The pace of Markets rebound over the past month has been astounding. The timing of my last post on Oil & Gas investments couldn't have been better and I find myself in the awkward position of large gains across almost all of my 'hated' contrarian ideas e.g. Spirit Aerosystems is >2x, Euronet has jumped >50%, Hasbro is up 30% (and 50% since May), retail plays: PVH and Levi >50% and the various Oil & Gas related investments have recovered from -20s% to flat. The only major laggards have been the tobacco names and a few stocks like Maoyan and Sands China which are positions I'm comfortable continuing to hold. I won't try to take full credit for the alpha generation when this market is clearly on a wild beta ride upwards.
My discomfort is growing with the pricing across more and more markets and asset classes. Discount rates are low, expectations are high and now too much is being placed on the magic bullet vaccines to return everything back to normal. Things have been broken this year and I think the new normal will bring sobering awareness of the runaway debts, poor real economy (especially the bread and butter middle to lower income parts of society) and lasting intra and inter-country tensions. The promised summer may turn out to be the real winter. Similar stock market to real economy contradictions are reflected in various residential real estate markets where house prices are jumping despite falling rents + rising vacancy rates and persisting unemployment. In both cases the pricing is a financial construct while the cashflows are an economic reality. Eventually all things must follow reality.
Humans have a tendency to explain things after the fact which I suspect is an evolutionary trait designed to help survival - see proof of success then base your learnings around that observation. Unfortunately correlation does not imply causality and dumb luck is always hanging around. In today's rising price environment investors are finding more and more creative explanations why they're making fat profits (and why they deserve to be winners). In doing so, greed is rising and fear is falling, further fueling the cycle. Investors should be doing the opposite - becoming more fearful and less complacent. Central banks won't always be in their corner and for example those wonderful innovation and disruption based explanations for the eye watering valuations of so many tech companies are likely to quickly evaporate if stock prices fall. I have trouble predicting what I'll eat for lunch tomorrow let alone the state of technology, competition, consumer preferences and execution ability of companies and industries many years from now. It's possible we're in the midst of Dotcom bubble 2.0 and if so, will probably be bigger and badder than the original because of the massive liquidity, state sponsorship, greater retail participation and false confidence brought on by information availability. Even if nothing eventuates, it's better to be prepared over nothing than to be sorry over everything.
My Actions
Portfolio actions:
Controlling the total % invested: trimmed slightly to 80% long equities. I'll reduce further as Markets rise and/or if the alpha upside declines
Controlling individual positions: a) reducing the total number of holdings - more concentrated alpha bets (total holdings in mid teens vs 20s before), b) being more vigorous in trimming individual target weightings and putting on rolling stop-loss limits
Increasing the long and short Put protection strategy: aiming to protect 50% of my equity exposure against fat tail market movements
Other actions:
Starting a monitor list of short candidates: Chanos has some interesting ideas and I also believe things like bitcoin derivatives could be future short proxies
Maintaining my company models: especially those companies which have jumped over the past month. Volatility could give me opportunity to add or renew these positions
My basic plan is to use alpha returns (and margin of safety) to continue participating in this market. If and when the markets start correcting and wide swathes of the industries break key technical resistance levels, I'll start building my short book positions. Hopefully the portfolio long tail protection will help reduce some of the downside. My goal is to ride a market downturn with below average losses and not necessarily achieve positive net gains - I'll likely be tempted by valuations to get back in early. The additional part to my March 2020 actions is I'll likely make a more aggressive levered beta play if the market declines to extremes. Beta is the dominant force in market sell-offs and early stage recoveries.
I have no idea when this happens. It could be as soon as mid next year or it could be a 2022 event. Maybe it never happens and the market just flattens for a period. But having a concrete gameplan is important for mental preparation which is half the struggle during bear market sell-offs.
Final words - bitcoin
I've taken time to understand the technology, philosophy and practicalities behind bitcoin since I first became aware of its existence in mid 2017. My conclusion was: you can make money from bitcoin but only if you have strong trading skills and a cynical viewpoint. But from a fundamental point of view I think the odds are heavily stacked against it and the Fight Club like promise of 'fighting the system' is just false. The regulation and failure of key bitcoin tenets since 2017 have proven my understanding correct (even though that had little impact on price in 2020). One may arrive at the same conclusions I did by examining its key promises/features (past and present) from a practical standpoint: anonymity, security, transactibility, limited supply, decentralisation and finally considering bitcoin using first principles: source and foundations of its legitimacy.
I have never invested in nor bet against bitcoin because I understand my advantage to be investing skills, not trading skills: my focus is on valuation fundamentals and not price movements so I would be clueless on what to do in a normal environment regarding bitcoin. However since observing it in 2020, I've become increasingly convinced bitcoin is symptomatic of the times - a reflection of the speculative and liquidity excess. And fundamentally I don't believe it will deliver on the promise of hedging against the next market collapse/financial system excesses/inflation. I think a US led market decline will likely lead to a precipitous fall in bitcoin price. That is opposite to the bitcoin fanclub's key belief that bitcoin is digital gold. Therefore this could be an asymmetrical, cheap shorting opportunity if a market sell-off occurs. This idea needs a lot more work and thought.
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