RESPECT

     Aretha Franklin recorded the song "RESPECT" in 1967. It soon became her signature song. Anyone with a pulse can't help from grooving to this tune when it comes on the radio. Originally recorded by Otis Redding in 1965, the song lyrics demand respect from the singer's lover. Somebody else who made a fortune complaining that "I don't get no respect" was my favorite comic, Rodney Dangerfield. Just like Rodney, I have a stock in my portfolio that just can't seem to get any respect from the investment community. That company is Gilead Sciences (GILD). Even though GILD pays a 3.5% dividend yield, sports a reasonable valuation of 18.7X earnings, has a lower than market beta at .7, has developed a drug that cured Hepatitis C, and now has proven to have an effective therapy against covid 19, the stock just can't seem to get traction. I first wrote about Gilead in a post called "Handyman Investing" on April 27, 2017.  In that blog, I complained about how Gilead had cured Hep C but the stock was not rewarded because of the loss of revenue from cured patients. Today, the stock market is in rally mode largely due to the good news that Gilead has a drug called Remdesivir that has shown to be effective against corona virus. At the time of this writing, the Dow is up about 500 points or about 2% mainly on news of the positive clinical trials. Remdesivir is not a new drug, it was developed to treat the Ebola virus but was not proven effective. Remdesivir has been used to treat coronaviris since the outbreak began in China through goverment regulated clinical trials with anecdotal positive results. When the pandemic reached the US, sick patients needed to be enrolled in FDA trials to be treated. It takes time for the trials to produce reliable results and that is why the good news has been delayed. People who contracted corona virus and live in smaller communities were not eligible to receive the drug because they were not part of the study which typically is performed in major medical centers.  I believe that people all over the world are desperate for good news after 2 months of isolation and depressing news. That is why the news from Gilead Sciences has lifted spirits and markets. It also doesn't hurt that interest rates are virtually zero or lower in real terms. Anyone looking for a return on their money MUST be in stocks. That being said I expect investors will experience additional pain this year when stock markets test their recent lows. As for Gilead, even though they are riding high on todays news, don't look for huge gains for them because sales of Remdesivir are nonexistent-they are currently giving the drug away for free. Aretha and Rodney, who both have passed are surely smiling on the company knowing that R-E-S-P-E-C-T is more valuable than anything.

Route A138

     About 55 years ago, at the age of 12, I owned my first business. I bought the local newspaper, The Evansville Press, wholesale and sold the papers to my retail customers. This involved picking-up the papers at a gas station about 3 miles from my house every day after school and folding, packing and delivering them to each house on my route. I had 100 customers during the week and about 65 on Sunday. Some days the papers were so heavy that I couldn't get off my Huffy bike because the bike would flip over. At the time (about 1964) every bank would pay 5 1/4% interest on your money. Inflation was running about 1 1/4% so your real rate of return on safe money was about 4%. Back then, people expected to get a decent return on their money. So what happened?  It all started with gold. In 1933 FDR effectively took the US off the gold standard by ordering all gold coin and bullion to be turned in to the US Treasury for $20.67 per oz. Then he raised the price of his hoard to $35 per oz, effectively inflating the dollar. Then in 1971 Richard Nixon totally removed the US from the gold standard. Now our government was free to print money without any constraints. At the same time our Federal Reserve was free to manipulate short term interest rates to promote full employment and control inflation. So here we are with a fiat currency and nearly full employment and very little inflation but interest rates are nearly zero. Treasury bonds are in such high demand from investors across the  world that they have pushed the yields to historic lows. So what should I do to get a decent yield today? In a word: stocks. It's about the only place where you can find dividend yields approaching that 5 1/4% of yesteryear. With a wild and volatile market like this, a little more due diligence is required. Buy large US companies with lots of cash and little debt. Avoid sectors that have been heavily damaged by the Corona virus such as travel, cruise lines, energy, and retailers. Above all do not panic and sell stocks for distressed prices. Like many crises before, this too shall pass. Long term holders of quality stocks that pay dividends almost always win in the end.

What? Me Worry?

     Remember Mad magazine and Alfred E Newman? That was his catch phrase. He must have hedged his bets somehow to give him peace of mind in times of turmoil. While I am not particularly happy about the stock market action of the last couple of weeks, I am not about to panic and sell out. What keeps me on an even keel is the amount of  federally insured certificates of deposit that I have bought over the last few years. Even though I may have forgone some potential stock gains by socking money into my local credit union, those funds are insulated from this volatile stock market. When a stock market becomes expensive, it is only prudent to take a more conservative stance. Remember that the long term price-earnings ratio for the S&P 500 index is closer to 15X than the recent 19X. Last year's 3% yield looks pretty good compared to the 1% offered for any new CD term today. With a correction in this market of about 20% or more, I am looking to direct any CD maturities into stocks with low debt, low multiples (12X or less), high dividend yield (5% or more), and large market caps. I  am placing limit orders for some of these stocks that may be executed on the next leg down. While I don't expect to buy at the bottom I feel like over the long term,what I buy at these lower levels will make money. Another reason not to worry is that with such low interest rates, investors almost have to risk money in dividend paying stocks to get a return. This is the TINA theory (There Is No Alternative) to stocks. While the corona virus will change some consumer behaviors for years to come, stocks that will benefit from these changes should be on your radar screen. Technologies that allow people to work from home, enjoy movies without leaving the house, order groceries and drugs online, enjoy home delivered meals, and shop and bank from home should recover quickly.  At the same time that the corona virus is wrecking portfolios, the price of oil has collapsed which may cause many American oil companies to file bankruptcy. When this health emergency and financial crisis ends, and there will be an end, Americans will enjoy much lower fuel costs in the future. Talking about risk and then actually experiencing a gut wrenching market decline like we are experiencing now are two very different things. Five years from now I plan to see a stronger healthcare system, a stronger financial system, and a healthier personal portfolio.

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.