Blood in the Streets

     Over one hundred years ago, Baron Rothschild is credited with saying that the time to buy is when blood is running in the streets. After the last three sessions in the stock market, it seems like blood (or red ink) is flowing freely. Almost every sector is being punished for having rich valuations and potential risks related to the corona virus that is spreading across the developed world. People are desperately seeking advice on what they should do with their money. My opinion is that even if this market continues to correct, the time to sell most positions has passed. Leisure and transportation stocks have been the most severely impacted and will continue to  endure pain for a long time going forward. People are cancelling vacations and business trips in record numbers. Some areas are locked-up due to quarantines, and airlines have cancelled flights to many of the impacted areas. Drug and technology companies have had supply chain disruptions because they sourced many needed materials from affected areas. At the time of this writing, the Dow Industrial Average has dropped nearly 3,000 points or about 10%. While I can't say that I expected this to happen, I have hedged my bets in this market by maintaining a portfolio of laddered CD's that are federally insured and safe and sound. This strategy protects me from ruin if the market continues it's decent and also protects my family's future if anything happens to me. Even though I am not thrilled with the yield on these products, I believe that later this year the interest rates paid by banks will go down even more. The Federal Reserve Bank will surely react to this financial crisis by lowering the fed funds rate even further to prop-up our economy. As far as this crisis being a buying opportunity, my buy list was already in place in the form of limit orders at my discount broker. Today two orders were executed at prices that I previously thought favorable. In summary, this too shall pass, just like every other crisis. Nobody knows when, but it will. It may take a long time for stocks to recover to their previous highs but for long term investors, this is a great time to buy some discounted stocks on your list.

HOW TO LOSE MONEY

     Every seasoned investor has experienced losses in their portfolio. Naturally, the object of investing is to make money but novice investors need to know how to handle the inevitable losing positions in their portfolio. The first rule is to not panic and sell just because of market gyrations that may temporarily affect a stock or whole sectors. Value investors who buy distressed securities will seldom buy at the bottom of a stock's range, therefore losses almost always occur when taking a new position. Owning stocks is not a "Buy and forget" proposition, one must stay apprised of a company's situation. Ask yourself if the reason you bought the stock is still valid. Has anything happened that could change your opinion about the company? If the market is simply not done punishing your stock you may consider adding to your position, all other things being equal. On the other hand, if after a reasonable amount of time the problems of your company start to look insurmountable, you may have to actually realize a loss. Even if that happens, all is not lost. The duds in your portfolio actually do have some value because they can be used to offset gains you have taken during the current year. Just be aware that any losses that exceed gains are limited to $3000 each year. If you have large losses, then you have to carry-over them into future years for tax purposes. Every year, I examine my losing positions to harvest offsetting losses but this year I could not force myself to sell because I still believe in all of them and there are many. I view these losers as the future of my portfolio. When I look back over the years, I have come to realize that underwater positions were not such a big mistake. The biggest mistake was not taking a chance on young struggling companies that have become the largest, most powerful companies the world has ever known.

Complimentary Investing Styles

     Anyone who has read my past posts knows that my investing style leans toward the value discipline. Unfortunately, this method of investing has under performed for the last 10 years. So how do I make money in this era of growth investing? The answer lies in a complementary blend of value and growth stocks held in my portfolio. If all I held was value stocks, I would get depressed every time I reviewed my brokerage statements In order to stay interested in the current market and not always hold a bag of losers, I try to buy some of the hottest stocks with unreasonable valuations. Hopefully, these companies will continue to be successful and their earnings will grow into their valuations. I have learned my lesson by missing out on the gains of Amazon, Netflix, Alphabet, and Priceline. It doesn't take a lot a shares of an expensive stock like Facebook or Tesla to rack-up a nice gain in these rapidly appreciating stocks. While.these investments are garnering all the headlines, I also like to bottomfish for the afflicted companies like Boeing and Kraft Heintz. Sometimes these hardship cases take years to find their way. Sometimes they never do, but like I mentioned in my previous post, large, well established companies usually survive. My main concern is to not pay too much for an ailing company. This is when the lessons about ratio analysis and charting come into play. Buying at or near the bottom can be as rewarding as owning high flyers, it just takes longer. In summary, diversification is not just about owning stocks in different sectors and market caps, a complementary blend of growth and value will produce returns in almost any market environment. 

The Blind Squirrel Takes A Random Walk

     What the hell am I talking about? The random walk refers to a book written by a Princeton professor named Burton Malkiel. He penned "A Random Walk Down Wall Street" in 1973 to argue that individual investors are foolish in trying to "beat" the market and should just invest in a passive mutual fund instead. This "Efficient Market Theory" postulates that every event or potential outcome is already baked into the stock prices of any company involved. After all, there are some very smart people who make a very good living just watching everything that goes on in the world and adjust their large portfolios accordingly. I'm sorry Burton, but this blind squirrel just didn't buy into this academic crap when I was in college and I don't now either. The only reason that I don't outperform the market averages is because I'm too lazy to do the research necessary. There's an old saying that "Even a Blind Squirrel Finds a Nut Eventually", well buying stocks of companies that are struggling today can  reward investors tomorrow. Not all companies will survive but a little research can tip the scales in your favor to identify the winners. The key to making money in stocks is to simply be invested and stay invested. When things are not working out, find out why. In my 47 years of investing in stocks there are only a few times when things were hopeless for a position that I held. In this day and age, there are usually remedies for companies that can't seem to right their ship. Often an activist investor gains board seats and demands corrective action. Companies like Kraft Heintz, Boeing, Johnson and Johnson, General Motors, Ford, Schlumberger, and many others have a good chance to turn around. I was advised many times not to buy Tesla stock but look what it is doing now. Not many investors believed in Amazon until it took off like a rocket. I can still remember when Apple was a basket case and looked like it would fail. I didn't understand how Google could make money from a search engine but they did. I wish I wouldn't have listened to the pundits that covered the stock.

The Past, Future and Present

     First. I look back at 2019 and how the financial markets treated me. It was a very good year to be a stock investor. The S&P index has returned over 28% year to date. Information Technology has led the way with a whooping 47% return. Communication Services was also unusually strong at 31% as this is usually a boring sector with a rich dividend. The laggard in the group was Energy with only a 10% gain on the year. What created such a great environment for stocks? In two words: Interest Rates. I remember exactly one year ago today, on Christmas Eve, the market reacted badly to the 25 basis point increase in the fed funds rates by sending the averages sharply lower. December of 2018 was a correction that literally was a Christmas gift to anyone who had the nerve to buy at a discount. Investors who picked-up these bargains were richly rewarded throughout 2019. During the past year, rates have been cut 3 times, creating a perfect scenario for stock gains. Looking forward to 2020, the Fed has indicated that interest rates should remain stable, another positive for stocks. What could derail this rally? First, trade tensions escalate, secondly, and unexpected increase in inflation and interest rates, third, an unexpected outcome in the presidential election or impeachment proceedings. I recently attended a convention for Credit Union volunteers and was taught how to predict the future. It involves looking at what is trending at the present and assuming that the trend will continue. Recent performance has worked for horse racing, so why not stocks? I predict that energy stocks which have suffered for a very long time will be strong in the new year. Even though tech companies have gotten a little ahead of themselves, I think they will also do well. I expect stable interest rates at least through the first half of the year so Home Builders should do well also. Let's not forget that this economic expansion is in its eleventh year, a record. What often works late in a bull market is small cap stocks. The best way to invest in small caps is through a managed mutual fund that has a good track record and low fees. Finally, its time to do a little year-end tax planning by looking for losing stocks that could offset gainers sold during the year.

Minorities are Welcome

      Unlike the big garden that I grow each summer, this blog is not targeted towards minorities. Most of my garden is devoted to vegetables that local people in my area shun. If I want to sell Collard Greens, I must find a market in the Black Community. Eggplant is a big hit with the Orientals who have located in this area. Europeans love my tomatoes, eggplant, and sweet potatoes. If it wasn't for these folks, I would waste more food than I use. However, this blog is targeted towards the 75% of people who own no stocks or financial assets at all. Becoming a member of the minority who own stocks is the best way to secure a comfortable retirement and achieve your financial goals.  In this era of ultra-low interest rates, stocks are one of the very few investments that can actually produce a positive return after taxes and inflation. For a young working person, putting aside a modest amount in a retirement account each week makes a lot of sense, especially if your employer offers a match on your contributions. In the old days, just saving money in a savings account produced out-sized returns over time due to the power of compounding interest, but that is not true today. In order to achieve positive returns over a lifetime now, a saver needs the premium that stocks offer in the dividend and appreciation in stock price. Buying a low cost mutual fund within your employer's plan offers diversification and the opportunity to participate in the stock market. I also recommend buying stocks outside of any retirement plan as a hedge against any of life's unexpected surprises. There is even a well discussed acronym that describes today's investing environment: TINA. This stands for "There Is No Alternative" to stocks. I  must admit that as a member of the minority who owns stocks and financial assets, I sometimes feel some discrimination against us in the 25%. Taxes on interest, taxes on dividends, taxes on capital gains and increased record-keeping to track my basis and performance, are all distractions. There are even discussions from left-leaning politicians to tax the amount of your net worth. In the end, the positives far outweigh the negatives and I am happy to be a minority.

Dumb Luck

     I recently decided that with interest rates nearing record lows and could possibly could go lower, I should invest in a home building company. After doing a little research, I decided that KB Homes (KBH) would be a good choice. I placed the limit order on an aging computer with a faulty keyboard. Within a week or so, I received a confirmation that my order had been executed. When I finally got around to reviewing my portfolio, I realized that I had not actually bought KB Homes, instead, I bought a Korean bank holding company (KB). Oops. Apparently, the keyboard did not connect on the letter "H" and the symbol (KB) was purchased erroneously. By coincidence, the stock prices of the two companies were very similar. While researching my new holding, I realized that it had some features that fit my criteria for investment and the stock has actually gone up since purchase. This is not the first time that I have screwed-up an order and probably won't be the last. The first lesson here is to be careful when placing on-line orders, this could have been a costly mistake. The second point I would make is that good things usually happen when investing in the stock market. Over the long term, stocks of high quality companies will produce above average returns for investors, assuming a diverse portfolio. I never know for sure if the stocks I buy will be winners or losers but I do know that if I was not in the market that I would have no chance to participate in its gains. Just like buying a lottery ticket does not guarantee a win, not buying a ticket guarantees you will not win. A third and final point is to review your holdings on a regular basis to identify any dramatic changes to your portfolio. This morning, I noticed one of my holdings was up 40% in pre-market trading. I would be lying if I said I expected such a move in Biogen, I just liked the company's prospects and valuation. A recent half pot lottery conducted by the West Side Nut Club sold over 1.2 million tickets, resulting in a prize of over $600,000 for some lucky winner. Unfortunately, the holder of the lucky number, has failed to check their ticket and the money will soon be donated to charity. Talk about dumb luck!