How comfortable do you feel about your stock portfolio?
A few weeks ago, Bill Bonner posted a warning on his blog – an essay titled “We’re Raising the Crash Flag.”
Bill has always understood economics better than I do. He’s intellectually attracted to big ideas and “connecting the dots,” as he puts it. I like to think of myself as his Charlie Munger, but I’m not sure I am. I am familiar with Buffett’s ideas. I have no idea what Charlie thinks.
In any case, my aim in understanding economics is lower than Bill’s. I don’t really care to understand how it works at a deep level. I just want to understand enough to avoid making stupid mistakes.
On a micro level, avoiding mistakes in the market is not that difficult. Buy mostly large, profitable companies that have a long-term history of paying dividends. And don’t speculate.
But on a macro level, avoiding mistakes is a bit more difficult.
When the economy goes bad (and all economies sooner or later go bad), the stock market goes bad too. And it can stay bad for an awfully long time.
So even if you own only good companies, you can see the value of your stock portfolio tank severely every now and then – and in rarer cases, stay down for years and years.
In my lifetime as an investor, I’ve seen several serious bear markets. Had I been able to predict them, I would surely have cashed out my stocks and moved into cash and gold. Which is what Bill does.
But since I’ve never had a crystal ball, I’ve never tried to time the market. And while that was not as profitable as it would have been to correctly play the future, it was, in retrospect, a lot better than pulling out.
There are lots of studies proving just about every imaginable thesis on investing. I’ve looked at enough of them to know that if it were possible to time the markets, it would take someone much smarter than I.
So my strategy has always been to buy great stocks and hold on to them. And when the crashes come, to buy more of them when their prices are, by value standards, historically cheap.
That said, it worries me when Bill puts out a warning about an imminent market crash. If he’s right – and eventually, he certainly will be right – it means that I’m going to see my stock portfolio descend by millions and millions of dollars.
That won’t be a good feeling. And I can understand that if I converted my stocks to cash today and a market collapse occurred next week, I’d feel very good about that decision.
But I don’t know for certain that the market will crash any time soon. So for the time being, my strategy is going to be as follows:
Avoid speculative stocks.
There are all sorts of reasons to a believer that certain speculative stocks might prevail in the coming years – e.g., Uber. But as of right now, the company is unprofitable. And that means, in my simple way of looking at it, that it is a speculation. If I’m going to speculate, I’d rather invest money in a fledgling business in an industry I know (such as direct response marketing) or in a business I can have some control over (as a founder, for example) than in a company like Uber, about which I know only what I read in the financial press.
Hold tight with my buy-up-to parameters.
My rule for buying stock is based on a simple metric: 10- to 20-year historical price-to-earnings ratio. When the stock market is generally overpriced, these ratios are very high. It becomes difficult if not impossible to buy stock in businesses, regardless of how great I think a particular business’s prospects are.
I just met with Dominick, my advisor at Raymond James, to go over the P/E ratios of my core stocks (the Legacy Portfolio), and only a handful were priced “right” according to the formula we follow. I was not disappointed. On the contrary, I was pleased. It meant that the cash I have been accumulating from dividends and from my active income will be put into cash and income-producing real estate, assets that should maintain their value or appreciate even if the market drops by 50%.
The last time Bill sent out a warning like this (it was prior to the 2008 crash), I started to buy gold. I bought a good deal of it at an average price of less than $500. That was a good contrarian move, and I have Bill to thank for it. But the amount of gold coins I own now is more than sufficient for “survival” purposes. And since gold is not a business and does not produce income, I won’t treat it like an investment. I have enough. I won’t buy more.
Dominick agrees with me that Bill’s thinking, on a macro-economic level, is sound. He gave me reasons why his company believes that we are still in a long-term secular bull market that will endure, with ups and downs, for many years – so long as interest rates stay low. And we both think (as Bill has pointed out) that the Fed is going to do everything it can to keep rates as low as they possibly can.
Of course, Trump’s crazy trade-war strategy is not good for the economy and it is very dangerous for the stock market. If all things were equal, he would settle his dispute with China quickly to bring back a sense of optimism to Wall Street. But I don’t think he cares as much about that as he does getting reelected. And since he’s already been saying that the Fed will be responsible for any future financial collapse, he has something he can talk about if it happens.
Meanwhile, the idiocy of the trade war is beyond the intellectual scope of his core supporters. So he might continue with it through the next elections. And if he does, we might see another collapse of as much as 50%. If that happens, I told Dominick, all of our Legacy Stocks should be trading at prices that are historically super-cheap. And if they get there, I’ll have a stockpile of cash ready for buying.