Summary
- So much to say, so little time in the middle of summer that you should be out enjoying.
- First off, we aren’t at “the bottom” yet, so any nibbles should be small and in SMID caps or a few select large cap industries.
- Second, there are some pretty neat growth and income ideas overseas starting to EMERGE, I’ll write an entire piece for your weekend reading pleasure.
- Third, my forecast for 2022 has been spot on, I don’t expect much to change, the Fed will back off sometime after Labor Day and we’ll see a bottom or double bottom by year-end.
- Finally, seriously, go out and play. There’s no point looking at a monitor when the weather is good. I’ll let you know precisely when to buy – see ideas below.
The stock market is getting hit again today on inflation data we already knew. Funny how that works. The breathy trader narratives can have a “sooo big” impact, even when they just regurgitate.
I prefer to look a little further ahead. In fact, I like to look a lot ahead, like a year or two, as well as, five years and ten years. That’s why I’m early sometimes with my starting investment positions. I’m okay with that as it made me a millionaire at 45 years old (I’m 52 now).
Interestingly, my path to being a millionaire is a weird looking curve. From 2000 to 2020 I earned about $2m. I invested just about exactly 10% of that. Pretty standard upper middle class stuff.
My Real Financial Crisis
Going into the financial crisis, I was over holding 75% cash on a portfolio worth just north of a $100k. By spring 2008, not long after I wrote my annual client letter and first to be published on the internet, I was betting against the banks in my personal account.
2008 Letter: 2007 Was a Major Turning Point – Bluemound Asset Management
Interestingly, less than a month after selling a bunch of mutual funds and moving my client accounts to about 75% cash, I got an email to call my brokerage compliance officer. He told me it’s “not investing to be mostly cash.” The firm really just wanted to collect fees on something. He told me to get invested.
So, after my Imperial entanglement, I moved my clients to about 25% cash, 60% U.S. Treasuries and GNMAs (which in a fund generate a small fee) and the rest equities. Moving to the bonds was actually a good move versus holding cash, so, kudos to the fee generating brokerage firm for siccing the compliance guy on me.
At one point in late spring, we used some of the cash, about 8% of net asset value, to buy the ProShares Ultrashort Financial ETF (SKF) [might have had slightly different name then, I don’t remember], that they more than doubled their money on. My firm told me not to do that again, which ironically, probably saved me from giving all the profits back.
Ultimately, most of my clients MADE a high single digit return in 2008 which could have been a bit more, but I started nibbling the dips late in the year.
Coming out of the financial crisis I remember a conversation with a manager who told me “Barack Obama is going to ruin the economy.” This was the week of the inauguration. My response was “isn’t it ruined already?”
On March 3rd, 2009, President Obama made this famous remark:
“What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it.” President Obama
Obama: It May Be Time To Buy Stocks
The Federal Reserve was also in the very early stages of “experimental” monetary policy that would late come to roll of our tongues as if it was normal: “QE.”
I knew more money would probably drive asset prices up because of basic supply and demand principles. And, I read “Inflation Targeting” when Ben Bernanke became Fed Chairman because it was interesting to me that during an economic expansion, President G.W. Bush appointed a depression expert to run the Fed.
In March, after hearing the President essentially say “buy stocks” and knowing the Fed was loosening in a new and weird ways, I had a few discussions with people I trusted and started to buy stocks and ETFs.
This was the first time, having sold most of my mutual funds a year earlier that I used ETFs for almost all of my investing. I also was looking for high beta individual stocks to hold and landed on Freeport McMoran (FCX), which is a stock we have been talking about again lately.
Most of my clients and I almost doubled our money in 2009.
The Investment Takeaway
I think there are some lessons in the story I told above. I hope so anyway.
The important one to me is that we indeed need to start investing when everyone else is selling. Buffett has pointed this out:
As we have discussed now most of the year and I reiterated in my review piece last week, I think we see a bottoming process after Labor Day. That will very likely be another double digit percentage down from here.
So, we are going slow and spreading our buys across well spaced price points. We are scaling in slow and small.
Trying to be perfect is the enemy of good. Trying to move all of your money in one perfect “pick the bottom day” will be a catastrophe unless you are extremely lucky.
Given that it is a market of stocks, we need to pay attention to each stock individually. We want to pay particular attention to small and mid cap stocks, because correlation falls near market tops and bottoms.
That is, the large caps usually have their final sell-offs as indexers, retirement plan participants and emotional old men sell near the bottom. Meanwhile, the small caps and mid caps worth owning in the first place, will already be turning up as smarter, less emotional and more tactical investors pick the low hanging fruit.
We can buy large caps gradually a bit later, beginning with the highest quality companies, i.e. our MANBAG stocks and most beaten up industries. See notes below.
We are measuring downward momentum to find our “buy zones.” I am primarily using the Relative Strength Index because it’s easy and effective, as well as, a few quantitative (remember, I was a quant before it was cool) measures of money flows.
The “money flow” measures helped me establish buy zones over a year ago that many thought would be impossible that we would get to. Here we are, lower by 30%, 50% and more on many stocks and ETFs.
Here’s a few old charts (see dates top left of each chart) to make the point on how well my basic RSI and quant combination of analysis works (an approach I largely borrowed, slightly modified and hopefully marginally improved):
Invesco QQQ (QQQ) from June 2021
SPDR S&P 500 ETF (SPY) from July 2021
VanEck Gold Miners (GDX) from July 2021
ARK Innovation ETF (ARKK) from May 2021
I finish with the ARK Innovation ETF (ARKK) because one subscriber asked if I really thought it was possible that ARKK could get to $60 and I said “yes, maybe lower.” He quit the service saying I “that’s nuts.”
We had been buyers of ARKK in 2019 and on the Covid crash in 2020, then heavy trimmers and sellers above $130. Obviously things got worse than $60 per share, but, sure is nice to have gotten out above $130.
My updated charts are in our VSLs (Very Short Lists) spreadsheets. What you’ll notice is that they haven’t changed a lot because they were pretty close a year ahead of time. We’re simply making adjustments now in real time based on the handful of factors (anybody who talks about dozens or over a hundred factors is BSing you or has a worthless process and isn’t competent enough to know it)
Closing Investment Thoughts
As I have been beating the drum on now for several months, it is time to get very involved with SMID cap stocks, including certain broken “de-SPACs” that are just too cheap on the hate. Scaling in slow and spread out is still the game plan.
See my 2022 Forecast Review & Update for a slew of individual investment thoughts.
On large caps, remember, we will want the MANBAG (think those little purses on a thin belt, not the other stuff a few of you weirdos have) stocks sooner than most: (MSFT) (AMZN) (NVDA) (BRK.B) (AAPL) & (GOOG). Buying the Invesco QQQ ETF (QQQ) in the $220s (see new chart in VSL) and BRK.B in the $240s seem to be an about right alternative path as well and is what I will likely do.
As you know, I really like the beaten up streaming stocks right now. The likelihood of M&A that constricts expenses and expands revenues seems very high to me and we have already seen it begin with the deal between AT&T (T) and Warner Brothers Discovery deal (WBD) which I have a big position in. Berkshire Hathaway (BRK.B) has recently followed us into Paramount Global (PARA) which I have a full position in. I followed them into Liberty Sirius (LSXMK) a couple years ago and am adding a starter again today. I also own a nearly full position Comcast (CMCSA) and a starter in Netflix (NFLX). I think you can start adding to all of these today if you have not started. If you have a position with a cost basis more than about 15% higher, then you can average down a bit.
Schedule
As a person who lives in a place with about half the year being less then ideal weather for a person who has worn out on snow and cold rain, I try to be outside and about in the summer. So, I am taking the rest of the day off to do grandpa and fiancé things. But, here’s what I have in store for the next 5 days:
- 2 Global Trends ETF reports including one on investing in emerging markets for growth and for income, the other will focus on QQQ and a few other “secular trends” ETFs.
- Stocks Of The Week with a big chart dump and updated buy zones on many Plug & Play stocks.
- An article on energy investing for now and later (a great childhood candy).
- A macro piece discussing inflation, the economy, the Fed, the dollar and the markets with a focus on the 20-year Treasury ETF (TLT) which I see an opportunity developing in for later this year.
That last one will be first and what I discuss in tomorrow’s webinar.
Finally, one last thing. I am currently negotiating to buy 61 acres in a Milwaukee suburb across from a high-end local high school. I am going to try to get permission to build a sustainable condo community with 50-60 side-by-sides, a midrise building, about a dozen RV spaces and a clubhouse with publicly open café/coffee shop/bar. I am fairly confident I can get a deal on the land down on my own.
The next phase will be raising some development money. If you are potentially interested in investing in such a project, keep it on your radar. I will be looking for about a dozen investors of $100-$500,000 each who will receive income when the project is sold out from proceeds and a management company, have redemption rights and rights to participate in future projects. My intention is to build a 9 or 10 figure sustainable development REIT.
Talk again soon.
Disclosure: I/we have a beneficial long position in the shares of QQQ, WBD, PARA, CMCSA, NFLX, LSXMK either through stock ownership, options, or other derivatives.
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.
