This is the end
This is the end
My only friend
– The Doors
The End! This legendary song, written by the late Jim Morrison, seems very fitting when thinking about recent events. We live in extraordinary and uncertain times, especially if you’re investing in the U.S. Explaining what’s up with my investments is a long story. I’ll keep it short. Just before the descent into hell, I acted on the warning signs and took some risk off the table by dumping some ugly duckling stocks and going into treasuries and a hedge fund-style exchange-traded fund (ETF). When the crash did come, I de-risked some more, but not in the same calculating way. Without going into the gory details, I quickly recovered my composure and have ended up achieving a good return for the QTR.
I’ve learned plenty recently, so I thought I would share. Here are some of my investing insights into the U.S share market during the crisis.
Lesson 1: Margin trading can magnify those darkest fears
I started margin trading (or borrowing to invest) earlier this year. I was initially killing it. When the hyper volatility hit in late February, that all changed. Truth be known, I was worried, much like a long-tailed cat in a room full of rocking chairs. Even with a conservative approach borrowing ratio, I became more fearful compared to past crashes I’ve experienced. Thankfully, my composure returned to normal when I got rid of my margin loan. My lesson was that gearing into equities late in the cycle in an overvalued market wasn’t the best move I’ve made. I’m lucky I didn’t suffer any big losses. Phew!
Lesson 2: A horses for courses approach to ETFs is a necessity
I’m a huge ETF fan. I’ve found that in times of extreme volatility, long-only equity-based ETFs have been painful. I’ve learned it doesn’t make sense for me to follow an index or a market via an ETF if it’s descending into the great abyss. I’m not alone. Net flows into the SPDR S&P 500 ETF, or SPY, the world’s oldest and largest ETF, went from USD$10.8 billion in Q4 2019 to -USD$14.9 billion in Q1 2020. For me, a carefully-selected range of shares and defensively-focused ETFs make more sense in this period of extreme uncertainty.
Lesson 3: Being boring makes dollars and sense
Many investors may call my shares boring. I’ve focused on larger multinational companies with a moderate to low risk profile that are in a strong financial and market position. Call me cynical or conservative, but I don’t think now is the time to speculate on high beta or growth stocks that have sex appeal. Owing to the uncertainty, my focus has been on quality, not glamor.
Lesson 4: Listen to Nouriel and Mohamed in a crisis
Two older, more experienced economists, Mohamed El Erian and Nouriel Roubini, have stood out for me. When interviewed, they were able to explain what’s happening and give their perspective on the outlook without the nonsense. They offer complementary views that are worthwhile listening to.
Lesson 5: Sharing news and views with your investment community is helpful when you’re alone
I’ve joined a new private social media group recently. This is made up of other Kiwis investing in U.S. shares and has been very helpful in more ways than one. It’s been great to share views and ideas on market movements, U.S. stock picks, what’s happenings with the virus, as well as a lot of non-financial stuff at a time of isolation. I live in a big three-bedroom house by myself, so the banter has been welcome.
Lesson 6: The opportunity costs of going completely into cash during a crisis can’t be ignored
De-risking is a legitimate strategy during periods of volatility. However, this doesn’t mean switching to a 100% cash portfolio is sensible. There’s still risk in taking an all-or-nothing approach. Some of the best trading days can be at the worst of times. For example, three of the top 25 trading days on the S&P500 since 1945 were in March 2020. And since no one knows when the best trading days will be, it’s better to be in than completely out. The message here is that investors, myself included, need to consider a balanced approach to active investing in volatile times.
Lesson 7: Stop orders can be useful tools in managing risk, but you need a strategy for using them
I’ve used stop orders, or more specifically, sell market stop orders, from time to time. This means that if a share drops to a certain level, it will automatically sell. Stop orders have the benefit of protecting any profits gained and helping manage the risks of trading in difficult conditions.
I’ve used different tactics via stops after listening to the many educational videos from TD Ameritrade, which has been great. For example, if a share is increasing in value, I will increase the trigger or activation price (or the point at which the share is sold) to protect my gains. Should a share be sold at the higher trigger price, I have once or twice repurchased it at a lower price later. This has allowed me to increase the quantity of shares I own. I’ve been able to execute this strategy in part thanks to the price alert push notifications I’ve set up on my account with my Nebraskan friends.
A word of warning on stops: it’s important to consider how much trading you do should you decide to use stop orders, as this has potential tax implications (i.e. you’ll be classified as a trader rather than an investor).
Lesson 8: Buying the dip and banking on a quick recovery is foolhardy
Buy the dip. If I had a dollar every time I’ve heard this expression, I could retire early in a five-bedroom mansion on Papamoa Beach. Some have used this expression to suggest that U.S. shares are on a Briscoes-like sale that you can’t ignore, as markets will go up. Sound right? Well, it’s not in my view. It’s difficult to accurately value a company at the current time simply because the E in PE ratio is unknown. There’s so much uncertainty in what is a health crisis that’s morphed into a financial one of gigantic proportions, as pointed out by the likes of Roubini and El Erian. We simply don’t know when there will be a recovery or how long it will last.My approach has been more circumspect – choose boring shares, invest in irregular chunks based on my price targets, use stop orders, and have a healthy exposure to defensives or cash, treasuries and alternatives.
Lesson 9: TD Ameritrade has helped me develop my skillset
Since switching to TD Ameritrade several months ago, I’ve become a better investor. I’ve learned how to use stop losses to hedge risk. I’ve learned about many companies from the research reports from the likes of Credit Suisse that are provided for free. I’ve learned from the immense educational resources they’ve provided for investors of different backgrounds. I’ve learned as I’ve had the flexibility to experiment thanks to zero trading commissions, the huge range of investment opportunities, and the many product features that are completely foreign to Kiwi investors. Looking back, I was 100% right to switch to TD Ameritrade.