driven decisions will be in place, coronavirus or not. Facebook (NASDAQ:FB), Mastercard (MA), Alteryx (AYX), and Twilio (TWLO) will continue to thrive in the next decade and beyond. It’s important not to be swayed from holding, or even adding to, positions on weakness because of large market declines on fear in some of these names.
Donald van Deventer: Emotion should play no role in risk management, whether it’s medical risk management or financial risk management.
Fear & Greed Trader: Emotion tops the list – one can’t handle risk or for that matter much else if emotions are at highs.
Fredrik Arnold: The story you make up about your future is a more powerful motivator than any current event. If you don’t like what you are thinking, change your mind.
D.M. Martins Research: It depends on each investor’s strategy. Systematic investors and traders (myself included) should always stay diligently focused on what I believe to be the most important aspect of investing, which is risk management – not only during this correction, but at all times. For discretionary investors and traders (or passive buyers-and-holders), who are most likely to be 15%-20% in the hole already, it may be a bit too late in this particular cycle to think about managing risks. In these cases, emotion management might make the most sense to prevent them from selling at low points and realizing large losses.
Anton Wahlman: In the long run – even a year from now – this virus may seem like a blip on the radar screen. However, there could be lots of drama yet to play out. We have yet to see huge hordes of companies pre-announce big Q1 misses, and with sharply reduced Q2 outlooks. GDP will fall materially already in March, and could be down 10% in Q2. Add any political consequences for the U.S. November 2020 elections, and the long run does not feel comforting at this point.
Tarun Chandra, CFA, author of Prudent Healthcare: Risk management in a highly uncertain market preserves one’s ability to remain an investor. Emotions can cloud decision-making. Since we practice model-driven systematic investing, we have rules that determine our allocation and exposure, which to a significant extent can reduce emotional related biases. Presently, we are 30% to 50% invested in our various model portfolios. We can raise the exposure when warranted, and even reduce it further.
Cory Cramer: Risk management was more important over the past two years. Emotion management is more important now. I manage a lot of my risk via position sizing. Since I often deal in highly cyclical stocks, I’ve found that having a 1-2% position size is the best way to stay rational. Even relatively big loses, while not fun to experience, won’t completely destroy a portfolio, and one is less likely to get scared and make bad emotionally driven decisions when the positions are small. I also try to make as many decisions about what good ‘buy’ prices are ahead of time when I wasn’t being influenced by the current news.
JD Henning: Of course, both risk and emotion management are essential for successful trading in any market condition. Over the years, I have drawn significant confidence in the quantitative signals from my MDA research algorithms and the substantial positive returns during both downturns and bull markets. This is reinforced by having more than 500 members daily trading and relying on these models for many different market applications ranging from stocks, sectors, ETFs, CEFs, and REITs. This constant feedback loop from an excellent community of market traders helps us all support both a risk management strategy and alleviate emotional reaction with members sharing insights as we trade in line with a reliable model. While I have been trading and investing for 30 years, it has been the balance of risk with an increased reliability on fundamental, technical, and sentiment based trading models that has reduced the most emotion in my trading.
ONeil Trader: Definitely emotion management. If you have a plan in place and you are not emotionally prepared, you will deviate from the investment/trading plan. And you should think about risk management before a crisis occurs, not during. If you don’t, your emotional problems will compound.
Dividend Sensei: Risk management comes first, always. A diversified and properly risk-managed sleep well at night or SWAN portfolio is what allows you to stay calm, rational and thinking like a long-term investor when the market freaks out and others are panic selling.
Tom Lloyd: Buy and hold investors will have no problem, if they don’t panic and sell at the bottom. They have to be able to stand the pain of the market dropping to 2400 before it returns to 3400.
Jonathan Faison, author of ROTY: Both – we’ve been suggesting that investors cut loose positions where they are losing conviction, raise cash to a comfortable degree and hunker down in the stocks where they have highest confidence in their thesis (the story). When adding to positions, it’s important to do so in a piecemeal fashion over time as opposed to all at once (can never know where the bottom is). On the emotion management side, it’s been tough to see investors (especially those using margin, which I discourage) taking a hit and/or panicking as a result of recent events. It’s important to have invested only money you can afford to lose (worst case scenario) and to conquer your emotions (fear, greed, panic, etc.) on a daily basis.
Bull & Bear Trading: Trader’s Idea Flow is an all-seasons, short-term trader service. For traders, the concepts of risk management and emotion management are both paramount. Discipline over both risk and emotions is essential.
Bret Jensen: I think good risk management takes a lot of the emotions out of the equation. It also helps to have significant cash on hand, so on big down days, you can deploy new ‘ammo’ into the market using risk mitigation techniques like covered calls. Your portfolio may be deep in the red that day, but at least you feel you put some money to work in some equities that were ‘on sale’.
Joseph L. Shaefer: Emotion management. Multiply the risk by a factor of 2 by what we now know and it still doesn’t come near the emotionalism and sensationalism that is being bandied about in the 24-hour news cycle.
Laura Starks: I have been through enough stock cycles, and so many oil and gas price cycles, that emotion management is not an issue for me, so the answer would be risk management. Even there, I would hope investors have acted on good risk management principles previous to this and are not just waking up to them now. By risk management principles, I mean basics of diversification across geographic markets and asset types (stocks, bonds, cash, real estate, commodities), including having sufficient liquidity so as not to be forced to sell into a falling market.
Michael A. Gayed CFA: I view them as one and the same. To manage risk, you must manage your emotion. Your ability to stick to a risk management strategy matters more than the strategy itself. For me, I stay emotionally detached, following signals outlines in The Lead-Lag Report for when to play offense or play defense based on the award winning white papers I co-authored, and which subscribers have access to.
J Mintzmyer: Obviously, both are important, but if you have strict risk management rules and policies, those will keep your emotions in check. For instance, my emotions and judgement have been all over the place during the past two months, but my personal risk management limit of 30% initial allocation (up to 40% surge on profits or crashes) to speculative holdings (which I define as anything non-blue chip and non-index) has kept me from hurting too badly. No matter how wild my emotions get, I don’t violate my risk management principles. Yes, this kept me from ‘bargain hunting’ on 9 March (or so it seems as I write this on March 10th), but it also kept from dumping good money into the markets during mid-January to early-March and getting crushed.
Long Hill Road Capital: Both are always important. Now is no different. I manage risk by owning high quality companies that are almost certain to be far larger and more profitable in the future. I don’t like to hope. I want to know. That hasn’t changed. As for emotion management, it’s always critical to view stocks as fractional ownership stakes in real businesses and to not react emotionally to stock price fluctuations. Business values don’t fluctuate nearly as much as stock prices do. As long as the business is destined to be much more valuable in the future, and I pay a cheap or even fair price, the stock will be much more valuable as well.
Laurentian Research: Risk management as part of a well-designed investment policy should be implemented throughout the investing process. At a crucial time like now, it is important to manage the emotion of fear and greed. Be fearful when others are greedy, and be greedy when others are fearful, said Warren Buffett.
The Macro Teller: Risk management, and not only now. Risk management is the single most important thing in investing, and too many people simply forgot about it, following 11 years of a bull market. When you have proper risk management in place – emotions anyhow don’t play part in your decision. On Macro Trading Factory, we started the year being very bullish solely thanks to the Fed. However, after we received the rally we were expecting for – we shifted allocations and we started doing that 5 weeks ago (before market reached the peak). We’re massively under-weight aggressive sectors, holding a lot of cash, and keep adding precious metals (mostly gold) to our mix.
Robert Honeywill: I do believe all companies that can survive through the disruption caused by COVID-19 will eventually see a full recovery in share prices and the share market will re-commence its upward trend. It is no time for emotion. Identify and eliminate any investments in companies that might not survive through this period. With the volatility there will be a lot of market mis-pricing as share prices fluctuate. Identify and add to holdings those companies identified as surviving and even prospering in this climate when their share prices are identified as being significantly under-priced.
Slingshot Insights: Severe market selloffs represent some of the greatest opportunities an investor can have. The key is staying unemotional and focused on what you know as an investor. Building positions in things that don’t make sense is a way to feel like you are making high risk investments (because it is chaotic), but actually you are investing in a low risk way (taking advantage of aberrantly low prices on high quality companies).
From Growth to Value: Emotion management is always the most important. If you have emotion management, you also have risk management. Don’t sell, because you never know when the market can bounce. Emotional control is not buying stocks that seem very cheap now. Don’t try to act as a hero now, purchasing shares of cruise companies, airlines, restaurants, energy, and so on. They will all be hit harder than the general economy, and we are probably only at the start of the trend. Emotional control is also not selling any stocks you want to hold for the long term. You can never time the market. It has been proven again and again that most market timers lose, not just to the average market returns, but also often in dollars. Just keep sailing on, even if the sea is rough. You are on the way to Treasure Island if you don’t get distracted.
Howard Jay Klein: Risk tolerance is the whole ballgame now. For those who understand how that works, there will be immense rewards. At the heart of that is confidence in buying great companies at bargain prices and waiting it out.
Joe Albano: I can’t control the emotions of other investors, I can only take advantage of it. Therefore, managing my risk is more difficult as I’m eager to lap up what others are tossing out of their windows blindly. The risk management turns to my cash pile; managing it too loosely, and I won’t have enough left when things are at a discount to the discount while managing it too aggressively and I’ll wind up not taking advantage of the discount satisfactorily.
Victor Dergunov: Both risk and emotional management are extremely important. One must manage risk to have a well-balanced portfolio. Moreover, in times of heightened volatility and market turmoil people must hedge, use various instruments to protect their holdings (i.e. write call options, buy put options, use stops, implement VIX instruments, invest in gold, etc.). On the emotional side of the equation, stay grounded, don’t lose your cool, do not over leverage. In fact, in times like these, I would not use any margin at all, as it could detrimentally impact your portfolio as well as your emotional state. Don’t fall in love with a company or a stock. Remember that the stock market is essentially psychological warfare, and the toughest times are times of extreme volatility, corrections, and bear markets. It takes a lot of skill to make money in a bear market especially for someone with a long-oriented mindset. It requires a lot of emotional strength and flexibility to turn from bull to bear and vice versa.
Ian Bezek: It’s two sides of the same coin in many cases. If you have too much risk in your portfolio, then it’s harder to control your emotions. If this decline showed that you were taking more risk than you anticipated in a downturn, consider making a list of stocks you don’t want to own anymore. When the market puts in a nice bounce, as it typically does at these sorts of oversold levels, then lighten up into the rally. There’s little to be gained selling positions into a fire sale, however.
App Economy Insights: Your temperament matters more than your asset allocation. When you control your emotions, you can take much more risk because it’s all under control. Over a multi-decade time horizon, the capacity to take more risk usually leads to higher returns. That is, if your emotions are kept in check to begin with.
David Krejca, author of Global Wealth Ideation: I would say that both – neither one is more important that the other. One should stay calm and do not succumb to impulsive or panicky behaviour but at the same time be aware of the increased risks with any attempts of buying the bid here.
Stanford Chemist: Both, and they go hand in hand. Our portfolios are diversified across various asset classes, in fact they have more fixed income exposure than equity exposure. This has helped to dampen the volatility of our portfolios compared to a purely equity strategy. Diversification, along with selecting the “best in class” funds from each sector, are central tenets of our risk management approach. In terms of emotion management, it is essential to appreciate that in market selloffs, discounts widen as investors get out of CEFs at any cost. This means that, in many cases, the prices of funds are down even while the NAVs are relatively stable, particularly for fixed income funds. An investor should ignore their emotions to sell and focus on the fact that if the underlying assets are relatively healthy, they will still be able to produce the same income stream.
KCI Research Ltd.: Emotions. There is historic opportunity, however, to take advantage of it, you have to keep your head, and sometimes, throw your risk parameters out the window, because the scale of what is happening, like the 4-standard deviation sell-off in oil and energy equities, is off the charts, so to speak.
Rida Morwa: Emotion management is the most important part.
Thomas Lott: Emotion management is always a factor, and can lead to selling at the bottom. The phrase that rings true with me is “sell often and sell early.” I suspect we are halfway through the Fear and Capitulation phase of the market. This typically is a 1-3 month rapid downcycle. When reality sets in, we will spend likely several months in the Despair phase, where investors give up on stocks. Selling then is generally a terrible idea. So, sell early and sell often in the first couple weeks of the Fear phase, namely in Ground Zero stocks. We have recommended many shorts and advised that we will wait until Despair sets in before increasing exposure.
Bram de Haas: Handling adversity badly will get in the way of risk management. But it is impossible not to feel negative emotions if your portfolio is doing badly. I experienced those at the end of the run-up. It definitely affects me and likely induces some buy/sells a robot wouldn’t have made. I try not to make big portfolio moves under stress. Satisfy the need to do something with small moves.
What are you telling members of your service, and what are you doing through this correction, if anything?
Richard Lejeune: The chat board at the Panick High Yield Report has been extremely active. I’m there almost constantly to answer member questions. There are often member questions during the trading day that just can’t wait until tomorrow when the markets are this volatile.
Cestrian Capital Research: All of the above!
ADS Analytics: Given our focus on CEFs, preferreds and baby bonds our message has been that CEFs have so far not exhibited the features of capitulation and despair. So, we have focused more on quality preferreds such as some bank and CEF preferreds as well as quality baby bonds which are now trading at attractive levels.
Andres Cardenal: I replicate the Data Driven portfolio with my personal money, and I tell members in the service before I put any buy or sell orders in the market. I raised cash to 50% in the portfolio due to excessive market complacency on January 20. During the market decline, I have increased stock exposure from 50% to 70% to capitalize on opportunities. Going forward, I am planning to remain patient and wait for signs of stabilization in order to put more capital to work.
Ranjit Thomas: Stick to high quality stocks that you own. If you want to buy something, consider companies that will be relatively unaffected by the virus or a recession like Verizon (NYSE:VZ).
Lance Roberts: We have been advising our readers for six months to take profits and reduce risk positions to levels in which you are comfortable. More recently, we have advised re balancing into sectors less affected by the virus and further reducing overall equity and credit exposure.
Early Retiree: I provide checklists, hard facts and food for thought, so everybody can stay rational. In addition, for us in Stability & Opportunity, the coronavirus is not a problem. It’s an opportunity. The problem was the absence of corrections.
Ruerd Heeg: I warned them on February 13. I avoid momentum stocks and avoid all stocks except for the very cheapest stocks.
Long Player: Stay the course and then, when the market gets through with this panic, pick through the remains for winners.
Dane Bowler: I’m emphasizing the disparity between the fundamental performance of the companies in our portfolio (fairly strong) and the market price performance. We are collecting dividends and investing them in the fresh opportunities.
Elazar Advisors: We got short when the market broke 331 SPY. We told everybody this is a time to be very cautious and I’d prefer a small portfolio. When the bottom appears, it will be more clear.
Whippy action is bearish. Slow and steady is bullish. For now, we’re very whippy, and that’s reason for caution unless you know how to trade the swings.
Yuval Taylor: I told my subscribers this: “This week’s sell-off has been damned indiscriminate. One can hope that the recovery, whenever it comes about, will be more discriminating. There is some evidence that value and quality matter more during recoveries than during bull markets. That gives me reason to hope. I’m not going to pull back at all, but will remain fully invested – in fact, I put in quite a bit of extra cash into my model this past week, and will do so again this coming week.” And this: “The terrible volatility in the stock market recently makes me grateful that I’m using a low-beta strategy. Not only am I beating my benchmark, but the daily variability of my portfolio is lower than that of the market too. If you invest in the highly ranked stocks of the Stock Evaluator, you’re also using a low-volatility strategy. If you had invested in stocks ranked 98, 99, or 100 over the last month with liquidity scores greater than 3, you would not only have beat the S&P 500, you would have done so with much lower variability; if you had invested only in stocks ranked 100, you would have done even better. So I tell myself this. While losing 11% or 12% of my money in two weeks is very distressing, it could have been worse. For instance, I could have been investing in an index fund.”
Mark Bern, CFA: First off, we are telling our subscribers that we expect this to be much more than a correction. We still expect another 10-20% drop in the general markets. With the additional pressure of falling oil prices, we expect a global recession has already begun. The U.S. economy is better positioned to withstand the downturn than most other major economies but due to globalization it will take a further beating, as well. We have taken our model portfolios to about 35% equities so we can ride out the storm. Limiting losses is the priority right now, but we continue to hold a hand full of stocks we think will bounce back strongly when this is over. Our allocations allow us to beat the market and have a lot of cash available to deploy when the markets bottom and economy looks poised to recover.
Chris Lau: DIY Value Investing launched a 15-class tutorial series. Instead of spending time trading volatility, I decided that subscribers are better served learning from my past successes and failures.
Richard Berger: Patience and a focus on value are our watchwords. We were well prepared for this correction and making even more money as it progresses. There is no way to know a bottom except in hindsight. Waiting for one is a futile exercise. Focus on value allows generation of high yield immediate income and entry at deep value discounts without the need to try to pick a bottom. A Top Idea this week is: Consider writing (sell to open) the 372 day cash secured SPY puts for 3/19/21 $270 @ $31.70 premium, for a net covering cash of $238.30 This break-even point puts us very close to the expected maximum bear market low. The premium locks in an annualized yield rate >13% on net covering cash for the coming year while providing deep downside market protection. My latest SA article discusses this idea in more detail.
Mark Hake: I am providing more data on companies that specialize in buybacks, as this is the ideal time for these companies to be buying back their shares.
Dhierin Bechai: Members are told to consider trimming where appropriate, but not sell in completely fear. Now, it also seems to be a good time to buy in on some fixed income names.
Damon Verial: While other services are likely looking to reduce losses, we are looking to take profits. We have been almost 100% short since around mid-February.
Integrator: I’ve been suggesting to wait for 20% broad index declines before starting to add the same high growth names that are riding secular tailwinds which have done well in the bull market so far and which will continue to run going forward. Folks should ease into these names incrementally with further declines in the index beyond this. It’s also perfectly okay to take no action if people are too scared to add, but self-directed investors shouldn’t give away their long term market advantage through any unnecessary, premature selling
Donald van Deventer: It’s times like these that generate the largest ratios of reward to risk, but one must earn that superb ratio with hard work, crunching the numbers for all issuers and all bonds like we do daily.
Fear & Greed Trader: Remain calm, Remain focused, Know YOUR self, Know YOUR situation, Know YOUR plan.
Fredrik Arnold: Keep calm and mind the gap!
D.M. Martins Research: I am a firm believer of having a plan before one is needed. So, my communication to members have been simply “stay the course and enjoy this moment of relative peace, a benefit for those who pursue diversified strategies”. Otherwise, I have been discussing a couple of potential buy-on-dip opportunities – but these are meant to serve more as small tactical rather than strategic moves.
Anton Wahlman: The automotive industry was already under hopeless assault from the new CO2 standards in many geographies, including Europe, China and double-digit number U.S. states. That alone guaranteed that there will be no fundamental improvement in financial automotive industry performance until there is a change in these regulations. The virus situation actually doesn’t make this situation all that worse, if at all. The world-wide automotive industry would rather have a big virus problem than this CO2 regulatory headwind – that’s how big that “pre-existing” problem was (and still is).
Tarun Chandra: At the beginning of the month, we reduced our model portfolio positions even further. Since most of our portfolios are in biotechs and healthcare, there are some unique offsetting elements relating to the outbreak. Healthcare is a defensive sector overall. The virus outbreak creates opportunities for some sub-industries, like diagnostics and drug/vaccine development. Also, you asked about elections earlier, even though the import of the Presidential elections will begin to be felt later in the second-half, the primary elections underway have assumed great importance for healthcare. Due to significant policy differences in the healthcare proposals of the candidates, the healthcare investing risk is materially different as well. So, primary election results underway now will continue to provide a boost or a drawdown for healthcare, as the possible leader on the Democratic side emerges.
Cory Cramer: Here is a direct quote from the chat room of the Cyclical Investors Club when the market went limit-down on Monday: “These are the times when having a good game plan really helps. No long-only investor is going to get through the downturn unscathed. There is a balance between preserving capital on the way down, and not being scared to make those investments that look reasonable long-term.” But honestly, I’ve been obsessively preparing for something like this at my service and in my public articles for a long time now. All of the members, as far as I can tell, have been very calm, and have been watching and waiting for opportunities to buy.
JD Henning: Since the Momentum Gauge™ signal on Feb 24th warned of high negative downturn acceleration (Segment 2 conditions in my research A Primer On Quick-Pick Momentum Accelerators), I have been cautioning members to move to cash or inverse market funds to mitigate downside risk. To that end, I also have been holding and adding to the following leveraged bear funds since the signal UVXY +179%, FNGD +34%, ERY +180%, SPXU +50.2, as tracked on my ETF signal page for members at each signal. Additionally, my actively traded Premium Portfolio was halted on Feb 24th with 1.60% gains until the market conditions deliver a positive signal on my gauges. The Premium Portfolio beat the S&P 500 again last year with +31.75% returns despite going to cash for 14 weeks consistent with the Momentum Gauge™ signals. In my MDA breakout dividend portfolio for March the 5 selected growth stocks are delivering positive returns through today led by Kroger (KR) +12.5%, The Clorox company (CLX) +7.49% and Gilead Sciences (GILD) +2.28%. My weekly MDA breakout portfolio is up +37.51% YTD and delivers enhanced results when negative gauge conditions are avoided. These are among the best ways I offer members to beat the market again for 2020: Value And Momentum Breakouts For 2020: 6 Different Ways To Beat The S&P 500 Again
ONeil Trader: I am sticking to my plan, re-evaluating the risks and opportunities and acting accordingly. I removed some stocks from the portfolio in the last few months and have added others.
Dividend Sensei: If you fail to plan, you plan to fail. For months Dividend Kings’ has been preparing our members for inevitable market declines. We don’t know when or why they will happen, but we know for certain they will happen. Our “How to Invest Better” library has 90 articles explaining how to determine your risk profile, construct a SWAN portfolio, manage it, rebalance it over time, as well as how to analyze and value companies. We have guides about how to properly allocate assets in a negative rate world, as well as what historical recessions, corrections and bear markets look like. Our approach is holistic, and based on our motto of “quality first, valuation second and prudent risk management always.”
Bull & Bear Trading: We recently covered a successful short on the IBB ETF. After covering the IBB short, we went long on the Direxion 3X Leveraged Daily Bull ETF. We have been enjoying and profiting from this volatility. We provide idea flow for traders that can be extrapolated into a trader’s own ideas for trading vehicles. Sometimes, we select specific trading vehicles. Other times we provide ideas on overall market direction for traders to analyze and include in their thought process if worthwhile. Candidly, we live for the type of markets that we are trading right now. We are well positioned and looking forward to the upcoming news cycle that will include “less bad” news on both of the black swan events now pressuring the market. Trading range markets are designed for… yes, traders.
Bret Jensen: We continue to put cash to work incrementally on dips in equities. We also continue to advocate risk management techniques like covered calls and have lively Live Chat discussions about breaking news, new trading ideas, discussions around possible buy-write candidates and also offer mutual support in what has become hard times in recent weeks. This is especially true at the Biotech Forum where scores of investors weigh in every day.
Joseph L. Shaefer: Since every sector, industry and company was sold equally, we are using this as an opportunity to switch from weaker firms to stronger firms before too many others notice that they have both been equally hammered.
Laura Starks: I have rolled out a new dividend yield table for companies in my “buy” portfolios because the yields have increased so dramatically for these companies, companies I’ve already analyzed to be operationally solid. Since oil (and natural gas) prices were already tanking before the overall market started diving, I have also reminded service members about the cyclical nature of these commodities and that my analysis looks for operational soundness. And frankly, I have noted my optimism that we may see a rebound boomerang, at least in activity and demand, in the second half of the year, or maybe as early as the second quarter (for coronavirus effects). As to the length and depth of the new complication of the Saudi-Russia oil price war, that remains to be seen.
Michael A. Gayed CFA: Patience matters, and being tactical matters. For years, passive has been the only strategy that worked. It seems as volatility on average remains elevated, there will be many opportunities to be tactical and position offensively and defensively. Members of the Lead-Lag Report see signals, ideas, and macro thoughts every week that are directly relevant to their portfolios and minimizing risk.
J Mintzmyer: I don’t ever give personal investment advice, but I do share my principles and risk management rules. This includes never violating that speculative allocation limit (30-40% as aforementioned), never utilizing net margin on speculatives, and not selling naked puts. Finally, one needs to remember that there is no such thing as a floor in stock prices. It can always go down another 50%, and 50% after that.
Long Hill Road Capital: My members know that the value of any business is the present value of all future cash flows. For any growing business that’s going to prosper for the long term, the impact of this year’s cash flow or even this year and next year’s is minuscule to the value of a company. It’s the cash flows over the next several decades that determine present value. So, we don’t overreact to temporary ebbs and flows in macro conditions or something like COVID-19. I’ve been putting cash to work in great companies trading at extraordinarily cheap prices.
Laurentian Research: For nearly two months, I have been informing community members at The Natural Resources Hub of the grave risk posed by the spreading coronavirus in and from China, advising them to build dry powder and raising cash, and to prepare a shopping list of high-quality businesses to prepare for an entry opportunity down the road. When Russia and KSA fell out, a double whammy arose (coronavirus-induced weak demand and OPEC+ surge production), thus creating an unfolding rout when the dry powder comes in handy.
The Macro Teller: Macro Trading Factory has a very simple and clear mandate: Aiming to outperform the SPDR® S&P 500 ETF Trust (SPY) on a risk-adjusted basis. We’re doing so very successfully YTD, with much higher return – in both absolute (though still negative) and relative (Risk-adjusted) terms. Delivering a higher return while taking less risk is more than we (or our members) could ask for. We still don’t trust this market, and our Funds Macro Portfolio reflects this when you look at the cash and gold positions. Note that we run a “I don’t trust this market” series now, which is getting published on Seeking Alpha in arrears, once our members have enough time to act upon our guidance.
Robert Honeywill: I am telling my subscribers to keep their powder dry while I am carefully assessing the situation and building my 120 and growing data base of dividend paying companies. I have developed a methodology over the last 12 months for identifying when a company’s share price is at a level that is likely to provide superior returns. If $3,000 was invested each time I made a bullish call in my articles published on Seeking Alpha in 2019, the returns would have exceeded 65% as at end of 2019. The detailed calculations are included on my Marketplace, and of course, the details are verifiable from the record of my articles on Seeking Alpha. The period ahead is likely to be fertile ground for identifying superior investment opportunities at discount share prices.
Slingshot Insights: Slingshot Insights is a fundamental diligence platform. We empower our members to do their own deep research through phone interviews and market surveys of experts. When it feels like “nothing matters” and “everything is going to zero” it often is hard to have conviction “work” matters. I remind my customers that these are the times that hard work really pays off. Panic leads to mispricing, and those are the most lucrative times a well informed and disciplined investor can operate in.
From Growth to Value: I tell them to keep their eyes on the future and hold on to their stocks. I also tell them to keep adding money to their accounts regularly. I add every two weeks. I usually invest that money immediately, but now I spread it a bit over the two weeks to be able to take advantage of the sometimes wild swings in stock prices right now.
Howard Jay Klein: Not to panic, to hold at the very least unless they need the cash back on the sidelines. The buys are incredible. Even if there is somewhat more downside ahead, I still guide buy now or hold depending on whether you want to price average or just sit tight.
Value Digger, author of Value Investor’s Stock Club: Thanks to our decades-long experience, we did not discount the disruptive ability of coronavirus. From day one, we realized the hidden links between China’s GDP, global markets, supply chains, consumption, lending etc. So, we advised our subscribers to short a bunch of stocks and indexes in Q1 2020. As a result, our subscribers have made multiple triple-digit returns by shorting specific stocks and indexes since early January 2020. We will continue to monitor the coronavirus situation closely, and we have a pipeline with new excellent short and long ideas.
Joe Albano: I’m continuing to analyze tech stocks that are at discounts relative to the information released about the impact on their business. Some have none, some have very little, others see an impact inline to what you would expect. The ones having a much smaller impact such as Skyworks (SWKS) or Nvidia (NVDA), the market jumps as it was pricing in a much deeper cut. Continued selling off after marks opportunity.
Victor Dergunov: Diversification remains a key factor. We are heavily invested in the gold, silver, and mining GSM sector right now. In fact, about 25% of our portfolio holdings are in this segment. We also like Bitcoin and other systemically important digital assets. I view both of these segments as inflation hedges and great tools to combat further monetary stimulus, central bank balance sheet growth, and perpetual monetary base expansion. We also like bond instruments like (TLT) that appreciate as longer-term rates go lower. These account for about 10% of our portfolio holdings and are up by around 16% YTD. Roughly 30% of our portfolio is in non-GSM stocks, which are broken down into several sectors. We have about 10% in technology, 6% in healthcare, 6% in financials, 5% in defense, and 3% in energy. We deployed about 10% of our cash holdings near the recent lows, and we have about 5% remaining in cash. Also, we’ve been continuously implementing several hedging strategies including a covered call strategy, and a sell call/buy put option strategy with various names. More recently we’ve adopted a simple put buying strategy on major market ETFs as well as with various stocks, including those in our portfolio.
Ian Bezek: The thing I’m emphasizing is to take a look at your high-quality stocks shopping list and buy something off it at these prices. There’s a whole class of stocks that people love but say are always “too expensive”. Yet, when markets tank, people tend to focus on buying the absolute “cheapest” assets rather than picking up high-quality at a fine price. Then when markets recover, people will say the great companies are overpriced again. I bought Stryker (NYSE:SYK) this week as this sort of investment, it’s one of the greatest growth stories in healthcare, and it’s now selling for less than 21x forward earnings. Sure, it won’t be the biggest gainer when markets snap back, but I’ll be thrilled with my entry point five years from now.
App Economy Insights: I’m reminding members of the App Economy Portfolio that this is the business we are in. The vicissitudes of the market are part of investing and something to accept and embrace. I want them to focus on time in the market rather than timing the market. I’m also sharing bull & bear market history to put things in context. Things could get much worse before they get better, so I’m telling them to stage their buys and keep dry powder.
David Krejca: Increase asset allocation to cash and precious metal producers. Commodities in comparison to equities are at historical lows and with a flight to safe haven assets, isolated precious metals producers can come out on top out of this market meltdown.
Elephant Analytics, author of Distressed Value Investing: I am covering the coronavirus and the Presidential election in updates to members of my service. So far, I believe that the virus can be contained and will largely ebb out within a few months. We haven’t reached the peak disruption level needed to achieve that containment though.
I’m keeping a decent amount of cash on hand at the moment, and will look to deploy that around the time that it looks like disruptions are approaching their peak.
Stanford Chemist: After urging caution in closed-end funds for a year now, we have finally reached another buying opportunity. We advised our members to buy during the heavy correction at the end of 2018, and it paid off extremely well. However, it should be noted that discounts are still currently not as wide as in December 2018, so I would not advise backing up the truck just yet. But now is definitely a better time to buy or add to quality CEFs than compared to a month ago.
KCI Research Ltd.: Take advantage of the opportunity. It is offering up 2008/2009 style bargains if you know where to look.
Rida Morwa: We are recommending patience. It is important not to be leveraged, or investors will get margin calls.
Thomas Lott: Mostly as we described above. Avoid the Ground Zero sectors, keep a ton of cash, and wait for the Despair phase to kick in. We noted that fundamentals have changed radically for many industries, e.g. banks will suffer not only from cyclical issues, but particularly as rates head toward zero and lending dries up. ROE’s will not be the same as the Fed likely adopts a zero rate policy for probably multiple years.
Bram de Haas: Special-situations tend to be less vulnerable to market risk and that’s certainly one reasons investors like them. I’ve backed off a bit from M&A which we are normally doing a lot in because I’ve been hyperfocused on the opportunities and threats posed by covid-19. I think you can gain a great advantage if you spend a lot of time monitoring the situation and thinking about the fallout. M&A opportunities have also become scarce as obviously no one decides to do a deal in the middle of this.
Thanks to our panel again, and to you for reading this! I hope you find it useful as you try to keep your own risks and emotions in control. Tomorrow, we’ll share what our authors are looking for as signs of stability, and where they are or are not going to shop when they’re ready.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclosures for contributors participating (if not listed, the contributor has no positions in stocks/vehicles mentioned, and disclosure applies to answers for the full three conversations).
Richard Lejeune: Long AFFT, GSLD, DLNG.PB, NGL, NMM
Cestrian Capital Research: Long LMT and MSFT, both on a personal account basis.
ADS Analytics: Long WFC.PRL
Andres Cardenal: Long LVGO, GOOG, BABA, AYX, KWEB
Ranjit Thomas: Long VZ
Lance Roberts: Long XLV and Healthcare stocks JNJ, HCA, UNH, PG
Mark Bern, CFA: We own Netflix (NFLX) in our portfolios.
Chris Lau: Long BP plc (BP)
Richard Berger: I am long AMT, GPN, SO, MSFT, WDC, and SPY.
Dhierin Bechai: Long AER, BA, EADSF
Integrator: Long FB, AYX, MKTX, TWLO
D.M. Martins Research: Long ADBE
Anton Wahlman: Long GLD, GOOG, GOOGL, FB and AMZN. Short TSLA, IWM and SPY.
Cory Cramer: Long Berkshire Hathaway (BRK.B)
JD Henning: Long ERY, FNGD, SPXS, SPXU, UVXY
Dividend Sensei: I own MDP, VIAC, UNM, CAT, TROW, LOW, PII, MPLX, ET and EPD. Dividend Kings owns all of those companies in our various portfolios.
Jonathan Faison: Long TRIL
Bull & Bear Trading: Long HIBL
Joseph L. Shaefer: Long CVX, XOM, and TOT.
Laura Starks: Long FANG, CVX, EPD
Long Hill Road Capital: Long BRK.B, FB, SPOT, AMZN
Laurentian Research: Long GPRK, AOIFF, LOMLF, GENMF
From Growth to Value: Long SHOP, TTD, OKTA, WDAY, SQ
Howard Jay Klein: All my stocks are in a blind trust. I own only gaming stocks. They are in a trust because I am a consultant to the industry and I want to avoid conflict of interest.
Joe Albano: Long SWKS and NVDA
Victor Dergunov: Long BABA, BIDU, MSFT, TSLA, NFLX, GOOG, FB, GS, JPM, V, GDX, GDXJ, SLV, NEM, KL
Ian Bezek: Long DEO, REMYY, EL, ASR, SYK.
App Economy Insights: I’m long ROKU, ESTC, SFIX.
Elephant Analytics: No position in PXD at the moment, but I may initiate a long position in it in the next 72 hours.
KCI Research Ltd.: I am long AR, RRC, XOM, and short SPY in a long/short Portfolio.
Rida Morwa: Long GEO and IMBBY
Thomas Lott: Long DFS and GOOG