If only we could be unbiased when observing stock markets and investors, we might get clued into probable future steps we should take. We should examine all that is exposed to us. The strengths and weaknesses of realities, rumors, and reactions. In many cases, crowds believe in “facts,” which, when fulfilled, provide comfort. In much the same way, contrarians often see the opposite in the same set of facts.
For an extended period, I have been seeing growing evidence of problems for various stock markets and related countries. I was comfortable with these feelings because relatively few perceptive analysts and other investors shared them.
Now, the worst of all possible trends is befalling a contrarian. The attitude of many sophisticated stock market investors is turning, echoing the attitude of the US Treasury bond market. Worse still, leaders in the commercial world are dealing with a present and likely future collapse of demand for their products and services.
International Paper (IP), Packaging Corp. (PKG), and WestRock (WRK) (*) announced a massive inventory glut of containerboard, which is critical in packaging most shipped goods. Consequently, I was not surprised by FedEx’s (FDX) quarterly earnings announcement, which fell 32 % below analysts’ estimates. The release indicated the company was reducing usage of its plane fleet, closing offices, and cutting expenses.
When operating companies have these problems, it almost always means smaller M&A activity and underwriting. Thus, it is not a surprise that canny Goldman Sachs (GS) (*) reintroduced a policy laying off the bottom performers of its talented staff. This week’s IPO actions by American International Group (AIG) (*) have them selling some Corebridge Financial (CRBG) at the low end of the expected price range, which fell below the issue price in the after market.
(*) Held in personal accounts
My reaction to this negative news was to accelerate my previously mentioned plans to look for new buying opportunities in new names.
An Organized Search Process
I have had discussions with sophisticated investors who have exited the equity market with 30% or more of their prior commitment. This has created a potential 30% buying reserve.
As subscribers to this blog know, I question whether we have seen the bottom of the US stock market decline. The S&P 500 hit its technical price low since June at roughly 3900 this week. One respected market analyst’s response was that the index had bent but did not break.
I don’t know if the September or June bottom will hold or break at the 3600 or 3000 level. Although it is possible we have seen a bottom from which an upward expansion could take place.
My tactic in this case is to dollar-cost average into favored investments. I divide my purchasing reserve by 6, putting 5% into the purchase bucket. One reason I believe we are likely to go into a serious recession or worse is that I see too many imbalances, with declining efficiency and productivity in the economy. Although I could be wrong. The way I deal with it is to invest differently than what produced my existing portfolio. So, if the market is flat at the end of the reinvestment period, I would have 70% in the original holdings and 30% in new thinking.
The first hurdle is determining the frequency of investing is the reinvestment money. One could choose monthly, quarterly, or yearly. That decision should pivot on the kind of decline expected. It could simply be a price decline where monthly investing generates a good result. If you think the market went down primarily because of imbalances in the economy, then investing quarterly makes sense, as these problems won’t be solved until next year at the earliest. Although the market should anticipate this event somewhat. An annual investment makes sense if you believe we might be entering a period of stagflation.
At first blush, the annual investment might seem excessive. However, we experienced two periods of stagflation in the 1930s and 1970s, which suggests it could happen. Since everything these days seems to move at warp speed, I searched the mutual fund data bank produced by my old firm this week. I examined the 170 mutual fund investment objective performance groups averages through this Thursday. While most had a down calendar year, prior years were positive.
For the last three years, 40% of the performance averages lost money. Thirteen percent lost money over five years and 5% lost money over ten years. These numbers suggest we could be in for a long dull period.
The reinvestment plan I am suggesting is not a hands-off procedure. Anytime the targeted investment is off 10% from the prior determined period, I would double the commitment. This may produce a bargain for the investor. It also reduces the length of the investment period. On the other hand, if the target price drops 25%, I would pass on the opportunity and wait for the next period, assuming the basic research remains favorable.
What to Buy to Complement the Portfolio
Remember, reinvestment is meant to offset investment opportunity in existing holdings. I suspect most holdings are dollar-dependent, so at some dollar level, the US will price itself out to foreign buyers. Internal political issues in various countries will also improve.
For those that have never owned a stock traded beyond our border, I would start with some Canadian holdings.
India has the largest middle class in the world. Other Asian countries, including China, are a good hedge against the dollar.
Another approach not in many portfolios are companies developing new products and services to fill unmet needs for new products/services not currently available.
If the individual selection of securities takes up too much time and you lack confidence in your selection, you can use mutual funds. As these funds are intended to address other needs in an investment portfolio, the following list of attributes may be useful in the selection process:
- The portfolio manager has ten years of experience running the fund, with a record that can be researched to understand down periods.
- A focused portfolio of under 70 names in two handfuls of sectors.
- A portfolio letter released at least semi-annually that is easy to read. It should be about the portfolio and not the economy.
- A proper discussion of what didn’t work and why, without blaming others for mistakes.
If all of this is too intense, I suggest index funds covering large and small companies, both here and overseas. Most index funds track a published index in terms of weighting how much to invest in each security. This is where a critical decision must be made. Most index funds own the same percentage the stock has in the index. Consequently, a handful of the biggest positions in the fund will drive performance in rising markets. While great in a rising market, it could be a negative in a declining market where investors sell their most liquid holdings. Equal-weighted index funds in some cases will slightly underperform on the way up but decline less than capitalization-weighted index funds on the way down.
Question of the week:
Are you open to investing differently for the next good market?
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.