Impending crash/correction? What does everyone believe is currently set to play out and how are you responding personally? Advice plse!!I’m pretty new to equity investing, (though have a background in fixed income analysis). Made my foray in to stocks early this year and performance across my portfolio of mixed caps has been mixed – hit lately by some dismal declines in certain growth names (Zillow, Docu, Pins. AVAV….etc). I mostly take recommendations from the Motley Crew, JB’s Near Future Portfolio, Teeka’s crypto recc’s and other tit bits shared here! Lately, with rumblings of an impending market crash I’ve been pondering whether i should scale back investments, and possibly even sell a large % of my portfolio, sit on the sidelines for a while and then restrike as/when any sizeable correction occurs. I’m about to turn 50 so all being well, have another 15-20 years before I’ll need some funds to retire with. My question to anyone here is what’s your take on current market conditions? Do you subscribe to a “time in the market is better than time out” philosophy and DCA’ing all the way or do you think there’s some sense in quite significantly reducing exposure in the face of a possible, sharp downturn and equally of course risk that scenario not playing out and losing opportunities along the way? Or are you on the fence?? Any advice for a newbie like me would be greatly appreciated. Feel like I need to make a commitment to one course of action or another to save my sanity!!!
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The market has never been as expensive as it has at times been this year, so we should certainly have lower expectations for future returns. The temptation to hide is very high, but it is a risky move because you have be pretty good on your timing twice — first to sell, then to buy back in, and those who are good at selling near the top are often so comforted by missing the crash that they never can reset their mindset toward the future and buy again.
Here’s part of a comment I shared in a Friday File a couple months ago:
And about two weeks ago I included this insight from legendary money manager Bill Miller in a different Friday File:
Thanks so much Travis – exactly the kind of sage reply I knew I could count on getting here – that’s really helped my thought process. Time in, not timing is certainly a powerful message, difficult though it may be to follow that wisdom! I’m certainly not of the mindset that I could remotely ever outwit Mr Market and that JPM illustration certainly underlines the near impossibility of being able to do that with such low odds, given the few days that account for the lion’s share of the moves. So I guess it’s time for me to pull up my big girl pants and stop freaking out every time another of my stocks gets shot down in flames after failing to deliver a blockbuster earnings report!
One other question i have though regarding positions that are in substantial loss (eg Peloton or Zillow…yes. I bought the hype!) – provided we don’t see the bigger picture as having changed materially we would of course continue to hold, but if the investment thesis has changed a bit and we no longer feel so bullish about future prospects of that company, is it best to cut losses asap, reinvest what’s left into brighter prospects, or keep dca’ing and willing that stock to rise up from the dead and bounce back? How can we ever know when to part with it? I seem to make the mistake of watching certain stocks go from bad to worse before thinking I should consider selling. Setting stop losses has never been something I’ve practised, perhaps it ought to be, but again, v hard to do in practice esp if you’re not a seasoned investor like me. I rely heavily on the likes of Motley for my buy/sell decisions and they tend to hang on to losers for quite some time by the looks of it, presumably because they see their investment thesis as still being intact (despite the market punishing those stocks) and potentially coming good over time..
Thanks again for your insights…. just wish I had your investing experience & knowledge, would no doubt save me a small fortune!!
My approach is to be an accumulator. I hold on to everything through thick and thin, almost never sell anything. I’m way over-diversified, which means i can’t pay Travis’ quality of attention to each individual position. It also means no one corporate failure can take much of a bite out of me. A few will die, a few will shoot the moon, and a lot of them will just keep chugging along as non-sexy reliable positions. There is a sample of everything in the “Real Money Portfolio.” Over several decades the average has been pretty good.
By far my most dramatic full-portfolio pop days come immediately after refusing to panic and sell low during a crash. It is not possible to market-time those. By the time someone can see the market begin to recover – they’ve already missed the best part.
Many thanks for sharing your experience here timcoahran! I too am probably overdiversified despite having only been investing for a short time – I kind of rushed into things. But as you say, that should in theory mean no single loss is too painful. Your point about market timing again makes me see how naive I would be believing I could outsmart the market if I were to reduce holdings and wait for a crash that may/ may not ever happen. I’ve done that to a v limited extent when attempting to take profits on the odd stock that;’s made 40% plus and rarely find it pulls back conveniently for me to buy back in a short time afterwards.. usually just keeps heading on up!
Wise words. I never sell either. Investing is a mindgame and you are the worst enemy of your success. Adopting buy and hold as a strategy is a process that has to grow on you. I remember when I started swing trading fifteen years ago that like-minded traders were all looking down on buy and hold investors. It seemed as if the latter were ignoring all the information the stock charts were giving: ignoring all the trendlines, cup-and-handle breakout pivots, Fibonacci retracement levels, MACD crossovers, …, how stupid must these long term investors really be? Trading presented as a science is essentially a trap designed to push the retail herd where Wall Street really wants them: on the receiving side of the lucrative short-term liquidity generating business. It is a game you cannot win. Believe me if I say I tried: CANSLIM swing trading with tight stops, 9-day calendars and butterflies, weekly and monthly condors on SPY and RUT, gamma scalping on straddles and strangles, no strategy within a timeframe of minutes, days or even months brought me consistent success. An expensive lesson to learn for sure, but also valuable for reminding me, when now in doubt while long term investing, that there really is no alternative. At least not for me.
If you are turning 50, with a decent timeframe of 15-20 years ahead of you, I would say that long-term investing is your best chance of success. Remember that the longer your timeframe is, the less your own market timing matters. I read somewhere on this website someone saying that investing is like soap, the more you touch it, the less you will have left. I think that nicely summarizes it.
Wise words. I never sell either. Investing is a mind game and you are the worst enemy of your success. Adopting buy and hold as a strategy is a process that has to grow on you. I remember when I started swing trading fifteen years ago that like-minded traders were all looking down on buy and hold investors. It seemed as if the latter were ignoring all the information the stock charts were giving: ignoring all the trendlines, cup-and-handle breakout pivots, Fibonacci retracement levels, MACD crossovers, how stupid must these long term investors really be? Trading presented as a science is essentially a trap designed to push the retail herd where Wall Street really wants them: on the receiving side of the lucrative short-term liquidity generating business. It is a game you cannot win. Believe me if I say I tried: CANSLIM swing trading with tight stops, 9-day calendars and butterflies, weekly and monthly condors on SPY and RUT, gamma scalping on straddles and strangles, no strategy within a timeframe of minutes, days or even months brought me consistent success. An expensive lesson to learn for sure, but also valuable for reminding me, when now in doubt while long term investing, that there really is no alternative. At least not for me.
If you are turning 50, with a decent timeframe of 15-20 years ahead of you, I would say that long-term investing is your best chance of success. Remember that the longer your timeframe is, the less your own market timing matters. I read somewhere on this website someone saying that investing is like soap, the more you touch it, the less you will have left. I think that nicely summarizes it.
Wise words Tim. I never sell either. Investing is a mind game and you are the worst enemy of your success. Adopting buy and hold as a strategy is a process that has to grow on you. I remember when I started swing trading fifteen years ago that like-minded traders were all looking down on buy and hold investors. It seemed as if the latter were ignoring all the information the stock charts were giving: ignoring all the trendlines, cup-and-handle breakout pivots, Fibonacci retracement levels, MACD crossovers, how stupid must these long term investors really be? Trading presented as a science is essentially a trap designed to push the retail herd where Wall Street really wants them: on the receiving side of the lucrative short-term liquidity generating business. It is a game you cannot win. Believe me if I say I tried: CANSLIM swing trading with tight stops, 9-day calendars and butterflies, weekly and monthly condors on SPY and RUT, gamma scalping on straddles and strangles, no strategy within a timeframe of minutes, days or even months brought me consistent success. An expensive lesson to learn for sure, but also valuable for reminding me, when now in doubt while long term investing, that there really is no alternative. At least not for me.
If you are turning 50, with a decent timeframe of 15-20 years ahead of you, I would say that long-term investing is your best chance of success. Remember that the longer your timeframe is, the less your own market timing matters. I read somewhere on this website someone saying that investing is like soap, the more you touch it, the less you will have left. I think that nicely summarizes it.
Thanks so much for sharing think_theta -positive. That’s really interesting hearing about your experiences taking a technical (and by the sounds of it… VERY technical!!) trading approach to timing your investments. I too have, as a newcomer to all of this, have strayed down that path a little and tried t o educate myself around key indicators in the hope of timing/justifying my entry points better. But as you say, in the long run, and when the ultimate horizon in question is 10+ years, it probably makes more sense to just sit tight, and let time in rather than timing work its magic! (Plus, actively trading many different stock positions would be a full time job which most of us don’t have the time to do, even if the inclination were there.)
I have however just recently signed up to Tradesmith, and their VQ based trailing stop system alerts, thinking/hoping it might give me another string to my investment decisions. They use a traffic light system to categorise and monitor the “health” of each company based on historical volatility and feed that in to their alerts system. (they also pull in lots of fundamental data and news feeds etc which is quite useful )- I’m not sure whether the core product will actually be of any use to me, and whether, if eg.something moves into the red zone hitting its trailing stop, I’d sell sat a loss (I find that too difficult to do)… we’ll see. I have tended to hang on to stocks like PINS , BYND and TDOC even when they’re hemoraging and should maybe have cut the chord sooner but am always conflicted with the short versus long term arguments!
Thank you everyone for your great comments. I too am learning by my mistakes and the examples that more experienced investors are so generously willing to share.
It’s difficult to know what to do sometimes when so many competing voices are chiming into the mix. I have sold some positions too soon when they were saying the big correction or crash was imminent. I have also bought too high after the positions had already peaked.
It seems to me that the best advice has been the long term waiting for good solid investments to grow and weather the storms of the momentary panic. I may not be getting rich over night but at least I feel like what I have is not being swallowed up in the devaluation of the dollar. Unless we are truly at the end of the world and disaster is upon us history shows that the market always comes back and revives again eventually so just hang on and try not to stress out during the down days. Thanks again for sharing your experience. 🙂
Hi roozie. I’m not much more experienced with stocks than you (plus I lack your fixed income experience), so it feels very presumptuous of me to comment, but I like the community aspect to this & may prompt more discussion by offering my 2¢. So here goes:
1. Psychology & the Markets.
The market is a system, but one that has far too many parameters for anyone to model explicitly, even intuitively. You can always be blindsided by fate: best to assume you will be. The market turns on irrational operators: people. People are rational (sometimes) as individuals, but as a group we’re all dumb as a post. And we act too often like a herd. An irrational herd. So one key, perhaps, to succeeding at investing, is to focus on the psychology of markets.
This is one reason why contrarian investing can work: as with a bookie setting odds, if the crowd bets one way a contrarian bet might (maybe) pay off big; if you bet with the crowd & win, you win little or nothing. So how the hell do you think at odds with the rest of the market, when you ARE part of the market (just another human…). I think the problem is partly that we all get caught up in the same stuff: same emotions, same fears, we act the same way as the herd.
Solution: don’t give a damn. Unplug from the news somewhat: don’t obsess. I realized in university the only way to avoid stress degrading my performance on exams was to convince myself it was a game: didn’t matter. Learned to play mind games on myself. It worked a charm.
I’ve always been a bit of a contrarian. But I’d avoided personally managing investments for decades already: we didn’t have much to invest & I sucked at it. Seemed wiser to hire someone professional. That’s the siren call of Wall Street; they rely on it. While “the market” is NEVER efficient (‘efficient markets’ theory is bullcrap), Wall Street IS incredibly efficient: after 25 years we had nothing to show from “professional management”. All profits sucked up by fees &/or poor ‘management’. Then I couldn’t do it anyhow, wasn’t cognitively capable (health problem).
Fast forward: I’ve fought & recovered from a terminal prognosis, recovered my brain (been gone over a decade) & decided time’s too short to bet on the pros to change their game. Remembered the lesson from school: this has to be a game or I’ll suck at it.
Too soon to tell: the past year was a rising tide; all boats float high. But I’m way up on the market (~75%) – perhaps closer to 60% after the past few days. I’m OK with that: if I get too emotionally involved I won’t think straight. By which I mean, contrarian. Markets were fear-struck today; stuff I liked is down 5-8% after trending down consistently. I invested more, though I’m keeping 20% on the side waiting for a really big dip (15-20%).
2. Be diversified in a rising market. That includes not just industries but growth vs. “value” stocks (dividend-paying low-growth but safe stuff like J&J, Canadian banks, etc.).
But if we’re approaching a peak or falling, concentrate on highest-conviction stocks. I think Cathie Wood has this right. So I added more to Microsoft, banks, payments processors. OTOH, I’ve added more to my highest conviction stock. In a falling market everything tanks, but the best bounce first in recovery. And if the market crashes (20%+) &/or we have a recession/depression, only VERY profitable companies will rise quickly, if at all.
I posit that you do NOT want to be diversified in a crash. I hear disagreement: push back, people. I want you to prove me wrong (really: I’m learning).
3. I suggest we think of buying stocks like running a business. I’m more familiar with that as a former business consultant. We used to argue you need a really tight business plan to launch a business: helped clients prepare a briefing book. Sure, a one-page summary, but an inch-thick detailed document to back it up. Then the internet happened. These days investors appear to be happy with an idea sketched on a lunch napkin. Is this insane?
For pure growth stocks: probably it is insane. Sorry about Peloton. Unless they pivot (they have cash) & buy gyms, or some other play that produces cashflow. Cause right now it looks like air & hope is what floats the stock. To me Zillow had the same issue: an idea but no demonstrated profit. It relied on house flipping in volume. Most contractors suck at house flipping one-offs: Zillow bet they could succeed by doing thousands at a time. Reminds me of clients who acknowledged they were losing money on everything they made, but were sure they could make it up in volume.
But what about Amazon in 1998? Teledoc now? Question is, can they reach “scale” that makes the business work? Do they look like they’ll be able to generate extraordinary profit at that point? Amazon was unprofitable for over a decade, but it was a play on scale: profit seemed possible. If it scaled enough to work, it would work in spades. Much like FedEx. Now Amazon has scale & it’s printing money. But I didn’t buy Amazon at $100.
I buy the argument that the only difference between value investing and growth investing is time horizon. For ‘growth’ stocks you really need to buy the story & see evidence it’s credible. I confess, I’m a hard sell. I did buy Teledoc for a while; re-evaluated & realized they show no path to profitability that I can find credible. As they scale, they remain unprofitable. How will that change?
Perhaps we should focus on a very simple metric: if a business can show it can be profitable – really profitable – then a lot else won’t matter so much; it can pivot to respond to unforeseen challenges. For me that means I have to wait for a growth stock to demonstrate credible profitability. So for “growth” stocks, instead of P/E alone, consider profitability, addressable market, moats, ability to execute, growth rate. Ideally (for safety) all should be exceptional. That’ll be rare.
Consider Tesla. Growth stock, right? Nope: value stock. I know, P/E over 300 is insane. But that’s because you’re valuing a growth stock on trailing P/E: that IS insane & will always look insane, until the stock is so accepted & priced-in that there’s little upside left. I waited till it was demonstrably profitable. Fortunately the Street was slower to realize it, & fortunately this firm has a vast runway ahead of it.
Tesla is insanely profitable. Gross Margin in automotive is <20%: best of the firms is VW & Toyota, both of which have hit 19% but are at ~18% currently. The rest of the industry sucks. Tesla OTOH has been above 20, even 21% for years, even during "production hell" when they flirted with bankruptcy. Last year 23% GM. Staggering. Q3 2021 hit 30%. By 2025 they should hit last year's 2030 goal: 50%. Unbelievable. $19B cash in the bank, after investing $5B each in Berlin & Austin gigafactories. They doubt they'll need new plants soon: they keep finding ways to increase production without, so this is it for now. Still, they have cash on hand to build several more plants if needed. No appreciable debt so largely immune to interest rate worries. No need to raise debt; no need to sell more stock. Order book full 2-24 months forward by model, & everything they build is pre-sold first. The only fully integrated manufacturer so less affected by supply fears. By 2025 Elon will want to pull out cash for SpaceX: they'll declare dividends (good for him; good for me). They won't know what else to do with all the …money.
Beside profit, Tesla offers exceptional moats, rapidly growing addressable markets, ability to execute, growth rate. A real unicorn. Doubling production annually (they keep doing that, while promising only 50% growth), increasing GM to 30%: stock should rise 35-50% p.a. compounded through 2030. Doesn't mean it will in any given year: something as big as COVID but different could change the world. But the case for 35% p.a. is credible. **Not for short-term buyers: Tesla will be volatile. Just a lot less volatile than before it made the S&P 500; now institutional investors & pension funds are holding; they don't day trade. And Tesla's retail investors are quite willing to buy up anything sold at discount. Tesla <$1k today was a gift.
I'm looking for similarly overlooked but "can't likely fail" businesses, so profitable in idea & execution that it appears unlikely they can be derailed. I know: anything can be. So I'm inviting ideas from the community: there must be more. I'd settle for half as good as Tesla, and know there won't be many. Till then half my "diversify" strategy is bound up in one firm that makes EVs, residential energy production & storage, grid-scale utility energy storage, energy distribution arbitrage services, batteries, insurance, maybe driverless transportation as a service (TAAS) & robotics, & already dominates the first four markets. It's an ETF on its own.
4. Avoid traps. First, Investment "managers" who make money selling promises, & gurus who make money selling stories.
Investment managers sell comfort (I'll manage your money) & access (I'll bring you great opportunities). They suck at both. In Canada they're required by law to offer outdated advice: your portfolio must be 'balanced' (albeit according to risk profile) between stocks & bonds/fixed income assets. Stocks rose when bonds didn't; bonds rose if stocks tanked. Sure, through 1999 perhaps. Since then we've been printing money & dropping interest rates to zero: bonds are dead money. Until rates rise again I've sought "bond-like" safety in Canadian bank stocks: safe as houses, recover fast if markets correct, pay good dividends because they're very profitable & protected. BTW, gold & cryptos aren't a proxy for bonds: both track the S&P 500 now though gold is more volatile, cryptos WAY more volatile. I know of no asset class that counterweights stocks at present. Maybe real estate, a little? Doesn't help me.
Investment newsletters & gurus make money selling you stories. I'd include Motley Fool: if they're so good at identifying opportunity why are they working so hard at marketing & publishing? If they can consistently beat the market they wouldn't waste time selling subscriptions to you. I love Stock Gumshoe: deflating bogus snake-oil salesmen is a public service. And reminds me not to be one of the sheep.
Second trap: pie-eyed futurism. Too many growth stocks appear to be a great story with no profit, little moat, no demonstrated execution ability. Or they're ideas still too ahead of their time. I like Cathie Wood's thesis, suspect she'll win on IT investments but is still too early on biotech; I want her to be right but I'm skeptical.
Third trap: oversold tech without demonstrated application. That might include stuff like DocuSign: real estate agents assure me they can easily change data on signed & sealed forms. Really? IF (big if) DocuSign is offering convenience to real estate agents & a semblance of security to users (but no real security) then it's primed for a fall. I see cryptos like this: a tech solution with no market value, no functional value.
Fourth Trap: outright fraud. Chinese stocks all appear to be VIEs (Variable Interest Equities). Look up VIE fraud. Chinese firms are prohibited by constitutional law from selling ownership to non-citizens of China; are prohibited from signing contracts to pay dividends or any significant sums to non-citizens. If this is true, any Chinese stock trading as a VIE on a US exchange is a fraud. SEC should never have permitted them; now is warning of wind-down in 3 years to allow institutional investors time to bail. Retail investors will be left holding. Moving listings to Hong Kong won't change the legal jeopardy: they'll still be illegal.
Crypto exchanges may constitute a legal risk as they aren't regulated. Wall Street is dangerous enough; crypto exchanges represent a return to pre-1928 unregulated markets. Yikes! Failures & losses have been few but spectacular.
In Summary
– Be contrarian, & try to approach markets like they're a game so you can be detached & avoid the sentiments driving everyone else.
– Diversify in rising markets; Concentrate for falling markets & recovery.
– Value profitability above all else; bet on proven track record & vision. If you identify a unicorn with exceptional business model, products, execution & profit, recognize how rare that is & be pretty aggressive (but not stupid: fate can still kill a "sure" thing).
– Be plenty skeptical of investment advisory services & investment managers. Avoid stuff with red flags.
I'm too ignorant to risk trading options, & lack the scale to play that market.
I'm not a very active trader: 2-3 trades/month; seek to hold 5 years but will re-evaluate as market changes & try to learn from mistakes, too.
I have yet to see how well my decisions hold up in a serious correction, but tried to buy with one in mind. If I could time things (hah!) I'd sell everything before a crash; best alternative is to buy with one in mind, keep some cash aside to buy after a crash. Hope I have the nerve to do so.
I'm sure I must be wrong about some of this & will welcome criticism from better minds.
Could you share the stocks you have in your portfolio which are not in gumshoe portfolio? Thank you!
During the Pandemic Crash of 2020, the stocks in my portfolio that held their own — i.e. neither tanked nor surged but helped stabilize the portfolio — were in the trash collection and funeral services industries. Sometimes the “best” stocks are the ones not written about.
A successful elder realtor friend tells me that there are over 1 million homeowners in foreclosure and that number is growing. He is predicting a 20% decline in home values over the next 2 years. So that’s one opinion.
Now for the big one: What are the foundation stocks to help us keep our portfolio values during these waves? AI, EV’s, Chips, etc. So far NVIDIA, QCOM, ADBE, APPL, and a few others have been my rocks over the years and I expect them to hold their ground in the coming years…
What are your foundations?