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| In a world full of endless possibility, following the financial news cycles can be an exhausting and generally fruitless – if not outright expensive – exercise for retail investors. There are better options*, after all! |
The month of June certainly started out with a bang, with equities continuously climbing as long-term fund managers publicly capitulated their bearish theses while shaking their heads in disbelief at the resiliency of the US equity market. However, even as The Ignorant Investor titled his last post ("Jubilant Investors Ride the S&P 500 to Optimistic Heights"; click here to read the article), the broader indexes eventually faced a reality check as the legitimate challenges newly-reopened state economies faced from the coronavirus became clearer. That’s not to say this was a bad month. All major indexes advanced, and the Nasdaq continues to set fresh all-time highs. A quick overview of S&P 500 sector breakdowns shows that Technology and Discretionary names were the big winners here as investors continued to take refuge in the relatively safety of technology and grew less pessimistic of select retail names as economies were indeed reopening.
But what about July? And where will we end up when this quarter ends in September? There are many possible outcomes, and investors stand to benefit substantially in the long term if they manage to correctly identify the outcome that most closely represents reality. The themes mentioned in last month's post continue to hold true, and there is also rising political risk that the market has yet to fully understand and price in. The Ignorant Investor has his own thesis for the economy and corresponding quality companies of interest. Rather than theorizing openly here, let’s simply discuss the best approach to investing in a volatile market with many possible outcomes. Just remember that certain sectors - and certain companies within those sectors - will outperform others during the recovery. Please note this particular post is dedicated to non-professional ("retail") investors.
But what about July? And where will we end up when this quarter ends in September? There are many possible outcomes, and investors stand to benefit substantially in the long term if they manage to correctly identify the outcome that most closely represents reality. The themes mentioned in last month's post continue to hold true, and there is also rising political risk that the market has yet to fully understand and price in. The Ignorant Investor has his own thesis for the economy and corresponding quality companies of interest. Rather than theorizing openly here, let’s simply discuss the best approach to investing in a volatile market with many possible outcomes. Just remember that certain sectors - and certain companies within those sectors - will outperform others during the recovery. Please note this particular post is dedicated to non-professional ("retail") investors.
Let’s Talk About Investing
Earlier this month The Ignorant Investor found himself watching an animated movie with some young nephews and nieces. In the film, the wise kung fu master Oogway tells his discouraged apprentice Po “Yesterday is history, tomorrow is a mystery, and today is a gift- that is why they call it the present.” Words to live by, as far as The Ignorant Investor is concerned. But investors must also necessarily live in both the present and the future. After all, assets an investor puts into play are expected to make future gains at some point! Any good investor will be looking six months, a year, or even ten years out to find opportunities that have the potential to generate high (or at least steady) returns.
Here, however, is the crisis: one week, financial networks and pundits are telling viewers (presumably the majority of whom are non-professional investors) that the future is golden, with analysts expecting the S&P 500 to hit some level perhaps 20% above today’s level by the end of the year. After all, are there are not more than 20 viable covid-19 treatments and vaccines currently progressing well through pharmaceutical pipelines? Then, several weeks later, doubt has crept back into the market, with one concerned investor after another talking about expensive markets and bubbles. Suddenly, the possibility of the virus creeping back into society and shutting down the economy is all too real once again and markets sell off. Whew! Enough to give the retail investor whiplash!
Currently, the US equity market is extremely sensitive to the regular news cycles since there are so many unknowns around the coronavirus Covid-19. As new data emerges, like the increase in rate of infections in some states or potential for quarantines being reintroduced, the market reacts with all the alacrity that computer trading algorithms can muster. In the near-term, this results in massive swings - sometimes daily - in individual company names and the broader S&P 500. Then of course, there is the nature of the news cycle as well. Breathless coverage of dry economic data leads to compelling viewer numbers but does not always translate to good advice for buy-and-hold investors (or indeed, for the statistically money-losing retail investors trying their hand at day trading; read this pertinent article by Forbes).
Here, however, is the crisis: one week, financial networks and pundits are telling viewers (presumably the majority of whom are non-professional investors) that the future is golden, with analysts expecting the S&P 500 to hit some level perhaps 20% above today’s level by the end of the year. After all, are there are not more than 20 viable covid-19 treatments and vaccines currently progressing well through pharmaceutical pipelines? Then, several weeks later, doubt has crept back into the market, with one concerned investor after another talking about expensive markets and bubbles. Suddenly, the possibility of the virus creeping back into society and shutting down the economy is all too real once again and markets sell off. Whew! Enough to give the retail investor whiplash!
Currently, the US equity market is extremely sensitive to the regular news cycles since there are so many unknowns around the coronavirus Covid-19. As new data emerges, like the increase in rate of infections in some states or potential for quarantines being reintroduced, the market reacts with all the alacrity that computer trading algorithms can muster. In the near-term, this results in massive swings - sometimes daily - in individual company names and the broader S&P 500. Then of course, there is the nature of the news cycle as well. Breathless coverage of dry economic data leads to compelling viewer numbers but does not always translate to good advice for buy-and-hold investors (or indeed, for the statistically money-losing retail investors trying their hand at day trading; read this pertinent article by Forbes).
A Better Way to Guarantee Success
Why not take the easy route and maintain peace of mind? Instead of responding emotionally or with fear to market volatility, a better approach for retail investors is to instead take comfort in fundamentals. First, consult with investment professionals to identify solid, quality companies that may be reasonably expected to generate substantial gains over the next five to ten years. Next, identify attractive entry stock prices for these companies. These wise retail investors may now ease into these positions with confidence even as the broader market sells off.
Indeed, this is the secret to winning in the stock market: buying baskets (ETFs) or a select group of quality companies – as always, with the consultation of your investment professional – and holding on for the long term will (almost) always lead to impressive gains* (and yes, we managed to make this one asterisk relevant twice in one post!).
Indeed, this is the secret to winning in the stock market: buying baskets (ETFs) or a select group of quality companies – as always, with the consultation of your investment professional – and holding on for the long term will (almost) always lead to impressive gains* (and yes, we managed to make this one asterisk relevant twice in one post!).
Notable Stories from June
High degree of pessimism in energy markets may be a bullish signal
Oil prices are expected to remain low with many exploration and production companies on the cusp of bankruptcy worldwide and especially concentrated in the offshore and US shale industries. Supermajors and other large producers worldwide have finally learned their lesson from recent oil market crashes and are reigning in expenses to conserve cash and ensure their survival, resulting in investment towards future production slowing to a trickle. In what may be viewed as a contrarian report, JP Morgan Chase believes these bearish conditions may portend the beginning of the next oil supercycle. This report wasn't widely covered by mainstream media in the midst of the epidemic, but CNN has a brief writeup on JP Morgan's oil thesis.
Executive management wanted to sell $500 million of worthless stock to naive buyers
Last month we discussed the controversial practice of executive management teams enriching themselves at the expense of investors despite a history of poor corporate governance decisions on the part of the company. In a tangential vein, towards the middle of this month, Hertz brazenly planned to issue another $500 million in worthless stock for retail investors to gamble away. After all, Hertz management posited, these daytraders were valuing the company at several dollars per share (even though every analyst and institutional investor believed it was worth $0). Even more astonishing is that banks were prepared to accommodate this plan. Finally, in a moment of sanity and good regulatory governance, the Security and Exchange Commission ended the madness by effectively stopping the dubious transaction.
Short sellers and investigative journalists help keep stock markets honest
Short sellers are perennially looked down upon by the public since they are perceived to profit from others misfortune and stir up trouble at the expense of honest folk (which can sometimes be true). And to some extent, German regulators apparently agreed, stepping in to disrupt short sellers and prosecute investigative journalists who had flagged Wirecard - Germany’s pride and joy as their primary fintech startup success - for filing financial statements that didn't seem quite right. In the end, German regulators and Wirecard’s CEO are the ones in the hotseat as more than $2 billion in the startup’s financial accounts proved to be fictitious and the company was forced to file for the equivalent of bankruptcy protection as their debts were called in.
Speculation is NOT Investing!
The first week of June was a real head scratcher. Speculative retail investors - well, let's call them what they are: gamblers - decided to bid up all kinds of bankrupt and distressed company share prices. Hertz was catapulted up more than 1000% in the resulting frenzy! Distressed energy names saw increases of upwards of 500%. In the ensuing game of hot potato, retail investors bought up and flipped stocks at a rapid rate. The problem was that the stocks they were buying and selling were junk in every sense of the word. Such speculation often ends in tears and is usually a sign of at least a frothy near-term market top. It's worth noting that the S&P 500 did come back down to reality over the following weeks.
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* Passive investment in quality ETFs like those tracking the S&P tend to outperform most active trading strategies over the long term. Not convinced? Read about the conclusion of Warren Buffet’s $1 million bet that his passive investments would outperform hedge funds over a ten-year period from the New York Post!
Oil prices are expected to remain low with many exploration and production companies on the cusp of bankruptcy worldwide and especially concentrated in the offshore and US shale industries. Supermajors and other large producers worldwide have finally learned their lesson from recent oil market crashes and are reigning in expenses to conserve cash and ensure their survival, resulting in investment towards future production slowing to a trickle. In what may be viewed as a contrarian report, JP Morgan Chase believes these bearish conditions may portend the beginning of the next oil supercycle. This report wasn't widely covered by mainstream media in the midst of the epidemic, but CNN has a brief writeup on JP Morgan's oil thesis.
Executive management wanted to sell $500 million of worthless stock to naive buyers
Last month we discussed the controversial practice of executive management teams enriching themselves at the expense of investors despite a history of poor corporate governance decisions on the part of the company. In a tangential vein, towards the middle of this month, Hertz brazenly planned to issue another $500 million in worthless stock for retail investors to gamble away. After all, Hertz management posited, these daytraders were valuing the company at several dollars per share (even though every analyst and institutional investor believed it was worth $0). Even more astonishing is that banks were prepared to accommodate this plan. Finally, in a moment of sanity and good regulatory governance, the Security and Exchange Commission ended the madness by effectively stopping the dubious transaction.
Short sellers and investigative journalists help keep stock markets honest
Short sellers are perennially looked down upon by the public since they are perceived to profit from others misfortune and stir up trouble at the expense of honest folk (which can sometimes be true). And to some extent, German regulators apparently agreed, stepping in to disrupt short sellers and prosecute investigative journalists who had flagged Wirecard - Germany’s pride and joy as their primary fintech startup success - for filing financial statements that didn't seem quite right. In the end, German regulators and Wirecard’s CEO are the ones in the hotseat as more than $2 billion in the startup’s financial accounts proved to be fictitious and the company was forced to file for the equivalent of bankruptcy protection as their debts were called in.
Speculation is NOT Investing!
The first week of June was a real head scratcher. Speculative retail investors - well, let's call them what they are: gamblers - decided to bid up all kinds of bankrupt and distressed company share prices. Hertz was catapulted up more than 1000% in the resulting frenzy! Distressed energy names saw increases of upwards of 500%. In the ensuing game of hot potato, retail investors bought up and flipped stocks at a rapid rate. The problem was that the stocks they were buying and selling were junk in every sense of the word. Such speculation often ends in tears and is usually a sign of at least a frothy near-term market top. It's worth noting that the S&P 500 did come back down to reality over the following weeks.
---
* Passive investment in quality ETFs like those tracking the S&P tend to outperform most active trading strategies over the long term. Not convinced? Read about the conclusion of Warren Buffet’s $1 million bet that his passive investments would outperform hedge funds over a ten-year period from the New York Post!
