Hello readers! I hope your families are safe and healthy. It’s been quite a while since I wrote in this space, so I appreciate you stopping by. I’ve been talking to and exchanging messages with a number of you about the crazy stock market lately and figured maybe it was time to just put my thoughts up on my old blog. I you find this helpful.
The 4-½ trading weeks from February 20 to March 23, 2020, the time most people realized the scope of the Coronavirus pandemic, were hideous. We saw astonishing price drops in record time: the Standard & Poor’s 500 Index fell 35% from its highs on February 19.
But since then it’s been on another tear, rising fast from the depths to recapture some of the value lost in the teeth of the outbreak. The gains seem to be almost everywhere, but in particular within certain sectors and even in specific businesses. Today I’ll try to describe what I’ve been buying and why.
Many of you, I’m sure, did not sell any of your holdings as things began to really fall at the end of Feburary. You thought it would get better soon, or you were working and never had a chance to get into your portfolios to make a move. Your inactions have generally been rewarded now, with substantial gains from the low point. The S&P is now just down only 14% for 2020, a much more tolerable scenario than what we saw a few weeks ago. But equally some of you probably sold everything within a few days of the top, unwilling to risk that your nest eggs might whither to zero. Hopefully now you’ve started to buy back in and haven’t missed too much of the current rally.
That’s the trick when you sell into a sliding market; you have to time it exactly right, not once, but twice: identifying the start of a long drop to sell, and then choosing just the right moment, the true bottom, to buy back in.
It's a difficult thing. As the saying goes, you don't want to 'try and fail to catch a falling knife.' I look at it like this: imagine you have your eye on a pair of pricey headphones. You want them, but they're just too much and you can't quite justify the purchase. Then one day they're on sale for 20% off. Do you grab them? Or do you roll the dice, hoping they drop further to 30% or 40% off? Does it change the calculus to consider that these headphones will likely increase in value the longer you own them?
I find I'm happy with a 20% discount, more or less where much of the stock market is right now. But the truth is, you can have it both ways; just don’t move all at once. Stocks are not a purchase you need only 1 of, they are something you can invest in anytime, in any quantity. Something which over time generally increase in value.
So here's how it went for me. When things first turned south I didn’t act. At the time the virus was only beginning to get reported within the US and I wasn’t sure how much impact it would have. Then when the market started falling, and kept falling, and kept falling, it became clear that just sitting on my hands was not the appropriate reaction. I was as fearful as anyone. But I knew that what I ought to be (opportunistic as it sounds), was greedy. Prices were dropping, so my opportunities were growing.
First I sold my losers: any stocks I owned which were in the red overall (which were below my purchase price) I sold immediately to recover what cash I could, and later to use those losses on my taxes to offset capital gains elsewhere. This is called ‘tax-loss harvesting’ and is a technique I use routinely on holdings that have not performed as I predicted when I purchased them. In a falling market, no sense letting good red ink go to waste. Hanging on in a time of volatility and uncertainty because “you just want to get back to even” is a bad plan. You can still take advantage now, selling your less successful stocks to recapture the cash and leverage the losses.
As I continued to watch the fall, I (slowly) began to think tactically. Which industries/businesses were going to be hit hardest? What are consumers avoiding, and what is getting forcibly closed by government order? Those would have the worst of it. I looked at airlines, cruise companies, gymnasium chains, restaurant businesses, sports arenas and concert venues. I sold what I owned in those areas—though I didn’t act fast enough on my gyms. Even if my investment was still net positive, I wanted out before and in case things got really ugly. I was beginning to build a small pile of cash for eventual purchasing.
Then it was a waiting game. What industries would come back first? What would do particularly well in an economic shutdown? What would consumers actually do in lockdown? Which businesses would have enough cash on hand (or a lack of crushing debt) to enable absorption of a prolonged shutdown? Which industries will be considered “essential” and be bailed out by the government? What kinds of things will suffer a sort of pent-up demand, and then blast off when restrictions lift? I bided my time poking around for ideas and supportive analysis.
By March 26 things looked like they had turned. I was still suspicious that it was a false bottom in the market, but I was also concerned that government bailout funds would come fast and would trigger huge gains in certain areas. I actually moved too soon with my first purchase:
JETS, the only airline-focused US exchange-traded fund (a grouping of companies that can be bought or sold as a block, like a stock). I knew airlines are viewed as critical national infrastructure by most economists, so I was certain the Feds would either give or loan many billions of dollars to prop up this sector. Turns out that
is happening as I predicted, but it’s coming about more slowly and with lots of pushback and questions regarding what sort of funding they’ll receive. So while I remain confident about airlines in general, that purchase is currently yielding no gains.
Next I thought about a streaming service, like
Netflix. (show me someone who’s not watching more TV these days). Turns out Netflix didn’t take it on the chin like most of the market, and in fact seems to have bottomed nearly a week before everything else. Probably for exactly the reason I was considering it myself. I was late on that buy, but still it’s been a winner.
Clearly,
Amazon is going to do well in an environment where we can't really leave the house. Their businesses are tailor-made for this moment: speedy shopping and delivery of just about anything, groceries included. Home electronics and smart speakers. Streaming video. The video-game spectating platform Twitch. And, behind the scenes, Amazon is also
by far the largest and most profitable provider of cloud-storage services for other companies (Netflix among them). Even in the face of millions of layoffs in the US, Amazon is
hiring like crazy right now, attempting to keep up with demand. I can’t see a downside to buying more Amazon… other than that a single share is currently over $2100. So that’s a limitation for most of us.
Shopify, too, has surged in the last few weeks, though it had a bumpier bounce. Shopify provides online storefronts and back-office order processing for hundreds of thousands of online businesses, and has become one of the default go-tos for many mom-and-pop retailers and startups. They’ve been a fast grower over several years and likely will get a shot of adrenaline in a moment like this.
I kept looking. What other companies are having a once-in-a-century moment? I doubled down on
Costo, for which shoppers are lined up at the front doors every morning looking for toilet paper, wine, beef, sweatpants and canned tuna. I opened a small position in
Peloton, which makes expensive stationary bikes with built-in video to connect to streaming spin classes run by its own coaches— and a separate app available for anyone even without their equipment.
Facebook, because our relationships all exist exclusively online for the moment and because in the runup to the 2020 election Facebook has
finally been taking action on limiting misinformation on their platform, as well as to begin properly protecting users’ data. Not to mention they’ve got a ton of cash on hand to fund their way through a slump.
Microsoft has been just killing it the last few years, and while we all know their personal and business software products, the fast-growing Azure cloud platform for business has seen a surge recently... not to mention they’re loaded, too. As I mentioned above, after I didn't sell my gym chain stock in time, I actually bought more in the form of
Planet Fitness. Planet Fitness is known for its uniquely memorable ‘no lunkheads’ ads and for valuing members’ comfort and sense of no judgment more than most competitors. Planet Fitness also has a strong balance sheet, a high cash-to-value for its recurring monthly members: generally an industry-low $10/month.
Finally, I looked at one of my perennial favorites,
Disney, despite a decade of underperformance. Disney has been indisputably devastated by the outbreak as they’ve taken body blows from no less than 4 directions: the entire Disney cruise line is currently docked; ESPN, its wholly-owned sports network, has nothing to broadcast; cinemas are closed, so all the usual blockbuster summer movies have been pushed back indefinitely; and of course Disney’s ubiquitous theme parks around the world are shuttered. Disney stock is actually at the same price today that it was in February 2015, around $105. But their new streaming platform, Disney+, is in high demand. And I am confident that cruises, movies, global Disneyland visits, will return soon enough, never mind that our ravenous appetites for sports viewing will provide another big boost. Now
that’s pent-up demand.
But to be clear, I do not know that the market won’t fall again soon. Earnings season is upon us, and most business analysts and economists are expecting horrifically bad news to at least put the brakes on our current rally. Unemployment has gone ballistic, and all those jobless people will not be shopping, traveling, or aiding the overall economy for a while. Even as some parts of the country have seen the top of a flattened pandemic curve, rural communities are still weeks away from peaking on outbreaks and deaths, and we don’t know if hospitals in those areas will be able to handle the coming surge. All these things make me worry, and make me cautious.
So I’m buying stocks now, yes. But also I’m only buying a little here and there, a few shares at a time. I’ll pick up a few shares on Monday, a few more on Thursday, still more in a week and then in a month. Instead of timing the market, I’m cost-averaging over a longer period. That way, in case the market continues to fall, I can keep buying as prices improve, remaining confident in my overall investment thesis and in the US economy’s ability to just keep chugging along. Eventually we’ll be on the other side of this moment, and the market will regain both stability and strength as job numbers improve and consumer sentiment— and spending— grows along with it.
So stay the course, friends. Do your research. Act slowly, act with baby steps, but act with conviction. And as always, never invest money you need in the next 3 years. This is long-term investing. This is for your child’s eventual wedding, for your parents’ late-life care, for your retirement.
Feel free to
reach out to me with questions. I may not communicate often, but I’m not going anywhere.
In this environment, certain types of businesses will be absolutely crushed. Many of us can’t go out, and even more of us are choosing not to. Which means a company that depends on customers physically showing up is not likely to recover soon. Live sports and concerts, theaters, theme parks, restaurants and bars, ride sharing and home sharing, shopping malls, airlines, cruises, hotels, gym chains— all are tightening their belts, cutting hours and staff, accepting help from government or private equity to flesh out their cash positions, figuring out how to ride this thing till the moment changes. So immediately we can rule out these businesses as viable investments in the near term. 